-----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, T2q20EkqvJtu66cOHlvzi5c4kbqzjkaNmS78Xws4vZABYVngpE7P3XpCgBecdrKL XIr620fmO/GcmfoWkVaChw== 0000940180-99-000479.txt : 19990504 0000940180-99-000479.hdr.sgml : 19990504 ACCESSION NUMBER: 0000940180-99-000479 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990430 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: 424B5 SEC ACT: SEC FILE NUMBER: 333-75939 FILM NUMBER: 99608173 BUSINESS ADDRESS: STREET 1: 10 HWY 35 STREET 2: PO BOX 500 CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 9087477800 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K HOVNANIAN ENTERPRISES INC CENTRAL INDEX KEY: 0000833199 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 222423583 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 424B5 SEC ACT: SEC FILE NUMBER: 333-75939-01 FILM NUMBER: 99608174 BUSINESS ADDRESS: STREET 1: 10 HIGHWAY 35 STREET 2: P O BOX 500 CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 7327477800 424B5 1 PROSPECTUS SUPPLEMENT - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Prospectus Supplement April 29, 1999 (To prospectus dated April 29, 1999) [LOGO OF HOVNANIAN COMPANIES] K. Hovnanian Enterprises, Inc. $150,000,000 9 1/8% Senior Notes due 2009 Guaranteed by Hovnanian Enterprises, Inc. - ------------------------------------------------------------------------------- The Issuer: The Notes and the Offering: . We are a wholly owned subsidiary of . Maturity: May 1, 2009. Hovnanian Enterprises, Inc., which is a guarantor of the notes. . Interest Payment: Semi-annually in cash on May 1 and November 1, . The notes will not be listed on any commencing November 1, 1999. securities exchange or NASDAQ. . Guarantees: The notes will be The Company and Guarantor: guaranteed by the parent corporation of the Issuer and by . We are the fourteenth largest most of the parent's existing and builder of for sale homes in the future restricted subsidiaries. United States. We offer a broad product array to our customers, . Optional Redemption: We may redeem including first-time buyers, move- any or all of the notes at any time up buyers, luxury buyers, active after May 1, 2004 at the redemption adult buyers and empty nesters. prices described herein plus accrued interest. In addition, we . Hovnanian Enterprises, Inc. may redeem notes at any time prior 10 Highway 35 to May 1, 2002 with the net cash P.O. Box 500 proceeds of one or more public Red Bank, New Jersey 07701 equity offerings so long as at (732) 747-7800 least $97.5 million principal http://www.khov.com amount of notes remains outstanding. . Mandatory Offers to Purchase: Upon a change of control, or in the event of certain asset sales, we are required to make an offer to purchase the notes. . Ranking: The notes are general unsecured obligations that are junior to our secured debt to the extent of their security and equal with our other unsecured unsubordinated debt. . Use of Proceeds: Retirement of the balance of our 11 1/4% Subordinated Notes due April 15, 2002, repayment of indebtedness under our revolving credit agreement and for general corporate purposes. . Closing: May 4, 1999. ----------------------------------------------------------------------
Per Note Total ----------------------------------------------- Public offering price: 100.00% $150,000,000 Underwriting fees: 2.00% $ 3,000,000 Proceeds to the Issuer: 98.00% $147,000,000 -----------------------------------------------
This investment involves risk. See "Risk Factors" beginning on page S-7. - ------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus supplement. Nor have they made, nor will they make any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - ------------------------------------------------------------------------------- Donaldson, Lufkin & Jenrette NationsBanc Montgomery Securities LLC BancBoston Robertson Stephens Inc. TABLE OF CONTENTS Prospectus Supplement
Page ---- Forward-Looking Statements..... i Prospectus Supplement Summary.. S-1 Risk Factors................... S-7 Use of Proceeds................ S-12 Capitalization................. S-13 Business Overview.............. S-14 Description of Notes........... S-21 Underwriting................... S-50 Legal Matters.................. S-51
Prospectus Page ---- Available Information.............. 1 Incorporation of Certain Documents by Reference...................... 1 The Company........................ 2 Selling Shareholders............... 2 Use of Proceeds.................... 3 Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends......................... 4 Description of Debt Securities..... 4 Description of Capital Stock....... 16 Description of Warrants............ 17 Plan of Distribution............... 18 Legal Matters...................... 18 Experts............................ 18 Index to Consolidated Financial Statements........................ F-1
FORWARD-LOOKING STATEMENTS All statements in this prospectus supplement, the accompanying prospectus, including the financial statements and their accompanying notes, and the information incorporated by reference that are not historical facts should be considered as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors include, but are not limited to, changes in general economic conditions, fluctuations in interest rates, increases in raw materials and labor costs, levels of competition and other factors described in detail in our form 10-K for the year ended October 31, 1998. See the section "Risk Factors." i PROSPECTUS SUPPLEMENT SUMMARY This is only a summary of the offering. To fully understand the investment you are contemplating, you must consider this prospectus supplement, the accompanying prospectus, including the financial statements and their accompanying notes, and the detailed information incorporated by reference. As used in this prospectus supplement and the accompanying prospectus, except as the context otherwise requires, references to "us", "we", "our" or "Company" means Hovnanian Enterprises, Inc., a Delaware corporation, together with its consolidated subsidiaries, including K. Hovnanian Enterprises, Inc. (the "Issuer"), a New Jersey corporation. The Company We design, construct and market high quality single-family detached homes and attached condominium apartments and townhouses in planned residential developments in the Northeast (primarily in New Jersey, southern New York state and eastern Pennsylvania), North Carolina, northern Virginia and Maryland, southern California, southeastern Florida and Poland. We market our homes to first-time buyers, first- and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. We offer a variety of homestyles at prices ranging from $41,000 to $921,000 with an average sales price in fiscal 1998 of $216,000. We are currently offering homes for sale in 75 communities. Since the incorporation of our predecessor company in 1959, we have delivered in excess of 62,000 homes. We believe our business strategy, including our implementation of recent initiatives to reduce costs and increase productivity, has contributed to strong recent operating results. During our fiscal year ended October 31, 1998, our revenues increased 20.1% to a record $941.9 million, the number of homes we delivered increased 11.3% to 4,138, our year over year homebuilding gross margin (before impairment loss and land sales) improved from 15.6% to 17.3% and EBITDA increased 51.7% to $90.6 million over fiscal 1997. At January 31, 1999, our backlog consisted of 1,599 homes, with a base value of $366.4 million, compared to 1,688 homes, with a base value of $342.7 million, at January 31, 1998. Over 58% of our customers who financed the purchase of their homes with mortgages utilized our mortgage financing subsidiary in fiscal 1998. Business Strategy Over the past few years, our strategy has included several initiatives to fundamentally transform our traditional practices used to design, build and sell homes and focus on "building better." We believe that the adoption and implementation of processes and systems successfully used in other manufacturing industries, such as rapid cycle times, vendor consolidation, vendor partnering and just-in-time material procurement, will dramatically improve our business and give us a clear advantage over our competitors. Our concentration in selected markets is a key factor that enables us to achieve powers and economies of scale and differentiate ourselves from most of our competitors. These performance enhancing strategies are designed to achieve operational excellence through the implementation of standardized and streamlined "best practice processes." Our strategies include: Financial and Growth Strategies . Focusing on our core homebuilding and related mortgage and title businesses . Growing our Company through the reinvestment of earnings while gradually reducing our leverage Competitive Positioning Strategies . Maintaining our current strong market position in the Northeast while increasing market share and profits in our other markets . Entering new geographic markets only where we can achieve a significant market presence, potentially through acquisitions S-1 Product Strategies . Marketing a broad array of research driven / value engineered home designs with an increased focus on the housing needs of aging baby boomers, including luxury and active adult communities . Achieving industry-leading customer satisfaction levels by providing a rewarding home buying experience, high quality homes and mortgage and title services designed to meet the expressed needs and preferences of our customers Operational Strategies . Continuing to acquire well-positioned, attractively priced land with minimal cash investment, principally through the use of rolling options . Standardizing best operating and financial processes across all of our markets . Achieving operational excellence through "Process Redesign" and our total quality initiative known as "Partners In Excellence." Examples include: . Reducing construction costs through efficient home design, consolidation of and partnering with vendors as well as streamlining the contracting and bidding processes . Improving production cycle times and productivity while realizing lower costs through the utilization of even flow production techniques . Reducing warranty and service expenses by streamlining processes and reducing errors Organizational Strategies . Attracting, developing and retaining the best associates in the industry . Improving our ability to implement change throughout the Company Operating and Financial Accomplishments To date, the implementation of these strategies has had a positive impact on our operating performance. Some of these accomplishments include the following: . We have reduced construction and administrative costs by consolidating the number of vendors serving our Northeast market from 350 to 79 and by executing national purchasing contracts with select vendors. We plan to implement this strategy throughout all of our markets. . We have balanced our quarterly home deliveries. For example, the deliveries occurring in the fourth quarter as a percentage of total annual home deliveries declined from 39.6% in fiscal 1997 to 26.9% in fiscal 1998. . We have recently opened a home design gallery in our Northeast region which we expect will increase option sales and profitability in this market. We plan to open our next gallery in southern California in the fourth quarter of fiscal 1999. . We have increased the percentage of active adult home deliveries as a percentage of total deliveries from 9.2% in fiscal 1996 to 20.2% in fiscal 1998. . We sold our commercial investment properties which allowed us to reinvest capital into our core homebuilding business and reduce outstanding debt. Partially as a result of these operating accomplishments, our gross profit margin (before impairment loss and land sales) increased from 15.6% in fiscal 1997 to 17.3% in fiscal 1998, to 20.9% in the first fiscal quarter of 1999. In addition, our financial leverage ratio, as measured by debt to total capitalization, decreased from 64.8% at October 31, 1997 to 53.2% at October 31, 1998. We believe that the continued implementation of these strategies will positively impact our future financial performance. S-2 The Offering Securities $150 million aggregate principal amount of 9 1/8% Senior Offered............. Notes due 2009. Maturity Date....... May 1, 2009. Interest Payment Interest will accrue from the date of issuance and will Dates............... be payable semi-annually on each May 1 and November 1, commencing November 1, 1999. Guarantees.......... The guarantors are Hovnanian Enterprises, Inc., the parent corporation of the Issuer, and most of the parent's existing and future restricted subsidiaries. If the Issuer can not make payments on the notes when they are due, the guarantors must make them instead. Optional We may redeem any or all of the notes at any time after Redemption.......... May 1, 2004 at the redemption prices described herein plus accrued interest. In addition, we may redeem notes at any time prior to May 1, 2002 with the net cash proceeds of one or more public equity offerings so long as at least $97.5 million principal amount of notes remains outstanding. Change of Control... Upon a change of control as described in the section "Description of Notes," you will have the right to require us to purchase some or all of your notes at 101% of the principal amount, plus accrued and unpaid interest to the date of purchase. We can give no assurance that upon such an event, we will have sufficient funds to purchase any of your notes. Ranking............. These notes are our general obligations and will not be secured by any collateral. Your right to payment under these notes will be: . junior to the rights of our secured creditors to the extent of their security in our assets; . equal with the rights of creditors under our other unsecured unsubordinated debt, including our revolving credit agreement; and . senior to the rights of creditors under debt expressly subordinated to these notes. The guarantee of each of the guarantors will also not be secured by any collateral. Your right to payment under any guarantee will be: . junior to the rights of secured creditors to the extent of their security in the guarantor's assets; . equal with the rights of creditors under the guarantor's other unsecured unsubordinated debt; and . senior to the rights of creditors under the guarantor's debt that is expressly subordinated to the guarantee. At January 31, 1999, assuming we had completed this offering on that date, the Issuer and the guarantors would have had approximately $261.9 million of debt (including these notes) outstanding, of which $11.9 million would have been secured by assets of the Company and the guarantors and $100.0 million of which would have been subordinated to these notes. S-3 Certain Covenants... We will issue the notes under an indenture. The indenture will, among other things, restrict our ability and the ability of the guarantors to: . borrow money; . pay dividends on our common stock; . repurchase our common stock; . make investments in subsidiaries that are not restricted; . sell certain assets; . incur certain liens; . merge with or into other companies; and . enter into certain transactions with our affiliates. For more details, see the section "Description of Notes" under the heading "Certain Covenants." Use of Proceeds..... We will use the net proceeds from the offering to retire the balance of our 11 1/4% Subordinated Notes due April 15, 2002, to repay indebtedness under our revolving credit agreement and for general corporate purposes. For more details, see the section "Use of Proceeds." S-4 Summary Consolidated Financial Information and Operating Data The following summary financial consolidated financial information for the three years ended October 31, 1998, is derived from our audited consolidated financial statements. The financial data for the three months ended January 31, 1999 and 1998 is derived from our unaudited consolidated financial statements.
Three Months Ended January 31, Year Ended October 31, --------------------- ------------------------------- 1999 1998 1998 1997 1996 ----------- ---------- --------- --------- --------- ($ in thousands, except average selling prices) Income Statement Data Total revenues......... $ 203,479 $ 213,960 $ 941,947 $ 784,136 $ 807,464 ========== ========== ========= ========= ========= Home and land sale rev- enues (1)............. $ 196,212 $ 205,654 $ 904,280 $ 754,662 $ 778,680 Cost of sales.......... 155,587 169,800 748,941 634,317 651,492 Inventory impairment loss (2).............. -- 1,589 3,994 14,019 1,608 ---------- ---------- --------- --------- --------- Homebuilding gross mar- gin................... 40,625 34,265 151,345 106,326 125,580 Selling, general and administrative ex- pense................. 17,534 15,657 68,170 62,475 60,704 Corporate general and administrative ex- penses................ 6,435 4,361 21,048 15,088 14,002 Home and land sales in- terest expense........ 6,686 7,796 32,151 30,467 26,649 Income (loss) from fi- nancial services...... 416 351 2,088 (45) 547 (Loss) income from in- vestment properties... (776) 1,841 4,406 (11,906) (977) Income (loss) from col- lateral mortgage fi- nancing............... 5 10 11 (24) (41) Other income (net of other operations)..... 563 365 4,811 1,555 1,252 ---------- ---------- --------- --------- --------- Income (loss) before income taxes and ex- traordinary loss...... 10,178 9,018 41,292 (12,124) 25,006 State and federal in- come taxes............ 4,050 3,105 15,141 (5,154) 7,719 ---------- ---------- --------- --------- --------- Income (loss) before extraordinary loss.... 6,128 5,913 26,151 (6,970) 17,287 Extraordinary loss from extinguishment of debt net of taxes.......... -- -- (748) -- -- ---------- ---------- --------- --------- --------- Net income (loss)...... $ 6,128 $ 5,913 $ 25,403 $ (6,970) $ 17,287 ========== ========== ========= ========= ========= Ratio of earnings to fixed charges (3)..... 3.2x 2.8x 2.6x -- 1.6x Selected Operating Data New homes delivered: Northeast Region....... 478 640 2,530 2,128 2,364 North Carolina......... 154 135 687 695 738 Florida................ 38 53 241 418 632 Virginia............... 54 20 152 70 75 California............. 103 117 457 365 325 Poland................. 9 7 71 41 -- ---------- ---------- --------- --------- --------- Total................ 836 972 4,138 3,717 4,134 ========== ========== ========= ========= ========= Average selling price for delivered homes: Northeast Region....... $ 265,029 $ 217,046 $ 235,522 $ 209,500 $ 194,979 North Carolina......... $ 188,831 $ 190,193 $ 185,723 $ 180,204 $ 167,137 Florida................ $ 219,289 $ 179,472 $ 183,269 $ 177,382 $ 156,780 Virginia............... $ 232,351 $ 305,900 $ 255,947 $ 205,685 $ 223,320 California............. $ 168,068 $ 197,615 $ 180,625 $ 189,731 $ 198,677 Poland................. $ 103,444 $ 88,429 $ 92,408 $ 72,000 -- Combined............. $ 233,117 $ 209,935 $ 216,443 $ 196,881 $ 184,974 Net sales contracts: Northeast Region....... 402 488 2,375 2,438 2,457 North Carolina......... 150 133 690 694 718 Florida................ 53 43 164 351 606 Virginia............... 50 15 170 73 71 California............. 94 93 439 456 304 Poland................. 5 16 39 61 19 ---------- ---------- --------- --------- --------- Total................ 754 788 3,877 4,073 4,175 ========== ========== ========= ========= ========= Backlog at period end: Number of homes........ 1,599 1,688 1,681 1,872 1,516 Dollar value using base prices........... $ 366,443 $ 342,659 $ 381,816 $ 374,314 $ 292,376
S-5
Four Quarters Ended ------------------------------------------- October 31, January 31, ---------------------------- 1999 1998 1997 1996 -------------- -------- -------- -------- ($ in thousands) Other Data Gross margin percentage (4)..... 18.0% 17.3% 15.6% 16.4% EBITDA (5)(6)................... $ 86,340 $ 90,594 $ 59,713 $ 64,688 Interest incurred (6)(7)........ $ 26,681 $ 28,947 $ 34,777 $ 35,551 Ratio of EBITDA to interest incurred (6)................... 3.2x 3.1x 1.7x 1.8x Ratio of total debt to EBITDA (6)(8)......................... 2.9x 2.5x 5.5x 4.5x At October 31, At January 31, ---------------------------- 1999 1998 1997 1996 -------------- -------- -------- -------- Balance Sheet Data Housing inventories............. $400,041 $375,733 $410,393 $376,307 Total assets.................... $597,086 $589,102 $637,082 $614,111 Total debt (8).................. $249,609 $229,065 $328,696 $290,140 Stockholders' equity............ $206,024 $201,392 $178,762 $193,622
- -------------------- (1) Land sales for the periods presented were $1,327,000 and $1,597,000 for the three months ended January 31, 1999 and 1998, respectively, and $8,636,000, $22,855,000 and $13,998,000 for the years ended October 31, 1998, 1997 and 1996, respectively. (2) In accordance with the provisions of Financial Accounting Standards No. 121 ("FAS 121"), the Company records impairment losses on inventories related to communities under development or inventories and long-lived assets held for sale. Under FAS 121, communities under development are impaired if the undiscounted cash flows estimated to be generated from sales is less than the community's carrying amounts. Inventories and long-lived assets held for sale are impaired if the carrying amount exceeds its fair value less selling costs. Along with writeoffs of options not exercised (included related approval engineering and capitalized interest costs) such impairment losses for housing operations are reported as "Inventory impairment loss." (3) No ratio is presented for the year ended October 31, 1997 as the earnings for such period were insufficient to cover fixed charges by $9,197,000. (4) Before inventory impairment loss and land sales. (5) EBITDA means earnings (loss) before (a) income taxes, (b) interest expense, (c) amortization of capitalized interest, (d) depreciation and amortization, (e) a nonrecurring noncash charge relating to real estate inventory of $5,032,000, $28,465,000 and $1,608,000 for the years ended October 31, 1998, 1997 and 1996, respectively, and (f) extraordinary loss from early extinguishment of debt. EBITDA is a widely accepted financial indicator of a company's availability to service debt. However, EBITDA should not be considered as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of the Company's operating performance or as a measure of liquidity. (6) During the quarter ended January 31, 1999 we completed our exit from the commercial investment properties business. The following table shows financial results and ratios adjusted to exclude the impact of these operations:
Four Quarters Ended ----------------------- January 31, October 31, 1999 1998 ----------- ----------- Adjusted EBITDA.................................... $78,527 $77,210 Adjusted interest incurred......................... $24,732 $26,675 Ratio of adjusted EBITDA to adjusted interest incurred.......................................... 3.2x 2.9x Ratio of total debt to adjusted EBITDA............. 3.2x 3.0x
(7) Interest incurred consists of all cash interest and accrued interest costs, whether expensed or capitalized, excluding interest under our mortgage warehouse line and bonds collateralized by mortgages receivable. (8) Total debt excludes debt under our mortgage warehouse line and bonds collateralized by mortgages receivable. S-6 RISK FACTORS Before purchasing these notes, you should consider all of the information set forth in this prospectus supplement, the accompanying prospectus, and the information incorporated by reference and, in particular, you should evaluate the risk factors set forth below. Substantial Leverage--Our substantial debt could adversely affect our financial health and prevent us from fulfilling our obligations under these notes. We have a significant amount of debt. As of January 31, 1999, assuming we had completed the offering on that date, our consolidated debt would have been $261.9 million. This offering will not reduce our debt. The amount of our debt could have important consequences to you. For example, it could: . limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements; . require us to dedicate a substantial portion of our cash flow from operations to the payment on our debt and reduce our ability to use our cash flow for other purposes; . limit our flexibility in planning for, or reacting to, changes in our business; . place us at a competitive disadvantage because we have more debt than some of our competitors; and . make us more vulnerable in the event of a downturn in our business or in general economic conditions. Our ability to meet our debt service and other obligations will depend upon our future performance. We are engaged in businesses that are substantially affected by changes in economic cycles. Our revenues and earnings vary with the level of general economic activity in the markets we serve. Our businesses are also affected by financial, political, business and other factors, many of which are beyond our control. The factors that affect our ability to generate cash can also affect our ability to raise additional funds for these purposes through the sale of equity securities, the refinancing of debt, or the sale of assets. Changes in prevailing interest rates may affect our ability to meet our debt service obligations, because borrowings under our revolving credit facilities bear interest at floating rates. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facilities will be adequate to meet our future liquidity needs for the long term. We can not assure you, however, that in the future our business will generate sufficient cash flow from operations or that borrowings will be available to us under our revolving credit facilities in an amount sufficient to enable us to pay our indebtedness, including these notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our debt, including these notes, on or before maturity. We can not assure you that we will be able to refinance any of our debt, including our revolving credit facilities and these notes, on commercially reasonable terms or at all. The indentures governing these notes and our other outstanding debt and our revolving credit facilities impose restrictions on our operations and activities. The most significant restrictions relate to debt incurrence, sales of assets and cash distributions by us and require us to comply with certain financial covenants. If we fail to comply with any of these restrictions or covenants, the trustees or the banks, as appropriate, could cause our debt to become due and payable prior to maturity. General Economic, Real Estate and Other Conditions--Future changes in business conditions could adversely affect our business, including our ability to build homes at prices our customers are willing or able to pay. The homebuilding industry is cyclical and is significantly affected by changes in general and local economic conditions, such as: . employment levels; . availability of financing for home buyers; S-7 . interest rates; . consumer confidence; and . housing demand. An oversupply of alternatives to new homes, such as rental properties and used homes, could depress prices and reduce margins for the sale of new homes. Weather conditions and natural disasters such as hurricanes, tornadoes, earthquakes, floods and fires, can harm the homebuilding business. Our success in developing, building and selling homes depends in part upon the continued availability of suitable undeveloped land at acceptable prices. The availability of undeveloped land for purchase at favorable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding of land prices and restrictive governmental regulation. Should suitable land opportunities become less available, our operating results could be adversely affected. Land inventory risk can be substantial for homebuilders. The market value of undeveloped land, buildable lots and housing inventories can fluctuate significantly as a result of changing economic and market conditions. In the event of significant changes in economic or market conditions, we may have to sell homes at a loss or hold land in inventory longer than planned. Inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In our business, we must continuously seek and make acquisitions of land for expansion into new markets and for replacement and expansion of land inventory within our current markets. Although we employ various measures designed to manage inventory risks, we can give no assurance that such measures will be successful. The homebuilding industry has from time to time experienced significant difficulties, including: . shortages of qualified trades people; . reliance on local contractors, who may be inadequately capitalized; . shortages of materials; and . increases in the cost of certain materials (particularly increases in the price of lumber, framing and cement, which are significant components of home construction costs). These difficulties could cause us to take longer and pay more costs to build our homes. We may not be able to recapture increased costs by raising prices in many cases because we fixed our prices up to twelve months in advance of delivery by signing home sales contracts. In addition, some home buyers may cancel or not honor their home sales contracts altogether. We Depend on the Northeast Market We presently conduct most of our business in the Northeast. Home prices in the Northeast, including in some of the markets in which we operate, have declined from time to time, particularly as a result of slow economic growth. We can not be certain that the current economic growth trend in the Northeast will continue. If home prices decline in one or more of the markets in which we operate, our results of operations may be adversely affected. S-8 Interest Rates; Mortgage Financing--Future increases in interest rates could prevent potential customers from buying our homes and adversely affect our business. Virtually all our customers finance their acquisitions through lenders providing mortgage financing. Increases in interest rates or decreases in availability of mortgage financing could depress the market for new homes because of the increased monthly mortgage costs to potential home buyers. Even if potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their homes to potential buyers who need financing. This could adversely affect our results of operations. In addition, we believe that the availability of FNMA, FHLMC, FHA and VA mortgage financing is an important factor in marketing many of our homes. Any limitations or restrictions on the availability of such financing could adversely affect our sales. Governmental Regulation and Environmental Matters--Governmental regulations could increase the cost and availability of our development and homebuilding projects and adversely affect our business. We are subject to extensive and complex regulations that affect the development and homebuilding process, including zoning, density and building standards. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding. We also are subject to a variety of local, state and federal laws and regulations concerning protection of health and the environment. These environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas. Despite our past ability to obtain necessary permits and approvals for our communities, it can be anticipated that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we can not predict the effect of these requirements, they could result in time- consuming and expensive compliance programs and in substantial expenditures, which could have a material adverse effect on our operations. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretation and application. Competition--Homebuilding is very competitive, and competitive conditions could adversely affect our results of operations. The homebuilding industry is highly competitive and fragmented. Homebuilders compete not only for home buyers, but also for desirable properties, financing, raw materials and skilled labor. We compete with other local, regional and national homebuilders, often within larger subdivisions designed, planned and developed by such homebuilders. Some of our competitors also have greater sales and financial resources. In addition, resales of homes and the availability of rental housing provide additional competition. The competitive conditions in the homebuilding industry could result in: . difficulty in acquiring suitable land at acceptable prices; . increased selling incentives; . lower sales; or . delays in construction. Any of these problems could adversely affect results of operations. Future Capital Requirements--Our future growth requires additional capital whose availability is not assured. Our operations require significant amounts of cash, and we will be required to seek additional capital, whether from sales of equity or borrowing more money, for the future growth and development of our business. S-9 We can give no assurance as to the terms or availability of such additional capital. Moreover, the indentures for our outstanding debt contain provisions that may restrict the debt we may incur in the future. If we are not successful in obtaining sufficient capital, it could reduce our sales and may adversely affect our future growth and results of operations. No Assurance of Successful Acquisitions--We can not assure you that any future acquisition will be successful. We evaluate potential acquisitions of other companies from time to time. We can give no assurance that we will be able to successfully integrate the operations of any future acquisitions and realize the earnings enhancements that may be available. Exercise of Change of Control Rights--We may not have the ability to raise funds necessary to finance any change of control offer required by the indenture. If a change of control occurs as described in the section "Description of Notes" under the heading "Certain Covenants," we would be required to offer to purchase your notes at 101% of their principal amount, together with all accrued and unpaid interest, if any. If a purchase offer obligation arises under the indenture governing your notes, a change of control will have also occurred under one or more of the other indentures governing our debt. If a purchase offer were required under the indentures for our debt, we can give no assurance that we would have sufficient funds to pay the purchase price for all debt that we are required to repurchase or repay. After giving effect to this offering, we would not have sufficient funds available to purchase all of such outstanding debt. Lack of Public Market for the Notes--We can not assure you that an active trading market will develop for these notes. These notes are a new issue of securities. There is no active public trading market for these notes. We do not intend to apply for listing of these notes on a security exchange. The underwriters have informed us that they currently intend to make a market in these notes. However, the underwriters are not obligated to do so and may discontinue any such market-making at any time. The liquidity of the trading market in the notes, and the market prices quoted for the notes, may be adversely affected by changes in the overall market for these types of securities and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. As a consequence, we can not assure you that an active trading market will develop for your notes, that you will be able to sell your notes, or that, even if you can sell your notes, that you will be able to sell them at an acceptable price. Fraudulent Conveyance Issues--Federal and state laws allow courts, under specific circumstances, to void guarantees and to require you to return payments received from guarantors. Although you will be direct creditors of the guarantors by virtue of the guarantees, existing or future creditors of any guarantor could avoid or subordinate such guarantor's guarantee under the fraudulent conveyance laws if they were successful in establishing that: . such guarantee was incurred with fraudulent intent; or . such guarantor did not receive fair consideration or reasonably equivalent value for issuing its guarantee and 1) was insolvent at the time of the guarantee; 2) was rendered insolvent by reason of the guarantee; 3) was engaged in a business or transaction for which its assets constituted unreasonably small capital to carry on its business; or 4) intended to incur, or believed that it would incur, debt beyond its ability to pay such debt as it matured. The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology S-10 applied by the court. Generally, however, a company would be considered insolvent for purposes of the foregoing if: . the sum of the company's debts, including contingent, unliquidated and unmatured liabilities, is greater than all of such company's property at a fair valuation, or . if the present fair saleable value of the company's assets is less than the amount that will be required to pay the probable liability on its existing debts as they become absolute and matured. Risks Relating to "Year 2000" Issues We have assessed and formulated a plan to resolve Year 2000 issues related to our information technology and non-information technology systems. We have designated a full-time Year 2000 project leader, engaged consultants to review and evaluate our plan, completed the identification of our information technology and non-information technology noncompliant systems and are in the process of evaluating our subcontractors and suppliers with respect to Year 2000 compliance. Our plan prioritizes the review of our software systems and computer hardware equipment. We have upgraded, fixed or retired 80% of our noncompliant systems. We expect substantially all of our critical information technology software to be tested by June 30, 1999 and to be Year 2000 capable by September 30, 1999. All of our other information technology and non- information technology systems are not considered critical to our operations, and if not Year 2000 capable, would not have a material adverse effect on our operations. We do not anticipate the costs of implementation of our plan to have a material impact on future earnings and the cost of implementation is expected to be funded through operations. We are also in the process of developing Year 2000 contingency plans. We are in the process of communicating with our subcontractors and suppliers to assess the state of their readiness for the Year 2000. If we find that any of these third parties lack readiness for the Year 2000 and that such unreadiness would have a substantial impact on our operations, we will look to replace such subcontractors and suppliers. We use more than one subcontractor and supplier in most cases and believe finding replacements will not be difficult. We believe we are on track to solve our Year 2000 issues and believe we will not have a material loss of revenues due to Year 2000 issues, but we can give you no assurance in this regard. S-11 USE OF PROCEEDS The net proceeds to us from the sale of these notes in this offering are estimated to be approximately $146.6 million. We intend to use $46.3 million of the proceeds for the redemption of the remaining $45.4 million principal amount of our 11 1/4% Subordinated Notes due April 15, 2002, including an optional redemption premium of $0.9 million. We intend to use the remainder of the proceeds for the repayment of outstanding debt under our revolving credit agreement and for general corporate purposes. Our revolving credit agreement expires on July 31, 2001 and bears interest at various rates of either the prime rate or LIBOR plus 1.45%, at our election. We will have the ability to reborrow under our revolving credit agreement from time to time for general corporate purposes, including the acquisition of related businesses. We are periodically involved in the evaluation of, and discussions with, potential acquisition candidates. S-12 CAPITALIZATION The following table sets forth our capitalization as of January 31, 1999 and as adjusted to give effect to the sale of these notes and the application of the estimated net proceeds of this offering. This table should be read in conjunction with our Consolidated Financial Statements and the related notes thereto and the other financial information incorporated by reference or included elsewhere in this prospectus supplement and the prospectus.
