UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the twelve months ended OCTOBER 31, 1998
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
10 Highway 35, P.O. Box 500, Red Bank, N.J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- -------------------- ------------------------
Class A Common Stock, $.01 par value American Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act - None
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ( X )Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of the close of business on January 7, 1999, there were outstanding
13,830,820 shares of the Registrant's Class A Common Stock and 7,688,600 shares
of its Class B Common Stock. The approximate aggregate market value (based upon
the closing price on the American Stock Exchange) of these shares held by non-
affiliates of the Registrant as of January 7, 1999 was $71,038,000. (The value
of a share of Class A Common Stock is used as the value for a share of Class B
Common Stock as there is no established market for Class B Common Stock and it
is convertible into Class A Common Stock on a share-for-share basis.)
Documents Incorporated by Reference:
Part III - Those portions of registrant's definitive proxy statement to be filed
pursuant to Regulation l4A in connection with registrant's annual meeting of
shareholders to be held on March 23, 1999 which are responsive to Items l0, ll,
l2 and l3.
HOVNANIAN ENTERPRISES, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
1 and 2 Business and Properties...................... 4
3 Legal Proceedings............................ 16
4 Submission of Matters to a Vote of
Security Holders........................... 16
Executive Officers of the Registrant......... 16
PART II
5 Market for the Registrant's Common Equity
and Related Stockholder Matters............ 16
6 Selected Financial Data...................... 17
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 19
8 Financial Statements and Supplementary
Data....................................... 34
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. 34
PART III
10 Directors and Executive Officers of the
Registrant................................. 35
Executive Officers of the Registrant......... 35
11 Executive Compensation....................... 36
12 Security Ownership of Certain Beneficial
Owners and Management...................... 36
13 Certain Relationships and Related
Transactions............................... 36
PART IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 37
SIGNATURES................................... 39
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
The Company primarily designs, constructs and markets multi-family attached
condominium apartments and townhouses and single family detached homes in
planned residential developments in its Northeast Region (comprised primarily of
New Jersey, southern New York state, and eastern Pennsylvania), southeastern
Florida, North Carolina, northern Virginia, southern California, and Poland.
The Company markets its homes to first time buyers. In addition, the Company
provides financial services (mortgage loans and title insurance) to its
homebuilding customers and third parties. The Company also developed and held
for investment income producing properties but has exited this business.
The Company employed approximately 1,200 full-time associates as of October
31, 1998. The Company was incorporated in New Jersey in 1967 and was
reincorporated in Delaware in 1982.
RESIDENTIAL DEVELOPMENT ACTIVITIES
The Company's residential development activities include evaluating and
purchasing properties, master planning, obtaining governmental approvals and
constructing, marketing and selling homes. A residential development generally
includes a number of residential buildings containing from two to twenty-four
individual homes per building and/or single family detached homes, together with
amenities such as recreational buildings, swimming pools, tennis courts and open
areas. By using standardized cost efficient designs and materials and by
rigorous control of subcontracting costs, the Company attempts to keep costs
low.
The Company attempts to reduce the effect of certain risks inherent in the
housing industry through the following policies and procedures:
- The Company acquires land for future development principally through the
use of land options which need not be exercised before the completion of
the regulatory approval process. The Company structures these options in
most cases with flexible takedown schedules rather than with an obligation
to takedown the entire parcel upon approval. Additionally, the Company
purchases improved lots in certain markets by acquiring a small number of
improved lots with an option on additional lots. This allows the Company
to minimize the economic costs and risks of carrying a large land
inventory, while maintaining its ability to commence new developments
during favorable market periods.
- In an attempt to reduce its land acquisition costs, the Company monitors
housing industry cycles and seeks to acquire land options near the cyclical
trough of specific geographic housing cycles.
- The Company generally begins construction on a residential multi-family
building only after entering into contracts for the sale of at least 50% of
the homes in that building. Single family detached homes are generally
started after a contract is signed and mortgage approvals obtained. This
limits the build-up of inventory of unsold homes and the costs of
maintaining and carrying that inventory.
- The Company finances all construction, land acquisition and operations
through equity, non-recourse purchase money mortgages, long term debt, its
unsecured revolving credit facility or cash flow. This eliminates the need
of obtaining specific community construction financing, which is especially
important at times when obtaining such community financing is difficult.
- Through its presence in multiple geographic markets, the Company's goal
is to reduce the effects that housing industry cycles, seasonality and
local conditions in any one area may have on its business. In addition,
the Company plans to achieve a significant market presence in each of its
markets in order to obtain powers and economies of scale.
- The Company looks to diversify its product line to provide housing to a
broad range of customers. Currently the Company's customers primarily
consist of first-time buyers, first and second time move-up buyers, move
down buyers and active adult buyers.
- The Company offers a wide range of customer options to satisfy
individual customer tastes. In its larger communities the Company has
constructed decoration centers where the customer can better see
customization possibilities for their new home. The Company is also
planning larger regional design centers and expects to open one in New
Jersey and one in California during the next year.
- Through operational excellence the Company attempts to reduce its
housing construction costs. Operational excellence is further discussed
under "Certain Operating Policies and Procedures" below.
The Company offers a broad array of products consisting of moderately
priced, multi-family attached condominium apartments and townhouses, which are
marketed primarily to first time buyers, as well as moderately priced townhouses
with garages and single family detached homes, which are marketed primarily to
first and second time move-up buyers and to active adult buyers. The Company
also offers detached single family homes and larger townhouses with garages
designed for the move-up buyer and age restricted communities for active adults.
Current base prices for the Company's homes in contract backlog at October 31,
1998 (exclusive of upgrades and options) range from $41,000 to $921,000 in its
Northeast Region, from $157,000 to $352,000 in Florida, from $100,000 to
$413,000 in North Carolina, from $140,000 to $355,000 in Virginia, from $113,000
to $307,000 in California, and from $84,000 to $94,000 in Poland. Closings
generally occur and are typically reflected in revenues from two to twelve
months after sales contracts are signed.
Information on homes delivered by market area is set forth below:
Year Ended
---------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- -------- --------
(Housing Revenue in Thousands)
Northeast Region:
Housing Revenues........ $595,873 $445,817 $460,931
Homes Delivered......... 2,530 2,128 2,364
Average Price........... $235,522 $209,500 $194,979
North Carolina:
Housing Revenues........ $127,592 $125,242 $123,347
Homes Delivered......... 687 695 738
Average Price........... $185,723 $180,204 $167,137
Florida:
Housing Revenues........ $ 44,168 $ 74,146 $ 99,085
Homes Delivered......... 241 418 632
Average Price........... $183,269 $177,382 $156,780
Virginia:
Housing Revenues........ $ 38,904 $ 14,398 $ 16,749
Homes Delivered......... 152 70 75
Average Price........... $255,947 $205,685 $223,320
California:
Housing Revenues........ $ 82,546 $ 69,252 $ 64,570
Homes Delivered......... 457 365 325
Average Price........... $180,625 $189,731 $198,677
Poland:
Housing Revenues........ $ 6,561 $ 2,952 --
Homes Delivered......... 71 41 --
Average Price........... $ 92,408 $ 72,000 --
Combined Total:
Housing Revenues........ $895,644 $731,807 $764,682
Homes Delivered......... 4,138 3,717 4,134
Average Price........... $216,443 $196,881 $184,974
Information on homes delivered by product type is set forth below:
Year Ended
-----------------------------
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
(Housing Revenues in Thousands)
First Time Buyer Product(1)
Housing Revenues............. $ 34,987 $ 52,589 $ 77,682
Homes Delivered.............. 279 407 619
Percentage of Housing
Revenues.................... 4% 7% 10%
Move-Up Buyer Product(2)
Housing Revenues............. $860,657 $679,218 $687,000
Homes Delivered.............. 3,859 3,310 3,515
Percentage of Housing
Revenues.................... 96% 93% 90%
(1) First time buyer product consists of all of the Company's
multi-family attached home products other than townhouses with
garages.
(2) Move-up buyer product consists of single family detached homes and
townhouses with garages.
The Company's net sales contracts increased to $806,247,000 for the year
ended October 31, 1998 from $762,750,000 for the year ended October 31, 1997 or
5.7%, and was the net result of a 4.8% decrease in the number of homes
contracted to 3,877 in 1998 from 4,073 in 1997 and a 11.0% increase in the
average home base sales prices. On a market area and dollar basis, Virginia
achieved the highest increase of 136.6%, followed by the Northeast Region with
an 11.6% increase and North Carolina with a 2.4% increase. The large increase
in Virginia was the result of an acquisition of a small Virginia developer on
May 1, 1998. Net sales contracts decreased in California, Florida and Poland.
In California and Poland, contracts decreased due to fewer homes available for
sale. Florida's decrease was due to the downsizing of the division.
During the year ended October 31, 1998 the Company has written down one
Florida residential community and one New Jersey parcel of land for sale. In
the Florida community, higher discounts are being offered to speed up sales. At
the New Jersey land site, lots are being contracted at prices lower than
anticipated. The result of the above decisions was a reduction in inventory
carrying amounts to fair value, resulting in a $1.9 million impairment loss in
accordance with FAS 121. The Company has also written off three New Jersey
residential land options including approval, engineering and capitalized
interest costs amounting to $2.1 million. The Company did not exercise these
options because of changes in local market conditions and difficulties in
obtaining government approvals. Total writedowns and write-offs of residential
inventories are presented on the consolidated statement of income as "Inventory
impairment loss." See "Notes to Consolidated Financial Statements - Note 10"
for additional explanation.
As of October 31, 1998, the following table summarizes the Company's active
communities under development:
(1) (2)
Contracted Remaining
Commun- Approved Homes Not Home Sites
ities Lots Delivered Delivered Available
------- -------- --------- --------- ----------
Northeast Region...... 31 10,111 3,818 1,126 5,167
North Carolina........ 32 3,740 1,285 232 2,223
Florida............... 4 970 622 73 275
Virginia.............. 11 1,033 250 115 668
California............ 6 1,036 466 119 451
Poland................ - 130 112 7 11
------- -------- --------- --------- ----------
Total 84 17,020 6,553 1,672 8,795
======= ======== ========= ========= ==========
(1) Includes 8 lots under option.
(2) Of the total home sites available, 460 were under construction or
completed (including 54 models and sales offices), 4,570 were under
option, and 330 were financed through purchase money mortgages.
In addition, in substantially completed or suspended developments, the
Company had 11 homes under construction or completed including 8 homes which are
under contract. The Company also had 281 lots without construction (1 under
contract) in these substantially completed or suspended developments.
As of October 31, 1998, the following table summarizes the Company's total
started or completed unsold homes:
Unsold
Homes Models Total
------ ------ -----
Northeast Region.................. 180 16 196
North Carolina.................... 93 - 93
Florida........................... 24 6 30
Virginia.......................... 23 11 34
California........................ 78 21 99
Poland............................ 11 - 11
------ ------ -----
Total 409 54 463
====== ====== =====
BACKLOG
Sales of the Company's United States residential homes typically are made
pursuant to a standard sales contract. This contract requires a nominal
customer deposit at the time of signing with the remainder of a 5% to 10% down
payment due 30 to 60 days after signing and provides the customer with a
statutorily mandated right of rescission for a period ranging up to 15 days
after execution. The contract may include a financing contingency, which
permits the customer to cancel his obligation in the event mortgage financing at
prevailing interest rates (including financing arranged or provided by the
Company) is unobtainable within the period specified in the contract. This
contingency period typically is four to eight weeks following the date of
execution.
At October 31, 1998 and October 31, 1997, the Company had a backlog of
signed contracts for 1,681 homes and 1,872 homes, respectively, with sales
values aggregating $381,816,000 and $374,314,000, respectively. Substantially
all of the Company's backlog at October 31, 1998 is expected to be completed and
closed within the next twelve months. At December 31, 1998 and 1997, the
Company's backlog of signed contracts was 1,584 homes and 1,779 homes,
respectively, with sales values aggregating $359,213,000 and $360,969,000,
respectively.
RESIDENTIAL LAND INVENTORY
It is the Company's objective to control a supply of land, primarily
through options, consistent with anticipated homebuilding requirements in its
housing markets. Controlled land as of October 31, 1998, exclusive of
communities under development described under "Business and Properties --
Residential Development Activities," is summarized in the following table:
Number
of Proposed Total Land
Proposed Developable Option Book
Communities Lots Price Value(1)(2)
----------- ----------- ----------- -----------
(In Thousands)
Northeast Region:
Under Option........ 23 6,217 $ 127,469 $ 16,288
Owned............... 3 359 14,593
-------- ----------- -----------
Total............ 26 6,576 30,881
-------- ----------- -----------
North Carolina:
Under Option........ 8 651 $ 11,610 268
Owned............... 1 82 1,058
-------- ----------- -----------
Total............ 9 733 1,326
-------- ----------- -----------
Florida:
Owned............... 3 1,033 3,923
-------- ----------- -----------
California:
Under Option........ 14 2,136 $ 63,384 6,028
-------- ----------- -----------
Poland:
Owned............... 1 485 1,350
-------- ----------- -----------
Totals:
Under Option........ 45 9,004 22,584
Owned............... 8 1,959 20,924
-------- ----------- -----------
Combined Total........ 53 10,963 $ 43,508
======== =========== ===========
(1) Properties under option also includes costs incurred on properties not
under option but which are under investigation. For properties under option,
the Company paid, as of October 31, 1998, option fees and deposits aggregating
approximately $11,085,000. As of October 31, 1998, the Company spent an
additional $11,499,000 in non-refundable predevelopment costs on such
properties.
(2) The book value of $43,508,000 is identified on the balance sheet as
"Inventories - land, land options, and cost of projects in planning."
In its Northeast Region, the Company's objective is to control a supply of
land sufficient to meet anticipated building requirements for at least three to
five years.
In North Carolina and Virginia, some land historically has been acquired
from land developers on a lot takedown basis. Under a typical agreement with
the lot developer, the Company purchases a minimal number of lots. The balance
of the lots to be purchased are covered under an option agreement or a non-
recourse purchase agreement. Due to the dwindling supply of improved lots in
North Carolina and Virginia, the Company is currently optioning parcels of
unimproved land for development.