As of January 31, 1999 ------------------ As Actual Adjusted -------- -------- ($ in thousands) Debt (1): Revolving credit agreement (2)........................... $ 92,225 $ -- 9 1/8% Senior Notes due 2009............................. -- 150,000 Nonrecourse land mortgages............................... 8,192 8,192 Nonrecourse mortgages secured by operating property...... 3,743 3,743 11 1/4% Subordinated Notes due 2002...................... 45,449 -- 9 3/4% Subordinated Notes due 2005....................... 100,000 100,000 -------- -------- Total debt............................................. 249,609 261,935 -------- -------- Stockholders' equity (3): Preferred Stock, $.01 par value; 100,000 shares authorized; none issued................................. -- -- Common Stock, Class A, $.01 par value; 87,000,000 shares authorized; 15,822,964 issued (including 2,118,274 held in treasury)............................................... 158 158 Common Stock, Class B, $.01 par value; 13,000,000 shares authorized; 8,025,504 issued (including 345,874 held in treasury)... 79 79 Paid-in capital.......................................... 34,590 34,590 Retained earnings........................................ 189,310 189,310 Treasury stock (at cost)................................. (18,113) (18,113) -------- -------- Total stockholders' equity............................. 206,024 206,024 -------- -------- Total capitalization................................. $455,633 $467,959 ======== ========
- --------------------- (1) Excludes debt under our mortgage warehouse line and bonds collateralized by mortgages receivable. (2) As of April 29, 1999, there was approximately $105 million outstanding under our revolving credit agreement. (3) Excludes 790,690 shares of Common Stock, Class A and 365,357 shares of Common Stock, Class B reserved at January 31, 1999 for issuance upon exercise of outstanding options under our Stock Incentive Plan. S-13 BUSINESS OVERVIEW We design, construct and market high quality single-family detached homes and attached condominium apartments and townhouses in planned residential developments in the Northeast (primarily in New Jersey, southern New York state and eastern Pennsylvania), North Carolina, northern Virginia and Maryland, southern California, southeastern Florida and Poland. We market our homes to first-time buyers, first- and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. We offer a variety of homestyles at prices ranging from $41,000 to $921,000 with an average sales price in fiscal 1998 of $216,000. We are currently offering homes for sale in 75 communities. Since the incorporation of our predecessor company in 1959, we have delivered in excess of 62,000 homes, including 4,138 homes in fiscal 1998. In addition, we provide financial services (mortgage loans and title insurance) to our homebuilding customers and third parties. We employed approximately 1,200 full-time associates as of October 31, 1998. We were incorporated in New Jersey in 1967 and we reincorporated in Delaware in 1982. Business Strategies, Operating Policies and Procedures Over the past few years, our strategies have included several initiatives to fundamentally transform the traditional practices we use to design, build and sell homes and focus on "building better." We believe that the adoption and implementation of processes and systems successfully used in other manufacturing industries, such as rapid cycle times, vendor consolidation, vendor partnering and just-in-time material procurement, will dramatically improve our business and give us a clear advantage over our competitors. Our concentration in selected markets is a key factor that enables us to achieve powers and economies of scale and differentiate ourselves from most of our competitors. These performance enhancing strategies are designed to achieve operational excellence through the implementation of standardized and streamlined "best practice processes." Strategic Initiatives. To improve our homebuilding gross profit margins, we have introduced a number of strategic initiatives, including: Partners In Excellence, Process Redesign and Training. Partners In Excellence, our total quality management initiative, is intended to focus on improving the way operations are performed. It involves all of our associates through a systematic, team-oriented approach to improvement. It increases our profits by streamlining processes and by reducing costly errors. We were recognized for our efforts by receiving the 1997 Gold National Housing Quality Award from Professional Builder magazine and The NAHB Research Center. Process Redesign is the fundamental rethinking and radical redesign of our processes to achieve dramatic improvements in performance. Our Process Redesign efforts are currently focused on streamlining and standardizing all of our key business processes. In addition, we are working to streamline our processes and implement SAP's enterprise-wide "Enterprise Resource Package" computer software system throughout our organization. Training is designed to provide our associates with the knowledge, attitudes, skill and habits necessary to succeed at their jobs. Our Training Department regularly conducts training classes in sales, construction, administration, and managerial skills. In addition, as Process Redesign develops new processes, the Training Department is responsible for educating our associates on the processes, procedures and operations. Land Acquisition, Planning and Development. Before entering into a contract to acquire land, we complete extensive comparative studies and analyses which assist us in evaluating the economic feasibility of such land acquisition. We generally follow a policy of acquiring options to purchase land for future community developments. We attempt to acquire land with a minimum cash investment and negotiate takedown options, thereby limiting the financial exposure to the amounts invested in property and predevelopment costs. This policy significantly reduces risk and generally allows us to obtain necessary development approvals before acquisition of the land, thereby enhancing the value of the options and the land eventually acquired. S-14 Our option and purchase agreements are typically subject to numerous conditions, including, but not limited to, our ability to obtain necessary governmental approvals for the proposed community. Generally, the deposit on the agreement will be returned to us if all approvals are not obtained, although predevelopment costs may not be recoverable. By paying an additional, nonrefundable deposit, we have the right to extend a significant number of our options for varying periods of time. In all instances, we have the right to cancel any of our land option agreements by forfeiture of our deposit on the agreement. In such instances, we generally are not able to recover any predevelopment costs. Our development activities include site planning and engineering, obtaining environmental and other regulatory approvals and constructing roads, sewer, water and drainage facilities, and for our residential developments, recreational facilities and other amenities. These activities are performed by our staff, together with independent architects, consultants and contractors. Our staff also carries out long-term planning of communities. Design. Our residential communities are generally located in suburban areas near major highways. The communities are designed as neighborhoods that fit existing land characteristics. We strive to create diversity within the overall planned community by offering a mix of homes with differing architecture, textures and colors. Wherever possible, recreational amenities such as a swimming pool, tennis courts, a club house and tot lots are included. Construction. We design and supervise the development and building of our communities. Our homes are constructed according to standardized prototypes which are designed and engineered to provide innovative product design while attempting to minimize costs of construction. We employ subcontractors for the installation of site improvements and construction of homes. Agreements with subcontractors are generally short term and provide for a fixed price for labor and materials. We rigorously control costs through the use of a computerized monitoring system. Because of the risks involved in speculative building, our general policy is to construct an attached condominium or townhouse building only after signing contracts for the sale of at least 50% of the homes in that building. Single family detached homes are usually constructed after the signing of a contract and mortgage approval has been obtained. Materials and Subcontractors. We attempt to maintain efficient operations by utilizing standardized materials available from a variety of sources. In addition, we contract with subcontractors representing all building trades in connection with the construction of our homes. In recent years, we have experienced no significant construction delays due to shortages of materials or labor. We can not predict, however, the extent to which shortages in necessary materials or labor may occur in the future. Marketing and Sales. Our residential communities are sold principally through on-site sales offices. In order to respond to our customers' needs and trends in housing design, we rely upon our internal market research group to analyze information gathered from, among other sources, buyer profiles, exit interviews at model sites, focus groups and demographic data bases. We make use of newspaper, radio, magazine, our website, billboard, video and direct mail advertising, special promotional events, illustrated brochures, full-sized and scale model homes in our comprehensive marketing program. In addition, we have recently opened a home design gallery in our Northeast region, which we expect will increase option sales and profitability in this market. We plan to open a similar gallery in each of our markets. Customer Service and Quality Control. Our associates responsible for customer service participate in pre-closing quality control inspections as well as responding to post-closing customer needs. Prior to closing, each home is inspected and any necessary completion work is undertaken by us. In some of our markets, we are enrolled in a standard limited warranty program which, in general, provides a homebuyer with a one-year warranty for the home's materials and workmanship, a two-year warranty for the home's heating, cooling, S-15 ventilating, electrical and plumbing systems and a ten-year warranty for major structural defects. All of the warranties contain standard exceptions, including, but not limited to, damage caused by the customer. Customer Financing. We sell our homes to customers who generally finance their purchases through mortgages. During the year ended October 31, 1998, over 58% of our non-cash customers obtained mortgages originated by our wholly-owned mortgage banking subsidiary, with a substantial portion of our remaining customers obtaining mortgages from various independent lending institutions. Mortgages originated by our wholly-owned mortgage banking subsidiary are sold in the secondary market. Residential Development Activities Our residential development activities include evaluating and purchasing properties, master planning, obtaining governmental approvals and constructing, marketing and selling homes. A residential development generally includes a number of residential buildings containing from two to twenty-four individual homes per building and/or single family detached homes, together with amenities such as recreational buildings, swimming pools, tennis courts and open areas. We attempt to reduce the effect of certain risks inherent in the housing industry through the following policies and procedures: . Through our presence in multiple geographic markets, our goal is to reduce the effects that housing industry cycles, seasonality and local conditions in any one area may have on our business. In addition, we plan to achieve a significant market presence in each of our markets in order to obtain powers and economies of scale. . We acquire land for future development principally through the use of land options which need not be exercised before the completion of the regulatory approval process. We structure these options in most cases with flexible takedown schedules rather than with an obligation to takedown the entire parcel upon approval. Additionally, we purchase improved lots in certain markets by acquiring a small number of improved lots with an option on additional lots. This allows us to minimize the economic costs and risks of carrying a large land inventory, while maintaining our ability to commence new developments during favorable market periods. . In an attempt to reduce our land acquisition costs, we monitor housing industry cycles and seek to acquire land options near the cyclical trough of specific geographic housing cycles. . We generally begin construction of an attached condominium or townhouse building only after entering into contracts for the sale of at least 50% of the homes in that building. Single-family detached homes are generally started after a contract is signed and mortgage approvals obtained. This limits the build-up of inventory of unsold homes and the costs of maintaining and carrying that inventory. . We offer a broad product array to provide housing to a wide range of customers. Our customers consist of first-time buyers, first- and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. . We offer a wide range of customer options to satisfy individual customer tastes. We have constructed decoration centers in our larger communities where the customer can better see customization possibilities for their new home. We recently opened a larger regional home design gallery in New Jersey and expect to open one in California during the next year. It is our expectation to open regional design galleries in each of our major markets. S-16 Current base prices for our homes in contract backlog at October 31, 1998 (exclusive of upgrades and options) range from $41,000 to $921,000 in our Northeast Region, from $100,000 to $413,000 in North Carolina, from $140,000 to $355,000 in Virginia, from $113,000 to $307,000 in California, from $157,000 to $352,000 in Florida and from $84,000 to $94,000 in Poland. Closings generally occur and are typically reflected in revenues from two to nine months after sales contracts are signed. Information on homes delivered by geographic market is set forth below:
Year Ended ----------------------------------- October 31, October 31, October 31, 1998 1997 1996 ----------- ----------- ----------- (Housing revenues in thousands) Northeast Region: Housing Revenues.......................... $595,873 $445,817 $460,931 Homes Delivered........................... 2,530 2,128 2,364 Average Price............................. $235,522 $209,500 $194,979 North Carolina: Housing Revenues.......................... $127,592 $125,242 $123,347 Homes Delivered........................... 687 695 738 Average Price............................. $185,723 $180,204 $167,137 Florida: Housing Revenues.......................... $ 44,168 $ 74,146 $ 99,085 Homes Delivered........................... 241 418 632 Average Price............................. $183,269 $177,382 $156,780 Virginia: Housing Revenues.......................... $ 38,904 $ 14,398 $ 16,749 Homes Delivered........................... 152 70 75 Average Price............................. $255,947 $205,685 $223,320 California: Housing Revenues.......................... $ 82,546 $ 69,252 $ 64,570 Homes Delivered........................... 457 365 325 Average Price............................. $180,625 $189,731 $198,677 Poland: Housing Revenues.......................... $ 6,561 $ 2,952 -- Homes Delivered........................... 71 41 -- Average Price............................. $ 92,408 $ 72,000 -- Combined Total: Housing Revenues.......................... $895,644 $731,807 $764,682 Homes Delivered........................... 4,138 3,717 4,134 Average Price............................. $216,443 $196,881 $184,974
The value of our net sales contracts increased 5.7% to $806.2 million for the year ended October 31, 1998 from $762.8 million for the year ended October 31, 1997. This increase was the net result of an 11.0% increase in the average base selling price to $207,969 from $187,270 and a 4.8% decrease in the number of homes contracted to 3,877 in 1998 from 4,073 in 1997. By market, on a dollar basis, Virginia achieved the highest increase of 136.6%, followed by the Northeast Region with an 11.6% increase and North Carolina with a 2.4% increase. The increase in Virginia was the result of an acquisition of a small homebuilder on May 1, 1998. Net sales contracts decreased in California, Florida and Poland. In California and Poland, contracts decreased due to fewer homes available for sale. Florida's decrease was due to the downsizing of the division. S-17 The following table summarizes our active communities under development as of January 31, 1999:
Contracted Remaining Approved Homes Not Homes Sites Communities Lots Delivered Delivered (1) Available (2) ----------- -------- --------- ------------- ------------- Northeast Region.... 28 8,977 3,412 1,043 4,522 North Carolina...... 29 3,772 1,241 217 2,314 Florida............. 4 971 660 88 223 Virginia............ 8 986 261 111 614 California.......... 6 2,467 341 95 2,031 Poland.............. -- 130 121 3 6 --- ------ ----- ----- ----- Total............. 75 17,303 6,036 1,557 9,710 === ====== ===== ===== =====
- --------------------- (1) Includes 29 lots under option. (2) Of the total home sites available, 422 were under construction or completed (including 47 models and sales offices), 4,863 were under option and 288 were financed through purchase money mortgages. In addition, as of January 31, 1999, in substantially completed or suspended developments, we owned 145 lots, including 13 unsold homes under construction. The following table summarizes our total started or completed unsold homes as of January 31, 1999:
Unsold Homes Models Total ------------ ------ ----- Northeast Region...................................... 175 10 185 North Carolina........................................ 108 -- 108 Florida............................................... 16 6 22 Virginia.............................................. 11 9 20 California............................................ 72 22 94 Poland................................................ 6 -- 6 --- --- --- Total............................................... 388 47 435 === === ===
Backlog At January 31, 1999 and January 31, 1998, we had a backlog of signed contracts with base values aggregating $366.4 million and $342.7 million, for 1,599 homes and 1,688 homes, respectively. Substantially all of our backlog at January 31, 1999 is expected to be completed and closed within the next nine months. Sales of our homes are typically made pursuant to a standard sales contract. This contract generally requires a nominal customer deposit at the time of signing with the remainder of a 5% to 10% down payment due 30 to 60 days after signing and provides the customer with a statutorily mandated right of rescission for a period ranging up to 15 days after execution. The contract may include a financing contingency, which permits the customer to cancel his obligation in the event mortgage financing at prevailing interest rates (including financing arranged or provided by us) is unobtainable within the period specified in the contract. This contingency period typically is four to eight weeks following the date of execution. S-18 Residential Land Inventory It is our objective to control a supply of land, primarily through options, consistent with anticipated homebuilding requirements in our housing markets. Controlled land as of January 31, 1999, exclusive of communities under development described under "Business Overview--Residential Development Activities," is summarized in the following table:
Number of Proposed Proposed Developable Communities Lots ----------- ----------- Northeast Region: Under Option.......................................... 24 7,350 Owned................................................. 6 724 --- ----- Total............................................... 30 8,074 --- ----- North Carolina: Under Option.......................................... 6 703 --- ----- California: Under Option.......................................... 4 604 --- ----- Poland: Owned................................................. 1 485 --- ----- Totals: Under Option.......................................... 34 8,657 Owned................................................. 7 1,209 --- ----- Combined Total (1).................................. 41 9,866 === =====
- --------------------- (1) In addition, we have three parcels of land in Florida approved for 1,033 homes, which parcels are being marketed for sale to third parties. In our Northeast Region, our objective is to control a supply of land sufficient to meet anticipated building requirements for at least three to five years. Historically, in North Carolina and Virginia, a portion of the land we acquired was from land developers on a lot takedown basis. Under a typical agreement with the lot developer, we purchase a minimal number of lots. The balance of the lots to be purchased are covered under an option agreement or a non-recourse purchase agreement. Due to the dwindling supply of improved lots in North Carolina and Virginia, we are currently optioning parcels of unimproved land for development. In California, we have focused our development efforts in the southern portion of the state. Where possible, we plan to option developed or partially developed lots with no more than 50 to 75 lots to be taken down during any twelve month period. With a limited supply of developed lots in California, we are currently optioning parcels of unimproved land for development. Customer Financing At our communities, on-site personnel facilitate sales by offering to arrange financing for prospective customers through K. Hovnanian Mortgage, Inc. ("KHM"). We believe that the ability to offer financing to customers on competitive terms as a part of the sales process is an important factor in completing sales. KHM is not a guarantor of the notes and will be an unrestricted subsidiary. S-19 KHM's business consists of providing our customers as well as unrelated third parties with competitive financing and coordinating and expediting the loan origination transaction through the steps of loan application, loan approval and closing. KHM has its headquarters in Red Bank, New Jersey. It originates loans in New Jersey, New York, Pennsylvania, North Carolina, Florida, California, South Carolina and Illinois. KHM, like other mortgage bankers, customarily sells nearly all of the loans that it originates. Additionally, KHM sells virtually all of the loan servicing rights to loans it originates. Loans are sold either individually or in pools to GNMA, FNMA, or FHLMC or against forward commitments to institutional investors, including banks and savings and loan associations. KHM plans to grow its mortgage banking operations. Initially, KHM focused on originating loans from customers who purchase homes from our affiliates. KHM's objective is to increase the capture rate of non-cash homebuyers from the 58% rate achieved in fiscal 1998 to 70% over the next several years. KHM has now expanded to offer its mortgage products and services to unrelated third parties. During the year ended October 31, 1998, third party loans amounted to 40% of total mortgage closings. S-20 DESCRIPTION OF NOTES The following description of the particular terms of the Notes supplements and to the extent inconsistent therewith, replaces the description of the general terms of the Debt Securities set forth under the heading "Descriptions of Debt Securities" in the accompanying Prospectus, to which description reference is hereby made. The Notes will be issued under an Indenture Supplement dated as of May 4, 1999, among the Company, the Issuer, the Guarantors and First Union National Bank, as trustee (the "Trustee") (as supplemented, the "Indenture"). The following is a summary of the material terms and provisions of the Notes. The terms of the Notes include those set forth in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), as in effect on the date of the Indenture. The Notes are subject to all such terms, and prospective purchasers of the Notes are referred to the Indenture and the Trust Indenture Act for a statement of such terms. Definitions of certain terms are set forth under "Certain Definitions" and throughout this description. Capitalized terms that are used but not otherwise defined herein have the meanings assigned to them in the Indenture, and those definitions are incorporated herein by reference. General The Notes will bear interest from the date the Notes are first issued under the Indenture at the rate per annum shown on the cover page of this prospectus supplement, payable semi-annually on May 1 and November 1 of each year, commencing November 1, 1999, to Holders of record at the close of business on April 15 or October 15, as the case may be, immediately preceding each such interest payment date. The Notes will mature on May 1, 2009, and will be issued in denominations of $1,000 and integral multiples thereof. The Notes will be limited to an aggregate principal amount of $150.0 million, of which $150.0 million will be issued in the offering. The Notes will be guaranteed by the Company and each of the Guarantors pursuant to the guarantees (the "Guarantees") described below. The Notes will be general unsecured obligations of the Issuer and rank senior in right of payment to all future Indebtedness of the Issuer that is, by its terms, expressly subordinated in right of payment to the Notes and pari passu in right of payment with all existing and future unsecured Indebtedness of the Issuer that is not so subordinated. The Guarantees will be general unsecured obligations of the Company and the Guarantors and will rank senior in right of payment to all future Indebtedness of the Company and the Guarantors that is, by its terms, expressly subordinated in right of payment to the Guarantees and will rank pari passu in right of payment with all existing and future unsecured Indebtedness of the Company and the Guarantors that is not so subordinated. Secured creditors of the Company, the Issuer and the other Guarantors will have a claim on the assets which secure the obligations of the Company and the Guarantors to such creditors prior to claims of Holders of the Notes against those assets. At January 31, 1999, as adjusted to give effect to the transactions described under "Use of Proceeds," the Company, the Issuer and the Guarantors would have had approximately $261.9 million (including the Notes) of Indebtedness outstanding, of which $11.9 million would have been secured by assets of the Company and its Restricted Subsidiaries and $100.0 million of which would have been subordinated to the Notes. In addition, the Indebtedness under the revolving credit agreement is secured by a pledge of the stock of KHL, Inc., a wholly owned subsidiary of the Company, which is not a guarantor of the Notes. Redemption Except as set forth below, the Notes will not be redeemable prior to May 1, 2004. Thereafter, the Issuer may redeem the Notes, at its option, in whole at any time or in part from time to time. Such redemption will be at the following redemption prices plus accrued and unpaid interest, if any, to the redemption date (subject to S-21 the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on May 1 of the years set forth below:
Redemption Year Price ---- ---------- 2004............................................................ 104.563% 2005............................................................ 103.042% 2006............................................................ 101.521% 2007 and thereafter............................................. 100.000%
In addition, the Issuer may redeem Notes, at any time prior to May 1, 2002, with the net cash proceeds of one or more Public Equity Offerings by the Company, at a redemption price equal to 109.125% of the principal amount of such Notes, plus accrued and unpaid interest, if any, to the date of redemption, provided, however, that after each such redemption not less than $97.5 million principal amount of Notes (excluding any Notes held by the Company or any of its Affiliates) remains outstanding. Notice of any such redemption must be given within 60 days after the date of the closing of the relevant Public Equity Offering. Selection of the Notes or portions thereof for redemption pursuant to the foregoing shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to the procedures of The Depository Trust Company), unless such method is otherwise prohibited. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at the registered address of such Holder. On and after the redemption date, interest ceases to accrue on the Notes or portions thereof called for redemption. There will be no sinking fund for the Notes. The Guarantees The Company and each of the Guarantors will (so long, in the case of a Restricted Subsidiary, as it remains a Restricted Subsidiary) unconditionally guarantee on a joint and several basis all of the Issuer's obligations under the Notes, including its obligations to pay principal, premium, if any, and interest with respect to the Notes. The Guarantees will be general unsecured obligations of the Company and the Guarantors and will rank pari passu with all existing and future unsecured Indebtedness of the Guarantors that is not, by its terms, expressly subordinated in right of payment to the Guarantees. The obligations of each Guarantor other than the Company are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, will result in the obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor other than the Company that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in an amount pro rata, based on the net assets of each Guarantor, determined in accordance with GAAP. Except as provided in "Certain Covenants" below, the Company is not restricted from selling or otherwise disposing of any of the Guarantors. The Indenture will require that each existing and future Restricted Subsidiary (other than KHL, Inc. and K. Hovnanian Poland, Inc.) be a Guarantor. The Company will be permitted to cause any Unrestricted Subsidiary to be a Guarantor. The Indenture will provide that if all or substantially all of the assets of any Guarantor other than the Company or all of the Capital Stock of any Guarantor other than the Company is sold (including by consolidation, merger, issuance or otherwise) or disposed of (including by liquidation, dissolution or otherwise) by the Company or any of its Subsidiaries, or, unless the Company elects otherwise, if any Guarantor other than the Company is designated an Unrestricted Subsidiary in accordance with the terms of the Indenture, then such Guarantor (in the event of a sale or other disposition of all of the Capital Stock of such Guarantor or a S-22 designation as an Unrestricted Subsidiary) or the Person acquiring such assets (in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor) shall be deemed automatically and unconditionally released and discharged from any of its obligations under the Indenture without any further action on the part of the Trustee or any Holder of the Notes. An Unrestricted Subsidiary that is a Guarantor shall be deemed automatically and unconditionally released and discharged from all obligations under its Guarantee upon notice from the Company to the Trustee to such effect, without any further action required on the part of the Trustee or any Holder. A sale of assets or Capital Stock of a Guarantor may constitute an Asset Disposition subject to the "Limitations on Dispositions of Assets" covenant. Certain Covenants The following is a summary of certain covenants that will be contained in the Indenture. Such covenants will be applicable (unless waived or amended as permitted by the Indenture) so long as any of the Notes are outstanding or until the Notes are defeased pursuant to provisions described under "Defeasance of Indenture." Repurchase of Notes upon Change of Control. In the event that there shall occur a Change of Control, each Holder of Notes shall have the right, at such Holder's option, to require the Issuer to purchase all or any part of such Holder's Notes on a date (the "Repurchase Date") that is no later than 90 days after notice of the Change of Control, at 101% of the principal amount thereof plus accrued and unpaid interest to the Repurchase Date. On or before the thirtieth day after any Change of Control, the Issuer is obligated to mail or cause to be mailed, to all Holders of record of Notes a notice regarding the Change of Control and the repurchase right. The notice shall state the Repurchase Date, the date by which the repurchase right must be exercised, the price for the Notes and the procedure which the Holder must follow to exercise such right. Substantially simultaneously with mailing of the notice, the Issuer shall cause a copy of such notice to be published in a newspaper of general circulation in the Borough of Manhattan, The City of New York. To exercise such right, the Holder of such Note must deliver at least ten days prior to the Repurchase Date written notice to the Issuer (or an agent designated by the Issuer for such purpose) of the Holder's exercise of such right, together with the Note with respect to which the right is being exercised, duly endorsed for transfer; provided, however, that if mandated by applicable law, a Holder may be permitted to deliver such written notice nearer to the Repurchase Date than may be specified by the Issuer. The Issuer will comply with applicable law, including Section 14(e) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule l4e-1 thereunder, if applicable, if the Issuer is required to give a notice of a right of repurchase as a result of a Change of Control. With respect to any disposition of assets, the phrase "all or substantially all" as used in the Indenture (including as set forth under "Limitations on Mergers, Consolidations and Sales of Assets" below) varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under New York law (which governs the Indenture) and is subject to judicial interpretation. Accordingly, in certain circumstances there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the assets of the Company, and therefore it may be unclear as to whether a Change of Control has occurred and whether the Holders have the right to require the Issuer to repurchase Notes. None of the provisions relating to a repurchase upon a Change of Control is waivable by the Board of Directors of the Issuer or the Company. The Company could, in the future, enter into certain transactions, including certain recapitalizations of the Company, that would not result in a Change of Control, but would increase the amount of Indebtedness outstanding at such time. S-23 The Indenture will require the payment of money for Notes or portions thereof validly tendered to and accepted for payment by the Issuer pursuant to a Change of Control offer. In the event that a Change of Control has occurred under the Indenture, a change of control will also have occurred under the indenture governing the Issuer's 9 3/4% Subordinated Notes due 2005 and under the revolving credit agreement. If a Change of Control were to occur, there can be no assurance that the Issuer would have sufficient funds to pay the purchase price for all Notes and amounts due under other Indebtedness that the Company may be required to repurchase or repay or that the Company or the other Guarantors would be able to make such payments. In the event that the Issuer were required to purchase outstanding Notes pursuant to a Change of Control offer, the Company expects that it would need to seek third-party financing to the extent it does not have available funds to enable the Issuer to meet its purchase obligations. However, there can be no assurance that the Company would be able to obtain such financing. Failure by the Issuer to purchase the Notes when required upon a Change of Control will result in an Event of Default with respect to the Notes. These provisions could have the effect of deterring hostile or friendly acquisitions of the Company where the Person attempting the acquisition views itself as unable to finance the purchase of the principal amount of Notes which may be tendered to the Company upon the occurrence of a Change of Control. Limitations on Indebtedness. The Indenture will provide that the Company and the Issuer will not, and will not cause or permit any Restricted Subsidiary, directly or indirectly, to create, incur, assume, become liable for or guarantee the payment of (collectively, an "incurrence") any Indebtedness (including Acquired Indebtedness) unless, after giving effect thereto and the application of the proceeds therefrom, the Consolidated Fixed Charge Coverage Ratio on the date thereof would be at least 2.0 to 1.0. Notwithstanding the foregoing, the provisions of the Indenture will not prevent the incurrence of: (1) Permitted Indebtedness, (2) Refinancing Indebtedness, (3) Non-Recourse Indebtedness, (4) any Guarantee of Indebtedness represented by the Notes, and (5) any guarantee of Indebtedness incurred under Credit Facilities in compliance with the Indenture. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness may be incurred through the first paragraph of this covenant or by meeting the criteria of one or more of the types of Indebtedness described in the second paragraph of this covenant (or the definitions of the terms used therein), the Company, in its sole discretion, (1) may classify such item of Indebtedness under and comply with either of such paragraphs (or any of such definitions), as applicable, (2) may classify and divide such item of Indebtedness into more than one of such paragraphs (or definitions), as applicable, and (3) may elect to comply with such paragraphs (or definitions), as applicable, in any order. The Company and the Issuer will not, and will not cause or permit any Guarantor to, directly or indirectly, in any event incur any Indebtedness that purports to be by its terms (or by the terms of any agreement governing such Indebtedness) subordinated to any other Indebtedness of the Company or of such Guarantor, as the case may be, unless such Indebtedness is also by its terms (or by the terms of any agreement governing such Indebtedness) made expressly subordinated to the Notes or the Guarantee of such Guarantor, as the case may be, to the same extent and in the same manner as such Indebtedness is subordinated to such other Indebtedness of the Company or such Guarantor, as the case may be. S-24 Limitations on Restricted Payments. The Indenture will provide that the Company and the Issuer will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment unless: (1) no Default or Event of Default shall have occurred and be continuing at the time of or immediately after giving effect to such Restricted Payment; (2) immediately after giving effect to such Restricted Payment, the Company could incur at least $1.00 of Indebtedness pursuant to the first paragraph of the "Limitations on Indebtedness" covenant; and (3) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments (including the Fair Market Value of any non-cash Restricted Payment) declared or made after the Issue Date does not exceed the sum of: (a) 50% of the Consolidated Net Income of the Company on a cumulative basis during the period (taken as one accounting period) from and including February 1, 1999 and ending on the last day of the Company's fiscal quarter immediately preceding the date of such Restricted Payment (or in the event such Consolidated Net Income shall be a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds of and the Fair Market Value of Property received by the Company from (1) any capital contribution to the Company after February 1, 1999 or any issue or sale after February 1, 1999 of Qualified Stock (other than to any Subsidiary of the Company) and (2) the issue or sale after February 1, 1999 of any Indebtedness or other securities of the Company convertible into or exercisable for Qualified Stock of the Company that have been so converted or exercised, as the case may be, plus (c) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the Issue Date, an amount (to the extent not included in the calculation of Consolidated Net Income referred to in (a)) equal to the lesser of (x) the return of capital with respect to such Investment (including by dividend, distribution or sale of Capital Stock) and (y) the amount of such Investment that was treated as a Restricted Payment, in either case, less the cost of the disposition or repayment of such Investment (to the extent not included in the calculation of Consolidated Net Income referred to in (a)), plus (d) with respect to any Unrestricted Subsidiary that is redesignated as a Restricted Subsidiary after the Issue Date, in accordance with the definition of Unrestricted Subsidiary (so long as the designation of such Subsidiary as an Unrestricted Subsidiary was treated as a Restricted Payment made after the Issue Date, and only to the extent not included in the calculation of Consolidated Net Income referred to in (a)), an amount equal to the lesser of (x) the proportionate interest of the Company or a Restricted Subsidiary in an amount equal to the excess of (I) the total assets of such Subsidiary, valued on an aggregate basis at the lesser of book value and Fair Market Value thereof, over (II) the total liabilities of such Subsidiary, determined in accordance with GAAP, and (y) the Designation Amount at the time of such Subsidiary's designation as an Unrestricted Subsidiary, plus (e) $17 million, minus (f) the aggregate amount of all Restricted Payments (other than Restricted Payments referred to in clause (C) of the immediately succeeding paragraph) made after February 1, 1999 through the Issue Date. The foregoing clauses (2) and (3) will not prohibit: (A) the payment of any dividend within 60 days of its declaration if such dividend could have been made on the date of its declaration without violation of the provisions of the Indenture; (B) the repurchase, redemption or retirement of any shares of Capital Stock of the Company in exchange for, or out of the net proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of, other shares of Qualified Stock; and S-25 (C) the purchase, redemption or other acquisition, cancellation or retirement for value of Capital Stock, or options, warrants, equity appreciation rights or other rights to purchase or acquire Capital Stock, of the Company or any Subsidiary held by officers or employees or former officers or employees of the Company or any Subsidiary (or their estates or beneficiaries under their estates) not to exceed $10 million in the aggregate since the Issue Date; provided, however that each Restricted Payment described in clauses (A) and (B) of this sentence shall be taken into account for purposes of computing the aggregate amount of all Restricted Payments pursuant to clause (3) of the immediately preceding paragraph. For purposes of determining the aggregate and permitted amounts of Restricted Payments made, the amount of any guarantee of any Investment in any Person that was initially treated as a Restricted Payment and which was subsequently terminated or expired, net of any amounts paid by the Company or any Restricted Subsidiary in respect of such guarantee, shall be deducted. In determining the "Fair Market Value of Property" for purposes of clause (3) of the first paragraph of this covenant, Property other than cash, Cash Equivalents and Marketable Securities shall be deemed to be equal in value to the "equity value" of the Capital Stock or other securities issued in exchange therefor. The equity value of such Capital Stock or other securities shall be equal to (i) the number of shares of Common Equity issued in the transaction (or issuable upon conversion or exercise of the Capital Stock or other securities issued in the transaction) multiplied by the closing sale price of the Common Equity on its principal market on the date of the transaction (less, in the case of Capital Stock or other securities which require the payment of consideration at the time of conversion or exercise, the aggregate consideration payable thereupon) or (ii) if the Common Equity is not then traded on the New York Stock Exchange, American Stock Exchange or Nasdaq National Market, or if the Capital Stock or other securities issued in the transaction do not consist of Common Equity (or Capital Stock or other securities convertible into or exercisable for Common Equity), the value (if more than $10 million) of such Capital Stock or other securities as determined by a nationally recognized investment banking firm retained by the Board of Directors of the Company. Limitations on Transactions with Affiliates. The Indenture will provide that the Company and the Issuer will not, and will not cause or permit any Restricted Subsidiary to, make any loan, advance, guarantee or capital contribution to, or for the benefit of, or sell, lease, transfer or otherwise dispose of any property or assets to or for the benefit of, or purchase or lease any property or assets from, or enter into or amend any contract, agreement or understanding with, or for the benefit of, any Affiliate of the Company or any Affiliate of any of the Company's Subsidiaries or any holder of 10% or more of the Common Equity of the Company (including any Affiliates of such holders), in a single transaction or series of related transactions (each, an "Affiliate Transaction"), except for any Affiliate Transaction the terms of which are at least as favorable as the terms which could be obtained by the Company, the Issuer or such Restricted Subsidiary, as the case may be, in a comparable transaction made on an arm's length basis with Persons who are not such a holder, an Affiliate of such a holder or an Affiliate of the Company or any of the Company's Subsidiaries. In addition, the Company and the Issuer will not, and will not cause or permit any Restricted Subsidiary to, enter into an Affiliate Transaction unless: (1) with respect to any such Affiliate Transaction involving or having a value of more than $1 million, the Company shall have (x) obtained the approval of a majority of the Board of Directors of the Company and (y) either obtained the approval of a majority of the Company's disinterested directors or obtained an opinion of a qualified independent financial advisor to the effect that such Affiliate Transaction is fair to the Company, the Issuer or such Restricted Subsidiary, as the case may be, from a financial point of view, and (2) with respect to any such Affiliate Transaction involving or having a value of more than $10 million, the Company shall have (x) obtained the approval of a majority of the Board of Directors of the Company and (y) delivered to the Trustee an opinion of a qualified independent financial advisor to the effect that such Affiliate Transaction is fair to the Company, the Issuer or such Restricted Subsidiary, as the case may be, from a financial point of view. S-26 The Indenture will also provide that notwithstanding the foregoing, an Affiliate Transaction will not include: (1) any contract, agreement or understanding with, or for the benefit of, or plan for the benefit of, employees of the Company or its Subsidiaries generally (in their capacities as such) that has been approved by the Board of Directors of the Company, (2) Capital Stock issuances to directors, officers and employees of the Company or its Subsidiaries pursuant to plans approved by the stockholders of the Company, (3) any Restricted Payment otherwise permitted under the "Limitations on Restricted Payments" covenant, (4) any transaction between or among the Company and one or more Restricted Subsidiaries or between or among Restricted Subsidiaries (provided, however, no such transaction shall involve any other Affiliate of the Company (other than an Unrestricted Subsidiary to the extent the applicable amount constitutes a Restricted Payment permitted by the Indenture)), (5) any transaction between one or more Restricted Subsidiaries and one or more Unrestricted Subsidiaries where all of the payments to, or other benefits conferred upon, such Unrestricted Subsidiaries are substantially contemporaneously dividended, or otherwise distributed or transferred without charge, to the Company or a Restricted Subsidiary, (6) issuances, sales or other transfers or dispositions of mortgages and collateralized mortgage obligations in the ordinary course of business between Restricted Subsidiaries and Unrestricted Subsidiaries of the Company, and (7) the payment of reasonable and customary fees to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company, the Issuer or any Restricted Subsidiary. Limitations on Dispositions of Assets. The Indenture will provide that the Company and the Issuer will not, and will not cause or permit any Restricted Subsidiary to, make any Asset Disposition unless: (x) the Company (or such Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Disposition at least equal to the Fair Market Value thereof, and (y) not less than 70% of the consideration received by the Company (or such Restricted Subsidiary, as the case may be) is in the form of cash, Cash Equivalents and Marketable Securities. The amount of (i) any Indebtedness (other than any Indebtedness subordinated to the Notes) of the Company or any Restricted Subsidiary that is actually assumed by the transferee in such Asset Disposition and (ii) the fair market value (as determined in good faith by the Board of Directors of the Company) of any property or assets received that are used or useful in a Real Estate Business, shall be deemed to be consideration required by clause (y) above for purposes of determining the percentage of such consideration received by the Company or the Restricted Subsidiaries. The Net Cash Proceeds of an Asset Disposition shall, within one year, at the Company's election, (a) be used by the Company or a Restricted Subsidiary in the business of the construction and sale of homes conducted by the Company and the Restricted Subsidiaries or any other business of the Company or a Restricted Subsidiary existing at the time of such Asset Disposition or (b) to the extent not so used, be applied to make a Net Cash Proceeds offer for the Notes and, if the Company or a Restricted Subsidiary elects or is required to do so repay, purchase or redeem any other unsubordinated Indebtedness (on a pro rata basis if the amount available for such repayment, purchase or redemption is less than the aggregate amount of (i) the principal amount of the Notes tendered in such Net Cash Proceeds Offer and (ii) the lesser of the principal amount, or accreted value, of such other unsubordinated Indebtedness, plus, in each case accrued interest to the date of repayment, purchase or redemption) at 100% of the principal amount or accreted value thereof, as the case may be, plus accrued interest to the date of repurchase or repayment. S-27 Notwithstanding the foregoing, (A) the Company will not be required to apply such Net Cash Proceeds to the repurchase of Notes in accordance with clause (b) of the preceding sentence except to the extent that such Net Cash Proceeds, together with the aggregate Net Cash Proceeds of prior Asset Dispositions (other than those so used) which have not been applied in accordance with this provision and as to which no prior Net Cash Proceeds offer shall have been made, exceed 5% of Consolidated Tangible Assets and (B) in connection with an Asset Disposition, the Company and the Restricted Subsidiaries will not be required to comply with the requirements of clause (y) of the first sentence of the first paragraph of this covenant to the extent that the non-cash consideration received in connection with such Asset Disposition, together with the sum of all non-cash consideration received in connection with all prior Asset Dispositions that has not yet been converted into cash, does not exceed 5% of Consolidated Tangible Assets; provided, however, that when any non-cash consideration is converted into cash, such cash shall constitute Net Cash Proceeds and be subject to the preceding sentence. Limitations on Liens. The Indenture will provide that the Company and the Issuer will not, and will not cause or permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens, other than Permitted Liens, on any of its Property, or on any shares of Capital Stock or Indebtedness of any Restricted Subsidiary, unless contemporaneously therewith or prior thereto all payments due under the Indenture and the Notes are secured on an equal and ratable basis with the obligation or liability so secured until such time as such obligation or liability is no longer secured by a Lien. Limitations on Restrictions Affecting Restricted Subsidiaries. The Indenture will provide that the Company and the Issuer will not, and will not cause or permit any Restricted Subsidiary to, create, assume or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction (other than encumbrances or restrictions imposed by law or by judicial or regulatory action or by provisions of agreements that restrict the assignability thereof) on the ability of any Restricted Subsidiary to: (1) pay dividends or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits, owned by the Company or any other Restricted Subsidiary, or pay interest on or principal of any Indebtedness owed to the Company or any other Restricted Subsidiary, (2) make loans or advances to the Company or any other Restricted Subsidiary, or (3) transfer any of its property or assets to the Company or any other Restricted Subsidiary, except for (a) encumbrances or restrictions existing under or by reason of applicable law, (b) contractual encumbrances or restrictions in effect on the Issue Date and any amendments, modifications, restatements, renewals, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, supplements, refundings, replacements or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in such contractual encumbrances or restrictions, as in effect on the Issue Date, (c) any restrictions or encumbrances arising under Acquired Indebtedness; provided, that such encumbrance or restriction applies only to either the assets that were subject to the restriction or encumbrance at the time of the acquisition or the obligor on such Indebtedness and its Subsidiaries prior to such acquisition, (d) any restrictions or encumbrances arising in connection with Refinancing Indebtedness; provided, however, that any restrictions and encumbrances of the type described in this clause (d) that arise under such Refinancing Indebtedness shall not be materially more restrictive or apply to additional assets than those under the agreement creating or evidencing the Indebtedness being refunded, refinanced, replaced or extended, S-28 (e) any Permitted Lien, or any other agreement restricting the sale or other disposition of property, securing Indebtedness permitted by the Indenture if such Permitted Lien or agreement does not expressly restrict the ability of a Subsidiary of the Company to pay dividends or make or repay loans or advances prior to default thereunder, (f) reasonable and customary borrowing base covenants set forth in agreements evidencing Indebtedness otherwise permitted by the Indenture, (g) customary non-assignment provisions in leases, licenses, encumbrances, contracts or similar assets entered into or acquired in the ordinary course of business, (h) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition, (i) encumbrances or restrictions existing under or by reason of the Indenture or the Notes, (j) purchase money obligations that impose restrictions on the property so acquired of the nature described in clause (3) of the preceding paragraph, (k) Liens permitted under the Indenture securing Indebtedness that limit the right of the debtor to dispose of the assets subject to such Lien, (l) provisions with respect to the disposition or distribution of assets or property in joint venture agreements, assets sale agreements, stock sale agreements and other similar agreements, (m) customary provisions of any franchise, distribution or similar agreements, (n) restrictions on cash or other deposits or net worth imposed by contracts entered into in the ordinary course of business, and (o) any encumbrance or restrictions of the type referred to in clauses (1), (2) or (3) of the first paragraph of this section imposed by any amendments, modifications, restatements, renewals, supplements, refinancings, replacements or refinancings of the contracts, instruments or obligations referred to in clauses (a) through (n) of this paragraph, provided that such amendments, modifications, restatements, renewals, supplements, refundings, replacements or refinancings are, in the good faith judgment of the Company's Board of Directors, no more restrictive with respect to such dividend and other payment restrictions than those contained in the dividend or other payment restrictions prior to such amendment, modification, restatement, renewal, supplement, refunding, replacement or refinancing. Limitations on Mergers, Consolidations and Sales of Assets. The Indenture will provide that neither the Company nor the Issuer nor any Guarantor will consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets (including, without limitation, by way of liquidation or dissolution), or assign any of its obligations under the Notes, the Guarantees or the Indenture (as an entirety or substantially as an entirety in one transaction or in a series of related transactions), to any Person (in each case other than in a transaction in which the Company, the Issuer or a Restricted Subsidiary is the survivor of a consolidation or merger, or the transferee in a sale, lease, conveyance or other disposition) unless: (1) the Person formed by or surviving such consolidation or merger (if other than the Company, the Issuer or the Guarantor, as the case may be), or to which such sale, lease, conveyance or other disposition or assignment will be made (collectively, the "Successor"), is a corporation or other legal entity organized and existing under the laws of the United States or any state thereof or the District of Columbia, and the Successor assumes by supplemental indenture in a form reasonably satisfactory to the Trustee all of the obligations of the Company, the Issuer or the Guarantor, as the case may be, under the Notes or a Guarantee, as the case may be, and the Indenture, (2) immediately after giving effect to such transaction, no Default or Event of Default has occurred and is continuing, S-29 (3) in the case of a transaction involving the Company, immediately after giving effect to such transaction and the use of any net proceeds therefrom, on a pro forma basis, the Consolidated Net Worth of the Company or the Successor as the case may be, would be at least equal to the Consolidated Net Worth of the Company immediately prior to such transaction (exclusive of any adjustments to Consolidated Net Worth attributable to transaction costs) less any amount treated as a Restricted Payment in connection with such transaction in accordance with the Indenture, and (4) immediately after giving effect to such transaction, the Company (or its Successor) could incur at least $1.00 of Indebtedness pursuant to the first paragraph of the "Limitation on Indebtedness" covenant. The foregoing provisions shall not apply to: (a) a transaction involving the sale or disposition of Capital Stock of a Guarantor, or the consolidation or merger of a Guarantor, or the sale, lease, conveyance or other disposition of all or substantially all of the assets of a Guarantor, that in any such case results in such Guarantor being released from its Guarantee as provided under "The Guarantees" above, or (b) a transaction the purpose of which is to change the state of incorporation of the Company, the Issuer or any Guarantor. Reports to Holders of Notes. The Company shall file with the Commission the annual reports and the information, documents and other reports required to be filed pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall file with the Trustee and mail to each Holder of record of Notes such reports, information and documents within 15 days after it files them with the Commission. In the event that the Company is no longer subject to these periodic requirements of the Exchange Act, it will nonetheless continue to file reports with the Commission and the Trustee and mail such reports to each Holder of Notes as if it were subject to such reporting requirements. Regardless of whether the Company is required to furnish such reports to its stockholders pursuant to the Exchange Act, the Company will cause its consolidated financial statements and a "Management's Discussion and Analysis of Results of Operations and Financial Condition" written report, similar to those that would have been required to appear in annual or quarterly reports, to be delivered to Holders of Notes. Events of Default The following are Events of Default under the Indenture: (1) the failure by the Company, the Issuer and the Guarantors to pay interest on any Note when the same becomes due and payable and the continuance of any such failure for a period of 30 days; (2) the failure by the Company, the Issuer and the Guarantors to pay the principal or premium of any Note when the same becomes due and payable at maturity, upon acceleration or otherwise; (3) the failure by the Company, the Issuer or any Restricted Subsidiary to comply with any of its agreements or covenants in, or provisions of, the Notes, the Guarantees or the Indenture and such failure continues for the period and after the notice specified below (except in the case of a default under covenants described under "Certain Covenants-- Repurchase of Notes upon Change of Control" and "Limitations on Mergers, Consolidations and Sales of Assets," which will constitute Events of Default with notice but without passage of time); (4) the acceleration of any Indebtedness (other than Non-Recourse Indebtedness) of the Company, the Issuer or any Restricted Subsidiary that has an outstanding principal amount of $10 million or more, individually or in the aggregate, and such acceleration does not cease to exist, or such Indebtedness is not satisfied, in either case within 30 days after such acceleration; (5) the failure by the Company, the Issuer or any Restricted Subsidiary to make any principal or interest payment in an amount of $10 million or more, individually or in the aggregate, in respect of Indebtedness (other than Non-Recourse Indebtedness) of the Company or any Restricted Subsidiary within 30 days of such principal or interest becoming due and payable (after giving effect to any applicable grace period set forth in the documents governing such Indebtedness); S-30 (6) a final judgment or judgments that exceed $10 million or more, individually or in the aggregate, for the payment of money having been entered by a court or courts of competent jurisdiction against the Company, the Issuer or any of its Restricted Subsidiaries and such judgment or judgments is not satisfied, stayed, annulled or rescinded within 60 days of being entered; (7) the Company or any Restricted Subsidiary that is a Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (d) makes a general assignment for the benefit of its creditors; (8) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company or any Restricted Subsidiary that is a Significant Subsidiary as debtor in an involuntary case, (b) appoints a Custodian of the Company or any Restricted Subsidiary that is a Significant Subsidiary or a Custodian for all or substantially all of the property of the Company or any Restricted Subsidiary that is a Significant Subsidiary, or (c) orders the liquidation of the Company or any Restricted Subsidiary that is a Significant Subsidiary, and the order or decree remains unstayed and in effect for 60 days, or (9) any Guarantee of a Guarantor which is a Significant Subsidiary ceases to be in full force and effect (other than in accordance with the terms of such Guarantee and the Indenture) or is declared null and void and unenforceable or found to be invalid or any Guarantor denies its liability under its Guarantee (other than by reason of release of a Guarantor from its Guarantee in accordance with the terms of the Indenture and the Guarantee). A Default as described in subclause (3) above will not be deemed an Event of Default until the Trustee notifies the Company, or the Holders of at least 25 percent in principal amount of the then outstanding Notes notify the Company and the Trustee, of the Default and (except in the case of a default with respect to covenants described under "Certain Covenants--Repurchase of Notes upon Change of Control" and "Limitations on Mergers, Consolidations and Sales of Assets") the Company does not cure the Default within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." If such a Default is cured within such time period, it ceases. If an Event of Default (other than an Event of Default with respect to the Company resulting from subclauses (7) or (8) above), shall have occurred and be continuing under the Indenture, the Trustee by notice to the Company, or the Holders of at least 25 percent in principal amount of the Notes then outstanding by notice to the Company and the Trustee, may declare all Notes to be due and payable immediately. Upon such declaration of acceleration, the amounts due and payable on the Notes will be due and payable immediately. If an Event of Default with respect to the Company specified in subclauses (7) or (8) above occurs, such an amount will ipso facto become and be immediately due and payable without any declaration, notice or other act on the part of the Trustee and the Company or any Holder. The Holders of a majority in principal amount of the Notes then outstanding by written notice to the Trustee and the Company may waive any Default or Event of Default (other than any Default or Event of Default in payment of principal or interest) on the Notes under the Indenture. Holders of a majority in principal amount of the then outstanding Notes may rescind an acceleration and its consequence (except an acceleration due to nonpayment of principal or interest on the Notes) if the rescission would not conflict with any judgment or decree and if all existing Events of Default (other than the non-payment of accelerated principal) have been cured or waived. S-31 The Holders may not enforce the provisions of the Indenture, the Notes or the Guarantees except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power, provided, however, that such direction does not conflict with the terms of the Indenture. The Trustee may withhold from the Holders notice of any continuing Default or Event of Default (except any Default or Event of Default in payment of principal or interest on the Notes or that resulted from the failure to comply with the covenant entitled "Repurchase of Notes upon Change of Control") if the Trustee determines that withholding such notice is in the Holders' interest. The Company is required to deliver to the Trustee an annual statement regarding compliance with the Indenture, and include in such statement, if any officer of the Company is aware of any Default or Event of Default, a statement specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. In addition, the Company is required to deliver to the Trustee prompt written notice of the occurrence of any Default or Event of Default. Defeasance of Indenture The Indenture will permit the Company, the Issuer and the Guarantors to terminate all of their respective obligations under the Indenture with respect to the Notes and the Guarantees, other than the obligation to pay interest on and the principal of the Notes and certain other obligations, at any time by (1) depositing in trust with the Trustee, under an irrevocable trust agreement, money or U.S. government obligations in an amount sufficient to pay principal of and interest on the Notes to their maturity, and (2) complying with certain other conditions, including delivery to the Trustee of an opinion of counsel or a ruling received from the Internal Revenue Service to the effect that Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of such right and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case otherwise. In addition, the Indenture will permit the Company, the Issuer and the Guarantors to terminate all of their obligations under the Indenture with respect to the Notes and the Guarantees (including the obligations to pay interest on and the principal of the Notes and certain other obligations), at any time by (1) depositing in trust with the Trustee, under an irrevocable trust agreement, money or U.S. government obligations in an amount sufficient to pay principal of and interest on the Notes to their maturity, and (2) complying with certain other conditions, including delivery to the Trustee of an opinion of counsel or a ruling, received from the Internal Revenue Service, to the effect that Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of such right and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case otherwise, which opinion of counsel is based upon a change in the applicable federal tax law since the date of the Indenture. Transfer and Exchange A Holder will be able to transfer or exchange Notes only in accordance with the provisions of the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Indenture. Amendment, Supplement and Waiver Subject to certain exceptions, the Indenture, the Notes or the Guarantees may be amended or supplemented with the consent (which may include consents obtained in connection with a tender offer or exchange offer for Notes) of the Holders of at least a majority in principal amount of the Notes then S-32 outstanding, and any existing Default under, or compliance with any provision of the Indenture may be waived (other than any continuing Default or Event of Default in the payment of interest on or the principal of the Notes) with the consent (which may include consents obtained in connection with a tender offer or exchange offer for Notes) of the Holders of a majority in principal amount of the Notes then outstanding. Without the consent of any Holder, the Company, the Issuer, the Guarantors and the Trustee may amend or supplement the Indenture, the Notes or the Guarantees to cure any ambiguity, defect or inconsistency; to comply with the "Limitations on Mergers, Consolidations and Sales of Assets" covenant set forth in the Indenture; to provide for uncertificated Notes in addition to or in place of certificated Notes; to make any change that does not adversely affect the legal rights of any Holder; to add a Guarantor; or to delete a Guarantor which, in accordance with the terms of the Indenture, ceases to be liable on its Guarantee. Without the consent of each Holder affected, the Company, the Issuer, the Guarantors and the Trustee may not: (1) reduce the amount of Notes whose Holders must consent to an amendment, supplement or waiver, (2) reduce the rate of or change the time for payment of interest, including default interest, on any Note, (3) reduce the principal of or change the fixed maturity of any Note or alter the provisions (including related definitions) with respect to redemptions described under "Optional Redemption" or with respect to mandatory offers to repurchase Notes described under "Limitations on Dispositions of Assets" or "Repurchase of Notes upon Change of Control," (4) make any Note payable in money other than that stated in the Note, (5) make any change in the "Waiver of Past Defaults and Compliance with Indenture Provisions," "Rights of Holders to Receive Payment" or the "With Consent of Holders" sections set forth in the Indenture, (6) modify the ranking or priority of the Notes or any Guarantee, (7) release any Guarantor from any of its obligations under its Guarantee or the Indenture otherwise than in accordance with the Indenture, or (8) waive a continuing Default or Event of Default in the payment of principal of or interest on the Notes. The right of any Holder to participate in any consent required or sought pursuant to any provision of the Indenture (and the obligation of the Issuer to obtain any such consent otherwise required from such Holder) may be subject to the requirement that such Holder shall have been the Holder of record of any Notes with respect to which such consent is required or sought as of a date identified by the Trustee in a notice furnished to Holders in accordance with the terms of the Indenture. Concerning the Trustee The Indenture contains certain limitations on the rights of the Trustee, as a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transaction; however, if it acquires any conflicting interest (as defined in the Indenture), it must eliminate such conflict or resign. The Trustee is also trustee with respect to the Issuer's 9 3/4% Subordinated Notes due 2005. Governing Law The Indenture, the Notes and the Guarantees will be governed by the laws of the State of New York without giving effect to principles of conflict of laws. Certain Definitions Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all terms used in the Indenture. S-33 "Acquired Indebtedness" means (1) with respect to any Person that becomes a Restricted Subsidiary (or is merged into the Company, the Issuer or any Restricted Subsidiary) after the Issue Date, Indebtedness of such Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary (or is merged into the Company, the Issuer or any Restricted Subsidiary) that was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary (or being merged into the Company, the Issuer or any Restricted Subsidiary) and (2) with respect to the Company, the Issuer or any Restricted Subsidiary, any Indebtedness expressly assumed by the Company, the Issuer or any Restricted Subsidiary in connection with the acquisition of any assets from another Person (other than the Company, the Issuer or any Restricted Subsidiary), which Indebtedness was not incurred by such other Person in connection with or in contemplation of such acquisition. Indebtedness incurred in connection with or in contemplation of any transaction described in clause (1) or (2) of the preceding sentence shall be deemed to have been incurred by the Company or a Restricted Subsidiary, as the case may be, at the time such Person becomes a Restricted Subsidiary (or is merged into the Company, the Issuer or any Restricted Subsidiary) in the case of clause (1) or at the time of the acquisition of such assets in the case of clause (2), but shall not be deemed Acquired Indebtedness. "Affiliate" means, when used with reference to a specified Person any Person direct or indirectly controlling, or controlled by or under direct or indirect common control with the Person specified. "Asset Acquisition" means (1) an Investment by the Company, the Issuer or any Restricted Subsidiary in any other Person if, as a result of such Investment, such Person shall become a Restricted Subsidiary or shall be consolidated or merged with or into the Company, the Issuer or any Restricted Subsidiary or (2) the acquisition by the Company, the Issuer or any Restricted Subsidiary of the assets of any Person, which constitute all or substantially all of the assets or of an operating unit or line of business of such Person or which is otherwise outside the ordinary course of business. "Asset Disposition" means any sale, transfer, conveyance, lease or other disposition (including, without limitation, by way of merger, consolidation or sale and leaseback or sale of shares of Capital Stock in any Subsidiary) (each, a "transaction") by the Company, the Issuer or any Restricted Subsidiary to any Person of any Property having a Fair Market Value in any transaction or series of related transactions of at least $5 million. The term "Asset Disposition" shall not include: (1) a transaction between the Company, the Issuer and any Restricted Subsidiary or a transaction between Restricted Subsidiaries, (2) a transaction in the ordinary course of business, including, without limitation, sales (directly or indirectly), dedications and other donations to governmental authorities, leases and sales and leasebacks of (A) homes, improved land and unimproved land and (B) real estate (including related amenities and improvements), (3) a transaction involving the sale of Capital Stock of, or the disposition of assets in, an Unrestricted Subsidiary, (4) any exchange or swap of assets of the Company, the Issuer or any Restricted Subsidiary for assets that (x) are to be used by the Company, the Issuer or any Restricted Subsidiary in the ordinary course of its Real Estate Business and (y) have a Fair Market Value not less than the Fair Market Value of the assets exchanged or swapped, (5) any sale, transfer, conveyance, lease or other disposition of assets and properties that is governed by the provisions relating to "Limitations on Mergers, Consolidation and Sales of Assets," or (6) dispositions of mortgage loans and related assets and mortgage-backed securities in the ordinary course of a mortgage lending business. "Attributable Debt" means, with respect to any Capitalized Lease Obligations, the capitalized amount thereof determined in accordance with GAAP. S-34 "Bankruptcy Law" means title 11 of the United States Code, as amended, or any similar federal or state law for the relief of debtors. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of or in such Person's capital stock or other equity interests, and options, rights or warrants to purchase such capital stock or other equity interests, whether now outstanding or issued after the Issue Date, including, without limitation, all Disqualified Stock and Preferred Stock. "Capitalized Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such obligations will be the capitalized amount thereof determined in accordance with GAAP. "Cash Equivalents" means (1) U.S. dollars; (2) securities issued or directly and fully guaranteed or insured by the U.S. government or any agency or instrumentality thereof having maturities of one year or less from the date of acquisition; (3) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500 million; (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) entered into with any financial institution meeting the qualifications specified in clause (3) above; (5) commercial paper rated P-1, A- 1 or the equivalent thereof by Moody's or S&P, respectively, and in each case maturing within six months after the date of acquisition; and (6) investments in money market funds substantially all of the assets of which consist of securities described in the foregoing clauses (1) through (5). "Change of Control" means (1) any sale, lease or other transfer (in one transaction or a series of transactions) of all or substantially all of the consolidated assets of the Company and its Restricted Subsidiaries to any Person (other than a Restricted Subsidiary); provided, however, that a transaction where the holders of all classes of Common Equity of the Company immediately prior to such transaction own, directly or indirectly, more than 50% of all classes of Common Equity of such Person immediately after such transaction shall not be a Change of Control; (2) a "person" or "group" (within the meaning of Section 13(d) of the Exchange Act (other than (x) the Company or (y) the Permitted Hovnanian Holders) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Common Equity of the Company representing more than 50% of the voting power of the Common Equity of the Company; (3) Continuing Directors cease to constitute at least a majority of the Board of Directors of the Company; (4) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; provided, however, that a liquidation or dissolution of the Company which is part of a transaction that does not constitute a Change of Control under the proviso contained in clause (1) above shall not constitute a Change of Control; or (5) a change of control shall occur as defined in the instrument governing any publicly traded debt securities of the Company or the Issuer which requires the Company or the Issuer to repay or repurchase such debt securities. S-35 "Common Equity" of any Person means Capital Stock of such Person that is generally entitled to (1) vote in the election of directors of such Person or (2) if such Person is not a corporation, vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person. "Consolidated Adjusted Tangible Assets" of the Company as of any date means the Consolidated Tangible Assets of the Company, the Issuer and the Restricted Subsidiaries at the end of the fiscal quarter immediately preceding the date less any assets securing any Non-Recourse Indebtedness, as determined in accordance with GAAP. "Consolidated Cash Flow Available for Fixed Charges" means, for any period Consolidated Net Income for such period plus (each to the extent deducted in calculating such Consolidated Net Income and determined in accordance with GAAP) the sum for such period, without duplication, of: (1) income taxes, (2) Consolidated Interest Expense, (3) depreciation and amortization expenses and other non-cash charges to earnings and (4) interest and financing fees and expenses which were previously capitalized and which are amortized to cost of sales, minus all other non-cash items (other than the receipt of notes receivable) increasing such Consolidated Net Income. "Consolidated Fixed Charge Coverage Ratio" means, with respect to any determination date, the ratio of (x) Consolidated Cash Flow Available for Fixed Charges for the prior four full fiscal quarters (the "Four Quarter Period") for which financial results have been reported immediately preceding the determination date (the "Transaction Date"), to (y) the aggregate Consolidated Interest Incurred for the Four Quarter Period. For purposes of this definition, "Consolidated Cash Flow Available for Fixed Charges" and "Consolidated Interest Incurred" shall be calculated after giving effect on a pro forma basis for the period of such calculation to (1) the incurrence or the repayment, repurchase, defeasance or other discharge or the assumption by another Person that is not an Affiliate (collectively, "repayment") of any Indebtedness of the Company, the Issuer or any Restricted Subsidiary (and the application of the proceeds thereof) giving rise to the need to make such calculation, and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), at any time on or after the first day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period, except that Indebtedness under revolving credit facilities shall be deemed to be the average daily balance of such Indebtedness during the Four Quarter Period (as reduced on such pro forma basis by the application of any proceeds of the incurrence of Indebtedness giving rise to the need to make such calculation); (2) any Asset Disposition or Asset Acquisition (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Company, the Issuer or any Restricted Subsidiary (including any Person that becomes a Restricted Subsidiary as a result of any such Asset Acquisition) incurring Acquired Indebtedness at any time on or after the first day of the Four Quarter Period and on or prior to the Transaction Date), as if such Asset Disposition or Asset Acquisition (including the incurrence or repayment of any such Indebtedness) and the inclusion, notwithstanding clause (2) of the definition of "Consolidated Net Income," of any Consolidated Cash Flow Available for Fixed Charges associated with such Asset Acquisition as if it occurred on the first day of the Four Quarter Period; provided, however, that the Consolidated Cash Flow Available for Fixed Charges associated with any Asset Acquisition shall not be included to the extent the net income so associated would be excluded pursuant to the definition of "Consolidated Net Income," other than clause (2) thereof, as if it applied to the Person or assets involved before they were acquired, and S-36 (3) the Consolidated Cash Flow Available for Fixed Charges and the Consolidated Interest Incurred attributable to discontinued operations, as determined in accordance with GAAP, shall be excluded. Furthermore, in calculating "Consolidated Cash Flow Available for Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (a) interest on Indebtedness in respect of which a pro forma calculation is required that is determined on a fluctuating basis as of the Transaction Date (including Indebtedness actually incurred on the Transaction Date) and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date, and (b) notwithstanding clause (a) above, interest on such Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Protection Agreements, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Interest Expense" of the Company for any period means the Interest Expense of the Company, the Issuer and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Incurred" for any period means the Interest Incurred of the Company, the Issuer and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" for any period means the aggregate net income (or loss) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP; provided that there will be excluded from such net income (loss) (to the extent otherwise included therein), without duplication: (1) the net income (or loss) of (x) any Unrestricted Subsidiary (other than a Mortgage Subsidiary) or (y) any Person (other than a Restricted Subsidiary or a Mortgage Subsidiary) in which any Person other than the Company, the Issuer or any Restricted Subsidiary has an ownership interest, except, in each case, to the extent that any such income has actually been received by the Company, the Issuer or any Restricted Subsidiary in the form of cash dividends or similar cash distributions during such period, which dividends or distributions are not in excess of the Company's, the Issuer's or such Restricted Subsidiary's (as applicable) pro rata share of such Unrestricted Subsidiary's or such other Person's net income earned during such period, (2) except to the extent includable in Consolidated Net Income pursuant to the foregoing clause (1), the net income (or loss) of any Person that accrued prior to the date that (a) such Person becomes a Restricted Subsidiary or is merged with or into or consolidated with the Company, the Issuer or any of its Restricted Subsidiaries (except, in the case of an Unrestricted Subsidiary that is redesignated a Restricted Subsidiary during such period, to the extent of its retained earnings from the beginning of such period to the date of such redesignation) or (b) the assets of such Person are acquired by the Company or any Restricted Subsidiary, (3) the net income of any Restricted Subsidiary to the extent that (but only so long as) the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of that income is not permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary during such period, (4) the gains or losses, together with any related provision for taxes, realized during such period by the Company, the Issuer or any Restricted Subsidiary resulting from (a) the acquisition of securities, or extinguishment of Indebtedness, of the Company or any Restricted Subsidiary or (b) any Asset Disposition by the Company or any Restricted Subsidiary, S-37 (5) any extraordinary gain or loss together with any related provision for taxes, realized by the Company, the Issuer or any Restricted Subsidiary, and (6) any non-recurring expense recorded by the Company, the Issuer or any Restricted Subsidiary in connection with a merger accounted for as a "pooling-of-interests" transaction; provided, further, that for purposes of calculating Consolidated Net Income solely as it relates to clause (3) of the first paragraph of the "Limitations on Restricted Payments" covenant, clause (4)(b) above shall not be applicable. "Consolidated Net Worth" of any Person as of any date means the stockholders' equity (including any Preferred Stock that is classified as equity under GAAP, other than Disqualified Stock) of such Person and its Restricted Subsidiaries on a consolidated basis at the end of the fiscal quarter immediately preceding such date, as determined in accordance with GAAP, less any amount attributable to Unrestricted Subsidiaries. "Consolidated Tangible Assets" of the Company as of any date means the total amount of assets of the Company, the Issuer and the Restricted Subsidiaries (less applicable reserves) on a consolidated basis at the end of the fiscal quarter immediately preceding such date, as determined in accordance with GAAP, less (1) Intangible Assets and (2) appropriate adjustments on account of minority interests of other Persons holding equity investments in Restricted Subsidiaries. "Continuing Director" means a director who either was a member of the Board of Directors of the Company on the date of the Indenture or who became a director of the Company subsequent to such date and whose election or nomination for election by the Company's stockholders, was duly approved by a majority of the Continuing Directors on the Board of Directors of the Company at the time of such approval, either by a specific vote or by approval of the proxy statement issued by the Company on behalf of the entire Board of Directors of the Company in which such individual is named as nominee for director. "control" when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Credit Facilities" means, collectively, each of the credit facilities and lines of credit of the Company or one or more Restricted Subsidiaries in existence on the Issue Date and one or more other facilities and lines of credit among or between the Company or one or more Restricted Subsidiaries and one or more lenders pursuant to which the Company or one or more Restricted Subsidiaries may incur indebtedness for working capital and general corporate purposes (including acquisitions), as any such facility or line of credit may be amended, restated, supplemented or otherwise modified from time to time, and includes any agreement extending the maturity of, increasing the amount of, or restructuring, all or any portion of the Indebtedness under such facility or line of credit or any successor facilities or lines of credit and includes any facility or line of credit with one or more lenders refinancing or replacing all or any portion of the Indebtedness under such facility or line of credit or any successor facility or line of credit. "Currency Agreement" of any Person means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect such Person or any of its Subsidiaries against fluctuations in currency values. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any event, act or condition that is, or after notice or the passage of time or both would be, an Event of Default. "Designation Amount" has the meaning provided in the definition of Unrestricted Subsidiary. S-38 "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, (1) matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the final maturity date of the Notes or (2) is convertible into or exchangeable or exercisable for (whether at the option of the issuer or the holder thereof) (a) debt securities or (b) any Capital Stock referred to in (1) above, in each case, at any time prior to the final maturity date of the Notes; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof (or the holders of any security into or for which such Capital Stock is convertible, exchangeable or exercisable) the right to require the Company to repurchase or redeem such Capital Stock upon the occurrence of a change in control occurring prior to the final maturity date of the Notes shall not constitute Disqualified Stock if the change in control provision applicable to such Capital Stock are no more favorable to such holders than the provisions described under the caption "Certain Covenants--Repurchase of Notes upon Change of Control" and such Capital Stock specifically provides that the Company will not repurchase or redeem any such Capital Stock pursuant to such provisions prior to the Company's repurchase of the Notes as are required pursuant to the provisions described under the caption "Certain Covenants-- Repurchase of Notes upon Change of Control." "Event of Default" has the meaning set forth in "Events of Default." "Fair Market Value" means, with respect to any asset, the price (after taking into account any liabilities relating to such assets) that would be negotiated in an arm's-length transaction for cash between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction, as such price is determined in good faith by the Board of Directors of the Company or a duly authorized committee thereof, as evidenced by a resolution of such Board or committee. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, as in effect on the Issue Date. "Guarantee" means the guarantee of the Notes by the Company and each Guarantor under the Indenture. "Guarantors" means (i) initially, each of the Company's Subsidiaries, except the Issuer, four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the Hovnanian trade name and a subsidiary engaged in homebuilding activities in Poland and (ii) each of the Company's Subsidiaries which becomes a Guarantor of the Notes pursuant to the provisions of the Indenture. "Holder" means the Person in whose name a Note is registered in the books of the Registrar for the Notes. "Indebtedness" of any Person means, without duplication, (1) any liability of such Person (a) for borrowed money or under any reimbursement obligation relating to a letter of credit or other similar instruments (other than standby letters of credit or similar instrument issued for the benefit of or surety, performance, completion or payment bonds, earnest money notes or similar purpose undertakings or indemnifications issued by, such Person in the ordinary course of business), (b) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any businesses, properties or assets of any kind or with services incurred in connection with capital expenditures (other than any obligation to pay a contingent purchase price which, as of the date of incurrence thereof is not required to be recorded as a liability in accordance with GAAP), or (c) in respect of Capitalized Lease Obligations (to the extent of the Attributable Debt in respect thereof), S-39 (2) any Indebtedness of others that such Person has guaranteed to the extent of the guarantee; provided however, that Indebtedness of the Company and its Restricted Subsidiaries will not include the obligations of the Company or a Restricted Subsidiary under warehouse lines of credit of Mortgage Subsidiaries to repurchase mortgages at prices no greater than 98% of the principal amount thereof, and upon any such purchase the excess, if any, of the purchase price thereof over the Fair Market Value of the mortgages acquired, will constitute Restricted Payments subject to the "Limitations on Restricted Payments" covenant, (3) to the extent not otherwise included, the obligations of such Person under Currency Agreements or Interest Protection Agreements to the extent recorded as liabilities not constituting Interest Incurred, net of amounts recorded as assets in respect of such agreements, in accordance with GAAP, and (4) all Indebtedness of others secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided, that Indebtedness shall not include accounts payable, liabilities to trade creditors of such Person or other accrued expenses arising in the ordinary course of business. The amount of Indebtedness of any Person at any date shall be (a) the outstanding balance at such date of all unconditional obligations as described above, net of any unamortized discount to be accounted for as Interest Expense, in accordance with GAAP, (b) the maximum liability of such Person for any contingent obligations under clause (1) above at such date, net of an unamortized discount to be accounted for as Interest Expense in accordance with GAAP, and (c) in the case of clause (4) above, the lesser of (x) the fair market value of any asset subject to a Lien securing the Indebtedness of others on the date that the Lien attaches and (y) the amount of the Indebtedness secured. "Intangible Assets" of the Company means all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, write-ups of assets over their prior carrying value (other than write-ups which occurred prior to the Issue Date and other than, in connection with the acquisition of an asset, the write-up of the value of such asset (within one year of its acquisition) to its fair market value in accordance with GAAP) and all other items which would be treated as intangible on the consolidated balance sheet of the Company, the Issuer and the Restricted Subsidiaries prepared in accordance with GAAP. "Interest Expense" of any Person for any period means, without duplication, the aggregate amount of (i) interest which, in conformity with GAAP, would be set opposite the caption "interest expense" or any like caption on an income statement for such Person (including, without limitation, imputed interest included in Capitalized Lease Obligations, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, the net costs (but reduced by net gains) associated with Currency Agreements and Interest Protection Agreements, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premium, if any, and all other noncash interest expense (other than interest and other charges amortized to cost of sales), and (ii) all interest actually paid by the Company or a Restricted Subsidiary under any guarantee of Indebtedness (including, without limitation, a guarantee of principal, interest or any combination thereof) of any Person other than the Company, the Issuer or any Restricted Subsidiary during such period; provided, that Interest Expense shall exclude any expense associated with the complete write-off of financing fees and expenses in connection with the repayment of any Indebtedness. "Interest Incurred" of any Person for any period means, without duplication, the aggregate amount of (1) Interest Expense and (2) all capitalized interest and amortized debt issuance costs. "Interest Protection Agreement" of any Person means any interest rate swap agreement, interest rate collar agreement, option or futures contract or other similar agreement or arrangement designed to protect such Person or any of its Subsidiaries against fluctuations in interest rates with respect to Debt permitted to be incurred under the Indenture. S-40 "Investments" of any Person means (i) all investments by such Person in any other Person in the form of loans, advances or capital contributions, (ii) all guarantees of Indebtedness or other obligations of any other Person by such Person, (iii) all purchases (or other acquisitions for consideration) by such Person of Indebtedness, Capital Stock or other securities of any other Person and (iv) all other items that would be classified as investments in any other Person (including, without limitation, purchases of assets outside the ordinary course of business) on a balance sheet of such Person prepared in accordance with GAAP. "Issue Date" means the date on which the Notes are originally issued under the Indenture. "Lien" means, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this definition, a Person shall be deemed to own, subject to a Lien, any Property which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such Property. "Marketable Securities" means (a) equity securities that are listed on the New York Stock Exchange, the American Stock Exchange or The Nasdaq National Market and (b) debt securities that are rated by a nationally recognized rating agency, listed on the New York Stock Exchange or the American Stock Exchange or covered by at least two reputable market makers. "Moody's" means Moody's Investors Service, Inc. or any successor to its debt rating business. "Mortgage Subsidiary" means any Subsidiary of the Company substantially all of whose operations consist of the mortgage lending business. "Net Cash Proceeds" means with respect to an Asset Disposition, cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise (including any cash received upon sale or disposition of such note or receivable), but only as and when received), excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to the Property disposed of in such Asset Disposition or received in any other non-cash form unless and until such non- cash consideration is converted into cash therefrom, in each case, net of all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all federal, state and local taxes required to be accrued as a liability under GAAP as a consequence of such Asset Disposition, and in each case net of a reasonable reserve for the after-tax cost of any indemnification or other payments (fixed and contingent) attributable to the seller's indemnities or other obligations to the purchaser undertaken by the Company, the Issuer or any of its Restricted Subsidiaries in connection with such Asset Disposition, and net of all payments made on any Indebtedness which is secured by or relates to such Property, in accordance with the terms of any Lien or agreement upon or with respect to such Property or which must by its terms or by applicable law be repaid out of the proceeds from such Asset Disposition, and net of all contractually required distributions and payments made to minority interest holders in Restricted Subsidiaries or joint ventures as a result of such Asset Disposition. "Non-Recourse Indebtedness" with respect to any Person means Indebtedness of such Person for which (1) the sole legal recourse for collection of principal and interest on such Indebtedness is against the specific property identified in the instruments evidencing or securing such Indebtedness and such property was acquired with the proceeds of such Indebtedness or such Indebtedness was incurred within 90 days after the acquisition of such property and (2) no other assets of such Person may be realized upon in collection of principal or interest on such Indebtedness. Indebtedness which is otherwise Non-Recourse Indebtedness will not lose its character as Non-Recourse Indebtedness because there is recourse to the borrower, any guarantor or any other Person for (a) environmental warranties and indemnities, or (b) indemnities for and liabilities arising from fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance and condemnation proceeds and other sums actually received by the borrower from secured assets to be paid to the lender, waste and mechanics' liens. S-41 "Notes" means the notes offered pursuant to this prospectus supplement. "Permitted Hovnanian Holders" means, collectively, Kevork S. Hovnanian, Ara K. Hovnanian, the members of their immediate families, the respective estates, spouses, heirs, ancestors, lineal descendants, legatees and legal representatives of any of the foregoing and the trustee of any bona fide trust of which one or more of the foregoing are the sole beneficiaries or the grantors thereof, or any entity of which any of the foregoing, individually or collectively, beneficially own more than 50% of the Common Equity. "Permitted Indebtedness" means (1) Indebtedness under Credit Facilities which does not exceed $250 million principal amount outstanding at any one time; (2) Indebtedness in respect of obligations of the Company and its Subsidiaries to the trustees under indentures for debt securities; (3) intercompany debt obligations of (i) the Company to the Issuer, (ii) the Issuer to the Company, (iii) the Company or the Issuer to any Restricted Subsidiary and (iv) any Restricted Subsidiary to the Company or the Issuer or any other Restricted Subsidiary; provided, however, that any Indebtedness of any Restricted Subsidiary or the Issuer or the Company owed to any Restricted Subsidiary or the Issuer that ceases to be a Restricted Subsidiary shall be deemed to be incurred and shall be treated as an incurrence for purposes of the first paragraph of the covenant described under "Limitations on Indebtedness" at the time the Restricted Subsidiary in question ceases to be a Restricted Subsidiary; (4) Indebtedness of the Company or the Issuer or any Restricted Subsidiary under any Currency Agreements or Interest Protection Agreements in a notional amount no greater than the payments due (at the time the related Currency Agreement or Interest Protection Agreement is entered into) with respect to the Indebtedness or currency being hedged; (5) Purchase Money Indebtedness; (6) Capitalized Lease Obligations; (7) obligations for, pledge of assets in respect of, and guaranties of, bond financings of political subdivisions or enterprises thereof in the ordinary course of business; (8) Indebtedness secured only by office buildings owned or occupied by the Company or any Restricted Subsidiary, which Indebtedness does not exceed $10 million aggregate principal amount outstanding at any one time; (9) Indebtedness under warehouse lines of credit, repurchase agreements and Indebtedness secured by mortgage loans and related assets of mortgage lending Subsidiaries in the ordinary course of a mortgage lending business; and (10) Indebtedness of the Company or any Restricted Subsidiary which, together with all other Indebtedness under this clause (10), does not exceed $30 million aggregate principal amount outstanding at any one time. "Permitted Investment" means (1) Cash Equivalents; (2) any Investment in the Company, the Issuer or any Restricted Subsidiary or any Person that becomes a Restricted Subsidiary as a result of such Investment or that is consolidated or merged with or into, or transfers all or substantially all of the assets of it or an operating unit or line of business to, the Company or a Restricted Subsidiary; (3) any receivables, loans or other consideration taken by the Company, the Issuer or any Restricted Subsidiary in connection with any asset sale otherwise permitted by the Indenture; S-42 (4) Investments received in connection with any bankruptcy or reorganization proceeding, or as a result of foreclosure, perfection or enforcement of any Lien or any judgment or settlement of any Person in exchange for or satisfaction of Indebtedness or other obligations or other property received from such Person, or for other liabilities or obligations of such Person created, in accordance with the terms of the Indenture; (5) Investments in Currency Agreements or Interest Protection Agreements described in the definition of Permitted Indebtedness; (6) any loan or advance to an executive officer, director or employee of the Company or any Restricted Subsidiary made in the ordinary course of business or in accordance with past practice; provided, however, that any such loan or advance exceeding $1 million shall have been approved by the Board of Directors of the Company or a committee thereof consisting of disinterested members; (7) Investments in joint ventures in a Real Estate Business with unaffiliated third parties in an aggregate amount at any time outstanding not to exceed 10% of Consolidated Tangible Assets at such time; (8) Investments in interests in issuances of collateralized mortgage obligations, mortgages, mortgage loan servicing, or other mortgage related assets; (9) obligations of the Company or a Restricted Subsidiary under warehouse lines of credit of Mortgage Subsidiaries to repurchase mortgages; and (10) Investments in an aggregate amount outstanding not to exceed $10 million. "Permitted Liens" means (1) Liens for taxes, assessments or governmental or quasi-government charges or claims that (a) are not yet delinquent, (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves have been established or other provisions have been made in accordance with GAAP, if required, or (c) encumber solely property abandoned or in the process of being abandoned, (2) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other Liens imposed by law and arising in the ordinary course of business and with respect to amounts that, to the extent applicable, either (a) are not yet delinquent or (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves have been established or other provisions have been made in accordance with GAAP, if required, (3) Liens (other than any Lien imposed by the Employer Retirement Income Security Act of 1974, as amended) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, (4) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, development obligations, progress payments, government contacts, utility services, developer's or other obligations to make on-site or off-site improvements and other obligations of like nature (exclusive of obligations for the payment of borrowed money but including the items referred to in the parenthetical in clause (1)(a) of the definition of "Indebtedness"), in each case incurred in the ordinary course of business of the Company, the Issuer and the Restricted Subsidiaries, (5) attachment or judgment Liens not giving rise to a Default or an Event of Default, (6) easements, dedications, assessment district or similar Liens in connection with municipal or special district financing, rights-of-way, restrictions, reservations and other similar charges, burdens, and other similar charges or encumbrances not materially interfering with the ordinary course of business of the Company, the Issuer and the Restricted Subsidiaries, (7) zoning restrictions, licenses, restrictions on the use of real property or minor irregularities in title thereto, which do not materially impair the use of such real property in the ordinary course of business of the Company, the Issuer and the Restricted Subsidiaries, S-43 (8) Liens securing Indebtedness incurred pursuant to clause (8) or (9) of the definition of Permitted Indebtedness, (9) Liens securing Indebtedness of the Company, the Issuer or any Restricted Subsidiary permitted to be incurred under the Indenture; provided, that the aggregate amount of all consolidated Indebtedness of the Company, the Issuer and the Restricted Subsidiaries (including, with respect to Capitalized Lease Obligations, the Attributable Debt in respect thereof) secured by Liens (other than Non-Recourse Indebtedness and Indebtedness incurred pursuant to clause (9) of the definition of Permitted Indebtedness) shall not exceed 40% of Consolidated Adjusted Tangible Assets at any one time outstanding (after giving effect to the incurrence of such Indebtedness and the use of the proceeds thereof), (10) Liens securing Non-Recourse Indebtedness of the Company, the Issuer or any Restricted Subsidiary; provided, that such Liens apply only to the property financed out of the net proceeds of such Non-Recourse Indebtedness within 90 days after the incurrence of such Non-Recourse Indebtedness, (11) Liens securing Purchase Money Indebtedness; provided that such Liens apply only to the property acquired, constructed or improved with the proceeds of such Purchase Money Indebtedness within 90 days after the incurrence of such Purchase Money Indebtedness, (12) Liens on property or assets of the Company, the Issuer or any Restricted Subsidiary securing Indebtedness of the Company, the Issuer or any Restricted Subsidiary owing to the Company, the Issuer or one or more Restricted Subsidiaries, (13) leases or subleases granted to others not materially interfering with the ordinary course of business of the Company and the Restricted Subsidiaries, (14) purchase money security interests (including, without limitation, Capitalized Lease Obligations); provided, that such Liens apply only to the Property acquired and the related Indebtedness is incurred within 90 days after the acquisition of such Property, (15) any right of first refusal, right of first offer, option, contract or other agreement to sell an asset; provided that such sale is not otherwise prohibited under the Indenture, (16) any right of a lender or lenders to which the Company, the Issuer or a Restricted Subsidiary may be indebted to offset against, or appropriate and apply to the payment of such, Indebtedness any and all balances, credits, deposits, accounts or money of the Company, the Issuer or a Restricted Subsidiary with or held by such lender or lenders or its Affiliates, (17) any pledge or deposit of cash or property in conjunction with obtaining surety, performance, completion or payment bonds and letters of credit or other similar instruments or providing earnest money obligations, escrows or similar purpose undertakings or indemnifications in the ordinary course of business of the Company, the Issuer and the Restricted Subsidiaries, (18) Liens for homeowner and property owner association developments and assessments, (19) Liens securing Refinancing Indebtedness; provided, that such Liens extend only to the assets securing the Indebtedness being refinanced, (20) Liens incurred in the ordinary course of business as security for the obligations of the Company, the Issuer and the Restricted Subsidiaries with respect to indemnification in respect of title insurance providers, (21) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with the Company or any Subsidiary of the Company or becomes a Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger or consolidation or acquisition and do not extend to any assets other than those of the Person merged into or consolidated with the Company or the Subsidiary or acquired by the Company or its Subsidiaries, S-44 (22) Liens on property existing at the time of acquisition thereof by the Company or any Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition, (23) Liens existing on the Issue Date and any extensions, renewals or replacements thereof, and (24) Liens on specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods. "Person" means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" of any Person means all Capital Stock of such Person which has a preference in liquidation or with respect to the payment of dividends. "Property" of any Person means all types of real, personal, tangible, intangible or mixed property owned by such Person, whether or not included in the most recent consolidated balance sheet of such Person and its Subsidiaries under GAAP. "Public Equity Offering" means an underwritten public offering of Common Equity of the Company pursuant to an effective registration statement filed under the Securities Act (excluding registration statements filed on Form S-8 or any successor form). "Purchase Money Indebtedness" means Indebtedness of the Company, the Issuer or any Restricted Subsidiary incurred for the purpose of financing all or any part of the purchase price, or the cost of construction or improvement, of any property to be used in the ordinary course of business by the Company, the Issuer and the Restricted Subsidiaries; provided, however, that (1) the aggregate principal amount of such Indebtedness shall not exceed such purchase price or cost and (2) such Indebtedness shall be incurred no later than 90 days after the acquisition of such property or completion of such construction or improvement. "Qualified Stock" means Capital Stock of the Company other than Disqualified Stock. "Real Estate Business" means homebuilding, housing construction, real estate development or construction and related real estate activities, including the provision of mortgage financing or title insurance. "Refinancing Indebtedness" means Indebtedness (to the extent not Permitted Indebtedness) that refunds, refinances or extends any Indebtedness of the Company, the Issuer or any Restricted Subsidiary (to the extent not Permitted Indebtedness) outstanding on the Issue Date or other Indebtedness (to the extent not Permitted Indebtedness) permitted to be incurred by the Company, the Issuer or any Restricted Subsidiary pursuant to the terms of the Indenture, but only to the extent that (1) the Refinancing Indebtedness is subordinated, if at all, to the Notes or the Guarantees, as the case may be, to the same extent as the Indebtedness being refunded, refinanced or extended, (2) the Refinancing Indebtedness is scheduled to mature either (a) no earlier than the Indebtedness being refunded, refinanced or extended or (b) after the maturity date of the Notes, (3) the portion, if any, of the Refinancing Indebtedness that is scheduled to mature on or prior to the maturity date of the Notes has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Indebtedness being refunded, refinanced or extended that is scheduled to mature on or prior to the maturity date of the Notes, and (4) such Refinancing Indebtedness is in an aggregate principal amount that is equal to or less than the aggregate principal amount then outstanding under the Indebtedness being refunded, refinanced or extended. S-45 "Restricted Payment" means any of the following: (1) the declaration or payment of any dividend or any other distribution on Capital Stock of the Company, the Issuer or any Restricted Subsidiary or any payment made to the direct or indirect holders (in their capacities as such) of Capital Stock of the Company, the Issuer or any Restricted Subsidiary (other than (a) dividends or distributions payable solely in Qualified Stock and (b) in the case of the Issuer or Restricted Subsidiaries, dividends or distributions payable to the Company, the Issuer or a Restricted Subsidiary); (2) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company, the Issuer or any Restricted Subsidiary (other than a payment made to the Company, the Issuer or any Restricted Subsidiary); and (3) any Investment (other than any Permitted Investment), including any Investment in an Unrestricted Subsidiary (including by the designation of a Subsidiary of the Company as an Unrestricted Subsidiary) and any amounts paid in accordance with clause (2) of the definition of Indebtedness. "Restricted Subsidiary" means any Subsidiary of the Company which is not an Unrestricted Subsidiary. "S&P" means Standard and Poor's Ratings Group or any successor to its debt rating business. "Significant Subsidiary" means any Subsidiary of the Company which would constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S- X under the Securities Act and the Exchange Act as in effect on the Issue Date. "Subsidiary" of any Person means any corporation or other entity of which a majority of the Capital Stock having ordinary voting power to elect a majority of the Board of Directors or other persons performing similar functions is at the time directly or indirectly owned or controlled by such Person. "Trustee" means the party named as such above until a successor replaces such party in accordance with the applicable provisions of the Indenture and thereafter means the successor serving hereunder. "Unrestricted Subsidiary" means any Subsidiary of the Company so designated by a resolution adopted by the Board of Directors of the Company or a duly authorized committee thereof as provided below; provided that (a) the holders of Indebtedness thereof do not have direct or indirect recourse against the Company, the Issuer or any Restricted Subsidiary, and neither the Company, the Issuer nor any Restricted Subsidiary otherwise has liability for, any payment obligations in respect of such Indebtedness (including any undertaking, agreement or instrument evidencing such Indebtedness), except, in each case, to the extent that the amount thereof constitutes a Restricted Payment permitted by the Indenture, in the case of Non-Recourse Indebtedness, to the extent such recourse or liability is for the matters discussed in the last sentence of the definition of "Non-Recourse Indebtedness," or to the extent such Indebtedness is a guarantee by such Subsidiary of Indebtedness of the Company, the Issuer or a Restricted Subsidiary and (b) no holder of any Indebtedness of such Subsidiary shall have a right to declare a default on such Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity as a result of a default on any Indebtedness of the Company, the Issuer or any Restricted Subsidiary. The Unrestricted Subsidiaries will be the following: K. Hovnanian Mortgage, Inc., Hovnanian Financial Services I, Inc., Hovnanian Financial Services II, Inc., Hovnanian Financial Services III, Inc. and Hovnanian Financial Services IV, Inc. Subject to the foregoing, the Board of Directors of the Company or a duly authorized committee thereof may designate any Subsidiary in addition to those named above to be an Unrestricted Subsidiary; provided, however, that (1) the net amount (the "Designation Amount") then outstanding of all previous Investments by the Company and the Restricted Subsidiaries in such Subsidiary will be deemed to be a Restricted Payment at the time of such designation and will reduce the amount available for Restricted Payments under the "Limitations on Restricted Payments" covenant set forth in the Indenture, to the extent provided therein, (2) S-46 the Company must be permitted under the "Limitations on Restricted Payments" covenant set forth in the Indenture to make the Restricted Payment deemed to have been made pursuant to clause (1), and (3) after giving effect to such designation, no Default or Event of Default shall have occurred or be continuing. In accordance with the foregoing, and not in limitation thereof, Investments made by any Person in any Subsidiary of such Person prior to such Person's merger with the Company or any Restricted Subsidiary (but not in contemplation or anticipation of such merger) shall not be counted as an Investment by the Company or such Restricted Subsidiary if such Subsidiary of such Person is designated as an Unrestricted Subsidiary. The Board of Directors of the Company or a duly authorized committee thereof may also redesignate an Unrestricted Subsidiary to be a Restricted Subsidiary provided, however, that (1) the Indebtedness of such Unrestricted Subsidiary as of the date of such redesignation could then be incurred under the "Limitations on Indebtedness" covenant and (2) immediately after giving effect to such redesignation and the incurrence of any such additional Indebtedness, the Company and the Restricted Subsidiaries could incur $1.00 of additional Indebtedness under the first paragraph of the "Limitations on Indebtedness" covenant. Any such designation or redesignation by the Board of Directors of the Company or a committee thereof will be evidenced to the Trustee by the filing with the Trustee of a certified copy of the resolution of the Board of Directors of the Company or a committee thereof giving effect to such designation or redesignation and an Officers' Certificate certifying that such designation or redesignation complied with the foregoing conditions and setting forth the underlying calculations of such Officers' Certificate. The designation of any Person as an Unrestricted Subsidiary shall be deemed to include a designation of all Subsidiaries of such Person as Unrestricted Subsidiaries; provided, however, that the ownership of the general partnership interest (or a similar member's interest in a limited liability company) by an Unrestricted Subsidiary shall not cause a Subsidiary of the Company of which more than 95% of the equity interest is held by the Company or one or more Restricted Subsidiaries to be deemed an Unrestricted Subsidiary. "Weighted Average Life to Maturity" means, when applied to any Indebtedness or portion thereof at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including, without limitation, payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one- twelfth) that will elapse between such date and the making of such payment by (ii) the sum of all such payments described in clause (i)(a) above. Book Entry, Delivery and Form The Notes will be issued in the form of a fully registered Global Note (the "Global Note"). The Global Note will be deposited on or about the Issue Date with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to herein as the "Global Note Holder"). The Depositary is a limited-purpose trust company which was created to hold securities for its participating organizations (collectively, the "Participants" or the "Depositary's Participants") and to facilitate the clearance and settlement of transactions in such securities between Participants through electronic book-entry changes in accounts of its Participants. The Depositary's Participants include securities brokers and dealers (including the Underwriters), banks and trust companies, clearing corporations and certain other organizations. Access to the Depositary's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants" or the "Depositary's Indirect Participants") that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of the Depositary only through the Depositary's Participants or the Depositary's Indirect Participants. The Company expects that pursuant to procedures established by the Depositary (i) upon deposit of the Global Note, the Depositary will credit the accounts of Participants designated by the Underwriters with portions of the principal amount of the Global Note and (ii) ownership of the Notes will be shown on, and the S-47 transfer of ownership thereof will be effected only through, records maintained by the Depositary (with respect to the interests of the Depositary's Participants), the Depositary's Participants and the Depositary's Indirect Participants. Prospective purchasers are advised that the laws of some states require that certain Persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer Notes will be limited to such extent. So long as the Global Note Holder is the registered owner of any Notes, the Global Note Holder will be considered the sole owner or holder of such Notes outstanding under the Indenture. Except as provided below, owners of Notes will not be entitled to have Notes registered in their names, will not receive or be entitled to receive physical delivery of Notes in definitive form, and will not be considered the Holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. As a result, the ability of a Person having a beneficial interest in Notes represented by the Global Note to pledge such interest to Persons or entities that do not participate in the Depositary's system or to otherwise take actions in respect of such interest may be affected by the lack of a physical certificate evidencing such interest. Neither the Company, the Issuer, the Trustee, the Paying Agent nor the Notes Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of Notes by the Depositary, or for maintaining, supervising or reviewing any records of the Depositary relating to such Notes. Payments in respect of the principal, premium, if any, and interest on any Notes registered in the name of a Global Note Holder on the applicable record date will be payable by the Trustee to or at the direction of such Global Note Holder in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, the Company, the Issuer and the Trustee may treat the Persons in whose names the Notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other liability for the payment of such amounts to beneficial owners of Notes (including principal, premium, if any, and interest). The Company believes, however, that it is currently the policy of the Depositary to immediately credit the accounts of the relevant Participants with such payment, in amounts proportionate to their respective holdings in principal amount of beneficial interests in the relevant security as shown on the records of the Depositary. Payments by the Depositary's Participants and the Depositary's Indirect Participants to the beneficial owner of Notes will be governed by standing instructions and customary practice and will be the responsibility of the Depositary's Participants or the Depositary's Indirect Participants. As long as the Notes are represented by a Global Note, the Depositary's nominee will be the holder of the Notes and therefore will be the only entity that can exercise a right to repayment or repurchase of the Notes. See "Covenants--Repurchase of Notes Upon a Change of Control" and "--Limitations on Dispositions of Assets." Notice by Participants or Indirect Participants of the exercise of the option to elect repayment of beneficial interests in Notes represented by a Global Note must be transmitted to the Depositary in accordance with its procedures on a form required by the Depositary and provided to Participants. In order to ensure that the Depositary's nominee will timely exercise a right to repayment with respect to a particular Note, the beneficial owner of such Note must instruct the broker or the Participant or Indirect Participant through which it holds an interest in such Note to notify the Depositary of its desire to exercise a right to repayment. Different firms have different cut-off times for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other Participant or Indirect Participant through which it holds an interest in a Note in order to ascertain the cut-off time by which such an instruction must be given in order for timely notice to be delivered to the Depositary. The Company and the Issuer will not be liable for any delay in delivery of notices of the exercise of the option to elect repayment. Certificated Securities Subject to certain conditions, any Person having a beneficial interest in the Global Note may, upon request to the Issuer or the Trustee, exchange such beneficial interest for Notes in the form of Certificated Securities. S-48 Upon any such issuance, the Trustee is required to register such Notes in the name of, and cause the same to be delivered to, such Person or Persons (or the nominee of any thereof). In addition, if (i) the Issuer notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Issuer is unable to locate a qualified successor within 90 days or (ii) the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in the form of Certificated Securities under the Indenture, then, upon surrender by the relevant Global Note Holder of its Global Note, Notes in such form will be issued to each Person that such Global Note Holder and the Depositary identify as the beneficial owner of the related Notes. Neither the Company, the Issuer nor the Trustee shall be liable for any delay by the related Global Note Holder or the Depositary in identifying the beneficial owners of Notes and each such Person may conclusively rely on and shall be protected in relying on, instructions from the Global Note Holder or of the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the Notes to be issued). Same-Day Settlement and Payment The Indenture will require that payments in respect of the Notes (including principal, premium, if any, and interest) be made by wire transfer of immediately available funds to the accounts specified by the Global Note Holders. Transfer and Exchange A holder may transfer or exchange the Notes in accordance with the procedures set forth in the Indenture. The Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar is not required to transfer or exchange any Note selected for redemption. Also, the Registrar is not required to transfer or exchange any Note for a period of 15 days before a selection of the Notes to be redeemed. The registered Holder of a Note will be treated as the owner of it for all purposes. S-49 UNDERWRITING Subject to the terms and conditions of our underwriting agreement with the guarantors and the underwriters named below we have agreed to sell and each underwriter has severally agreed to purchase from us the principal amount of notes set forth opposite its name below:
Principal Amount of Underwriters: Notes ------------- ------------ Donaldson, Lufkin & Jenrette Securities Corporation............ $ 90,000,000 NationsBanc Montgomery Securities LLC.......................... 37,500,000 BancBoston Robertson Stephens Inc.............................. 22,500,000 ------------ Total........................................................ $150,000,000 ============
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent and that the underwriters will purchase all of the notes if any such notes are purchased. We have been advised by the underwriters that the underwriters propose to offer the notes to the public at the public offering price set forth on the cover page of this prospectus supplement and to certain dealers at such price less a concession not in excess of 0.250% of the principal amount of the notes. The underwriters may allow, and such dealers may reallow, a discount not in excess of 0.250% of the principal amount of the notes to certain other dealers. After the offering, the public offering price, concession, discount and other selling terms may be changed by the underwriters at any time. In connection with this offering, and in compliance with applicable law, the underwriters may engage in transactions that stabilize or maintain the market price of the notes at levels above those which might otherwise prevail in the open market. Specifically, the underwriters may over-allot in connection with this offering creating a short position in the notes for their own accounts. For the purpose of covering a syndicate short position or stabilizing the price of the notes, the underwriters may place bids for the notes or effect purchases of the notes in the open market. Finally, the underwriters may impose a penalty bid whereby selling concessions allowed to syndicate members or other broker- dealers for distributing the notes in this offering may be reclaimed by the syndicate if the syndicate repurchases previously distributed notes in transactions to cover short positions, in stabilization transactions or otherwise. These activities may stabilize, maintain or otherwise affect the market price of the notes, which may be higher than the price that might otherwise prevail in the open market, and, if commenced, may be discontinued at any time. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), or to contribute to payments that the underwriters may be required to make in respect thereof. The notes are a new issue of securities. There is no active public trading market for the notes. The underwriters have advised us that they currently intend to make a market in the notes, but the underwriters are not obligated to do so and may discontinue any such market-making at any time. As a consequence, we cannot assure you that an active trading market will develop for your notes, that you will be able to sell your notes, or that, even if you can sell your notes, that you will be able to sell them at an acceptable price. Certain affiliates of the Underwriters are lenders to us under the revolving credit agreement. Such lenders will receive more than 10% of the net proceeds of this offering through the repayment of outstanding debt under the revolving credit agreement. As a consequence, the underwriting arrangements for the offering will be made in compliance with Rule 2710(c)(8) of the Conduct Rules of the NASD, which requires that the yield at which a debt issue is to be distributed to the public is established at a yield no lower than that recommended by a qualified independent underwriter which has participated in the preparation of the prospectus supplement and performed its usual standard of due diligence with respect to the offering. Accordingly, Donaldson, Lufkin & Jenrette Securities Corporation (in that capacity, the "Independent Underwriter") is acting as a qualified S-50 independent underwriter for purposes of determining the price of the notes offered and has conducted due diligence in connection with its responsibilities as a qualified independent underwriter. The price at which the notes are being sold to the public is no lower than the price recommended by the Independent Underwriter. We have agreed to indemnify the Independent Underwriter against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters related to the notes being offered hereby are being passed upon for us by Simpson Thacher & Bartlett, New York, New York, and for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Simpson Thacher & Bartlett will rely, as to matters of New Jersey law, on the opinion of Peter S. Reinhart, Esq., Senior Vice President and General Counsel for the Company. S-51 PROSPECTUS [LOGO OF HOVNANIAN COMPANIES] $226,000,000 Hovnanian Enterprises, Inc. Preferred Stock, Class A Common Stock, Warrants to Purchase Preferred Stock, Warrants to Purchase Class A Common Stock, Debt Securities, Warrants to Purchase Debt Securities ---------------- K. Hovnanian Enterprises, Inc. Guaranteed Debt Securities Guaranteed Warrants to Purchase Debt Securities ---------------- 7,643,312 Shares Hovnanian Enterprises, Inc. Class A Common Stock We, Hovnanian Enterprises, Inc., Our debt securities or warrants or the may offer and sell from time to debt securities or warrants issued by K. time, in one or more series: Hovnanian Enterprises may be guaranteed by substantially all of our wholly owned . our Preferred Stock subsidiaries. . our Class A Common Stock We or certain of our shareholders may offer and sell from time to time an . our unsecured debt securities aggregate of 7,643,312 shares of Class A consisting of notes, debentures Common Stock. or other evidences of indebtedness which may be our The Preferred Stock, Class A Common senior debt securities, senior Stock (other than any sold by any subordinated debt securities or selling shareholders), and debt subordinated debt securities, securities and warrants of Hovnanian or and K. Hovnanian may be offered at an aggregate initial offering price not to . warrants to purchase our exceed $226,000,000, at prices and on Preferred Stock, our Class A terms to be determined at or prior to Common Stock or our debt the time of sale. securities, or any combination of these securities. We will provide more specific information about the terms of an Our wholly owned subsidiary, K. offering of any of these securities in Hovnanian Enterprises, Inc., may supplements to this prospectus. The offer and sell from time to time, securities may be sold directly by us, in one or more series: K. Hovnanian or selling shareholders to investors, through agents designated . its unsecured senior debt from time to time or to or through securities, senior subordinated underwriters or dealers. If any agents debt securities or subordinated of Hovnanian, K. Hovnanian or selling debt securities, which in each shareholders or any underwriters are case will be fully and involved in the sale of any securities, unconditionally guaranteed by the names of such agents or underwriters us, and and any applicable commissions or discounts will be set forth in a . warrants to purchase K. supplement to this prospectus. Hovnanian debt securities, which will be fully and These securities have not been approved unconditionally guaranteed by or disapproved by the Securities and us or any combination of these Exchange Commission or any state securities. securities commission nor have those organizations determined if this prospectus is truthful. Any representation to the contrary is a criminal offense. The date of this Prospectus is April 29, 1999 AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form S-3. This Prospectus, which forms part of the registration statement, does not contain all the information set forth in the registration statement. Statements in this prospectus as to the contents of any contract or other document are not necessarily complete, and, where such contract or other document is an exhibit to the registration statement, or was previously filed with the Commission and is now incorporated by reference, each such statement is qualified in all respects by the provision in such exhibit to which reference is hereby made. A copy of the registration statement may be inspected by anyone without charge at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Commission upon payment of certain fees prescribed by the Commission. We are subject to the informational requirements of the Securities Exchange Act of 1934, and file reports, proxy statements and other information with the Commission. You may read and copy any reports, proxy statements and other information at the Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located at 500 West Madison Street, 14th Floor, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material also can be obtained by mail from the Public Reference Section of the Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the prescribed rates. The Commission also maintains a website that contains reports, proxy and information statements and other information. The website address is: http://www.sec.gov. Hovnanian's Class A Common Stock is listed on the American Stock Exchange, and reports, proxy statements and other information also can be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York 10006. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE Hovnanian has filed the following documents with the Commission and these documents are incorporated herein by reference: . Annual Report on Form 10-K for the fiscal year ended October 31, 1998, Registration File No. 1-8551, and . Quarterly Report on Form 10-Q for the quarter ended January 31, 1999, Registration File No. 1-8551. All documents filed by Hovnanian pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior to the termination of the offering made by this prospectus are to be incorporated herein by reference. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. Hovnanian will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the information incorporated by reference in this prospectus, other than exhibits to such information (unless such exhibits are specifically incorporated by reference into the information that this prospectus incorporates). Requests for such copies should be directed to Paul W. Buchanan, Senior Vice President--Corporate Controller, Hovnanian Enterprises, Inc., 10 Highway 35, P.O. Box 500, Red Bank, New Jersey 07701 (telephone: (732) 747-7800). 1 THE COMPANY We design, construct and market high quality single-family detached homes and attached condominium apartments and townhouses in planned residential developments in the Northeast (primarily in New Jersey, southern New York state, and eastern Pennsylvania), North Carolina, northern Virginia and Maryland, southern California, southeastern Florida and Poland and provide mortgage banking and title insurance activities. Operations in Poland began for the first time during the year ended October 31, 1997. We market our homes to first-time buyers, first- and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. Hovnanian was originally incorporated in New Jersey in 1967 as successor to a business founded in 1959 by Kevork S. Hovnanian and became a Delaware corporation in August 1983. The Company maintains its executive offices at 10 Highway 35, P.O. Box 500, Red Bank, New Jersey 07701, and its telephone number is (732) 747-7800. K. Hovnanian was incorporated under the laws of the State of New Jersey on November 1, 1982, as an indirect wholly-owned consolidated subsidiary of Hovnanian. K. Hovnanian functions as a management company for the operating subsidiaries of Hovnanian and borrows funds which it lends to such subsidiaries. K. Hovnanian has essentially no independent operations and generates no operating revenues. K. Hovnanian's principal executive offices are located at 10 Highway 35, P.O. Box 500, Red Bank, New Jersey 07701, and its telephone number is (732) 747-7800. SELLING SHAREHOLDERS Some or all of the shares of Class A Common Stock of Hovnanian being offered pursuant to this Prospectus may be offered by certain Selling Shareholders. The potential Selling Shareholders include Kevork S. Hovnanian, Chairman of the Board and Director of the Company and, until July 1997, Chief Executive Officer of the Company and Ara K. Hovnanian, President and Director of the Company and, since July 1997, Chief Executive Officer of the Company. The following table sets forth as of January 7, 1999 (the record date for the Company's most recent annual meeting) the Class A Common Stock and Class B Common Stock of the Company beneficially owned by each potential Selling Shareholder. The amount, if any, of Class A Common Stock to be offered by the Selling Shareholders and the amount and percentage of Class A Common Stock to be owned by the Selling Shareholders following such offering shall be disclosed in the applicable Prospectus Supplement.