In Florida, the Company is focusing its development efforts primarily in
the southeast. Emphasis is principally on building single family detached
homes. As a result of its decision to downsize, the Company is attempting to
sell all its land in other locations, including the parcels of owned land
included in the table on the previous page.
In California, the Company has focused its development efforts in the
southern region. Here the emphasis is on affordable housing and will consist of
single family attached and detached homes. Where possible, the Company plans to
option developed or partially developed lots with no more than fifty to seventy-
five lots to be taken down during any twelve month period. With a dwindling
supplyin California of developed lots, some land parcels will be optioned which
will require the full range of development activities. Option fees range up to
10% of the land value.
CUSTOMER FINANCING
At the Company's communities, on-site personnel facilitate sales by
offering to arrange financing for prospective customers through K. Hovnanian
Mortgage, Inc. ("KHM"). Management believes that the ability to offer financing
to customers on competitive terms as a part of the sales process is an important
factor in completing sales.
KHM's business consists of providing the Company's customers as well as
unrelated third parties with competitive financing and coordinating and
expediting the loan origination transaction through the steps of loan
application, loan approval and closing. KHM has its headquarters in Red Bank,
New Jersey. It originates loans in New Jersey, New York, Pennsylvania, North
Carolina, Florida, California, South Carolina and Illinois.
KHM's principal sources of revenues are: (i) net gains from the sale of
loans; (ii) revenues from the sale of the rights to service loans; and (iii)
interest income earned on mortgage loans during the period they are held by KHM
prior to their sale to investors.
KHM is approved by the Government National Mortgage Association ("GNMA") as
a seller-servicer of Federal Housing Administration ("FHA") and Veterans
Administration ("VA") loans. A portion of the conventional loans originated by
KHM (i.e., loans other than those insured by FHA or guaranteed by VA) qualify
for inclusion in loan guarantee programs sponsored by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). KHM also originates conventional loans which are sold to a number of
private investors. KHM arranges for fixed and adjustable rate, conventional,
privately insured mortgages, FHA-insured or VA-guaranteed mortgages, and
mortgages funded by revenue bond programs of states and municipalities.
KHM is a delegated underwriter under the FHA Direct Endorsement and VA
Automatic programs in accordance with criteria established by such agencies.
Additionally, KHM has delegated underwriting authority from FNMA and FHLMC. As
a delegated underwriter, KHM may underwrite and close mortgage loans under
programs sponsored by these agencies without their prior approval, which
expedites the loan origination process.
KHM, like other mortgage bankers, customarily sells nearly all of the loans
that it originates. Additionally, KHM sells virtually all of the loan servicing
rights to loans it originates. Loans are sold either individually or in pools
to GNMA, FNMA, or FHLMC or against forward commitments to institutional
investors, including banks and savings and loan associations.
KHM plans to grow its mortgage banking operations. Initially, KHM focused
on originating loans from customers who purchase homes from Hovnanian
Enterprises, Inc. affiliates. KHM's objective is to increase the capture rate
of non-cash homebuyers from the 58% rate achieved in fiscal 1998 to 70% over the
next several years. KHM has now expanded to offer its mortgage products and
services to unrelated third parties. During the year ended October 31, 1998,
third party loans amounted to 40% of total mortgage closings.
RENTAL PROPERTY DEVELOPMENT ACTIVITIES AND LAND INVENTORY
The Company had previously diversified its business, on a limited scale,
through the development, acquisition and ownership of commercial properties,
primarily in central New Jersey, and, to a lesser extent, in Florida, but has
exited this business (see "Item 7 - Management's Dicsussion and Analysis of
Financial Condition and Results of Operations").
CERTAIN OPERATING POLICIES AND PROCEDURES
Financial Goals. The Company has been focusing on housing margin
improvement and de-emphasizing revenue growth. Housing margins had declined
from 18.0% for the year ended February 28, 1994 to 15.6% for the year ended
October 31, 1997. To improve its housing margin, the Company is focusing on
increasing associate productivity, reducing overheads and reducing construction
costs by decreasing construction cycle times, designing and building cost
efficient products, and using national and regional contracts. Also the
Company has consolidated its vendor base and centralized purchasing functions
in the Northeast Region. As a result of the combination of these
efforts, the Company's housing margin increased to 17.3% for the year ended
October 31, 1998.
Strategic Initiatives. In order to help improve housing margins the
Company previously introduced three strategic initiatives. These initiatives
are Partners In Excellence, Process Redesign, and Training.
Partners In Excellence (the Company's total quality management initiative)
is intended to focus on improving the way operations are performed. It involves
all Company associates through a systematic, team-oriented approach to
improvement. It increases the Company's profits by streamlining processes and
by reducing errors which cost money. The Company was recognized for its efforts
by receiving the 1997 gold National Housing Quality Award from Professional
Builder and The NAHB Research Center.
Process Redesign is a fundamental rethinking and radical redesign of our
processes to achieve dramatic improvements in performance. The Company's
Process Redesign efforts are currently focused on streamlining and standardizing
all of its key business processes. In addition, the Company is working to
implement a new enterprise wide "Enterprise Resource Package" computer software
system.
Training is designed to provide our associates with the knowledge,
attitudes, skill and habits necessary to succeed at their jobs. The Company's
Training Department regularly conducts training classes in sales, construction,
administrative, and managerial areas. In addition, as Process Redesign develops
new processes, the Training Department is responsible for educating the
Company's associates on the processes, procedures, and operations.
Land Acquisition, Planning and Development. Before entering into a
contract to acquire land, the Company completes extensive comparative studies
and analyses which assist the Company in evaluating the economic feasibility of
such land acquisition. The Company generally follows a policy of acquiring
options to purchase land for future community developments. The Company
attempts to acquire land with a minimum cash investment and negotiate takedown
options, thereby limiting the financial exposure to the amounts invested in
property and predevelopment costs. This policy of land acquisition may somewhat
raise the price of land that the Company acquires, but significantly reduces
risk. Further, this policy generally allows the Company to obtain necessary
development approvals before acquisition of the land, thereby enhancing the
value of the options and the land eventually acquired.
The Company's option and purchase agreements are typically subject to
numerous conditions, including, but not limited to, the Company's ability to
obtain necessary governmental approvals for the proposed community. Generally,
the deposit on the agreement will be returned to the Company if all approvals
are not obtained, although predevelopment costs may not be recoverable. By
paying an additional, nonrefundable deposit, the Company has the right to extend
a significant number of its options for varying periods of time. In all
instances, the Company has the right to cancel any of its land option agreements
by forfeiture of the Company's deposit on the agreement. In such instances, the
Company generally is not able to recover any predevelopment costs.
The Company's development activities include site planning and engineering,
obtaining environmental and other regulatory approvals and constructing roads,
sewer, water and drainage facilities, and for the Company's residential
developments, recreational facilities and other amenities. These activities are
performed by the Company's staff, together with independent architects,
consultants and contractors. The Company's staff also carries out long-term
planning of communities.