Class A Class B Common Stock Common Stock -------------- -------------- Kevork S. Hovnanian(4)(6)....................... 5,492,887 39.7% 5,843,837 76.0% Ara K. Hovnanian(5)............................. 1,429,661 10.0% 1,234,096 15.6% Total......................................... 6,922,548 49.7% 7,198,760 91.6%
- --------------------- (1) Beneficial ownership is determined in accordance with the rules of the Commission and generally attributes ownership to persons who have voting or investment power with respect to the relevant securities. Shares of Common Stock subject to options either currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Except as indicated by these footnotes, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all Class A Common Stock shown as beneficially owned by them. 2 (2) The figures in the table in respect of Class A Common Stock do not include the shares of Class B Common Stock beneficially owned by the specified persons, which shares of Class B Common Stock are convertible at any time on a share for a share basis to Class A Common Stock. The figures in the table represent beneficial ownership (including ownership of options, currently exercisable or exercisable within 60 days) and sole voting power and sole investment power except as noted in notes (3), (4) and (5) below. (3) Based upon the number of shares outstanding plus options for such shareholder. (4) Includes 167,812 shares of Class A Common Stock and 320,012 shares of Class B Common Stock as to which Kevork S. Hovnanian has shared voting power and shared investment power. (5) Includes 35,217 shares of Class A Common Stock and 68,667 shares of Class B Common Stock as to which Ara K. Hovnanian has shared voting power and shared investment power and Class A Common Stock options and Class B Common Stock options, that were exercisable or exercisable within 60 days of such date by Ara K. Hovnanian. (6) Includes 2,829,413 shares of Class B Common Stock held by the Kevork S. Hovnanian Family Limited Partnership, a Connecticut limited partnership (the "Limited Partnership"), beneficial ownership of which is disclaimed by Kevork S. Hovnanian. Kevork S. Hovnanian's wife, Sirwart Hovnanian, as trustee of the Sirwart Hovnanian 1994 Marital Trust, is the Managing General Partner of the Limited Partnership and as such has the sole power to vote and dispose of the Shares of Class B Common Stock held by the Limited Partnership. Also includes 129,562 shares of Class A Common Stock and 264,562 shares of Class B Common Stock held in trust for Mr. Hovnanian's daughter over which Sirwart Hovnanian, as trustee, shares with her daughter the power to dispose of and vote. In addition, includes 18,250 shares of Class A Common Stock and 55,450 shares of Class B Common Stock held in trust for Mr. Hovnanian's grandchildren, over which Sirwart Hovnanian, as trustee, has sole power to dispose of and vote and includes 20,000 shares of Class A Common Stock held in the name of Sirwart Hovnanian over which she has sole power to dispose of and vote. Mr. Hovnanian disclaims beneficial ownership of the shares described in the preceding three sentences. USE OF PROCEEDS Unless otherwise provided in the applicable Prospectus Supplement, the net proceeds from the sale of the Securities offered by this Prospectus and each Prospectus Supplement (the "Offered Securities") will be used for general corporate purposes, which may include working capital needs, the refinancing of existing indebtedness, expansion of the business and acquisitions. The Company will not receive any net proceeds from the sale of any shares of Class A Common Stock offered by the Selling Shareholders. 3 RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS For purposes of computing the ratios of earnings to fixed charges and earnings to combined fixed charges and preferred dividends, earnings consist of earnings (loss) from continuing operations before income taxes, minority interest, extraordinary items and cumulative effect of accounting charges, plus fixed charges (interest charges and preferred share dividend requirements of subsidiaries, adjusted to a pretax basis), less interest capitalized, less preferred share dividend requirements of subsidiaries adjusted to a pretax basis and less undistributed earnings of affiliates whose debt is not guaranteed by the Company. The following table sets forth the ratios of earnings to fixed charges and earnings to combined fixed charges and preferred dividends for the Company for the periods indicated:
Three Eight Months Months Year Ended Years Ended October 31, Ended Ended Jan. 31, --------------------------- October 31, February 28, 1999 1998 1997 1996 1995 1994 1994 Ratio of earnings to fixed charges.......... 3.2 2.6 (a) 1.6 1.4 (b) 1.8 Ratio of earnings of combined fixed charges and preferred stock dividends.............. 3.2 2.6 (a) 1.6 1.4 (b) 1.8
- --------------------- (a) No ratio is presented for the year ended October 31, 1997 as the earnings for such period were insufficient to cover fixed charges by $9,197,000. (b) No ratio is presented for the eight months ended October 31, 1994 as the earnings for such period were insufficient to cover fixed charges by $18,803,000. DESCRIPTION OF DEBT SECURITIES The K. Hovnanian Debt Securities will be unsecured senior, senior subordinated or subordinated debt of K. Hovnanian and will be issued: in the case of K. Hovnanian Senior Debt Securities, under a Senior Indenture (the "K. Hovnanian Senior Debt Indenture") among K. Hovnanian, Hovnanian, as guarantor, and the trustee specified in the applicable Prospectus Supplement; in the case of K. Hovnanian Senior Subordinated Debt Securities, under a Senior Subordinated Indenture (the "K. Hovnanian Senior Subordinated Debt Indenture") among K. Hovnanian, Hovnanian, as guarantor, and the trustee specified in the applicable Prospectus Supplement; and in the case of K. Hovnanian Subordinated Debt Securities, under a Subordinated Indenture (the "K. Hovnanian Subordinated Debt Indenture") among K. Hovnanian, Hovnanian, as guarantor, and the trustee specified in the applicable Prospectus Supplement. The K. Hovnanian Senior Debt Indenture, the K. Hovnanian Senior Subordinated Debt Indenture and the K. Hovnanian Subordinated Debt Indenture are sometimes hereinafter referred to individually as a "K. Hovnanian Indenture" and collectively as the "K. Hovnanian Indentures." The Hovnanian Debt Securities will be unsecured senior, senior subordinated or subordinated debt of Hovnanian and will be issued: in the case of Hovnanian Senior Debt Securities, under a Senior Indenture (the "Hovnanian Senior Debt Indenture") between Hovnanian and the trustee specified in the applicable Prospectus Supplement; in the case of Hovnanian Senior Subordinated Debt Securities, under a Senior Subordinated Indenture (the "Hovnanian Senior Subordinated Debt Indenture") between Hovnanian and the trustee specified in the applicable Prospectus Supplement; and in the case of Hovnanian Subordinated Debt Securities, under a Subordinated Indenture (the "Hovnanian Subordinated Debt Indenture") between Hovnanian and the trustee specified in the applicable Prospectus Supplement. The Hovnanian Senior Debt Indenture, The Hovnanian Senior Subordinated Debt Indenture and the Hovnanian Subordinated Debt Indenture are sometimes hereinafter referred to individually as a "Hovnanian Indenture" and collectively as the "Hovnanian Indentures." The K. Hovnanian Senior Indenture and the Hovnanian Senior Indenture are sometimes collectively referred to individually as a "Senior Debt Indenture" and collectively as the "Senior Debt Indentures." The K. Hovnanian Senior Subordinated Debt Indenture and the Hovnanian Senior Subordinated Debt Indenture are sometimes referred to individually as a "Senior Subordinated Debt 4 Indenture" and collectively as the "Senior Subordinated Debt Indentures." The K. Hovnanian Subordinated Debt Indenture and the Hovnanian Subordinated Debt Indenture are sometimes referred to individually as a "Subordinated Debt Indenture" and collectively as the "Subordinated Debt Indentures." The K. Hovnanian Indentures and the Hovnanian Indentures are sometimes referred to individually as an "Indenture" and collectively as the "Indentures." None of the Indentures limits the amount of Debt Securities that may be issued thereunder, and the Indentures provide that the Debt Securities may be issued from time to time in one or more series. The Indentures permit the appointment of a different trustee for each series of Debt Securities. The Indentures are filed as exhibits to the Registration Statement, of which this Prospectus is a part. The following summaries of certain provisions of the Indentures and the Debt Securities do not purport to be complete, and, while Hovnanian and K. Hovnanian believe the descriptions of the material provisions of the Indentures and Debt Securities contained in this Prospectus are accurate summaries of such material provisions, such summaries are subject to the detailed provisions of the applicable Indenture to which reference is hereby made for a full description of such provisions, including the definition of certain terms used herein. Section references in parenthesesular sections or defined terms of the applicable Indenture are referred to, such sections or defined terms are incorporated herein by reference as part of the statement made, and the statement is qualified in its entirety by such reference. The Indentures are substantially identical, except for provisions relating to the Guarantee and to subordination. For purposes of the summaries set forth below, the term "Issuer" shall refer to K. Hovnanian in the case of the K. Hovnanian Debt Securities and the K. Hovnanian Indentures, and to Hovnanian in the case of the Hovnanian Debt Securities and the Hovnanian Indentures. The term "Obligors" shall refer to Hovnanian in the case of the Hovnanian Debt Securities and the Hovnanian Indentures, and K. Hovnanian and Hovnanian, as guarantor (the "Guarantor"), in the case of the K. Hovnanian Debt Securities and the K. Hovnanian Indentures. Provisions Applicable to Senior, Senior Subordinated and Subordinated Debt Securities General. Hovnanian Debt Securities will be unsecured senior, senior subordinated or subordinated obligations of Hovnanian, and K. Hovnanian Debt Securities will be unsecured senior, senior subordinated or subordinated obligations of K. Hovnanian, except that, under certain circumstances, K. Hovnanian may be released from such obligations. See "--Condition for Release of K. Hovnanian." Except to the extent set forth in the applicable Prospectus Supplement, none of the Indentures limits the payment of dividends by or the acquisition of stock of Hovnanian or K. Hovnanian. Except to the extent set forth in any Prospectus Supplement, the Indentures do not, and the Debt Securities will not, contain any covenants or other provisions that are intended to afford holders of the Debt Securities special protection in the event of either a change of control of Hovnanian or a highly leveraged transaction by Hovnanian. Reference is made to the Prospectus Supplement for the following terms of and information relating to the Debt Securities being offered (the "Offered Debt Securities") (to the extent such terms are applicable to such Offered Debt Securities): (i) the title of the Offered Debt Securities; (ii) classification as K. Hovnanian Senior Debt Securities, K. Hovnanian Senior Subordinated Debt Securities, K. Hovnanian Subordinated Debt Securities, Hovnanian Senior Debt Securities, Hovnanian Senior Subordinated Debt Securities or Hovnanian Subordinated Debt Securities, aggregate principal amount, purchase price and denomination, and whether the Offered Debt Securities will be guaranteed by the Subsidiary Guarantors of Hovnanian as described under "Description of Guarantees" below; (iii) the date or dates on which the Offered Debt Securities will mature; (iv) the method by which amounts payable in respect of principal, premium, if any, or interest, if any, on or upon the redemption of such Offered Debt Securities may be calculated; (v) the interest rate or rates (or the method by which such will be determined) and the date or dates from which such interest, if any, will accrue; (vi) the date or dates on which such interest, if any, will be payable; (vii) the place or places where and the manner in which the principal of, premium, if any, and interest, if any, on the Offered Debt Securities will be payable and the place or places where the Offered Debt Securities may be presented for transfer; (viii) the right, if any, or obligation, if any, of the Company to redeem, repay or purchase the Offered Debt Securities 5 pursuant to any sinking fund or analogous provisions or at the option of a holder thereof, and the period or periods within which, the price or prices (or the method by which such price or prices will be determined, or both) at which, the form or method of payment therefor if other than in cash and the terms and conditions upon which the Offered Debt Securities will be redeemed, repaid or purchased pursuant to any such obligation; (ix) the terms for conversion or exchange, if any, of the Offered Debt Securities; (x) any provision relating to Debt Securities at an original issue discount; (xi) if the amounts of payments of principal of, premium, if any, and interest, if any, on the Offered Debt Securities are to be determined with reference to an index, the manner in which such amounts shall be determined; (xii) any applicable United States federal income tax consequences; (xiii) the currency or currencies for which the Offered Debt Securities may be purchased and the currency or currencies in which principal, premium, if any, and interest, if any, may be payable; (xiv) the trustee with respect to the series of Offered Debt Securities; and (xv) any other specific terms of the Offered Debt Securities, including any deleted, modified or additional events of default or remedies or additional covenants provided with respect to such Offered Debt Securities, and any terms that may be required by or advisable under applicable laws or regulations. Unless otherwise specified in any Prospectus Supplement, the Debt Securities will be issuable in registered form and in denominations of $1,000 and any integral multiple thereof (Section 2.7). No service charge will be made for any transfer or exchange of any Debt Securities but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith (Section 2.8). Debt Securities may bear interest at a fixed rate or a floating rate. Debt Securities bearing no interest or interest at a rate that at the time of issuance is below the prevailing market rate may be sold at a discount below their stated principal amount. Special United States federal income tax considerations applicable to any such discounted Debt Securities or to certain Debt Securities issued at par that are treated as having been issued at a discount for United States federal income tax purposes will be described in the applicable Prospectus Supplement. In determining whether the holders of the requisite aggregate principal amount of outstanding Debt Sequest, demand, authorization, direction, notice, consent or waiver under the Indentures, the principal amount of any series of Debt Securities originally issued at a discount from their stated principal amount that will be deemed to be outstanding for such purposes will be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof. Description of Guarantees. Hovnanian will fully and unconditionally guarantee, pursuant to the K. Hovnanian Indentures, the due and prompt payment of the principal of (and premium, if any) and interest on the K. Hovnanian Debt Securities when and as the same shall become due and payable, whether at the Stated Maturity, by declaration of acceleration, call for redemption or otherwise. Debt Securities of Hovnanian may be guaranteed by, and Debt Securities of K. Hovnanian may be further guaranteed by, the subsidiaries of Hovnanian (the "Subsidiary Guarantees") that also guaranty Hovnanian's revolving credit agreement at the time of issuance of such Debt Securities (the "Subsidiary Guarantors"). Under the current revolving credit agreement, the Subsidiary Guarantors consist of all of Hovnanian's subsidiaries other than four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, Hovnanian's mortgage lending subsidiary, a subsidiary holding and licensing the Hovnanian trade name and a subsidiary engaged in homebuilding activities in Poland. If Debt Securities are guaranteed by Subsidiary Guarantors, such guarantee will be set forth in a supplemental indenture. Payments with respect to the Guarantee of the K. Hovnanian Senior Subordinated Debt Securities and K. Hovnanian Subordinated Debt Securities will be subordinated in right of payment to the prior payment in full of all Senior Indebtedness of the Guarantor to the same extent and manner that payments with respect to the K. Hovnanian Senior Subordinated Debt Securities are subordinated in right of payment to the prior payment in full of all Senior Indebtedness of the Issuer as described under "Provisions Applicable Solely to Senior Subordinated Debt Securities and Subordinated Debt Securities" below. Likewise, payments with respect to Subsidiary Guarantees of Senior Subordinated Debt Securities and Subordinated Debt Securities will 6 be subordinated in right of payment to the prior payment in full of all Senior Indebtedness of each such Subsidiary Guarantor to the same extent and manner that payments with respect to the Senior Subordinated Debt Securities and Subordinated Debt Securities are subordinated in right of payment to the prior payment in full of all Senior Indebtedness of the issuer of such Debt Securities. Global Securities. The Debt Securities of a series may be issued in whole or in part in the form of one or more global securities ("Global Securities") that will be deposited with or on behalf of a depositary (the "Depositary") identified in the Prospectus Supplement relating to such series. Global Securities may be issued only in fully registered form and in either temporary or permanent form. Unless and until it is exchanged in whole or in part for the individual Debt Securities represented thereby, a Global Security (i) may not be transferred except as a whole and (ii) may only be transferred (A) by the Depositary for such Global Security to its nominee, (B) by a nominee of such Depositary to such Depositary or another nominee of such Depositary or (C) by such Depositary or any such nominee to a successor Depositary or nominee of such successor Depositary (Section 2.8). The specific terms of the depositary arrangement with respect to a series of Debt Securities will be described in the Prospectus Supplement relating to such series. Hovnanian and K. Hovnanian anticipate that the following provisions generally will apply to all depositary arrangements. Upon the issuance of a Global Security, the Depositary for such Global Security or its nominee will credit, on its book-entry registration and transfer system, the respective principal amounts of the individual Debt Securities represented by such Global Security to the accounts of persons that have accounts with such Depositary. Such accounts shall be designated by the dealers, underwriters or agents with respect to such Debt Securities or by the Issuer if such Debt Securities are offered and sold directly by the Issuer. Ownership of beneficial interests in a Global Security will be limited to persons that have accounts with the applicable Depositary ("participants") or persons that may hold interests through participants. Ownership of beneficial interests in such Global Security will be shown on, and the transfer of that ownership will be effected only through, records maintained by the applicable Depositary or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). The laws of some states require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Security. As long as the Depositary for a Global Security or its nominee is the registered owner of such Global Security, such Depositary or its nominee, as the case may be, will be considered the sole owner or holder of the Debt Securities of the series represented by such Global Security for all purposes under the Indenture governing such Debt Securities. Except as provided below, owners of beneficial interests in a Global Security will not be entitled to have any of the individual Debt Securities of the series represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of any such Debt Securities in definitive form and will not be considered the owners or holders thereof under the Indenture governing such Debt Securities. Payment of principal of, premium, if any, and interest, if any, on individual Debt Securities represented by a Global Security registered in the name of a Depositary or its nominee will be made to the Depositary or its nominee, as the case may be, as the registered owner of the Global Security representing such Debt Securities. Hovnanian and K. Hovnanian expect that the Depositary for a series of Debt Securities or its nominee, upon receipt of any payment of principal, premium, if any, and interest, if any, in respect of a Global Security representing any such Debt Securities, will immediately credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Security for such Securities as shown on the records of such Depositary or its nominee. Hovnanian and K. Hovnanian also expect that payments by participants to owners of beneficial interests in such Global Security held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name." Such payments will be the responsibility of such participants. Neither Hovnanian, K. Hovnanian, the trustee for such Debt 7 Securities, any paying agent nor the registrar for such Debt Securities will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Global Security for such Debt Securities or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. If the Depositary for a series of Debt Securities is at any time unwilling, unable or ineligible to continue as depositary and a successor depositary is not appointed by the Issuer within 90 days, such Issuer will issue individual Debt Securities of such series in exchange for the Global Security representing such series of Debt Securities. In addition, an Issuer may at any time and in its sole discretion, subject to any limitations described in the Prospectus Supplement relating to such Debt Securities, determine not to have any Debt Securities of a series represented by a Global Security and, in such event, will issue individual Debt Securities of such series in exchange for the Global Security representing such series of Debt Securities. Further, if an Issuer so specifies with respect to the Debt Securities of a series, an owner of a beneficial interest in a Global Security representing Debt Securities of such series may, on terms acceptable to such Issuer, the trustee and the Depositary for such Global Security, receive individual Debt Securities of such series in exchange for such beneficial interests, subject to any limitations described in the Prospectus Supplement relating to such Debt Securities. In any such instance, an owner of a beneficial interest in a Global Security will be entitled to physical delivery of individual Debt Securities of the series represented by such Global Security equal in principal amount to such beneficial interest and to have such Debt Securities registered in its name. Individual Debt Securities of such series so issued will be issued in registered form and in denominations, unless otherwise specified in the applicable Prospectus Supplement relating to such series of Debt Securities, of $1,000 and integral multiples thereof. Events of Default. Unless otherwise specified in the applicable Prospectus Supplement, an Event of Default is defined under each Indenture with respect to the Debt Securities of any series issued under such Indenture as being: (a) default in the payment of principal of or premium, if any, with respect to Debt Securities of such series when due; (b) default in the payment of any installment of interest on any of the Debt Securities of such series when due, continued for 30 days; (c) default in the payment or satisfaction of any sinking fund or other purchase obligation with respect to Debt Securities of such series when due; (d) any other covenant of any of the Obligors applicable to Debt Securities of such series, continued for 90 days after written notice to the Obligors by the trustee or to the Obligors and the trustee, by the holders of at least 25% in aggregate principal amount of the Debt Securities of such series then outstanding requiring the same to be remedied; and (e) certain events of bankruptcy, insolvency or reorganization of the Issuer (Section 5.1). If any Event of Default shall occur and be continuing, the trustee or the holders of not less than 25% in aggregate principal amount of the Debt Securities of such series then outstanding, by notice in writing to the Obligors (and to the trustee, if given by the holders), may declare the principal (or, in the case of any series of Debt Securities originally issued at a discount from their stated principal amount, such portion of the principal amount as may be specified in the terms of such series) of all of the Debt Securities of such series and the interest, if any, accrued thereon to be due and payable immediately; provided, however, that the holders of a majority in aggregate principal amount of the Debt Securities of such series then outstanding, by notice in writing to the Obligors and the trustee, may rescind and annul such declaration and its consequences if all defaults under such Indenture are cured or waived (Section 5.1). Each Indenture provides that no holder of any series of Debt Securities then outstanding may institute any suit, action or proceeding with respect to, or otherwise attempt to enforce, such Indenture, unless (i) such holder previously shall have given to the trustee written notice of default and of the continuance thereof, (ii) the holders of not less than 25% in aggregate principal amount of such series of Debt Securities then outstanding shall have made written request to the trustee to institute such suit, action or proceeding and shall have offered to the trustee such reasonable indemnity as it may requie trustee for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding; provided that, subject to the subordination provisions applicable to the Senior Subordinated Debt Securities and the Subordinated Debt Securities, the right of any holder of any Debt Security to receive payment of the 8 principal of, premium, if any, or interest, if any, on such Debt Security, on or after the respective due dates, or to institute suit for the enforcement of any such payment shall not be impaired or affected without the consent of such holder (Section 5.4). The holders of a majority in aggregate principal amount of the Debt Securities of such series then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee with respect to the Debt Securities of such series, provided that the trustee may decline to follow such direction if the trustee determines that such action or proceeding is unlawful or would involve the trustee in personal liability (Section 5.7). The Obligors are required to furnish to the trustee annually a certificate as to compliance by the Obligors with all conditions and covenants under each Indenture (Section 4.3). Discharge and Defeasance. Unless otherwise specified in the applicable Prospectus Supplement, the Obligors can discharge or defease their respective obligations with respect to any series of Debt Securities as set forth below (Article Ten). The Obligors may discharge all of their obligations (except those set forth below) to holders of any series of Debt Securities issued under any Indenture that have not already been delivered to the trustee for cancellation and that have either become due and payable, or are by their terms due and payable within one year (or scheduled for redemption within one year), by irrevocably depositing with the trustee cash or U.S. Government Obligations (as defined in such) Indenture), or a combination thereof, as trust funds in an amount certified to be sufficient to pay when due the principal of, premium, if any, and interest, if any, on all outstanding Debt Securities of such series and to make any mandatory sinking fund payments, if any, thereon when due. Unless otherwise provided in the applicable Prospectus Supplement, the Obligors may also elect at any time to (a) defease and be discharged from all of their obligations (except those set forth below) to holders of any series of Debt Securities issued under each Indenture ("defeasance") or (b) be released from all of their obligations with respect to certain covenants applicable to any series of Debt Securities issued under each Indenture ("covenant defeasance"), if, among other things: (i) the Obligors irrevocably deposit with the trustee cash or U.S. Government Obligations, or a combination thereof, as trust funds in an amount certified to be sufficient to pay when due the principal of, premium, if any, and interest, if any, on all outstanding Debt Securities of such series and to make any mandatory sinking fund payments, if any, thereon when due and such funds have been so deposited for 91 days; (ii) such deposit will not result in a breach or violation of, or cause a default under, any agreement or instrument to which any of the Obligors is a party or by which it is bound; and (iii) the Obligors deliver to the trustee an opinion of counsel to the effect that the holders of such series of Debt Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of such defeasance or covenant defeasance and that defeasance or covenant defeasance will not otherwise alter the United States federal income tax treatment of such holders' principal of and interest payments, if any, on such series of Debt Securities. Such opinion in the case of defeasance under clause (a) above must be based on a ruling of the Internal Revenue Service or a change in United States federal income tax law occurring after the date of the Indenture relating to the Debt Securities of such series, since such a result would not occur under current tax law (Section 10.1). Notwithstanding the foregoing, no discharge, defeasance or covenant defeasance described above shall affect the following obligations to or rights of the holders of any series of Debt Securities: (i) rights of registration of transfer and exchange of Debt Securities of such series, (ii) rights of substitution of mutilated, defaced, destroyed, lost or stolen Debt Securities of such series, (iii) rights of holders of Debt Securities of such series to receive payments of principal thereof, premium, if any, and interest, if any, thereon, upon the original due dates therefor (but not upon accelerating sinking fund payments thereon when due, if any, (iv) rights, obligations, duties and immunities of the trustee, (v) rights of holders of Debt Securities of such series as beneficiaries with respect to property so deposited with the trustee payable to all or any of them and (vi) obligations of the Obligors to maintain an office or agency in respect of Debt Securities of such series (Section 10.1). 9 The Obligors may exercise the defeasance option with respect to any series of Debt Securities notwithstanding the prior exercise of the covenant defeasance option with respect to any series of Debt Securities. If the Obligors exercise the defeasance option with respect to any series of Debt Securities, payment of such series of Debt Securities may not be accelerated because of an Event of Default with respect to such series of Debt Securities. If the Obligors exercise the covenant defeasance option with respect to any series of Debt Securities, payment of such series of Debt Securities may not be accelerated by reason of an Event of Default with respect to the covenants to which such covenant defeasance is applicable. However, if such acceleration were to occur by reason of another Event of Default, the realizable value at the acceleration date of the cash and U.S. Government Obligations in the defeasance trust could be less than the principal of, premium, if any, and interest, if any, and any mandatory sinking fund payments, if any, then due on such series of Debt Securities, in that the required deposit in the defeasance trust is based upon scheduled cash flow rather than market value, which will vary depending upon interest rates and other factors. Modification of the Indenture. Each Indenture provides that the Obligors and the trustee may enter into supplemental indentures without the consent of the holders of the Debt Securities to (a) evidence the assumption by a successor entity of the obligations of any of the Obligors under such Indenture, (b) add covenants or new events of default for the protection of the holders of such Debt Securities, (c) cure any ambiguity or correct any inconsistency the form and terms of Debt Securities of any series, (e) evidence the acceptance of appointment by a successor trustee, (f) in the case of Senior Debt Securities, secure such Debt Securities, (g) designate a bank or trust company other than the trustee specified in the applicable Prospectus Supplement to act as trustee for a series of Debt Securities, (h) modify the existing covenants and events of default solely in respect of, or add new covenants and events of default that apply solely to, Debt Securities not yet issued and outstanding on the date of such supplemental indenture, (i) provide for the issuance of Debt Securities of any series in coupon form and exchangeability of such Debt Securities for fully registered Debt Securities, (j) modify, eliminate or add to the provisions of such Indenture as necessary to effect the qualification of such Indenture under the Trust Indenture Act of 1939 and to add certain provisions expressly permitted by such Act and (k) modify the provisions to provide for the denomination of Debt Securities in foreign currencies which shall not adversely affect the interests of the holders of such Debt Securities in any material respect. (Section 8.1). Each Indenture also contains provisions permitting the Obligors and the trustee, with the consent of the holders of not less than a majority in aggregate principal amount of Debt Securities of each series then outstanding and affected, to add any provisions to, or change in any manner or eliminate any of the provisions of, such Indenture or any supplemental indenture or modify in any manner the rights of the holders of the Debt Securities of such series; provided that the Obligors and the trustee may not, without the consent of the holder of each outstanding Debt Security affected thereby, (a) extend the stated final maturity of any Debt Security, reduce the principal amount thereof, reduce the rate or extend the time of payment of interest, if any, thereon, reduce or alter the method of computation of any amount payable on redemption, repayment or purchase by the Issuer, change the coin or currency in which principal, premium, if any, and interest, if any, are payable, reduce the amount of the principal of any original issue discount security payable upon acceleration or provable in bankruptcy, impair or affect the right to institute suit for the enforcement of any payment or repayment thereof or, if applicable, adversely affect any right of prepayment at the option of the holder or, in the case of K. Hovnanian Indentures, make any change adverse to the interests of the holders in the terms and conditions of the Guarantee or (b) reduce the aforesaid percentage in aggregate principal amount of Debt Securities of any series issued under such Indenture (Section 8.2). Consolidation, Merger, Sale or Conveyance. Except as otherwise provided in the applicable Prospectus Supplement, the K. Hovnanian Indentures provide that K. Hovnanian or the Guarantor may, and the Hovnanian Indentures provide that Hovnanian may, without the consent of the holders of Debt Securities, consolidate with, merge into or transfer, exchange or dispose of all of its properties to, any other corporation or partnership organized under the laws of the United States, provided that (i) the successor corporation assumes all obligations of K. Hovnanian or Hovnanian, as the case may be, by supplemental indenture satisfactory in form 10 to the applicable trustee executed and delivered to such trustee, under the Indentures and the Debt Securities, (ii) immediately after giving effect to such consolidation, merger, exchange or other disposition, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing and (iii) certain other conditions are met. (Section 9.1). Condition for Release of K. Hovnanian. Except as otherwise provided in the applicable Prospectus Supplement, each K. Hovnanian Indenture provides that K. Hovnanian may be released from its obligations under such K. Hovnanian Indenture and the K. Hovnanian Debt Securities, without the consent of the holders of the K. Hovnanian Debt Securities of any series, if Hovnanian or any successor to Hovnanian has assumed the obligations of K. Hovnanian under such K. Hovnanian Debt Securities. In the event of such release, a taxable sale or exchange of a Debt Security for a new Debt Security will be deemed to occur. As a result, a holder of a Debt Security may recognize gain or loss on the sale or exchange and may be required to include in income different amounts during the remaining term of the Debt Security than would have been included absent such release. Certain Definitions. Except as otherwise provided in the applicable Prospectus Supplement, the following definitions are applicable to the discussions of the Indentures (Article One). "Consolidated Net Tangible Assets" means the aggregate amount of assets included on the most recent consolidated balance sheet of Hovnanian and its Restricted Subsidiaries, less applicable reserves and other properly deductible items and after deducting therefrom (a) all current liabilities and (b) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all in accordance with generally accepted accounting principles consistently applied. "Indebtedness," with respect to any person, means, without duplication: (a)(i) the principal of, premium, if any, and interest, if any, on indebtedness for money borrowed of such person, indebtedness of such person evidenced by bonds, notes, debentures or similar obligations, and any guaranty by such person of any indebtedness for money borrowed or indebtedness evidenced by bonds, notes, debentures or similar obligations of any other person, whether any such indebtedness or guaranty is outstanding on the date of the Indenture or is thereafter created, assumed or incurred, (ii) obligations of such person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (iii) the principal of and premium, if any, and interest, if any, on indebtedness incurred, assumed or guaranteed by such person in connection with the acquisition by it or any of its subsidiaries of any other businesses, properties or other assets, (iv) lease obligations that such person capitalized in accordance with Statement of Financial Accounting Standards No. 13 promulgated by the Financial Accounting Standards Board or such other generally accepted accounting principles as may be from time to time in effect, (v) any indebtedness of such person representing the balance deferred and unpaid of the purchase price of any property or interest therein (except any such balance that constitutes an accrued expense or trade payable) and any guaranty, endorsement or other contingent obligation of such person in respect of any indebtedness of another that is outstanding on the date of the Indenture or is thereafter created, assumed or incurred by such person and (vi) obligations of such person under interest rate, commodity or currency swaps, caps, collars, options and similar arrangements; and (b) any amendments, modifications, refundings, renewals or extensions of any indebtedness or obligation described as Indebtedness in clause (a) above. "Restricted Subsidiary" means (a) any Subsidiary of Hovnanian other than an Unrestricted Subsidiary, and (b) any Subsidiary of Hovnanian which was an Unrestricted Subsidiary but which, subsequent to the date of the Indentures, is designated by the Board of Directors of Hovnanian to be a Restricted Subsidiary; provided, however, that Hovnanian may not designate any such Subsidiary to be a Restricted Subsidiary if Hovnanian would thereby breach any covenant or agreement contained in the Indentures (on the assumptions that any outstanding Indebtedness of such Subsidiary was incurred at the time of such designation). "Subsidiary" of any specified Person means any corporation of which such Person, or such Person and one or more Subsidiaries of such Person, or any one or more Subsidiaries of such Person, directly or indirectly 11 own voting securities entitling any one or more of such Person and its Subsidiaries to elect a majority of the directors, either at all times, or so long as there is no default or contingency which permits the holders of any other class or classes of securities to vote for the election of one or more directors. "Unrestricted Subsidiary" means (a) any Subsidiary of Hovnanian acquired or organized after the date of the Indentures, provided, however, that such Subsidiary shall not be a successor, directly or indirectly, to any Restricted Subsidiary and (b) any Subsidiary of Hovnanian substantially all the assets of which consist of stock or other securities of a Subsidiary or Subsidiaries of the character described in clause (a) above, unless and until such Subsidiary shall have been designated to be a Restricted Subsidiary. Provisions Applicable Solely to Senior Debt Securities General. Senior Debt Securities will be issued under a Senior Debt Indenture and will rank pari passu with all other unsecured and unsubordinated debt of the Issuer of such Senior Debt Securities. At April 30, 1998, the Company had an aggregate of $190 million of Indebtedness outstanding which would be subordinated to Senior Debt Securities. Limitations on Liens. The Senior Debt Indentures provide that, so long as any Senior Debt Securities are outstanding, the Issuer will not, and will not permit any Restricted Subsidiary to, pledge, mortgage, hypothecate or grant a security interest in, or permit any mortgage, pledge, security interest or other lien upon, any property or assets owned by the Issuer or any Restricted Subsidiary to secure any Indebtedness, without making effective provision whereby outstanding Senior Debt Securities shall be equally and ratably secured. Under the terms of the Senior Debt Indentures, the foregoing limitation does not apply to (a) any mortgage, pledge, security interest, lien or encumbrance upon any property or assets created at the time of the acquisition of such property or assets by the Issuer or any Restricted Subsidiary or within one year after such time to secure all or a portion of the purchase price for such property or assets; (b) any mortgage, pledge, security interest, lien or encumbrance upon any property or assets existing thereon at the time of the acquisition thereof by the Issuer or any Restricted Subsidiary (whether or not the obligations secured thereby are assumed by the Issuer or any Restricted Subsidiary); (c) any mortgage, pledge, security interest, lien or encumbrance upon any property or assets, whenever acquired, of any corporation or other entity that becomes a Restricted Subsidiary after the date of the Senior Debt Indenture, provided that (i) the instrument creating such mortgage, pledge, security interest, lien or encumbrance shall be in effect prior to the time such corporation or other entity becomes a Restricted Subsidiary and (ii) such mortgage, pledge, security interest, lien or encumbrance shall only apply to properties or assets owned by such corporation or other entity at the time it becomes a Restricted Subsidiary or thereafter acquired by it from sources other than the Issuer or another Restricted Subsidiary; (d) any mortgage, pledge, security interest, lien or encumbrance in favor of the Issuer or any wholly- owned Subsidiary of Hovnanian; (e) any mortgage, pledge, security interest, lien or encumbrance created or assumed by the Issuer or a Restricted Subsidiary in connection with the issuance of debt securities the interest on which is excludable from gross income of the holder of such security pursuant to the Internal Revenue Code of 1986, as amended, for the purpose of financing, in whole or in part, the acquisition or construction of property or assets to be used by the Issuer or a Subsidiary; (f) any extension, renewal or refunding of any mortgage, pledge, security interest, lien or encumbrance described in the foregoing subparagraphs (a) through (e) on substantially the same property or assets theretofore subject thereto; (g) any mortgage, pledge, security interest, lien or encumbrance securing any Indebtedness in an amount which, together with all other Indebtedness secured by a mortgage, pledge, security interest, lien or encumbrance that is not otherwise permitted by the foregoing provisions, does not at the time of the incurrence of the Indebtedness so secured exceed 20% of Consolidated Net Tangible Assets; (h) deposits or pledges to secure the payment of workmen's compensation, unemployment insurance or other social security benefits or obligations, or to secure the performance of trade contracts, leases, public or statutory obligations, surety or appeal bonds or other obligations of a like general nature incurred in the ordinary course of business; (i) mechanics', materialmen's, warehousemen's, carriers' or other like liens arising in the ordinary course of business securing obligations which are not overdue for a 12 period longer than 30 days or which are being contested in good faith by appropriate proceedings; (j) liens for taxes, assessments or other governmental charges not yet payable or being contested in good faith and as to which adequate reserves shall have been established in accordance with generally accepted accounting principles; (k) non-recourse mortgages on Income Producing Pro Indebtedness; (l) liens on assets of a Mortgage Subsidiary to secure only a Warehouse Line of Credit provided to such Subsidiary; (m) easements, rights-of- way, restrictions and other similar encumbrances incurred in the ordinary course of business or (n) liens in connection with capital leases or sale leaseback transactions not securing any other indebtedness. For the purpose of this provision, "security interest" will include the interest of the lessor under a lease with a term of three years or more that should be, in accordance with generally accepted accounting principles, recorded as a capital lease, and any such lease of property or assets not acquired from the Issuer or any Restricted Subsidiary in contemplation of such lease shall be treated as though the lessee had purchased such property or assets from the lessor. (Section 3.6 of the Senior Debt Indentures). Provisions Applicable Solely to Senior Subordinated Debt Securities and Subordinated Debt Securities Subordination. The Subordinated Debt Securities will be subordinate and junior in right of payment, to the extent set forth in the Subordinated Debt Indentures, to all Senior Indebtedness. The Senior Subordinated Debt Securities will be subordinate and junior in right of payment, to the extent set forth in the Senior Subordinated Debt Indentures, to all Senior Indebtedness of the Issuer. The Senior Subordinated Debt Securities will rank senior to all existing and future Indebtedness of the Issuer that is neither Senior Indebtedness of the Issuer nor Senior Subordinated Indebtedness, and only Indebtedness of the Issuer that is Senior Indebtedness of the Issuer will rank senior to the Senior Subordinated Debt Securities in accordance with the subordination provisions of the Senior Subordinated Debt Indentures. "Senior Indebtedness" of the Issuer is defined in the Subordinated Debt Indentures and the Senior Subordinated Debt Indentures as Indebtedness of the Issuer outstanding at any time (other than the Indebtedness evidenced by the Debt Securities of any series) except (a) any Indebtedness as to which, by the terms of the instrument creating or evidencing the same, it is provided that such Indebtedness is not senior or prior in right of payment to the Debt Securities or is pari passu or subordinate by its terms in right of payment to the Debt Securities, (b) renewals, extensions and modifications of any such Indebtedness, (c) any Indebtedness of the Company to a wholly-owned Subsidiary of the Issuer, (d) interest accruing after the filing of a petition initiating certain events of bankruptcy or insolvency unless such interest is an allowed claim enforceable against the Issuer in a proceeding under federal or state bankruptcy laws and (e) trade payables. "Senior Subordinated Indebtedness" is defined in the Hovnanian Senior Subordinated Debt Indenture as the Hovnanian Senior Subordinated Debt Securities and any other Indebtedness of Hovnanian that ranks pari passu with the Hovnanian Senior Subordinated Debt Securities. Any Indebtedness of Hovnanian that is subordinate or junior by its terms in right of payment to any other Indebtedness of Hovnanian shall be subordinate to Senior Subordinated Indebtedness of Hovnanian unless the instrument creating or evidencing the same or pursuant to which the same is outstanding specifically provides that such Indebtedness (i) is to rank pari passu with other Senior Subordinated Indebtedness of Hovnanian and (ii) is not subordinated by its terms to any Indebtedness of Hovnanian which is not Senior Indebtedness of Hovnanian. "Senior Subordinated Indebtedness" is defined in the K. Hovnanian Senior Subordinated Debt Indenture as the K. Hovnanian Senior Subordinated Debt Securities, the Guarantee and any other Indebtedness of K. Hovnanian or the Guarantor that ranks pari passu with the K. Hovnanian Senior Subordinated Debt Securities. Any Indebtedness of K. Hovnanian or the Guarantor that is subordinate or junior by its terms in right of payment to any other Indebtedness of K. Hovnanian or the Guarantor shall be subordinate to Senior Subordinated Indebtedness unless the instrument creating or evidencing the same or pursuant to which the same is outstanding specifically provides that such Indebtedness (i) is to rank pari passu with other Senior Subordinated Indebtedness and (ii) is not subordinated by its terms to any Indebtedness of K. Hovnanian or the Guarantor which is not Senior Indebtedness of K. Hoebtedness' of the Obligors means the Senior Subordinated Debt Securities, the Guarantees, any other Senior Subordinated Indebtedness of such Obligor and any other Indebtedness that is subordinate or junior in right of payment to Senior Indebtedness of such Obligor. 13 If (i) the Issuer should default in the payment of any principal of, premium, if any, or interest, if any, on any Senior Indebtedness of the Issuer when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration of acceleration or otherwise or (ii) any other default with respect to Senior Indebtedness of the Issuer shall occur and the maturity of the Senior Indebtedness has been accelerated in accordance with its terms, then, upon written notice of such default to the Issuer by the holders of such Senior Indebtedness or any trustee therefor, unless and until such default shall have been cured or waived or shall have ceased to exist or such acceleration shall have been rescinded, no direct or indirect payment (in cash, property, securities, by set-off or otherwise) will be made or agreed to be made for principal of, premium, if any, or interest, if any, on any of the Senior Subordinated Debt Securities or the Subordinated Debt Securities, or in respect of any redemption, retirement, purchase or other acquisition of the Senior Subordinated Debt Securities or the Subordinated Debt Securities other than those made in capital stock of Hovnanian (or cash in lieu of fractional shares thereof) (Sections 13.1 and 13.4 of the Senior Subordinated Debt Indentures and Sections 13.1 and 13.4 of the Subordinated Debt Indentures). If any default (other than a default described in the preceding paragraph) occurs under the Senior Indebtedness of the Issuer, pursuant to which the maturity thereof may be accelerated immediately or the expiration of any applicable grace periods occurs (a "Senior Nonmonetary Default"), then, upon the receipt by the Issuer and the trustee of written on behalf of holders of 25% or more of the aggregate principal amount of Senior Indebtedness specifying an election to prohibit such payment and other action by the Issuer in accordance with the following provisions of this paragraph, the Issuer may not make any payment or take any other action that would be prohibited by the immediately preceding paragraph during the period (the "Payment Blockage Period") commencing on the date of receipt of such Payment Notice and ending on the earlier of (i) the date, if any, on which the holders of such Senior Indebtedness or their representative notify the trustee that such Senior Nonmonetary Default is cured or waived or ceases to exist or the Senior Indebtedness to which such Senior Nonmonetary Default relates is discharged or (ii) the 179th day after the date of receipt of such Payment Notice. Notwithstanding the provisions described in the immediately preceding sentence, the Issuer may resume payments on the Senior Subordinated Debt Securities and the Subordinated Debt Securities after such Payment Blockage Period. If (i)(A) without the consent of the Issuer a receiver, conservator, liquidator or trustee of the Issuer or of any of its property is appointed by the order or decree of any court or agency or supervisory authority having jurisdiction, and such decree or order remains in effect for more than 60 days or (B) the Issuer is adjudicated bankrupt or insolvent or (C) any of its property is sequestered by court order and such order remains in effect for more than 60 days or (D) a petition is filed against the Issuer under any state or federal bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or receivership law of any jurisdiction whether now or hereafter in effect, and is not dismissed within 60 days after such filing; (ii) the Issuer (A) commences a voluntary case or other proceeding seeking liquidation, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or other relief with respect to itself or its debt or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or (B) consents to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or (C) fails generally to, or cannot, pay its debts generally as they become due or (D) takes any corporate action to authorize or effect any of the foregoing; or (iii) any Subsidiary of the Issuer takes, suffers or permits to exist any of the events or conditions referred to in the foregoing clause (i) or (ii), then all Senior Indebtedness of the Issuer (including any interest thereon accruing after the commencement of any such proceedings) will first be paid in full before any payment or distribution, whether in cash, securities or other property, is made by the Issuer to any holder of Senior Subordinated Debt Securities or Subordinated Debt Securities on account of the principal of, premium, if any, or interest, if any, on such Senior Subordinated Debt Securities or Subordinated Debt Securities, as the case may be. Any payment or distribution, whether in cash, securities or other property (other than securities of the Issuer or any other corporation provided for bganization or readjustment the payment of which is subordinate, at least to the extent provided in the subordination provisions with respect to the indebtedness evidenced by the 14 Senior Subordinated Debt Securities or the Subordinated Debt Securities, to the payment of all Senior Indebtedness of the Issuer then outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment) that would otherwise (but for the subordination provisions) be payable or deliverable in respect of the Senior Subordinated Debt Securities or the Subordinated Debt Securities of any series will be paid or delivered directly to the holders of Senior Indebtedness of the Issuer in accordance with the priorities then existing among such holders until all Senior Indebtedness of the Issuer (including any interest thereon accruing after the commencement of any such proceedings) has been paid in full. In the event of any such proceeding, after payment in full of all sums owing with respect to Senior Indebtedness of the Issuer, the holders of Senior Subordinated Debt Securities, together with the holders of any obligations of the Issuer ranking on a parity with the Senior Subordinated Debt Securities, will be entitled to be repaid from the remaining assets of the Issuer the amounts at that time due and owing on account of unpaid principal of, premium, if any, or interest, if any, on the Senior Subordinated Debt Securities and such other obligations before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any capital stock or obligations of the Issuer ranking junior to the Senior Subordinated Debt Securities (including the Subordinated Debt Securities) and such other obligations (Section 13.1 of the Senior Subordinated Debt Indentures and Section 13.1 of the Subordinated Debt Indentures). If any payment or distribution of any character, whether in cash, securities or other property (other than securities of the Issuer or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in the subordination provisions with respect to the Senior Subordinated Debt Securities or the Subordinated Debt Securities, to the payment of all Senior Indebtedness of the Issuer then outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment), shall be received by the trustee, or any holder of any Senior Subordinated Debt Securities or Subordinated Debt Securities in contravention of any of the terms of the Senior Subordinated Debt Indenture or the Subordinated Debt Indenture, as the case may be, such payment or distribution of securities will be received in trust for the benefit of, and will be paid over or delivered and transferred to, the holders of the Senior Indebtedness of the Issuer then outstanding in accordance with the priorities then existing among such holders for application to the payment of all Senior Indebtedness of the Issuer remaining unpaid to the extent necessary to pay all such Senior Indebtedness of the Issuer in full (Section 13.1 of the Senior Subordinated Debt Indentures and Section 13.1 of the Subordinated Debt Indentures). By reason of such subordination, in the event of the insolvency of the Issuer, holders of Senior Indebtedness of the Issuer may receive more, ratably, than holders of the Senior Subordinated Debt Securities or Subordinated Debt Securities of the Issuer. Such subordination will not prevent the occurrence of any Event of Default (as defined in the Indentures) or limit the right of acceleration in respect of the Senior Subordinated Debt Securities or Subordinated Debt Securities. Concerning the Trustee Information concerning the trustee for a series of Debt Securities will be set forth in the Prospectus Supplement relating to such series of Debt Securities. Any of the trustees under the Indentures may make loans to Hovnanian or K. Hovnanian in the normal course of business. 15 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company is 100,100,000 shares consisting of 87,000,000 shares of Class A Common Stock, par value $.01 per share, 13,000,000 shares of Class B Common Stock, par value $.01 per share the "Class B Common Stock") and 100,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock") in such series and with such voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as may be fixed from time to time by the Board of Directors for each series. The following summary description of certain provisions of the Company's Restated Certificate of Incorporation (the "Certificate of Incorporation") and By-laws does not purport to be complete and is qualified in its entirety by reference to said provisions. Common Stock As of March 5, 1999, 13,647,087 shares of Class A Common Stock and 7,675,333 shares of Class B Common Stock were outstanding. The Class A Common Stock is traded on the American Stock Exchange. There is no established public trading market for the Class B Common Stock. In order to trade Class B Common Stock, the shares must be converted into Class A Common Stock on a one-for-one basis. Any offering of common stock made hereby would only consist of Class A Common Stock. The outstanding Class A Common Stock is, and any Class A Common Stock offered pursuant to this Prospectus and any Prospectus Supplement when issued and paid for will be, fully paid and non-assessable. Dividends. Dividends on the Class A Common Stock will be paid if, when and as determined by the Board of Directors of the Company out of funds legally available for this purpose. Certain debt instruments to which the Company is a party contain restrictions on the payment of cash dividends. At October 31, 1998, $42,995,000 of retained earnings were free of such restrictions. The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B Common Stock. The Company has never paid dividends nor does it currently intend to pay dividends. Voting Rights. Holders of Class A Common Stock are entitled to one vote for each share held by them on all matters presented to shareholders. Holders of Class B Common Stock are entitled to ten votes per share. Liquidation Rights. After satisfaction of the preferential liquidation rights of any Preferred Stock, the holders of the Class A Common Stock and Class B Common Stock are entitled to share ratably as a single class in the distribution of all remaining net assets. Preemptive and Other Rights. The holders of Class A Common Stock do not have preemptive rights as to additional issues of Common Stock or conversion rights. The shares of Class A Common Stock are not subject to redemption or to any further calls or assessments and are not entitled to the benefit of any sinking fund provisions. The rights, preferences and privileges of holders of Class A Common Stock are subject to, and may be adversely affected by, the rights of the holder of shares of any series of Preferred Stock which the Company may designate and issue in the future. Preferred Stock The Certificate of Incorporation authorizes the Board of Directors to issue from time to time up to 100,000 shares of Preferred Stock, in one or more series, and with such voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as may be fixed from time to time by the Board of Directors for each series. No shares of Preferred Stock have been issued and the Company has no present plans to issue any shares of Preferred Stock. The Preferred Stock, however, could be used without further action by the Board of Directors as an anti-takeover device. 16 DESCRIPTION OF WARRANTS Hovnanian may issue Warrants, including Warrants to purchase Class A Common Stock or Preferred Stock and Warrants to purchase Hovnanian Debt Securities. K. Hovnanian may issue Warrants to purchase K. Hovnanian Debt Securities. All obligations of K. Hovnanian under the K. Hovnanian Warrants will be fully and unconditionally guaranteed by Hovnanian. Warrants may be issued independently of or together with any other Securities and may be attached to or separate from such Securities. Obligations of Hovnanian and K. Hovnanian under the Warrants may be guaranteed by the Subsidiary Guarantors. Each series of Warrants will be issued under a separate Warrant Agreement (each a "Warrant Agreement") to be entered into between Hovnanian and/or K. Hovnanian and a warrant agent (the "Warrant Agent"). The Warrant Agent will act solely as an agent of Hovnanian and/or K. Hovnanian in connection with the Warrants of such series and will not assume any obligation or relationship of agency or trust for or with holders or beneficial owners of Warrants. The following sets forth certain general terms and provisions of the Warrants offered hereby. Further terms of the Warrants and the applicable Warrant Agreement will be set forth in the applicable Prospectus Supplement. The applicable Prospectus Supplement will describe the following terms, where applicable, of the Warrants in respect of which this Prospectus is being delivered: (i) the title of such Warrants; (ii) the aggregate number of such Warrants; (iii) the price or prices at which such Warrants will be issued; (iv) the designation, aggregate principal amount and terms of the securities purchasable upon exercise of such Warrants; (v) the designation and terms of the Securities with which such Warrants are issued and the number of such Warrants issued with each such security; (vi) if applicable, the date on and after which such Warrants and the related securities will be separately transferable; (vii) the price at which the securities may be purchased; (viii) the date on which the right to exercise such Warrants shall commence and the date on which such right shall expire; (ix) the minimum or maximum amount of such Warrants which may be exercised at any one time; (x) information with respect to book-entry procedures, if any; (xi) a discussion of certain United States Federal income tax considerations; and (xii) any other terms of such Warrants, including terms, procedures and limitations relating to the exercise of such Warrants. 17 PLAN OF DISTRIBUTION Hovnanian, K. Hovnanian and the Selling Shareholders may sell the Securities to or through underwriters or dealers, and also may sell the Securities directly to one or more other purchasers or through agents. The applicable Prospectus Supplement will set forth the names of any underwriters or agents involved in the sale of the Offered Securities and any applicable commissions or discounts. Underwriters, dealers or agents may offer and sell the Offered Securities at a fixed price or prices, which may be changed, or from time to time at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. In connection with the sale of the Securities, underwriters or agents may be deemed to have received compensation from Hovnanian, K. Hovnanian or the Selling Shareholders in the form of underwriting discounts or commissions and may also receive commissions from purchasers of the Securities for whom they may act as agent. Underwriters or agents may sell the Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters or commissions from the purchasers for whom they may act as agent. The Preferred Stock, Debt Securities and Warrants, when first issued, will have no established trading market. Any underwriters or agents to or through whom Securities are sold by Hovnanian or K. Hovnanian for public offering and sale may make a market in such Securities, but such underwriters or agents will not be obligated to do so and may discontinue any market making at any time without notice. No assurance can be given as to the liquidity of the trading market for any Securities. Any underwriters, dealers or agents participating in the distribution of the Securities may be deemed to be underwriters, and any discounts and commissions received by them and any profit realized by them on resale of the Securities may be deemed to be underwriting discounts and commissions under the Securities Act. Underwriters, dealers or agents may be entitled, under agreements entered into with Hovnanian, K. Hovnanian or the Selling Shareholders, to indemnification against or contribution toward certain civil liabilities, including liabilities under the Securities Act. If so indicated in the Prospectus Supplement, Hovnanian, K. Hovnanian or the Selling Shareholders will authorize underwriters or other persons acting as its agents to solicit offers by certain institutions to purchase Securities from it pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases will be subject to the condition that the purchase of the Securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such agents will not have any responsibility in respect of the validity or performance of such contracts. LEGAL MATTERS Certain legal matters with respect to the validity of the Securities will be passed upon for Hovnanian and K. Hovnanian by Simpson Thacher & Bartlett, New York, New York. Simpson Thacher & Bartlett will rely, as to matters of New Jersey law, on the opinion of Peter S. Reinhart, Esq., Senior Vice President and General Counsel for the Company. Certain legal matters in connection with the Securities may also be passed upon for any agents or underwriters by counsel specified in the Prospectus Supplement. EXPERTS The consolidated financial statements of Hovnanian Enterprises, Inc. appearing in the Company's Annual Report (Form 10-K) for the fiscal year ended October 31, 1998, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 18 Index to Consolidated Financial Statements HOVNANIAN ENTERPRISES, INC.
Page ---- Consolidated Financial Statements Independent Auditors' Report............................................. F-2 Consolidated Balance Sheets at October 31, 1998 and 1997................. F-3 Consolidated Statements of Operations for the Years Ended October 31, 1998, 1997, and 1996.................................................... F-5 Consolidated Statements of Stockholders' Equity for the Years Ended October 31, 1998, 1997, and 1996........................................ F-6 Consolidated Statements of Cash Flows for the Years Ended October 31, 1998, 1997, and 1996.................................................... F-7 Notes to the Consolidated Financial Statements........................... F-8 Consolidated Balance Sheets at January 31, 1999 (unaudited) and October 31, 1998................................................................ F-30 Consolidated Statements of Income for the three months ended January 31, 1999 and 1998 (unaudited)............................................... F-32 Consolidated Statements of Stockholders' Equity for the three months ended January 31, 1999 (unaudited)...................................... F-33 Consolidated Statements of Cash Flows for the three months ended January 31, 1999 and 1998 (unaudited)........................................... F-34 Notes to the Consolidated Financial Statements (unaudited)............... F-35
F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Hovnanian Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Hovnanian Enterprises, Inc. and subsidiaries as of October 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hovnanian Enterprises, Inc. and subsidiaries at October 31, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York December 15, 1998 F-2 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
October 31, October 31, 1998 1997 ----------- ----------- (In thousands) ASSETS Homebuilding: Cash and cash equivalents (Note 4)................... $ 13,306 $ 7,952 -------- -------- Inventories--At cost, not in excess of fair value (Notes 6 and 10): Sold and unsold homes and lots under development..... 332,225 363,592 Land and land options held for future development or sale........................................... 43,508 46,801 -------- -------- Total Inventories................................ 375,733 410,393 -------- -------- Receivables, deposits, and notes (Notes 5 and 11).... 29,490 35,723 -------- -------- Property, plant, and equipment--net (Note 3)......... 16,831 18,027 -------- -------- Prepaid expenses and other assets.................... 32,650 36,708 -------- -------- Total Homebuilding............................... 468,010 508,803 -------- -------- Financial Services: Cash................................................. 1,486 2,598 Mortgage loans held for sale (Note 5)................ 71,611 48,382 Other assets......................................... 3,717 2,518 -------- -------- Total Financial Services......................... 76,814 53,498 -------- -------- Investment Properties: Held for sale: Rental property--net (Notes 3 and 10).............. 23,920 Land and improvements (Notes 3 and 10)............. 17,832 15,026 Other assets....................................... 295 1,397 Held for investment: Cash............................................... 762 763 Rental property--net (Note 3)...................... 10,794 11,412 Other assets....................................... 868 1,072 -------- -------- Total Investment Properties...................... 30,551 53,590 -------- -------- Collateralized Mortgage Financing: Collateral for bonds payable (Note 5)................ 5,970 7,999 Other assets......................................... 426 627 -------- -------- Total Collateralized Mortgage Financing.......... 6,396 8,626 -------- -------- Income Taxes Receivable--Including deferred tax benefits (Note 9)..................................... 7,331 12,565 -------- -------- Total Assets........................................... $589,102 $637,082 ======== ========
See notes to consolidated financial statements. F-3 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
October 31, October 31, 1998 1997 ----------- ----------- (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding: Nonrecourse land mortgages (Note 6).................. $ 11,846 $ 20,625 Accounts payable and other liabilities............... 53,765 45,521 Customers' deposits (Note 4)......................... 23,857 22,422 Nonrecourse mortgages secured by operating properties (Note 6)............................................ 3,770 3,830 -------- -------- Total Homebuilding................................. 93,238 92,398 -------- -------- Financial Services: Accounts payable and other liabilities............... 2,422 1,522 Mortgage warehouse line of credit (Note 5)........... 66,666 45,823 -------- -------- Total Financial Services........................... 69,088 47,345 -------- -------- Investment Properties: Accounts payable and other liabilities............... 1,373 502 Nonrecourse mortgages secured by rental property..... 19,241 -------- -------- Total Investment Properties........................ 1,373 19,743 -------- -------- Collateralized Mortgage Financing: Accounts payable and other liabilities............... 6 10 Bonds collateralized by mortgages receivable (Note 5).................................................. 5,652 7,855 -------- -------- Total Collateralized Mortgage Financing............ 5,658 7,865 -------- -------- Notes Payable: Revolving credit agreement (Note 6).................. 68,000 95,000 Subordinated notes (Note 7).......................... 145,449 190,000 Accrued interest..................................... 4,904 5,969 -------- -------- Total Notes Payable................................ 218,353 290,969 -------- -------- Total Liabilities.................................. 387,710 458,320 -------- -------- Commitments and Contingent Liabilities (Notes 4 and 13) Stockholders' Equity (Notes 11 and 12): Preferred Stock,$.01 par value-authorized 100,000 shares; none issued................................. Common Stock,Class A,$.01 par value-authorized 87,000,000 shares; issued 15,803,297 shares (including 1,937,374 shares in 1998 and 1,530,274 shares in 1997 held in Treasury).................... 157 156 Common Stock,Class B,$.01 par value (convertible to Class A at time of sale)--authorized 13,000,000 shares; issued 8,040,171 shares (including 345,874 shares held in Treasury)............................ 80 81 Paid in Capital...................................... 34,561 33,935 Retained Earnings (Note 7)........................... 183,182 157,779 Treasury Stock--at cost.............................. (16,588) (13,189) -------- -------- Total Stockholders' Equity....................... 201,392 178,762 -------- -------- Total Liabilities and Stockholders' Equity............. $589,102 $637,082 ======== ========
See notes to consolidated financial statements. F-4 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended ---------------------------- October October October 31, 1998 31, 1997 31, 1996 (In thousands except per share data) Revenues: Homebuilding: Sale of homes................................ $895,644 $731,807 $764,682 Land sales and other revenues................ 15,411 26,983 18,612 -------- -------- -------- Total Homebuilding......................... 911,055 758,790 783,294 Financial Services............................. 19,098 10,735 11,216 Investment Properties.......................... 11,111 13,757 10,919 Collateralized Mortgage Financing.............. 683 854 2,035 -------- -------- -------- Total Revenues............................. 941,947 784,136 807,464 -------- -------- -------- Expenses: Homebuilding: Cost of sales................................ 748,941 634,317 651,492 Selling, general and administrative.......... 68,170 62,475 60,704 Inventory impairment loss (Note 10).......... 3,994 14,019 1,608 -------- -------- -------- Total Homebuilding......................... 821,105 710,811 713,804 -------- -------- -------- Financial Services............................. 17,010 10,780 10,669 -------- -------- -------- Investment Properties: Operations................................... 3,395 5,909 6,388 Provision for impairment loss (Note 10)...... 1,038 14,446 -------- -------- -------- Total Investment Properties................ 4,433 20,355 6,388 -------- -------- -------- Collateralized Mortgage Financing.............. 672 878 2,076 -------- -------- -------- Corporate General and Administration (Note 2).. 21,048 15,088 14,002 -------- -------- -------- Interest....................................... 34,423 35,775 32,157 -------- -------- -------- Other operations............................... 1,964 2,573 3,362 -------- -------- -------- Total Expenses............................. 900,655 796,260 782,458 -------- -------- -------- Income(Loss) Before Income Taxes and Extraordinary Loss.............................. 41,292 (12,124) 25,006 -------- -------- -------- State and Federal Income Taxes: State (Note 9)................................. 3,572 1,796 1,336 Federal (Note 9)............................... 11,569 (6,950) 6,383 -------- -------- -------- Total Taxes................................ 15,141 (5,154) 7,719 -------- -------- -------- Extraordinary Loss From Extinguisement of Debt, Net of Income Taxes............................. (748) -------- -------- -------- Net Income (Loss)................................ $ 25,403 $ (6,970) $ 17,287 ======== ======== ======== Per Share Data: Basic: Income (Loss) Per Common Share Before Extraordinary Loss............................ $ 1.20 $ (0.31) $ 0.75 Extraordinary Loss............................. (.03) -------- -------- -------- Income (Loss).................................. $ 1.17 $ (0.31) $ 0.75 ======== ======== ======== Assuming Dilution: Income (Loss)Per Common Share Before Extraordinary Loss............................ $ 1.19 $ (0.31) $ 0.75 Extraordinary Loss............................. (.03) -------- -------- -------- Income (Loss).................................. $ 1.16 $ (0.31) $ 0.75 ======== ======== ========
See notes to consolidated financial statements. F-5 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
A Common Stock B Common Stock ------------------- ------------------ Shares Shares Issued and Issued and Paid-In Retained Treasury Outstanding Amount Outstanding Amount Capital Earnings Stock Total ----------- ------ ----------- ------ ------- -------- -------- -------- Balance, October 31, 1995................... 15,038,483 $154 7,998,570 $83 $33,935 $147,462 $ (5,299) $176,335 Conversion of Class B to Class A common stock... 96,865 1 (96,865) (1) Net Income.............. 17,287 17,287 ---------- ---- --------- --- ------- -------- -------- -------- Balance, October 31, 1996................... 15,135,348 155 7,901,705 82 33,935 164,749 (5,299) 193,622 Conversion of Class B to Class A common stock... 146,893 1 (146,893) (1) Treasury stock purchases.............. (1,184,400) (7,890) (7,890) Net Loss................ (6,970) (6,970) ---------- ---- --------- --- ------- -------- -------- -------- Balance, October 31, 1997................... 14,097,841 156 7,754,812 81 33,935 157,779 (13,189) 178,762 Sale of Common Stock Under Employee Stock Option Plan............ 114,667 626 626 Conversion of Class B to Class A common stock... 60,515 1 (60,515) (1) Treasury stock purchases.............. (407,100) (3,399) (3,399) Net Income.............. 25,403 25,403 ---------- ---- --------- --- ------- -------- -------- -------- Balance, October 31, 1998................... 13,865,923 $157 7,694,297 $80 $34,561 $183,182 $(16,588) $201,392 ========== ==== ========= === ======= ======== ======== ========