Design. The Company's residential communities are generally located in
suburban areas near major highways. The communities are designed as
neighborhoods that fit existing land characteristics. The Company strives to
create diversity within the overall planned community by offering a mix of homes
with differing architecture, textures and colors. Wherever possible,
recreational amenities such as a swimming pool, tennis courts and tot lots are
included.
Construction. The Company designs and supervises the development and
building of its communities. Its homes are constructed according to
standardized prototypes which are designed and engineered to provide innovative
product design while attempting to minimize costs of construction. The Company
employs subcontractors for the installation of site improvements and
construction of homes. Agreements with subcontractors are generally short term
and provide for a fixed price for labor and materials. The Company rigorously
controls costs through the use of a computerized monitoring system. Because of
the risks involved in speculative building, the Company's general policy is to
construct a residential multi-family building only after signing contracts for
the sale of at least 50% of the homes in that building. Single family detached
homes are usually constructed after the signing of a contract and mortgage
approval has been obtained.
Materials and Subcontractors. The Company attempts to maintain efficient
operations by utilizing standardized materials available from a variety of
sources. In addition, the Company contracts with subcontractors representing
all building trades in connection with the construction of its homes. In recent
years, the Company has experienced no significant construction delays due to
shortages of materials or labor. The Company cannot predict, however, the
extent to which shortages in necessary materials or labor may occur in the
future.
Marketing and Sales. The Company's residential communities are sold
principally through on-site sales offices. In order to respond to its
customers' needs and trends in housing design, the Company relies upon its
internal market research group to analyze information gathered from, among other
sources, buyer profiles, exit interviews at model sites, focus groups and
demographic data bases. The Company makes use of newspaper, radio, magazine,
its website, billboard, video and direct mail advertising, special promotional
events, illustrated brochures, full-sized and scale model homes in its
comprehensive marketing program. For the year ended October 31, 1998, the
Company's advertising expenditures totaled $10,531,000.
Customer Service and Quality Control. The Company's associates responsible
for customer service participate in pre-closing quality control inspection as
well as responding to post-closing customer needs. Prior to closing, each home
is inspected and any necessary completion work is undertaken by the Company. In
some of its markets the Company is also enrolled in a standard limited warranty
program which, in general, provides a homebuyer with a one-year warranty for the
home's materials and workmanship, a two-year warranty for the home's heating,
cooling, ventilating, electrical and plumbing systems and a ten-year warranty
for major structural defects. All of the warranties contain standard
exceptions, including, but not limited to, damage caused by the customer.
Customer Financing. The Company sells its homes to customers who generally
finance their purchases through mortgages. During the year ended October 31,
1998, approximately 58% of the Company's non-cash customers obtained mortgages
originated by the Company's wholly-owned mortgage banking subsidiary, with a
substantial portion of the Company's remaining customers obtaining mortgages
from various independent lending institutions. Mortgages originated by the
Company's wholly-owned mortgage banking subsidiary are sold in the secondary
market.
Financing arrangements with independent lending institutions are at
prevailing rates and on terms in accordance with the lending institutions
policies. Mortgages offered by the Company's subsidiary are on terms similar to
those offered by independent lending institutions. There are no assurances that
mortgage financing will remain readily available to the Company's customers at
affordable rates.
COMPETITION
The Company's residential business is highly competitive. The Company
competes in each of the geographic areas in which it operates with numerous real
estate developers, ranging from small local builders to larger regional and
national builders and developers, some of which have greater sales and financial
resources than the Company. Resales of housing and the availability of rental
housing provide additional competition. The Company competes primarily on the
basis of reputation, price, location, design, quality, service and amenities.
REGULATION AND ENVIRONMENTAL MATTERS
General. The Company is subject to various local, state and federal
statutes, ordinances, rules and regulations concerning zoning, building design,
construction and similar matters, including local regulations which impose
restrictive zoning and density requirements in order to limit the number of
homes that can eventually be built within the boundaries of a particular
locality. In addition, the Company is subject to registration and filing
requirements in connection with the construction, advertisement and sale of its
communities in certain states and localities in which it operates even if all
necessary government approvals have been obtained. The Company may also be
subject to periodic delays or may be precluded entirely from developing
communities due to building moratoriums that could be implemented in the future
in the states in which it operates. Generally, such moratoriums relate to
insufficient water or sewerage facilities or inadequate road capacity.
Environmental. The Company is also subject to a variety of local, state
and federal statutes, ordinances, rules and regulations concerningprotection of
health and the environment ("environmental laws"). The particular environmental
laws which apply to any given community vary greatly according to the community
site, the site's environmental conditions and the present and former uses of the
site. These environmental laws may result in delays, may cause the Company to
incur substantial compliance and other costs, and prohibit or severely restrict
development in certain environmentally sensitive regions or areas.
The Florida Growth Management Act of 1985 became fully effective in Palm
Beach County on February 1, 1990. The act requires that infrastructure,
including roads, sewer and water lines must be in existence concurrently with
the construction of the development. If such infrastructure is not concurrently
available, then the community cannot be developed. This will have an effect on
limiting the amount of land available for development and may delay approvals of
some developments.
Fair Housing Act. In July 1985, New Jersey adopted the Fair Housing Act
which established an administrative agency to adopt criteria by which
municipalities will determine and provide for their fair share of low and
moderate income housing. This agency adopted such criteria in May 1986. Its
implementation thus far has caused some delay in approvals for some of the
Company's New Jersey communities and may result in a reduction in the number of
homes planned for some properties.
Both prior to the enactment of the Fair Housing Act and in its
implementation thus far, municipal approvals in some of the New Jersey
municipalities in which the Company owns land or land options required the
Company to set aside up to 22% of the approved homes for sale at prices
affordable to persons of low and moderate income. In order to comply with such
requirements, the Company must sell these homes at a loss. The Company attempts
to reduce some of these losses through increased density, certain cost saving
construction measures and reduced land prices from the sellers of property.
Such losses are absorbed by the market priced homes in the same developments.
State Planning Act. Pursuant to the 1985 State Planning Act, the New
Jersey State Planning Commission has adopted a State Development and
Redevelopment Plan ("State Plan"). The State Plan, if fully implemented, would
designate large portions of the state as unavailable for development or as
available for development only at low densities, and other portions of the state
for more intense development. State government agencies would be required to
make permitting decisions in accordance with the State Plan, if it is fully
implemented. The state government agencies have not yet adopted policies and
regulations to fully implement the State Plan. However, at least one state
agency has issued an Executive Order requiring compliance with the State Plan.
It is unclear what effect this Executive Order may have on the Company's ability
to develop its lands.
Conclusion. Despite the Company's past ability to obtain necessary permits
and approvals for its communities, it can be anticipated that increasingly
stringent requirements will be imposed on developers and homebuilders in the
future. Although the Company cannot predict the effect of these requirements,
they could result in time-consuming and expensive compliance programs and
substantial expenditures for pollution and water quality control, which could
have a material adverse effect on the Company. In addition, the continued
effectiveness of permits already granted or approvals already obtained is
dependent upon many factors, some of which are beyond the Company's control,
such as changes in policies, rules and regulations and their interpretation and
application.