See notes to consolidated financial statements. F-6 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended ---------------------------------- October October October 31, 1998 31, 1997 31, 1996 --------- ----------- ---------- (In thousands) Cash Flows From Operating Activities: Net Income (Loss)........................... $ 25,403 $ (6,970) $ 17,287 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation.............................. 4,293 5,032 5,246 Loss (gain)on sale and retirement of property and assets...................... (6,189) (4,760) (1,998) Deferred income taxes..................... 1,987 (4,568) (820) Impairment losses......................... 5,032 28,465 1,608 Decrease (increase) in assets: Receivables, prepaids and other assets... 6,828 (6,830) (4,297) Mortgage notes receivable................ (19,485) 2,858 (10,966) Inventories.............................. 30,666 (48,105) 26,498 Increase (decrease) in liabilities: State and Federal income taxes........... 3,248 (7,325) 6,509 Customers' deposits...................... 1,490 10,007 774 Interest and other accrued liabilities... 2,235 3,726 (3,366) Post development completion costs........ 4,438 (8,746) 4,062 Accounts payable......................... 2,233 5,034 (3,681) --------- ----------- ---------- Net cash provided by (used in) operating activities............................. 62,179 (32,182) 36,856 --------- ----------- ---------- Cash Flows From Investing Activities: Net proceeds from sale of property and assets..................................... 30,436 14,997 10,308 Purchase of property....................... (3,135) (3,156) (5,882) Investment in and advances to unconsolidated affiliates................. 243 195 3,792 Investment in income producing properties.. (3,844) (11,099) (2,134) --------- ----------- ---------- Net cash provided by (used in) investing activities............................. 23,700 937 6,084 --------- ----------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes......... 632,531 1,139,780 1,142,106 Principal payments on mortgages and notes.................................... (668,987) (1,101,969) (1,188,449) Principal payments on subordinated debt... (44,551) (10,000) Investment in mortgage notes receivable... 2,142 1,474 8,941 Purchase of treasury stock................ (3,399) (7,890) Proceeds from sale of stock............... 626 --------- ----------- ---------- Net cash provided by (used in) financing activities............................. (81,638) 21,395 (37,402) --------- ----------- ---------- Net Increase (Decrease) In Cash............. 4,241 (9,850) 5,538 Cash and Cash Equivalent Balance, Beginning Of Period.................................. 11,313 21,163 15,625 --------- ----------- ---------- Cash and Cash Equivalent Balance, End Of Period..................................... $ 15,554 $ 11,313 $ 21,163 ========= =========== ========== Supplemental Disclosures Of Cash Flow: Cash paid during the year for: Interest (net of amount capitalized)...... $ 35,315 $ 35,869 $ 32,194 ========= =========== ========== Income Taxes.............................. $ 12,303 $ 6,809 $ 6,875 ========= =========== ========== Non-cash Investing and Finance Activities: Debt assumed on sale of property and assets..................................... $ 13,530 =========
See notes to consolidated financial statements F-7 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended October 31, 1998, 1997, and 1996 1. SUMMARY OF ACCOUNTING POLICIES Operations--The Company, a Delaware Corporation, principally develops housing communities in New Jersey, Pennsylvania, New York, Florida, North Carolina, Virginia, California and Poland. In addition, the Company provides financial services to its homebuilding customers and third parties. The Company also developed and held for investment income producing properties but has exited from this business. Principles of Consolidation--The accompanying consolidated financial statements include the accounts of the Company and all wholly-owned or majority-owned subsidiaries after elimination of all significant intercompany balances and transactions. The Company's investments in joint ventures in which the Company's interest is 50% or less are accounted for by the equity method of accounting. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Income Recognition--Income from sales is recorded when title is conveyed to the buyer, subject to the buyer's financial commitment being sufficient to provide economic substance to the transaction. Cash--Cash includes cash deposited in checking accounts, overnight repurchase agreements, certificates of deposit, Treasury bills and government money market funds with original maturities of less than 90 days at date of issuance. Fair Value of Financial Instruments--The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The Company's financial instruments consist of cash equivalents, mortgages and notes receivable, mortgages and notes payable, and the subordinated notes payable. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded values. Inventories--For inventories of communities under development, a loss is recorded when events and circumstances indicate impairment and the undiscounted future cash flows generated are less than the related carrying amounts. The impairment loss is based on expected revenue, cost to complete including interest, and selling costs. Inventories and long-lived assets held for sale are recorded at the lower of cost or fair value less selling costs. Fair value is defined in Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121") as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land, land development, and common facility costs in a community are amortized equally based upon the number of homes to be constructed in each housing community. Interest costs related to properties in progress are capitalized during the construction period and expensed along with the associated cost of sales as the related inventories are sold (see Note 6). The cost of land options is capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations when the Company determines it will not exercise the option. F-8 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 Property--Rental operations of the Company arise primarily from rental of commercial properties. In addition, the Company has, from time to time, rented under short-term leases condominium homes not yet under contract of sale. Such homes are reclassified from inventory and depreciated after a reasonable selling period not to exceed one year. Post Development Completion Costs--In those instances where a development is substantially completed and sold and the Company has additional construction work to be incurred, an estimated liability is provided to cover the cost of such work. Deferred Income Tax--Deferred income taxes or income tax benefits are provided for temporary differences between amounts recorded for financial reporting and for income tax purposes. Common Stock--Each share of Class A Common Stock entitles its holder to one vote per share and each share of Class B Common Stock entitles its holder to ten votes per share. The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B Common Stock. If a shareholder desires to sell shares of Class B Common Stock, such stock must be converted into shares of Class A Common Stock. On December 10, 1998, the Company's Board of Directors approved an increase in the stock repurchase plan to purchase up to 3 million shares. The 3 million shares equals 13.0% of the Company's total and outstanding shares as of December 16, 1996 when the initial repurchase plan was approved by the Board. As of October 31, 1998, 1,591,500 shares have been repurchased under this program. Depreciation--The straight-line method is used for both financial and tax reporting purposes for all assets except office furniture and equipment which are depreciated using the declining balance method over their estimated useful lives. Prepaid Expenses--Prepaid expenses which relate to specific housing communities (marketing materials, model setup, architectural fees, homeowner warranty, etc.) are amortized to costs of sales as the applicable inventories are sold. All other prepaid expenses are amortized over a specific time period or as used and charged to overhead expense. Stock Options--Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" establishes a fair value-based method of accounting for stock-based compensation plans, including stock options. Registrants may elect to continue accounting for stock option plans under Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," but are required to provide proforma net income and earnings per share information "as if" the new fair value approach had been adopted. The Company intends to continue accounting for its stock option plan under APB 25. Under APB 25, no compensation expense was recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant (see Note 12). Per Share Calculations--New Accounting Pronouncement--Statement of Financial Accounting Standards No. 128 ("FAS 128") "Earnings Per Share" requires the presentation of basic earnings per share and diluted earnings per share, and is effective for annual periods ending after December 15, 1997. The Company has adopted FAS 128 for the year ending October 31, 1998. Basic earnings per common share is computed using the weighted average number of shares outstanding and is the same calculation as reported in prior years. Diluted earnings per common share has been presented for prior years and is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock of 235,000, 97,000, and 83,000 for the years ended October 31, 1998, 1997, and 1996, respectively. F-9 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 New Accounting Pronouncement--Statement of Financial Accounting Standards No. 131 ("FAS 131") "Disclosures About Segments of an Enterprise and Related Information" requires disclosure about operating segments and is effective for fiscal years beginning after December 15, 1997. At October 31, 1998, the Company has not adopted FAS 131. The Company believes the requirements of FAS 131 is not expected to materially impact the Company. 2. CORPORATE INITIATIVES The Company has embarked on long term improvement initiatives of total quality, process redesign, and training. Included in Corporate General and Administration is $3,756,000, $2,216,000, and $1,601,000 for the years ended October 31, 1998, 1997, and 1996, respectively, related to such initiatives. 3. PROPERTY Homebuilding property, plant, and equipment consists of land, land improvements, buildings, building improvements, furniture and equipment used by the Company and its subsidiaries to conduct day to day business. Homebuilding accumulated depreciation related to these assets at October 31, 1998 and October 31, 1997 amounted to $15,088,000 and $15,338,000, respectively. At October 31, 1997, held for sale--rental property consisted of two office buildings, three office warehouse facilities and one retail shopping center. All held for sale rental property was sold during the year ended October 31, 1998 for $33,442,000 resulting in a pretax gain of $6,475,000. In addition at October 31, 1998 and 1997, two senior residential rental properties were classified as held for investment--rental property. Accumulated depreciation on rental property at October 31, 1998 and October 31, 1997 amounted to $1,826,000 and $10,450,000, respectively. The Company owned and held for sale three parcels of commercial land at October 31, 1998. All three parcels are under contract and are expected to close during the year ended October 31, 1999 for $20,955,000. During the year ended October 31, 1998 a 50%-owned partnership also sold its retail center resulting in the Company recording a pretax gain of $1,418,000. 4. ESCROW CASH The Company holds escrow cash amounting to $4,775,000 and $3,248,000 at October 31, 1998 and October 31, 1997, respectively, which primarily represents customers' deposits which are restricted from use by the Company. The Company is able to release escrow cash by pledging letters of credit. At October 31, 1998 and October 31, 1997, $14,000,000 and $13,500,000 was released from escrow and letters of credit were pledged, respectively. Escrow cash accounts are substantially invested in short-term certificates of deposit or time deposits. 5. MORTGAGES AND NOTES RECEIVABLE The Company's wholly-owned mortgage banking subsidiary originates mortgage loans, primarily from the sale of the Company's homes. Such mortgage loans are sold in the secondary mortgage market servicing released, or prior to February 28, 1987 pledged against, collateralized mortgage obligations ("CMOs"). At October 31, 1998 and October 31, 1997, respectively, $71,002,000 and $47,660,000 of such mortgages were pledged against, the Company's mortgage warehouse line (see "Notes to Consolidated Financial Statements--Note 6"). The Company may incur risk with respect to mortgages that are delinquent and not pledged against CMOs, but only to the extent the losses are not covered by mortgage insurance or resale value of the home. Historically, the Company has incurred minimal credit losses. The mortgage loans held for sale are carried at the lower of cost or market value, determined on an aggregate basis. There was no valuation adjustment at October 31, 1998. F-10 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 6.MORTGAGES AND NOTES PAYABLE Substantially all of the nonrecourse land mortgages are short-term borrowings. Nonrecourse mortgages secured by operating properties are installment obligations having annual principal maturities in the following years ending October 31, of approximately $115,000 in 1999, $119,000 in 2000, $132,000 in 2001, $138,000 in 2002, $2,581,000 in 2003, and $685,000 after 2003. The interest rates on these obligations range from 7.000% to 8.375%. The Company has an unsecured Revolving Credit Agreement ("Agreement") with a group of banks which provides up to $280,000,000 through July 2001. Interest is payable monthly and at various rates of either the prime rate or LIBOR plus 1.45%. In addition, the Company pays .325% per annum on the weighted average unused portion of the line. F-11 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 Interest costs incurred, expensed and capitalized were:
Year Ended ----------------------------------- October 31, October 31, October 31, 1998 1997 1996 ----------- ----------- ----------- (Dollars in Thousands) Interest incurred (1): Residential(3)............ $26,675 $29,469 $30,058 Commercial(4)............. 2,272 5,308 5,493 ------- ------- ------- Total incurred.......... $28,947 $34,777 $35,551 ======= ======= ======= Interest expensed: Residential(3)............ $32,151 $30,467 $26,649 Commercial(4)............. 2,272 5,308 5,508 ------- ------- ------- Total expensed.......... $34,423 $35,775 $32,157 ======= ======= ======= Interest capitalized at beginning of year.......... $35,950 $39,152 $36,182 Plus interest incurred...... 28,947 34,777 35,551 Less interest expensed...... 34,423 35,775 32,157 Less impairment adjustments................ -- 275 424 Less property written off... 460 945 -- Less sale of assets......... 4,469 984 -- ------- ------- ------- Interest capitalized at end of year.................... $25,545 $35,950 $39,152 ======= ======= ======= Interest capitalized at end of year (5): Residential(3)............ $23,868 $29,804 $32,669 Commercial(2)............. 1,677 6,146 6,483 ------- ------- ------- Total interest capitalized............ $25,545 $35,950 $39,152 ======= ======= =======
- --------------------- (1) Data does not include interest incurred by the Company's mortgage and finance subsidiaries. (2) Data does not include a reduction for depreciation. (3) Represents acquisition interest for construction, land and development costs which is charged to interest expense when land is not under active development and when homes are delivered. (4) Represents interest allocated to or incurred on long term debt for investment properties and charged to interest expense. (5) Commercial interest for October 31, 1997 includes $832,000 reported at October 31, 1996 as capitalized residential interest. This reclassification was the result of the transfer of two parcels of land and related capitalized interest from homebuilding to investment properties. F-12 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 Average interest rates and average balances outstanding for short-term debt are as follows:
October 31, October 31, October 31, 1998 1997 1996 ----------- ----------- ----------- (Dollars In Thousands) Average outstanding borrowings............. $ 98,090 $133,760 $127,770 Average interest rate during period.......... 8.4% 8.2% 8.5% Average interest rate at end of period(1)....... 6.9% 7.8% 7.6% Maximum outstanding at any month end.......... $125,325 $184,550 $157,125
- --------------------- (1) Average interest rate at the end of the period excludes any charges on unused loan balances. 7. SUBORDINATED NOTES On April 29, 1992, the Company issued $100,000,000 principal amount of 11 1/4% Subordinated Notes due April 15, 2002. Interest is payable semi-annually. In November and December 1996, the Company redeemed $10,000,000 principal amount at an average price of 100.3% of par. In October 1998, the Company also redeemed $44,551,000 principal amount at an average price of 101.6% of par. The funds for this redemption were provided by the Revolving Credit Agreement and resulted in an extraordinary loss of $748,000 net of an income tax benefit of $403,000. The remaining principal amount is due April 2002. On June 7, 1993, the Company issued $100,000,000 principal amount of 9 3/4% Subordinated Notes due June 1, 2005. Interest is payable semi-annually. The notes are redeemable in whole or in part at the Company's option, initially at 104.875% of their principal amount on or after June 1, 1999 and reducing to 100% of their principal amount on or after June 1, 2002. The indentures relating to the subordinated notes and the Revolving Credit Agreement contain restrictions on the payment of cash dividends. At October 31, 1998, $42,995,000 of retained earnings were free of such restrictions. The fair value of the Subordinated Notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The combined fair value of the Subordinated Notes is estimated at $136,329,000 as of October 31, 1998. 8. RETIREMENT PLAN In December 1982, the Company established a defined contribution savings and investment retirement plan. Under such plan there are no prior service costs. All associates are eligible to participate in the retirement plan and employer contributions are based on a percentage of associate contributions. Plan costs charged to operations amount to $1,523,000, $1,520,000, and $1,406,000 for the years ended October 31, 1998, 1997, and 1996, respectively. F-13 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 9. INCOME TAXES Income Taxes payable (receivable) including deferred benefits, consists of the following:
October 31, October 31, 1998 1997 ----------- ----------- (In Thousands) State income taxes: Current............................................... $ 2,897 $ 1,387 Deferred.............................................. (1,495) (1,586) Federal income taxes: Current............................................... 36 (1,611) Deferred.............................................. (8,769) (10,755) ------- -------- Total............................................... $(7,331) $(12,565) ======= ========
The provision for income taxes is composed of the following charges (benefits):
Year Ended ------------------------ October October October 31, 31, 31, 1998 1997 1996 ------- ------- ------- (In Thousands) Current income tax expense: Federal(1).......................................... $ 9,177 $(2,381) $7,205 State............................................... 3,484 2,051 1,768 ------- ------- ------ 12,661 (330) 8,973 ------- ------- ------- Deferred income tax expense: Federal............................................. 1,989 (4,569) (822) State............................................... 88 (255) (432) ------- ------- ------ 2,077 (4,824) (1,254) ------- ------- ------- Total............................................. $14,738 $(5,154) $7,719 ======= ======= ======
- --------------------- (1) The current federal income tax expense includes a tax benefit of $403,000 in the year ended October 31, 1998 relating to the loss on the redemption of Subordinated Notes that was reported as an extraordinary item in the "Statement of Operations." F-14 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 The deferred tax liabilities or assets have been recognized in the consolidated balance sheets due to temporary differences as follows:
October 31, October 31, 1998 1997 ----------- ----------- (In Thousands) Deferred tax assets: Deferred income...................................... $ 40 $ 321 Maintenance guarantee reserves....................... 701 481 Provision to reduce inventory to net realizable value............................................... 136 95 Inventory impairment loss............................ 6,077 8,621 Uniform capitalization of overhead................... 2,967 3,972 Post development completion costs.................... 1,379 509 State net operating loss carryforwards............... 27,205 22,227 Other................................................ 843 639 ------- ------- Total.............................................. 39,348 36,865 Valuation allowance(2)............................... (27,205) (22,227) ------- ------- Deferred tax assets.................................. 12,143 14,638 ------- ------- Deferred tax liabilities: Deferred interest.................................... 31 31 Installment sales.................................... 137 208 Accelerated depreciation............................. 1,711 2,058 ------- ------- Total.............................................. 1,879 2,297 ------- ------- Net deferred tax assets................................ $10,264 $12,341 ======= =======
- -------------------- (2) The net change in the valuation allowance of $4,978,000 results from an increase in the separate company state net operating losses that may not be fully utilized. The effective tax rates varied from the expected rate. The sources of these differences were as follows:
Year Ended ----------------------------------- October 31, October 31, October 31, 1998 1997 1996 ----------- ----------- ----------- Computed "expected" tax rate.............. 35.0 % (35.0)% 35.0 % State income taxes, net of Federal income tax benefit.............................. 6.0 % 11.6 % 3.2 % Company owned life insurance.............. (1.6)% (6.2)% (2.9)% Low income housing tax credit............. (3.4)% (11.2)% (5.3)% Other..................................... .7 % (1.9)% .9 % ---- ----- ---- Effective tax rate........................ 36.7 % (42.7)% 30.9 % ==== ===== ====
The Company has state net operating loss carryforwards for financial reporting and tax purposes of $359,000,000 due to expire between the years October 31, 1999 and October 31, 2013. F-15 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 10. REDUCTION OF INVENTORY TO FAIR VALUE In accordance with FAS 121, the Company records impairment losses on inventories related to communities under development when events and circumstances indicate that they may be impaired and the undiscounted cashflows estimated to be generated by those assets are less than their related carrying amounts. As of October 31, 1998, 1997 and 1996, inventory with a carrying amount of $3,077,000, $33,143,000 and $2,240,000, respectively, was written down by $353,000, $9,258,000 and $1,289,000, respectively, to its fair value. This was based on the Company's evaluation of the expected revenue, cost to complete including interest and selling cost. The writedown during the year ended October 31, 1998 was attributed to one community in Florida where homes are being discounted to accelerate sales. The writedowns during the year ended October 31, 1997 were attributable to numerous communities in Florida after the Company decided to reduce its investment in that state and two communities in New Jersey resulting from a product type change and unforeseen development costs. Also in accordance with FAS 121, the Company records impairment losses on inventories and long-lived assets held for sale when the related carrying amount exceeds the fair value less the selling cost. As of October 31, 1998, 1997 and 1996, inventory and commercial properties with a carrying amount of $4,629,000, $32,008,000 and $12,031,000, respectively, was written down by $2,588,000, $12,690,000 and $3,795,000, respectively, to its fair value. The writedowns during the year ended October 31, 1998 were attributed to one parcel of land being sold as lots and a commercial retail center parcel of land which incurred higher land development costs, both in New Jersey. The writedowns during the year ended October 31, 1997 were attributable to four residential parcels of land in Florida, one residential parcel of land in New Jersey, one multi-use commercial parcel of land in New Jersey and two Florida commercial facilities with expansion land attached to one facility. During the year ended October 31, 1998, when these commercial facilities were liquidated, the Company recovered the carrying value. During the years ended October 31, 1998, 1997 and 1996, the Company recovered the carrying value or recognized nominal losses on the land held for sale which was subsequently liquidated. The total aggregate impairment losses, which are presented in the consolidated statements of operations, on the inventory held for development and the land or commercial facilities held for sale were $2,941,000, $21,948,000, and $1,608,000 for the years ended October 31, 1998, 1997 and 1996, respectively. On the statement of operations the lines entitled "Homebuilding--Inventory impairment loss" and "Investment Properties--Provision for impairment loss" also include writeoffs of options including approval, engineering and capitalized interest costs. During the year ended October 31, 1998, the writeoffs amounted to $2,091,000 and zero, respectively. During the year ended October 31, 1997, the writeoffs amounted to $4,761,000 and $1,756,000, respectively. During 1998, the Company did not exercise three residential options because of changes in local market conditions and difficulties in obtaining government approvals. During 1997, the Company decided not to exercise three residential options due to environmental problems or the property's proforma did not produce an adequate return on investment commensurate with the risk and one commercial property option because an anchor tenant with an acceptable credit rating could not be found. F-16 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 11. TRANSACTIONS WITH RELATED PARTIES The Company's Board of Directors has adopted a general policy providing that it will not make loans to officers or directors of the Company or their relatives at an interest rate less than the interest rate at the date of the loan on six month U.S. Treasury Bills, that the aggregate of such loans will not exceed $3,000,000 at any one time, and that such loans will be made only with the approval of the members of the Company's Board of Directors who have no interest in the transaction. At October 31, 1998 and 1997 included in receivables, deposits and notes are related party receivables from officers and directors amounted to $2,117,000 and $1,889,000, respectively. Notwithstanding the policy stated above, the Board of Directors of the Company concluded that the following transactions were in the best interests of the Company. The Company provides property management services to various limited partnerships including one partnership in which Mr. A. Hovnanian, Chief Executive Officer, President and a Director of the Company, is a general partner, and members of his family and certain officers and directors of the Company are limited partners. At October 31, 1998, no amounts were due the Company by these partnerships. 12.STOCK OPTION PLAN The Company has a stock option plan for certain officers and key employees. Options are granted by a Committee appointed by the Board of Directors. The exercise price of all stock options must be at least equal to the fair market value of the underlying shares on the date of the grant. Options granted prior to May 14, 1998 vest in three equal installments on the first, second and third anniversaries of the date of the grant. Options granted on or after May 14, 1998 vest in four equal installments on the third, fourth, fifth and sixth anniversaries of the date of the grant. All options expire after ten years after the date of the grant. In addition, during the year ended October 31, 1997 each of the three outside directors of the Company were granted options to purchase 5,000 shares at the same price and terms as those granted to officers and key employees. Stock option transactions are summarized as follows:
Weighted Weighted Weighted Average Average Average October 31, Exercise October 31, Exercise October 31, Exercise 1998 Price 1997 Price 1996 Price ----------- -------- ----------- -------- ----------- -------- Options outstanding at beginning of period ................ 1,336,500 $7.83 1,156,000 $8.04 1,176,000 $8.00 Granted............... 291,500 $9.09 190,500 $6.47 Exercised............. 114,667 $5.45 Forfeited............. 98,333 $9.98 10,000 $5.81 20,000 $5.81 --------- --------- --------- Options outstanding at end of period.......... 1,415,000 $8.13 1,336,500 $7.83 1,156,000 $8.04 ========= ========= ========= Options exercisable at end of period.......... 1,013,166 1,069,333 996,000 Price range of options $5.13- $5.13- $5.13- outstanding............ $11.50 $11.50 $11.50 Weighted-average remaining contractual life................... 5.4 yrs. 5.4 yrs. 5.8 yrs.
Pro forma information regarding net income and earnings per share is required under the fair value method of Financial Accounting Standards No. 123 ("FAS 123") "Accounting for Stock-Based compensation" and is to be calculated as if the Company had accounted for its stock options under the fair value method of FAS 123. The fair value for these options is established at the date of grant using a Black-Scholes option pricing model F-17 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 with the following weighted-average assumptions for 1998 and 1997: risk- free interest rate of 4.5% and 5.8%, respectively; divided yield of zero; volatility factor of the expected market price of the Company's common stock of 0.46 and 0.47, respectively; and a weighted-average expected life of the option of 7.5 and 7.0 years, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and are not likely to be representative of the effects on reported net income for future years, if applicable. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
Year Ended ----------------------------------- October 31, October 31, October 31, 1998 1997 1996(1) ----------- ----------- ----------- Pro forma net income (loss)................ $25,107 $(7,131) $17,287 ------- ------- ------- Pro forma basic earnings (loss) per share................................... $ 1.15 $ (0.32) $ 0.75 ------- ------- ------- Pro forma diluted earnings (loss)per share................................... $ 1.14 $ (0.32) $ 0.75 ------- ------- -------
- --------------------- (1) No options were granted in 1996, as a result pro forma amounts equal actual per the income statement. 13.COMMITMENTS AND CONTINGENT LIABILITIES The Company is involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company. As of October 31, 1998 and 1997, respectively, the Company is obligated under various performance letters of credit amounting to $6,934,000 and $6,834,000. F-18 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 14.UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION Summarized quarterly financial information for the years ended October 31, 1998, 1997, and 1996 is as follows:
Three Months Ended ------------------------------------------ October 31, July 31, April 30, January 31, 1998 1998 1998 1998 ----------- -------- --------- ----------- (In Thousands Except Per Share Data) Revenues............................ $267,542 $248,125 $212,320 $213,960 Expenses............................ $255,268 $235,735 $204,710 $204,942 Income before income taxes and extraordinary loss................. $ 12,274 $ 12,390 $ 7,610 $ 9,018 State and Federal income tax........ $ 4,762 $ 4,677 $ 2,597 $ 3,105 Extraordinary loss from extinguishment of debt, net of income taxes................ $ (748) Net income.......................... $ 6,764 $ 7,713 $ 5,013 $ 5,913 Per Share Data: Basic: Income per common share before extraordinary loss............... $ 0.35 $ 0.35 $ 0.23 $ 0.27 Extraordinary loss................ $ (.03) Net Income........................ $ 0.32 $ 0.35 $ 0.23 $ 0.27 Weighted average number of common shares outstanding............... 21,661 21,785 21,848 21,834 Assuming Dilution: Income per common share before extraordinary loss............... $ 0.34 $ 0.35 $ 0.23 $ 0.27 Extraordinary loss................ $ (.03) Net Income........................ $ 0.31 $ 0.35 $ 0.23 $ 0.27 Weighted average number of common shares outstanding............... 21,896 22,018 22,042 21,985
Three Months Ended(1) ------------------------------------------- October 31, July 31, April 30, January 31, 1997 1997 1997 1997 ----------- -------- --------- ----------- (In Thousands Except Per Share Data) Revenues............................ $315,150 $205,107 $143,526 $120,353 Expenses............................ $302,494 $196,105 $173,453 $124,208 Income before income taxes and extraordinary loss................. $ 12,656 $ 9,002 $(29,927) $ (3,855) State and Federal income tax........ $ 4,930 $ 2,782 $(10,785) $ (2,081) Net income (loss)................... $ 7,726 $ 6,220 $(19,142) $ (1,774) Per Share Data: Basic: Net income (loss) per common share............................ $ 0.35 $ 0.27 $ (0.83) $ (.08) Weighted average number of common shares outstanding............... 22,098 22,409 22,925 23,037 Net income (loss) per common share............................ $ 0.35 $ 0.27 $ (0.83) $ (.08) Weighted average number of common shares outstanding............... 22,195 22,485 22,999 23,121
F-19 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996
Three Months Ended(1) ----------------------------------------- October 31, July 31, April January 31, 1996 1996 30, 1996 1996 ----------- -------- -------- ----------- (In Thousands Except Per Share Data) Revenues............................. $342,049 $195,812 $152,464 $117,139 Expenses............................. $323,474 $191,280 $150,881 $116,823 Income before income taxes........... $ 18,575 $ 4,532 $ 1,583 $ 316 State and Federal income tax......... $ 6,146 $ 1,422 $ 335 $ (184) Net income........................... $ 12,429 $ 3,110 $ 1,248 $ 500 Per Share Data: Basic: Net income per common share........ $ 0.54 $ 0.13 $ 0.06 $ 0.02 Weighted average number of common shares outstanding................ 23,037 23,037 23,037 23,037 Assuming dilution: Net income per common share........ $ 0.54 $ 0.13 $ 0.06 $ 0.02 Weighted average number of common shares outstanding................ 23,120 23,115 23,112 23,093
- --------------------- (1) The earnings per share for the years ended October 31, 1997 and 1996 have been restated as required to comply with FAS 128. For further discussion of earnings per share and the impact of FAS 128, see Note 1. 15.FINANCIAL INFORMATION OF SUBSIDIARY ISSUER AND SUBSIDIARY GUARANTORS Hovnanian Enterprises, Inc., the parent company (the "Parent" or "Company") is the issuer of publicly traded common stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer") will be the issuer of certain notes (the "Term Notes") that may be issued under registration statements on Form S-3. These registration statements provide for the issuance of up to $226,000,000 of Term Notes. Through October 31, 1998 no Term Notes were issued. The Subsidiary Issuer acts as a finance and management entity that as of October 31, 1998 had issued and outstanding approximately $145,449,000 of subordinated notes and a revolving credit agreement with an outstanding balance of approximately $68,000,000. Both the subordinated notes and the revolving credit agreement are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name and a subsidiary engaged in homebuilding activity in Poland (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the revolving credit agreement of the Subsidiary Issuer. Additionally the Parent has provided full, unconditional and joint and several guarantees to the Term Notes. The Guarantor Subsidiaries may also provide similar guarantees to the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries the Company has included the accompanying consolidating condensed financial statements based on our understanding of the Securities and Exchange Commission's interpretation and application of Rule 3-10 of the Securities and F-20 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Years Ended October 31, 1998, 1997, and 1996 Exchange Commission's Regulation S-X and Staff Accounting Bulletin 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information 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 of the Parent and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. F-21 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) For the Years Ended October 31, 1998, 1997, and 1996 CONSOLIDATING CONDENSED BALANCE SHEET October 31, 1998 (Thousands of Dollars)
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ---------- ------------ ------------ ------------ ------------ ASSETS Homebuilding: Cash and cash equivalents........... $ 14 $ (9,660) $ 21,732 $ 1,220 $ $ 13,306 Inventories............ 373,364 2,369 375,733 Receivables, deposits, and notes............. 2,618 26,872 29,490 Property, plant, and equipment............. 10,180 6,627 24 16,831 Prepaid expenses and other assets 187 9,931 22,530 2 32,650 -------- -------- --------- ------- ---------- -------- Total Homebuilding.... 201 13,069 451,125 3,615 468,010 -------- -------- --------- ------- ---------- -------- Financial Services...... 1,461 75,353 76,814 -------- -------- --------- ------- ---------- -------- Investment Properties: Held for sale.......... 18,127 18,127 Held for investment.... 12,424 12,424 -------- -------- --------- ------- ---------- -------- Total Investment Properties........... 30,551 30,551 -------- -------- --------- ------- ---------- -------- Collateralized Mortgage Financing.............. 6,396 6,396 -------- -------- --------- ------- ---------- -------- Income Taxes Receivables--Including deferred tax benefits.. 41 382 8,419 (1,511) 7,331 -------- -------- --------- ------- ---------- -------- Investments in and amounts due to and from consolidated subsidiaries........... 201,150 210,648 (236,457) 7,941 (183,282) -------- -------- --------- ------- ---------- -------- Total Assets............ $201,392 $224,099 $ 255,099 $91,794 $ (183,282) $589,102 ======== ======== ========= ======= ========== ======== LIABILITIES Homebuilding: Accounts payable and other liabilities..... $ $ 5,908 $ 47,636 $ 221 $ $ 53,765 Customers' deposits.... 23,367 490 23,857 Nonrecourse mortgages.. 15,616 15,616 -------- -------- --------- ------- ---------- -------- Total Homebuilding.... 5,908 86,619 711 93,238 -------- -------- --------- ------- ---------- -------- Financial Services...... 677 68,411 69,088 Investment Properties... 1,373 1,373 Collateralized Mortgage Financing.............. 5,658 5,658 Notes Payable........... 218,182 171 218,353 -------- -------- --------- ------- ---------- -------- Total Liabilities..... 224,090 88,840 74,780 387,710 -------- -------- --------- ------- ---------- -------- STOCKHOLDERS' EQUITY.... 201,392 9 166,259 17,014 (183,282) 201,392 -------- -------- --------- ------- ---------- -------- Total Liabilities and Stockholders' Equity... $201,392 $224,099 $ 255,099 $91,794 $ (183,282) $589,102 ======== ======== ========= ======= ========== ========
F-22 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) For the Years Ended October 31, 1998, 1997, and 1996 CONSOLIDATING CONDENSED BALANCE SHEET October 31, 1997 (Thousands of Dollars)