Company Offices. The Company owns its corporate headquarters, a four-
story, 24,000 square feet office building located in Red Bank, New Jersey, a
17,450 square feet office building located in Winston-Salem, North Carolina, and
17,255 square feet in a Middletown, New Jersey condominium office building. The
Company leases office space consisting of 63,691 square feet in various New
Jersey locations, 3,300 square feet in Woodbridge, Virginia, 18,456 square feet
in various North Carolina locations, 15,900 square feet in West Palm Beach,
Florida, and 10,520 square feet in southern California.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended October 31, 1998 no matters
were submitted to a vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information on executive officers of the registrant is incorporated herein
from Part III, Item 10.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The number of shares and all data presented on a per share basis in this
Form 10-K have been adjusted to give effect to all stock splits. The Company's
Class A Common Stock is traded on the American Stock Exchange and was held by
approximately 800 shareholders of record at January 7, 1999. There is no
established public trading market for the Company's Class B Common Stock,which
was held by approximately 670 shareholders of record at January 7, 1999. In
order to trade Class B Common Stock, the shares must be converted into Class A
Common Stock on a one-for-one basis. The high and low sales prices for the
Company's Class A Common Stock were as follows for each fiscal quarter during
the years ended October 31, 1998, 1997, and 1996:
Class A Common Stock
------------------------------------------------
Oct. 31, 1998 Oct. 31, 1997 Oct. 31, 1996
-------------- -------------- --------------
Quarter High Low High Low High Low
- ------- ------ ------ ------ ------ ------ ------
First........ $ 9.25 $ 6.50 $7.63 $5.63 $7.75 $6.25
Second....... $11.50 $ 8.56 $7.00 $6.25 $8.25 $6.25
Third........ $11.19 $ 8.50 $7.13 $5.69 $7.25 $5.06
Fourth....... $ 9.88 $ 6.00 $8.13 $6.75 $6.63 $5.50
Certain debt instruments to which the Company is a party contain
restrictions on the payment of cash dividends. As a result of the most
restrictive of these provisions, approximately $42,995,000 was free of such
restrictions at October 31, 1998. The Company has never paid dividends nor
does it currently intend to pay dividends.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data for the Company
and its consolidated subsidiaries and should be read in conjunction with
the financial statements included elsewhere in this Form 10-K. Per common
share data and weighted average number of common shares outstanding reflect all
stock splits.
<TABLE>
<CAPTION>
Eight Year
Year Ended Months Ended
-------------------------------------- Ende ---------
Summary Consolidated October October October October October February
Income Statement Data 31, 1998 31, 1997 31, 1996 31, 1995 31, 1994 28, 1994
- ------------------------------- -------- -------- -------- -------- -------- --------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $941,947 $784,136 $807,464 $777,745 $386,585 $587,010
Expenses....................... 900,655 796,260 782,458 756,091 402,090 557,859
-------- -------- -------- -------- -------- --------
Income(loss) before income
taxes and extraordinary loss. 41,292 (12,124) 25,006 21,654 (15,505) 29,151
State and Federal income taxes. 15,141 (5,154) 7,719 7,526 (5,075) 9,229
Extraordinary loss............. (748) -- -- -- -- (1,277)
-------- -------- -------- -------- -------- --------
Net income (loss).............. $ 25,403 $ (6,970) $ 17,287 $ 14,128 $(10,430) $ 18,645
======== ======== ======== ======== ======== ========
Per Share Data:
Basic::
Income (loss) before
extraordinary loss......... $ 1.20 $ (0.31) $ 0.75 $ 0.61 $ (0.46) $ 0.87
Extraordinary loss........... (0.03) -- -- -- -- (0.05)
-------- -------- -------- -------- -------- --------
Net income (loss)............ $ 1.17 $ (0.31) $ 0.75 $ 0.61 $ (0.46) $ 0.82
======== ======== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 21,781 22,615 23,037 23,032 22,906 22,821
Assuming Dilution:
Income (loss) before
extraordinary loss......... $ 1.19 $ (0.31) $ 0.75 $ 0.61 $ (0.45) $ 0.86
Extraordinary loss........... (0.03) (0.05)
-------- -------- -------- -------- -------- --------
Net income (loss)............ $ 1.16 $ (0.31) $ 0.75 $ 0.61 $ (0.45) $ 0.81
======== ======== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 22,016 22,712 23,120 23,079 23,061 23,072
Summary Consolidated October October October October October February
Balance Sheet Data 31, 1998 31, 1997 31, 1996 31, 1995 31, 1994 28, 1994
- ------------------------------- -------- -------- -------- -------- -------- --------
Total assets................... $589,102 $637,082 $614,111 $645,378 $612,925 $539,602
Mortgages and notes payable.... $150,282 $184,519 $145,336 $183,044 $167,179 $ 68,244
Bonds collateralized by
mortgages receivable......... $ 5,652 $ 7,855 $ 9,231 $ 17,880 $ 20,815 $ 30,343
Participating senior
subordinated debentures
and subordinated notes....... $145,449 $190,000 $200,000 $200,000 $200,000 $200,000
Stockholders' equity........... $201,392 $178,762 $193,622 $176,335 $162,130 $171,001
</TABLE>
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For purposes of computing the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred dividends, earnings consist of
earnings (loss) from continuing operations before income taxes, minority
interest, extraordinary items and cumulative effect of accounting changes, plus
fixed charges (interest charges and preferred share dividend requirements of
subisidiaries, adjusted to a pretax basis), less interest capitallized, less
preferred share dividend requirements of subsidiaries adjusted to a pretax basis
and less undistributed earnings of affiliates whose debt is not guaranteed by
the Company.
The following table sets forth the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred dividends for the Company for
the periods indicated:
<TABLE>
<CAPTION>
Eight
Months
Years Ended October 31, Ended
-------------------------------------- October 31 February 28,
1998 1997 1996 1995 1994 1994
-------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges............. 2.6 (a) 1.6 1.4 (b) 1.8
Ratio of earnings to
combined fixed charges
and preferred stock
dividends................. 2.6 (a) 1.6 1.4 (b) 1.8
(a) No ratio is presented for the year ended October 31, 1997 as the earnings
for such period were insufficient to cover fixed charges by $9,197,000.
(b) No ratio is presented for the eight months ended Octber 31, 1994 as the
earnings for such period were insufficient to cover fixed charges by
$18,803,000.
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash uses during the twelve months ended October 31, 1998
were for operating expenses, seasonal increases in housing inventories,
construction, income taxes, interest, the repurchase of common stock, the
redemption of subordinated indebtedness, and the net reduction of the revolving
credit line. The Company provided for its cash requirements from housing and
land sales, the revolving credit facility, the sale of commercial facilities,
financial service fees, and other revenues. The Company believes that these
sources of cash are sufficient to finance its working capital requirements and
other needs.
In December 1998 the Board of Directors increased the stock repurchase
program to purchase up to 3 million shares of Class A Common Stock. This
authorization expires on December 31, 2000. As of October 31, 1998, 1,591,500
shares were repurchased under this program of which 407,100 were repurchased
during the year ended October 31, 1998.
The Company's bank borrowings are made pursuant to a revolving credit
agreement (the "Agreement") which provides a revolving credit line and letter of
credit line of up to $280,000,000 through July 2001. Interest is payable
monthly and at various rates of either the prime rate or Libor plus 1.45%. The
Company believes that it will be able either to extend the Agreement beyond July
2001 or negotiate a replacement facility, but there can be no assurance of such
extension or replacement facility. The Company currently is in compliance and
intends to maintain compliance with its covenants under the Agreement. As of
October 31, 1998, borrowings under the Agreement were $68,000,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of October 31, 1998 was $145,449,000. During the
year ended October 31, 1998, the Company reduced its subordinated debt by
$44,551,000. See "Results of Operations - Extraordinary Loss." Payments of
$45,449,000 and $100,000,000 are due in April 2002 and June 2005, respectively.
The Company's mortgage banking subsidiary borrows under a bank warehousing
arrangement. Other finance subsidiaries formerly borrowed from a multi-builder
owned financial corporation and a builder owned financial corporation to finance
mortgage backed securities but in fiscal 1988 decided to cease further borrowing
from multi-builder and builder owned financial corporations. These non-recourse
borrowings have been generally secured by mortgage loans originated by one of
the Company's subsidiaries. As of October 31, 1998, the aggregate outstanding
principal amount of such borrowings was $72,318,000.
The book value of the Company's inventories, rental condominiums, and
commercial properties completed and under development amounted to the following:
October 31, October 31,
1998 1997
------------ ------------
Residential real estate inventory....... $375,733,000 $410,393,000
Senior residential rental property...... 10,794,000 11,412,000
------------ ------------
Total residential real estate....... 386,527,000 421,805,000
Commercial properties................... 17,832,000 38,946,000
------------ ------------
Combined Total...................... $404,359,000 $460,751,000
============ ============
Total residential real estate decreased $35,278,000 from October 31, 1997
to October 31, 1998 as a result of an inventory decrease of $34,660,000 and
depreciation of senior residential rental property. The decrease in residential
real estate inventory was primarily due to decreases in the Company's Northeast
Region where fewer deliveries are planned for the first quarter of fiscal year
1999 compared to the same period in fiscal 1998. Residential homes under
construction or completed and included in residential real estate inventory at
October 31, 1998 are expected to be closed during the next twelve months. Most
residential real estate, completed or under development, is financed through the
Company's line of credit and subordinated indebtedness.
The following table summarizes housing lots included in the Company's total
residential real estate:
Total Contracted Remaining
Home Not Lots
Lots Delivered Available
-------- ---------- ---------
October 31, 1998:
Owned.......................... 8,054 1,673 6,381
Optioned....................... 13,668 8 13,660
-------- ---------- ---------
Total........................ 21,722 1,681 20,041
======== ========== =========
October 31, 1997:
Owned.......................... 8,266 1,848 6,418
Optioned....................... 12,159 24 12,135
-------- ---------- ---------
Total........................ 20,425 1,872 18,553
======== ========== =========
The following table summarizes the Company's started or completed unsold
homes in active, substantially completed and suspended communities:
October 31, October 31,
1998 1997
-------------------------- -------------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ------ ------ ------ ------
Northeast Region.... 180 16 196 279 63 342
North Carolina...... 93 -- 93 83 -- 83
Florida............. 24 6 30 47 11 58
Virginia............ 23 11 34 16 10 26
California.......... 78 21 99 60 16 76
Poland.............. 11 -- 11 10 2 12
------ ------ ------ ------ ------ ------
Total 409 54 463 495 102 597
====== ====== ====== ====== ====== ======
Prior to the second quarter of fiscal 1997, the Company's commercial
properties represented long-term investments in commercial and retail facilities
completed or under development. At the end of the second quarter of fiscal
1997, the Company announced it was planning an orderly exit from the business of
owning investment properties. During fiscal 1998, the Company sold all its
remaining commercial facilities which had a book value of $23,920,000 and
outstanding loan balances of $19,241,000 as of October 31, 1997. In addition, a
50% owned partnership sold its retail center. The Company has various parcels
of land approved for commercial development. The Company has contracts on all
such parcels and expects to close substantially all such land sales in the first
quarter of 1999. See "Results of Operations - Investment Properties."
Collateral Mortgage Financing - collateral for bonds payable consists of
collateralized mortgages receivable which are pledged against non-recourse
collateralized mortgage obligations. Financial Services - mortgage loans held
for sale consist of residential mortgages receivable of which $71,002,000 and
$47,660,000 at October 31, 1998 and October 31, 1997, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market. The
balance of mortgage loans held for sale is being held as an investment by the
Company. The Company may incur risk with respect to mortgages that are
delinquent, but only to the extent the losses are not covered by mortgage
insurance or resale value of the house. Historically, the Company has incurred
minimal credit losses.
RESULTS OF OPERATIONS
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprised primarily of New
Jersey, southern New York state, and eastern Pennsylvania), in southeastern
Florida, North Carolina, northern Virginia, southern California, and Poland. In
addition, the Company had developed and operated commercial properties as long-
term investments in New Jersey, and, to a lesser extent, Florida, but has exited
this business (see "Investment Properties" below).
During the years ended October 31, 1998, 1997, and 1996, the Company's
Northeast Region and North Carolina Division housing operations consistently
produced operating profits. The Company's California housing operations
produced profits in 1998 and 1997. In 1998, financial services and the sale of
commercial properties also contributed profits to the Company. These profits
have been reduced by net losses from its other housing divisions, the writedown
of certain residential inventories and commercial properties to their estimated
fair value and the write-off of optioned properties and related approval,
engineering and capitalized interest costs. See "Notes to Consolidated
Financial Statements - Note 10".
Historically, the Company's first two quarters produced the least amount of
deliveries for the year and the fourth quarter produced the most deliveries for
the year, sometimes in excess of 40%. The Company's management has made a
concerted effort to change this trend using new management tools to focus on
delivery evenness and through a new quarterly bonus incentive plan. The
percentage distribution of deliveries for the last three years is as follows:
Quarter Ended
----------------------------------------------------------
January 31 April 30 July 31 October 31 Total
---------- ---------- ---------- ---------- ----------
1998........... 24% 23% 26% 27% 100%
1997........... 16% 19% 25% 40% 100%
1996........... 14% 18% 25% 43% 100%
Total Revenues
Compared to the same prior period, revenues increased (decreased) as
follows:
Year Ended
-----------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars in Thousands)
Homebuilding:
Sale of homes......................$163,837 $(32,875) $ 24,201
Land sales and other revenues...... (11,572) 8,371 3,214
Financial services................... 8,363 (481) 868
Investment properties................ (2,646) 2,838 1,388
Collateralized mortgage financing.... (171) (1,181) 48
--------- --------- ---------
Total change....................$157,811 $(23,328) $ 29,719
========= ========= =========
Percent change.................... 20.1% (2.9%) 3.8%
========= ========= =========
Homebuilding
Compared to the same prior period, housing revenues increased $163.8
million or 22.4% for the year ended October 31, 1998, after decreasing $32.9
million or 4.3% for the year ended October 31, 1997, and increasing $24.2
million or 3.3% for the year ended October 31, 1996. Housing revenues are
recorded at the time each home is delivered and title and possession have been
transferred to the buyer.