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ---------- ------------ ------------ ------------ ------------ ASSETS Homebuilding: Cash and cash equivalents........... $ 10 $ (5,485) $ 13,003 $ 424 $ $ 7,952 Inventories............ 407,695 2,698 410,393 Receivables, deposits, and notes............. 2,618 33,105 35,723 Property, plant, and equipment............. 10,854 7,166 7 18,027 Prepaid expenses and other assets.......... 223 9,925 26,534 26 36,708 -------- -------- --------- ------- --------- -------- Total Homebuilding... 233 17,912 487,503 3,155 508,803 -------- -------- --------- ------- --------- -------- Financial Services...... 1,294 52,204 53,498 -------- -------- --------- ------- --------- -------- Investment Properties: Held for sale.......... 40,343 40,343 Held for investment.... 13,247 13,247 -------- -------- --------- ------- --------- -------- Total Investment Properties.......... 53,590 53,590 -------- -------- --------- ------- --------- -------- Collateralized Mortgage Financing.............. 8,626 8,626 -------- -------- --------- ------- --------- -------- Income Taxes Receivables-Including deferred tax benefits.. 1,645 (43) 31,525 (20,562) 12,565 -------- -------- --------- ------- --------- -------- Investments in and amounts due to and from consolidated subsidiaries........... 176,901 277,222 (316,748) 21,708 (159,083) -------- -------- --------- ------- --------- -------- Total Assets............ $178,779 $295,091 $ 257,164 $65,131 $(159,083) $637,082 ======== ======== ========= ======= ========= ======== LIABILITIES Homebuilding: Accounts payable and other liabilities..... $ 17 $ 4,166 $ 40,926 $ 412 $ $ 45,521 Customers' deposits.... 21,379 1,043 22,422 Nonrecourse mortgages.. 24,455 24,455 -------- -------- --------- ------- --------- -------- Total Homebuilding... 17 4,166 86,760 1,455 92,398 -------- -------- --------- ------- --------- -------- Financial Services...... 423 46,922 47,345 Investment Properties... 19,743 19,743 Collateralized Mortgage Financing.............. 7,865 7,865 Notes Payable........... 290,916 53 290,969 -------- -------- --------- ------- --------- -------- Total Liabilities.... 17 295,082 106,979 56,242 458,320 -------- -------- --------- ------- --------- -------- STOCKHOLDERS' EQUITY.... 178,762 9 150,185 8,889 (159,083) 178,762 -------- -------- --------- ------- --------- -------- Total Liabilities and Stockholders' Equity... $178,779 $295,091 $ 257,164 $65,131 $(159,083) $637,082 ======== ======== ========= ======= ========= ========
F-23 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) For the Years Ended October 31, 1998, 1997, and 1996 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year Ended October 31, 1998 (Thousands of Dollars)
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ ------------ Revenues: Homebuilding........... $ $ 1,441 $902,952 $26,210 $ (19,548) $911,055 Financial Services..... 3,817 15,281 19,098 Investment Properties.. 12,180 (1,069) 11,111 Collateralized Mortgage Financing............. 683 683 Intercompany Charges... 84,166 3,844 (88,010) Equity In Pretax Income of Consolidated Subsidiaries.......... 41,292 (41,292) ------- ------- -------- ------- --------- -------- Total Revenues....... $41,292 85,607 922,793 42,174 (149,919) 941,947 ------- ------- -------- ------- --------- -------- Expenses: Homebuilding........... 834,121 6,219 (19,235) 821,105 Financial Services..... 3,049 14,165 (204) 17,010 Investment Properties.. 5,179 (746) 4,433 Collateralized Mortgage Financing............. 672 672 Corporate General and Administration 20,388 897 (237) 21,048 Interest............... 61,972 34,184 515 (62,248) 34,423 Other Operations....... 1,680 270 14 1,964 ------- ------- -------- ------- --------- -------- Total Expenses....... 84,040 877,700 21,585 (82,670) 900,655 ------- ------- -------- ------- --------- -------- Income (Loss) Before Income Taxes and Extraordinary Loss..... 41,292 1,567 45,093 20,589 (67,249) 41,292 State and Federal Income Taxes.................. 15,141 (64) 16,315 7,975 (24,226) 15,141 Extraordinary Loss From Extinguishment Of Debt, Net of Income Taxes.... (748) (748) 748 (748) ------- ------- -------- ------- --------- -------- Net Income (Loss)....... $25,403 $ 883 $ 28,778 $12,614 $ (42,275) $ 25,403 ======= ======= ======== ======= ========= ========
F-24 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) For the Years Ended October 31, 1998, 1997, and 1996 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year Ended October 31, 1997 (Thousands of Dollars)
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ---------- ------------ ------------ ------------ ------------ Revenues: Homebuilding........... $ $ 895 $754,972 $14,053 $(11,130) $758,790 Financial Services..... 3,090 7,645 10,735 Investment Properties.. 14,822 (1,065) 13,757 Collateralized Mortgage Financing............. 854 854 Intercompany Charges... 77,737 7,346 (85,083) Equity In Pretax Income of Consolidated Subsidiaries.......... (12,124) 12,124 -------- ------- -------- ------- -------- -------- Total Revenues....... (12,124) 78,632 780,230 22,552 (85,154) 784,136 -------- ------- -------- ------- -------- -------- Expenses: Homebuilding........... 717,637 3,331 (10,157) 710,811 Financial Services..... 3,063 8,101 (384) 10,780 Investment Properties.. 21,031 (676) 20,355 Collateralized Mortgage Financing............. 878 878 Corporate General and Administration 14,671 737 (320) 15,088 Interest............... 58,870 36,555 157 (59,807) 35,775 Other Operations....... 1,951 608 14 2,573 -------- ------- -------- ------- -------- -------- Total Expenses....... 75,492 779,631 12,481 (71,344) 796,260 -------- ------- -------- ------- -------- -------- Income (Loss) Before Income Taxes........... (12,124) 3,140 599 10,071 (13,810) (12,124) State and Federal Income Taxes.................. (5,154) 367 (830) 4,028 (3,565) (5,154) -------- ------- -------- ------- -------- -------- Net Income (Loss)....... $ (6,970) $ 2,773 $ 1,429 $ 6,043 $(10,245) $ (6,970) ======== ======= ======== ======= ======== ========
F-25 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) For the Years Ended October 31, 1998, 1997, and 1996 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year Ended October 31, 1996 (Thousands of Dollars)
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ ------------ Revenues: Homebuilding........... $ 40 $ 1,218 $782,034 $32,541 $ (32,539) $783,294 Financial Services..... 3,380 7,836 11,216 Investment Properties.. 12,001 (1,082) 10,919 Collateralized Mortgage Financing............. 2,035 2,035 Intercompany Charges... 71,556 7,638 (79,194) Equity In Pretax Income of Consolidated Subsidiaries.......... 24,966 (24,966) ------- -------- -------- ------- --------- -------- Total Revenues....... 25,006 72,774 805,053 42,412 (137,781) 807,464 ------- -------- -------- ------- --------- -------- Expenses: Homebuilding........... 745,340 161 (31,697) 713,804 Financial Services..... 2,882 8,194 (407) 10,669 Investment Properties.. 7,108 (720) 6,388 Collateralized Mortgage Financing............. 2,076 2,076 Corporate General and Administration........ 13,935 714 (647) 14,002 Interest............... 53,322 32,999 (54,164) 32,157 Other Operations....... 2,452 897 13 3,362 ------- -------- -------- ------- --------- -------- Total Expenses....... 69,709 789,940 10,444 (87,635) 782,458 ------- -------- -------- ------- --------- -------- Income (Loss) Before Income Taxes and Extraordinary Loss..... 25,006 3,065 15,113 31,968 (50,146) 25,006 State and Federal Income Taxes.................. 7,719 350 4,975 11,135 (16,460) 7,719 ------- -------- -------- ------- --------- -------- Net Income (Loss)....... $17,287 $ 2,715 $ 10,138 $20,833 $ (33,686) $ 17,287 ======= ======== ======== ======= ========= ========
F-26 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) For the Years Ended October 31, 1998, 1997, and 1996 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Year Ended October 31, 1998 (Thousands of Dollars)
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ---------- ------------ ------------ ------------ ------------ Cash Flows From Operating Activities: Net income (loss)...... $ 25,403 $ 883 $ 28,778 $ 12,614 $(42,275) $ 25,403 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities............ (22,675) 1,708 32,607 (17,139) 42,275 36,776 -------- -------- -------- -------- -------- -------- Net Cash Provided By (Used In) Operating Activities........... 2,728 2,591 61,385 (4,525) 62,179 Net Cash Provided by (Used In) Investing Activities... (1,789) 26,090 (601) 23,700 Net Cash Provided By(Used In) Financing Activities... (2,773) (71,551) (25,954) 18,640 (81,638) Intercompany Investing and Financing Activities-- Net.................... 49 66,574 (52,355) (14,628) -------- -------- -------- -------- -------- -------- Net Increase (Decrease) In Cash................ 4 (4,175) 9,166 (754) 4,241 Cash and Cash Equivalent Balance, Beginning of Period................. 10 (5,485) 13,857 2,931 11,313 -------- -------- -------- -------- -------- -------- Cash and Cash Equivalent Balance, End of Period.......... $ 14 $ (9,660) $ 23,023 $ 2,177 $ $ 15,554 ======== ======== ======== ======== ======== ========
F-27 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) For the Years Ended October 31, 1998, 1997, and 1996 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Year Ended October 31, 1997 (Thousands of Dollars)
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ---------- ------------ ------------ ------------ ------------ Cash Flows From Operating Activities: Net income (loss)...... $ (6,970) $ 2,773 $ 1,429 $ 6,043 $(10,245) $ (6,970) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities.. 30,787 (121,105) 56,498 (1,637) 10,245 (25,212) -------- --------- -------- -------- -------- -------- Net Cash Provided By (Used In) Operating Activities........... 23,817 (118,332) 57,927 4,406 (32,182) Net Cash Provided By (Used In) Investing Activities............. (2,327) 3,327 (63) 937 Net Cash Provided By (Used In) Financing Activities............. (7,890) 55,000 (14,965) (10,750) 21,395 Intercompany Investing and Financing Activities--Net........ (15,926) 61,423 (50,708) 5,211 -------- --------- -------- -------- -------- -------- Net Increase (Decrease) In Cash................ 1 (4,236) (4,419) (1,196) (9,850) Cash and Cash Equivalent Balance, Beginning of Period................. 9 (1,249) 18,276 4,127 21,163 -------- --------- -------- -------- -------- -------- Cash and Cash Equivalent Balance, End of Period................. $ 10 $ (5,485) $ 13,857 $ 2,931 $ $ 11,313 ======== ========= ======== ======== ======== ========
F-28 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) For the Years Ended October 31, 1998, 1997 and 1996 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Year Ended October 31, 1996 (Thousands of Dollars)
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated --------- ---------- ------------ ------------ ------------ ------------ Cash Flows From Operating Activities: Net Income (loss)...... $ 17,287 $ 2,715 $ 10,138 $ 20,833 $ (33,686) $17,287 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities............ 227,430 194,119 (413,466) (22,200) 33,686 19,569 --------- -------- --------- -------- --------- ------- Net Cash Provided By (Used In) Operating Activities........... 244,717 196,834 (403,328) (1,367) 36,856 Net Cash Provided by (Used In) Investing Activities... (5,774) 11,991 (133) 6,084 Net Cash Provided By (Used In) Financing Activities... (50,650) 8,555 4,693 (37,402) Intercompany Investing and Financing Activities--Net........ (261,400) (97,203) 358,907 (304) --------- -------- --------- -------- --------- ------- Net Increase (Decrease) In Cash................ (16,683) 43,207 (23,875) 2,889 5,538 Cash and Cash Equivalent Balance, Beginning of Period................. 16,692 (44,456) 42,151 1,238 15,625 --------- -------- --------- -------- --------- ------- Cash and Cash Equivalent Balance, End of Period.......... $ 9 $ (1,249) $ 18,276 $ 4,127 $ $21,163 ========= ======== ========= ======== ========= =======
F-29 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES consolidated balance sheets (Unaudited)
January 31, October 31, 1999 1998 ----------- ----------- (In thousands) ASSETS Homebuilding: Cash and cash equivalents............................ $ 12,095 $ 13,306 -------- -------- Inventories--at cost, not in excess of fair value: Sold and unsold homes and lots under development... 364,716 332,225 Land and land options held for future development or sale........................................... 35,325 43,508 -------- -------- Total Inventories................................ 400,041 375,733 -------- -------- Receivables, deposits, and notes..................... 42,396 29,490 -------- -------- Property, plant, and equipment--net.................. 17,317 16,831 -------- -------- Prepaid expenses and other assets.................... 31,774 32,650 -------- -------- Total Homebuilding............................... 503,623 468,010 -------- -------- Financial Services: Cash and cash equivalents............................ 1,768 1,486 Mortgage loans held for sale......................... 62,502 71,611 Other assets......................................... 3,672 3,717 -------- -------- Total Financial Services......................... 67,942 76,814 -------- -------- Investment Properties: Held for sale: Rental property--net Land and improvements.............................. 107 17,832 Other assets....................................... 946 295 Held for investment: Cash............................................... 509 762 Rental property--net............................... 10,873 10,794 Other assets....................................... 977 868 -------- -------- Total Investment Properties...................... 13,412 30,551 -------- -------- Collateralized Mortgage Financing: Collateral for bonds payable......................... 5,902 5,970 Other assets......................................... 438 426 -------- -------- Total Collateralized Mortgage Financing.......... 6,340 6,396 -------- -------- Income Taxes Receivable--Including deferred tax benefits.............................................. 5,769 7,331 -------- -------- Total Assets........................................... $597,086 $589,102 ======== ========
See notes to consolidated financial statements. F-30 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES consolidated balance sheets (Unaudited)
January 31, October 31, 1999 1998 ----------- ----------- (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding: Nonrecourse land mortgages.......................... $ 8,192 $ 11,846 Accounts payable and other liabilities.............. 47,811 53,765 Customers' deposits................................. 21,765 23,857 Nonrecourse mortgages secured by operating properties......................................... 3,743 3,770 -------- -------- Total Homebuilding................................ 81,511 93,238 -------- -------- Financial Services: Accounts payable and other liabilities.............. 1,677 2,422 Mortgage warehouse line of credit................... 59,119 66,666 -------- -------- Total Financial Services.......................... 60,796 69,088 -------- -------- Investment Properties: Accounts payable and other liabilities.............. 1,360 1,373 -------- -------- Total Investment Properties....................... 1,360 1,373 -------- -------- Collateralized Mortgage Financing: Accounts payable and other liabilities.............. 17 6 Bonds collateralized by mortgages receivable........ 5,582 5,652 -------- -------- Total Collateralized Mortgage Financing........... 5,599 5,658 -------- -------- Notes Payable: Revolving credit agreement.......................... 92,225 68,000 Subordinated notes.................................. 145,449 145,449 Accrued interest.................................... 4,122 4,904 -------- -------- Total Notes Payable............................... 241,796 218,353 -------- -------- Total Liabilities................................. 391,062 387,710 -------- -------- Stockholders' Equity: Preferred Stock, $.01 par value-authorized 100,000 shares; none issued................................ Common Stock, Class A, $.01 par value-authorized 87,000,000 shares; issued 15,822,964 shares (including 2,118,274 shares in January 1999 and 1,937,374 in October 1998 held in Treasury)........ 158 157 Common Stock, Class B, $.01 par value-authorized 13,000,000 shares; issued 8,025,504 shares (including 345,874 shares held in Treasury)..................... 79 80 Paid in Capital..................................... 34,590 34,561 Retained Earnings................................... 189,310 183,182 Treasury Stock--at cost............................. (18,113) (16,588) -------- -------- Total Stockholders' Equity........................ 206,024 201,392 -------- -------- Total Liabilities and Stockholders' Equity............ $597,086 $589,102 ======== ========
See notes to consolidated financial statements. F-31 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES consolidated statements of income (Unaudited)
Three Months Ended January 31, ----------------- 1999 1998 -------- -------- (In thousands except per share data) Revenues: Homebuilding: Sale of homes............................................. $194,885 $204,057 Land sales and other revenues............................. 2,441 2,485 -------- -------- Total Homebuilding...................................... 197,326 206,542 Financial Services.......................................... 5,658 3,562 Investment Properties....................................... 359 3,644 Collateralized Mortgage Financing........................... 136 212 -------- -------- Total Revenues.......................................... 203,479 213,960 -------- -------- Expenses: Homebuilding: Cost of sales............................................. 155,587 169,800 Selling, general and administrative....................... 17,534 15,657 Inventory write-off....................................... 1,589 -------- -------- Total Homebuilding...................................... 173,121 187,046 -------- -------- Financial Services............................................ 5,242 3,211 -------- -------- Investment Properties......................................... 779 1,123 -------- -------- Collateralized Mortgage Financing............................. 131 202 -------- -------- Corporate General and Administration.......................... 6,435 4,361 -------- -------- Interest...................................................... 7,042 8,476 -------- -------- Other Operations.............................................. 551 523 -------- -------- Total Expenses.......................................... 193,301 204,942 -------- -------- Income Before Income Taxes.................................... 10,178 9,018 -------- -------- State and Federal Income Taxes: State....................................................... 1,488 648 Federal..................................................... 2,562 2,457 -------- -------- Total Taxes............................................. 4,050 3,105 -------- -------- Net Income.................................................... $ 6,128 $ 5,913 ======== ======== Per Share Data: Basic: Income per common share..................................... $ 0.28 $ 0.27 Weighted average number of common shares outstanding........ 21,512 21,834 Assuming dilution: Income per common share..................................... 0.28 0.27 Weighted average number of common Shares outstanding........ 21,725 21,985
See notes to consolidated financial statements. F-32 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES consolidated statements of stockholders' equity (Unaudited)
A Common Stock B Common Stock ------------------- ------------------ Shares Shares Issued and Issued and Paid-In Retained Treasury Outstanding Amount Outstanding Amount Capital Earnings Stock Total ----------- ------ ----------- ------ ------- -------- -------- -------- (dollars in thousands) Balance, October 31, 1998................... 13,865,923 $157 7,694,297 $80 $34,561 $183,182 $(16,588) $201,392 Sale of Common Stock Under Employee Stock Option Plan............ 5,000 29 29 Conversion of Class B to Class A Common Stock... 14,667 1 (14,667) (1) -- Treasury stock purchases.............. (180,900) (1,525) (1,525) Net Income.............. 6,128 6,128 ---------- ---- --------- --- ------- -------- -------- -------- Balance, January 31, 1999................... 13,704,690 $158 7,679,630 $79 $34,590 $189,310 ($18,113) $206,024 ========== ==== ========= === ======= ======== ======== ========
See notes to consolidated financial statements. F-33 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES consolidated statements of cash flows (Unaudited)
Three Months Ended January 31, -------------------- 1999 1998 --------- --------- (In thousands) Cash Flows From Operating Activities: Net Income.............................................. $ 6,128 $ 5,913 Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Depreciation........................................... 1,200 917 Loss (gain) on sale and retirement of property and assets................................................ 393 (2,682) Deferred income taxes.................................. 2,617 1,720 Impairment losses...................................... 1,589 Decrease (increase) in assets: Receivables, prepaids and other assets................ (12,964) (14,419) Mortgage notes receivable............................. 9,289 21,517 Inventories........................................... (25,345) (289) Increase (decrease) in liabilities: State and Federal income taxes........................ (1,055) 5 Customers' deposits................................... (2,199) (1,031) Interest and other accrued liabilities................ (3,689) (1,490) Post development completion costs..................... (608) (603) Accounts payable...................................... (3,078) (6,679) --------- --------- Net cash (used in) provided by operating activities.. (29,311) 4,468 --------- --------- Cash Flows From Investing Activities: Net proceeds from sale of property and assets.......... 19,226 23,078 Purchase of property................................... (1,576) (477) Investment in and advances to unconsolidated affiliates............................................ (4) 393 Investment in income producing properties.............. (1,016) (4,672) --------- --------- Net cash provided by investing activities............ 16,630 18,322 --------- --------- Cash Flows From Financing Activities: Proceeds from mortgages and notes...................... 179,965 129,564 Principal payments on mortgages and notes.............. (167,040) (152,730) Investment in mortgage notes receivable................ 70 587 Purchase of treasury stock............................. (1,525) (457) Proceeds from sale of stock............................ 29 --------- --------- Net cash provided by (used in) financing activities.. 11,499 (23,036) --------- --------- Net Increase (Decrease) In Cash.......................... (1,182) (246) Cash and Cash Equivalent and Balance, Beginning Of Period.................................................. 15,554 11,313 --------- --------- Cash and Cash Equivalent and Balance, End Of Period...... $ 14,372 $ 11,067 ========= =========
See notes to consolidated financial statements. F-34 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Unaudited 1. The consolidated financial statements, except for the October 31, 1998 consolidated balance sheets, have been prepared without audit. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of consolidated financial position, results of operations, and changes in cash flows. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for the interim periods are not necessarily indicative of the results which might be expected for a full year. 2. Interest costs incurred, expensed and capitalized were:
Three Months Ended January 31, --------------- 1999 1998 (dollars in thousands) Interest Incurred(1): Residential(3)............................................... $ 4,699 $ 6,642 Commercial(4)................................................ 356 679 ------- ------- Total Incurred............................................. $ 5,055 $ 7,321 ======= ======= Interest Expensed: Residential(3)............................................... $ 6,686 $ 7,797 Commercial(4)................................................ 356 679 ------- ------- Total Expensed............................................. $ 7,042 $ 8,476 ======= ======= Interest Capitalized at Beginning of Period.................... $25,545 $35,950 Plus Interest Incurred......................................... 5,055 7,321 Less Interest Expensed......................................... 7,042 8,476 Less Inventory Write-Off....................................... -- 460 Less Sale of Assets............................................ 1,469 3,640 ------- ------- Interest Capitalized at End of Period.......................... $22,089 $30,695 ======= ======= Interest Capitalized at End of Period: Residential(3)............................................... $21,881 $28,189 Commercial(2)................................................ 208 2,506 ------- ------- Total Capitalized.......................................... $22,089 $30,695 ======= =======
- --------------------- (1) Does not include interest incurred by the Company's mortgage and finance subsidiaries. (2) Does not include a reduction for depreciation. (3) Represents acquisition interest for construction, land and development costs which is charged to interest expense when homes are delivered and when land is not under active development. (4) Represents interest allocated to or incurred on long term debt for investment properties and charged to interest expense. 3. Homebuilding accumulated depreciation at January 31, 1999 and October 31, 1998 amounted to $16,083,000 and $15,088,000, respectively. Rental property accumulated depreciation at January 31, 1999 and October 31, 1998 amounted to $1,909,000 and $1,826,000, respectively. F-35 HOVNANAIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(Continued) 4. During the three months ended January 31, 1998 the Company has written off the costs associated with an option in New Jersey including approval, engineering and capitalized interest. The write off amounted to $1,589,000 and is reported on the Consolidated Statements of Income as "Homebuilding-- Inventory Write-Off." 5. The Company is involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company. As of January 31, 1999 and 1998, respectively, the Company is obligated under various performance letters of credit amounting to $6,868,000 and $9,240,000. 6. Financial Information of Subsidiary Issuer and Subsidiary Guarantors. Hovnanian Enterprises, Inc., the parent company (the "Parent" or "Company") is the issuer of publicly traded common stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer") will be the issuer of certain notes (the "Term Notes") that may be issued under registration statements on Form S-3. These registration statements provide for the issuance of up to $226,000,000 of Term Notes. Through January 31, 1999 no Term Notes were issued. The Subsidiary Issuer acts as a finance and management entity that as of January 31, 1999 had issued and outstanding approximately $145,449,000 of subordinated notes and a revolving credit agreement with an outstanding balance of approximately $92,225,000. Both the subordinated notes and the revolving credit agreement are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name and a subsidiary engaged in homebuilding activity in Poland (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the revolving credit agreement of the Subsidiary Issuer. Additionally the Parent has provided full, unconditional and joint and several guarantees to the Term Notes. The Guarantor Subsidiaries may also provide similar guarantees to the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries the Company has included the accompanying consolidating condensed financial statements based on our understanding of the Securities and Exchange Commission's interpretation and application of Rule 3-10 of the Securities and Exchange Commission's Regulation S-X and Staff Accounting Bulletin 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information 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 of the Parent and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. F-36 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (Continued) CONSOLIDATING CONDENSED BALANCE SHEET JANUARY 31, 1999
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ---------- ------------ ------------ ------------ ------------ (In Thousands) ASSETS Homebuilding: Cash and cash equivalents........... $ 750 $ (3,876) $ 14,080 $ 1,141 $ $ 12,095 Inventories............ 397,799 2,242 400,041 Receivables, deposits, and notes............. 3,252 38,786 358 42,396 Property, plant, and equipment............. 10,683 6,611 23 17,317 Prepaid expenses and other assets.......... 187 10,194 21,379 14 31,774 -------- -------- --------- ------- --------- -------- Total Homebuilding... 937 20,253 478,655 3,778 503,623 -------- -------- --------- ------- --------- -------- Financial Services...... 762 67,180 67,942 -------- -------- --------- ------- --------- -------- Investment Properties: Held for sale.......... 1,053 1,053 Held for investment.... 12,359 12,359 -------- -------- --------- ------- --------- -------- Total Investment Properties.......... 13,412 13,412 -------- -------- --------- ------- --------- -------- Collateralized Mortgage Financing.............. 6,340 6,340 -------- -------- --------- ------- --------- -------- Income Taxes Receivables-Including deferred tax benefits.. 3 (162) 7,740 (1,812) 5,769 -------- -------- --------- ------- --------- -------- Investments in and amounts due to and from consolidated subsidiaries........... 205,084 226,265 (254,993) 12,637 (188,993) -------- -------- --------- ------- --------- -------- Total Assets............ $206,024 $246,356 $ 245,576 $88,123 $(188,993) $597,086 ======== ======== ========= ======= ========= ======== LIABILITIES Homebuilding: Accounts payable and other liabilities..... $ $ 4,737 $ 42,951 $ 123 $ $ 47,811 Customers' deposits.... 21,533 232 21,765 Nonrecourse mortgages.. 11,935 11,935 -------- -------- --------- ------- --------- -------- Total Homebuilding... 4,737 76,419 355 81,511 -------- -------- --------- ------- --------- -------- Financial Services...... 447 60,349 60,796 Investment Properties... 1,360 1,360 Collateralized Mortgage Financing.............. 5,599 5,599 Notes Payable........... 241,610 186 241,796 -------- -------- --------- ------- --------- -------- Total Liabilities.... 246,347 78,412 66,303 391,062 -------- -------- --------- ------- --------- -------- STOCKHOLDERS' EQUITY.... 206,024 9 167,164 21,820 (188,993) 206,024 -------- -------- --------- ------- --------- -------- Total Liabilities and Stockholders' Equity... $206,024 $246,356 $ 245,576 $88,123 $(188,993) $597,086 ======== ======== ========= ======= ========= ========
F-37 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (Continued) CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 1998
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ---------- ------------ ------------ ------------ ------------ (In Thousands) ASSETS Homebuilding: Cash and cash equivalents........... $ 14 $(9,660) $ 21,732 $ 1,220 $ $ 13,306 Inventories............ 373,364 2,369 375,733 Receivables, deposits, and notes............. 2,618 26,872 29,490 Property, plant, and equipment............. 10,180 6,627 24 16,831 Prepaid expenses and other assets.......... 187 9,931 22,530 2 32,650 -------- -------- --------- ------- --------- -------- Total Homebuilding... 201 13,069 451,125 3,615 468,010 -------- -------- --------- ------- --------- -------- Financial Services...... 1,461 75,353 76,814 -------- -------- --------- ------- --------- -------- Investment Properties: Held for sale.......... 18,127 18,127 Held for investment.... 12,424 12,424 -------- -------- --------- ------- --------- -------- Total Investment Properties.......... 30,551 30,551 -------- -------- --------- ------- --------- -------- Collateralized Mortgage Financing.............. 6,396 6,396 -------- -------- --------- ------- --------- -------- Income Taxes Receivables--Including deferred tax benefits.. 41 382 8,419 (1,511) 7,331 -------- -------- --------- ------- --------- -------- Investments in and amounts due to and from consolidated subsidiaries........... 201,150 210,648 (236,457) 7,941 (183,282) -------- -------- --------- ------- --------- -------- Total Assets............ $201,392 $224,099 $ 255,099 $91,794 $(183,282) $589,102 ======== ======== ========= ======= ========= ======== LIABILITIES Homebuilding: Accounts payable and other liabilities..... $ $ 5,908 $ 47,636 $ 221 $ $ 53,765 Customers' deposits.... 23,367 490 23,857 Nonrecourse mortgages.. 15,616 15,616 -------- -------- --------- ------- --------- -------- Total Homebuilding... 5,908 86,619 711 93,238 -------- -------- --------- ------- --------- -------- Financial Services...... 677 68,411 69,088 Investment Properties... 1,373 1,373 Collateralized Mortgage Financing.............. 5,658 5,658 Notes Payable........... 218,182 171 218,353 -------- -------- --------- ------- --------- -------- Total Liabilities.... 224,090 88,840 74,780 387,710 -------- -------- --------- ------- --------- -------- STOCKHOLDERS' EQUITY.... 201,392 9 166,259 17,014 (183,282) 201,392 -------- -------- --------- ------- --------- -------- Total Liabilities and Stockholders' Equity... $201,392 $224,099 $ 255,099 $91,794 $(183,282) $589,102 ======== ======== ========= ======= ========= ========
F-38 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(Continued) CONSOLIDATING CONDENSED STATEMENT OF INCOME THREE MONTHS ENDED JANUARY 31, 1999
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ ------------ (In Thousands) Revenues: Homebuilding........... $ $ 86 $196,284 $4,261 $ (3,305) $197,326 Financial Services..... 820 4,838 5,658 Investment Properties............ 633 (274) 359 Collateralized Mortgage Financing.... 136 136 Intercompany Charges... 20,896 649 (21,545) Equity In Pretax Income of Consolidated Subsidiaries.......... 10,178 (10,178) ------ ------ -------- ------ -------- -------- Total Revenues....... 10,178 20,982 198,386 9,235 (35,302) 203,479 ------ ------ -------- ------ -------- -------- Expenses: Homebuilding........... 175,492 925 (3,296) 173,121 Financial Services..... 490 4,749 3 5,242 Investment Properties............ 1,031 (252) 779 Collateralized Mortgage Financing.... 131 131 Corporate General and Administration........ 6,297 177 (39) 6,435 Interest............... 14,182 6,945 97 (14,182) 7,042 Other Operations....... 486 65 551 ------ ------ -------- ------ -------- -------- Total Expenses....... 20,965 184,200 5,902 (17,766) 193,301 ------ ------ -------- ------ -------- -------- Income (Loss) Before Income Taxes........... 10,178 17 14,186 3,333 (17,536) 10,178 State and Federal Income Taxes.................. 4,050 5,621 1,445 (7,066) 4,050 ------ ------ -------- ------ -------- -------- Net Income (Loss)....... $6,128 $ 17 $ 8,565 $1,888 $(10,470) $ 6,128 ====== ====== ======== ====== ======== ========
F-39 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (Continued) CONSOLIDATING CONDENSED STATEMENT OF INCOME THREE MONTHS ENDED JANUARY 31, 1998
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ ------------ (In Thousands) Revenues: Homebuilding............ $ $ 47 $205,844 $4,725 $ (4,074) $206,542 Financial Services.... 861 2,701 3,562 Investment Properties........... 3,910 (266) 3,644 Collateralized Mortgage Financing... 212 212 Intercompany Charges.. 20,176 1,808 (21,984) Equity In Pretax Income of Consolidated Subsidiaries......... 9,018 (9,018) ------ ------- -------- ------ -------- -------- Total Revenues...... 9,018 20,223 212,423 7,638 (35,342) 213,960 ------ ------- -------- ------ -------- -------- Expenses: Homebuilding.......... 190,499 611 (4,064) 187,046 Financial Services.... 619 2,684 (92) 3,211 Investment Properties........... 1,315 (192) 1,123 Collateralized Mortgage Financing... 202 202 Corporate General and Administration....... 4,244 183 (66) 4,361 Interest.............. 15,288 8,449 27 (15,288) 8,476 Other Operations...... 425 98 523 ------ ------- -------- ------ -------- -------- Total Expenses...... 19,957 201,163 3,524 (19,702) 204,942 ------ ------- -------- ------ -------- -------- Income (Loss) Before Income Taxes........... 9,018 266 11,260 4,114 (15,640) 9,018 State and Federal Income Taxes.................. 3,105 4,168 1,595 (5,763) 3,105 ------ ------- -------- ------ -------- -------- Net Income (Loss)....... $5,913 $ 266 $ 7,092 $2,519 $ (9,877) $ 5,913 ====== ======= ======== ====== ======== ========
F-40 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (Continued) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 1999
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ ------------ (In Thousands) Cash Flows From Operating Activities: Net Income (loss)...... $ 6,128 $ 17 $ 8,565 $ 1,888 $(10,470) $ 6,128 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities.. (5,673) (1,604) (49,662) 11,030 10,470 (35,439) ------- -------- -------- ------- -------- ------- Net Cash Provided By (Used In) Operating Activities............ 455 (1,587) (41,097) 12,918 (29,311) Net Cash Provided by (Used In) Investing Activities............. (1,237) 17,909 (42) 16,630 Net Cash Provided By (Used In) Financing Activities............. (1,525) 24,225 (3,583) (7,618) 11,499 Intercompany Investing and Financing Activities - Net... 1,806 (15,617) 18,507 (4,696) ------- -------- -------- ------- -------- ------- Net Increase (Decrease) In Cash................ 736 5,784 (8,264) 562 (1,182) Cash and Cash Equivalent Balance, Beginning of Period................. 14 (9,660) 23,023 2,177 15,554 ------- -------- -------- ------- -------- ------- Cash and Cash Equivalent Balance, End of Period................. $ 750 $ (3,876) $ 14,759 $ 2,739 $ $14,372 ======= ======== ======== ======= ======== =======
F-41 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTE TO CONSOLIDATED FINANCIAL STATEMENTS -- -UNAUDITED -- (Continued) CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 1998
Non- Subsidiary Guarantor Guarantor Parent Issuer Subsidiaries Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ ------------ (In Thousands) Cash Flows From Operating Activities: Net Income (loss)...... $5,913 $ 266 $ 7,092 $ 2,519 $(9,877) $ 5,913 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities.. (4,067) (6,981) (33,522) 33,248 9,877 (1,445) ------ ------- -------- -------- ------- -------- Net Cash Provided By (Used In) Operating Activities............ 1,846 (6,715) (26,430) 35,767 4,468 Net Cash Provided by (Used In) Investing Activities............ (295) 18,653 (36) 18,322 Net Cash (Used In) Provided By Financing Activities............ (457) 6,625 (8,253) (20,951) (23,036) Intercompany Investing and Financing Activities--Net (1,389) 4,135 13,873 (16,619) ------ ------- -------- -------- ------- -------- Net Increase (Decrease) In Cash............... 3,750 (2,157) (1,839) (246) Cash and Cash Equivalent Balance, Beginning of Period... 10 (5,485) 13,857 2,931 11,313 ------ ------- -------- -------- ------- -------- Cash and Cash Equivalent Balance, End of Period......... $ 10 $(1,735) $ 11,700 $ 1,092 $ $ 11,067 ====== ======= ======== ======== ======= ========
F-42 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- April 29, 1999 [LOGO OF HAVNANIAN COMPANIES] K. Hovnanian Enterprises, Inc. $150,000,000 9 1/8% Senior Notes due 2009 Guaranteed by Hovnanian Enterprises, Inc. ------------------------------ PROSPECTUS SUPPLEMENT ------------------------------ Donaldson, Lufkin & Jenrette NationsBanc Montgomery Securities LLC BancBoston Robertson Stephens Inc. - ------------------------------------------------------------------------------- No person has been authorized to give any information or to make any representations other than those contained in this prospectus supplement or the accompanying prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized. This prospectus supplement and the prospectus do not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities described in this prospectus supplement or an offer to sell or the solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus supplement or the accompanying prospectus nor any sale made hereunder or thereunder shall, under any circumstances, create an implication that there has been no change in our affairs since the date hereof or that the information contained in this prospectus supplement or the accompanying prospectus is correct as of any time subsequent to this date. - ------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----