Information on homes delivered by market area is set forth below:
Year Ended
---------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Housing Revenues............$595,873 $445,817 $460,931
Homes Delivered............. 2,530 2,128 2,364
North Carolina:
Housing Revenues............$127,592 $125,242 $123,347
Homes Delivered............. 687 695 738
Florida:
Housing Revenues............$ 44,168 $ 74,146 $ 99,085
Homes Delivered............. 241 418 632
Virginia:
Housing Revenues............$ 38,904 $ 14,398 $ 16,749
Homes Delivered............. 152 70 75
California:
Housing Revenues............$ 82,546 $ 69,252 $ 64,570
Homes Delivered............. 457 365 325
Poland:
Housing Revenues............$ 6,561 $ 2,952 --
Homes Delivered............. 71 41 --
Totals:
Housing Revenues............$895,644 $731,807 $764,682
Homes Delivered............. 4,138 3,717 4,134
The overall increase in housing revenues is acombination of higher
deliveries and increases in average sales prices. The increase in the number of
homes delivered during the year ended October 31, 1998 is primarily due to the
increased deliveries in the Northeast Region, California and Virginia which was
partially offset by decreased sales in Florida. The increase in the Northeast
was due to the timing of deliveries in fiscal 1997 and the Company's desire to
even out deliveries over the four quarters of fiscal 1998. In California,
deliveries increased due to the opening of additional communities. In Virginia,
deliveries increased due to the acquisition of a small home developer on May 1,
1998. In Florida, deliveries declined since the Company cut back its operations
due to a highly competitive market. The increased average sales prices are
primarily the result of diversifying the Company's product mix in the Northeast
Region to include more detached single family homes and larger townhouses with
garages designed for the move-up buyer and the sale of more decorator and
structural options. In Florida, average sales prices increased as a result of
fewer communities, all of which are higher priced single family developments.
In Virginia, average sales prices increased because there was a higher
percentage of single family detached homes delivered. In North Carolina,
average sales prices did not show a significant change. In California, sales
prices decreased due to a change in product mix to smaller, less expensive
homes.
Unaudited quarterly housing revenues and sales contracts using base sales
prices by market area for the years ending October 31, 1998, 1997, and 1996 are
set forth below:
Quarter Ended
------------------------------------------
October July April January
31, 1998 31, 1998 30, 1998 31, 1998
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $157,882 $162,847 $136,133 $139,011
North Carolina............. 38,997 34,655 28,264 25,676
Florida.................... 11,291 8,111 15,254 9,512
Virginia................... 16,687 11,256 4,843 6,118
California................. 22,980 18,832 17,613 23,121
Poland..................... 2,283 2,199 1,460 619
--------- --------- --------- ---------
Total.................. $250,120 $237,900 $203,567 $204,057
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $114,144 $124,144 $188,082 $ 98,814
North Carolina............. 37,085 33,302 35,990 23,903
Florida.................... 5,385 9,503 8,631 7,802
Virginia................... 11,834 15,265 9,583 3,866
California................. 21,325 25,402 9,535 18,769
Poland..................... 1,758 516 332 1,277
--------- --------- --------- ---------
Total.................. $191,531 $208,132 $252,153 $154,431
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 1997 31, 1997 30, 1997 31, 1997
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $193,513 $118,186 $ 70,678 $ 63,440
North Carolina............. 41,566 35,293 26,341 22,042
Florida.................... 28,951 14,325 17,042 13,828
Virginia................... 5,214 2,759 3,018 3,407
California................. 23,317 15,113 18,489 12,333
Poland..................... 1,212 1,008 667 65
--------- --------- --------- ---------
Total.................. $293,773 $186,684 $136,235 $115,115
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $134,280 $124,860 $118,840 $ 92,544
North Carolina............. 29,409 30,339 35,988 31,506
Florida.................... 11,134 15,296 21,399 9,708
Virginia................... 5,618 3,761 5,279 2,478
California................. 24,255 22,785 22,383 16,268
Poland..................... 2,109 436 468 1,607
--------- --------- --------- ---------
Total.................. $206,805 $197,477 $204,357 $154,111
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 1996 31, 1996 30, 1996 31, 1996
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $210,951 $112,665 $ 81,950 $ 55,365
North Carolina............. 44,334 33,506 24,445 21,062
Florida.................... 38,910 21,407 20,890 17,878
Virginia................... 5,538 3,614 3,200 4,397
California................. 25,747 15,936 13,019 9,868
--------- --------- --------- ---------
Total.................. $325,480 $187,128 $143,504 $108,570
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $149,930 $ 94,933 $147,576 $ 55,785
North Carolina............. 28,973 31,485 43,136 19,594
Florida.................... 13,485 19,668 41,003 19,315
Virginia................... 1,638 2,249 5,821 3,463
California................. 16,419 14,847 19,496 8,209
Poland..................... 1,306 -- -- --
--------- --------- --------- ---------
Total.................. $211,751 $163,182 $257,032 $106,366
========= ========= ========= =========
The Company's contract backlog using base sales prices by market area is
set forth below:
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Total Contract Backlog........$270,753 $266,889 $198,248
Number of Homes............... 1,132 1,287 977
North Carolina:
Total Contract Backlog........$ 48,713 $ 45,879 $ 43,587
Number of Homes............... 235 232 233
Florida:
Total Contract Backlog........$ 14,800 $ 25,315 $ 36,910
Number of Homes............... 73 150 217
Virginia:
Total Contract Backlog........$ 26,083 $ 7,621 $ 4,252
Number of Homes............... 115 27 24
California:
Total Contract Backlog........$ 20,721 $ 25,636 $ 8,073
Number of Homes............... 119 137 46
Poland:
Total Contract Backlog........$ 746 $ 2,974 $ 1,306
Number of Homes............... 7 39 19
Totals:
Total Contract Backlog........$381,816 $374,314 $292,376
Number of Homes............... 1,681 1,872 1,516
The Company has written down or written off certain residential inventories
$4.0 million, $14.0 million and $1.6 million during the years ended October 31,
1998, 1997, and 1996, respectively, to their estimated fair value. See "Notes
to Consolidated Financial Statements - Note 10" for additional explanation.
These writedowns and writeoffs were incurred primarily because of lower property
values due to economic downturns, a change in the marketing strategy to
liquidate a particular property, or the decision not to exercise an option.
During the year ended October 31, 1998, the Company has written down one
Florida residential community and one New Jersey parcel of land for sale. In the
Florida residential community, higher discounts are being offered to speed up
sales. At the New Jersey land site, lots are being contracted at prices lower
than anticipated. The result of the above decisions was a reduction in
inventory carrying amounts to fair value, resulting in a $1.9 million
impairment loss in accordance with FAS 121. The Company has also written off
three New Jersey residential land options including approval, engineering and
capitalized interest costs amounting to $2.1 million. The Company did not
exercise these options because of changes in local market conditions and
difficulties in obtaining government approvals.
During the year ended October 31, 1997, the Company had written down
certain residential communities, and written off certain residential land
options including approval, engineering and capitalized interest costs. In
Florida, the Company's return on investment was unsatisfactory. A a result,
the Company established a goal to reduce its investment in Florida by $25.0
million. To do so on an accelerated basis, it reduced prices and offered
pricing concessions in all Florida residential communities. The Company also
decided to sell all inactive properties in Florida. In the Northeast Region,
the Company changed the product type to be constructed on a parcel of land it
owns. In an active community in the Northeast Region, the Company incurred
unforeseen development costs. Also in the Northeast, the Company decided to
sell an optioned property instead of developing it. The result of the above
decisions was a reduction in fair values below carrying amounts and, in
accordance with FAS 121, the Company recorded an impairment loss on the related
inventories. At October 31, 1997, residential inventories were reduced $9.3
million to reduce such inventories to estimated fair value. The Northeast
Region also wrote off costs associated with three optioned properties and
related approval, engineering and capitalized interest costs amounting to $4.7
million. In two cases, the Company decided not to exercise the option due to
environmental problems. The third option was not exercised because the
community's proforma profitability did not produce an adequate return on
investment commensurate with the risk.
The writedowns of residential inventories during the year ended October 31,
1996 were primarily attributable to one community in New Jersey, a parcel of
land in Florida and one community and a parcel of land in Virginia. In New
Jersey, the writedown was due to the change in use of a parcel of land from
residential to commercial. In Florida, a parcel of idle land was written down
due to a decline in land values. In Virginia, the writedown was primarily due
to reduced sales prices in one community. Also in Virginia, a reserve was
recorded against a parcel of land which the Company was attempting to liquidate
through lot sales.
Cost of sales includes expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Year Ended
---------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. $895,644 $731,807 $764,682
Cost of sales.............. 740,871 617,312 638,944
--------- --------- ---------
Housing gross margin....... $154,773 $114,495 $125,738
========= ========= =========
Gross margin percentage.... 17.3% 15.6% 16.4%
========= ========= =========
Cost of sales expenses as a percentage of home sales revenues are presented
below:
Year Ended
---------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of sales:
Housing, land and
development costs....... 74.8 76.0 75.5
Commissions.............. 1.9 2.0 1.7
Financing concessions.... 0.7 0.9 1.0
Overheads................ 5.3 5.5 5.4
--------- --------- ---------
Total cost of sales........ 82.7 84.4 83.6
--------- --------- ---------
Gross margin............... 17.3% 15.6% 16.4%
========= ========= =========
The Company sells a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the mix of
both the communities and of home types delivered, consolidated gross margin will
fluctuate up or down. During the year ended October 31, 1998, the Company's
gross margin increased 1.7% from the previous year. This can be attributed to
higher gross margins being achieved in each of the Company's markets except
Florida. Higher gross margins are primarily attributed to positive effects from
process redesign and quality programs that reduced the housing and land
development costs, selective price increases or reduced selling incentives in
the Company's stronger markets, and an increased percentage of deliveries from
the better performing communities. In addition, gross margin percentages are
higher in the Northeast Region compared to the Company's other markets. In
1998, the gross margin benefited from a higher percentage of housing revenues
from the Northeast Region amounting to 66.5% in fiscal 1998 compared to 60.9% in
fiscal 1997.
During the year ended October 31, 1997, gross margins decreased in all the
Company's markets compared to the prior year. This decline was primarily caused
by higher housing, land and development costs and commission expenses. 0.3% of
the increase was the result of unforeseen development costs in one community in
the Northeast Region. The balance of the increase in housing, land and
development costs was due to a higher number of communities not obtaining
acceptable housing, land and development cost performance. The increase in
commissions was the result of more co-broker sales and sales associate
incentives to increase sales.
Selling and general administrative expenses as a percentage of homebuilding
revenues decreased to 7.5% for the year ended October 31, 1998 from 8.2% for the
year ended October 31, 1997 which had increased from 7.7% for the year ended
October 31, 1996. The percentage decrease during the year ended October 31,
1998 is due to increased deliveries. The percentage increase during the year
ended October 31, 1997 was due to increased costs while home deliveries
declined. Such expenses increased $5.7 million and $1.8 million for the years
ended October 31, 1998 and 1997, respectively, from the previous year. The
dollar increase is due primarily to increased salary and bonus administration
costs in 1998 and increased advertising and sales center operations in 1997.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales,
interest income, contract deposit forfeitures, cash discounts, national contract
rebates, and corporate owned life insurance benefits.
A breakout of land and lot sales is set forth below:
Year Ended
----------------------------
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
(In Thousands)
Land and lot sales................... $ 8,636 $22,855 $13,998
Cost of sales........................ 8,070 17,005 12,548
-------- -------- --------
Land and lot sales gross margin...... $ 566 $ 5,850 $ 1,450
======== ======== ========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
Financial Services
Financial services consists primarily of originating mortgages from the
Company's homebuyers, as well as from third parties, selling such mortgages in
the secondary market, and title insurance activities. During the year ended
October 31, 1998 financial services provided a $2.1 million pretax profit, up
from break even the prior year and up from a pretax profit of $.5 million in
1996. In the market areas served by the Company's wholly-owned mortgage banking
subsidiaries, approximately 58%, 51%, and 51% of the Company's non-cash
homebuyers obtained mortgages originated by these subsidiaries during the years
ended October 31, 1998, 1997, 1996, respectively. The Company's mortgage
banking goals are to improve profitability by increasing the capture rate of its
homebuyers and expanding its business to include originations from unrelated
mortgages. The Company has initiated efforts to originate mortgages from
unrelated third parties and expects these third party loans to increase as a
percentage of the Company's total loan volume over the next few years. During
the year ended October 31, 1998, third party loans amounted to 40% of total
mortgage closings. Most servicing rights on new mortgages originated by the
Company will be sold as the loans are closed.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from sale of such property. See "Capital Resources and
Liquidity" for information on the Company's decision to sell its investment
properties. The Company plans to liquidate all properties except for its senior
rentals. At October 31, 1998, all properties had been liquidated except various
parcels of land. These parcels are under contract and are expected to close
during 1999. During the year ended October 31, 1998 one of these contracted
parcels was written down $1.0 million due to increased land development costs.
During the years ended October 31, 1998 and 1997, investment property revenues
included a $6.5 million pretax gain and a $4.9 million pretax gain,
respectively, from the sale of its commercial facilities and land. Investment
properties'expenses do not include interest expense (see "Interest" below).
Collateralized Mortgage Financing
In the years prior to February 29, 1988 the Company pledged mortgage loans
originated by its mortgage banking subsidiaries against collateralized mortgage
obligations ("CMOs"). Subsequently, the Company discontinued its CMO program.
As a result, CMO operations are diminishing as pledged loans are decreasing
through principal amortization and loan payoffs, and related bonds are reduced.
In recent years, as a result of bonds becoming callable, the Company has also
sold a portion of its CMO pledged mortgages.
Corporate General and Administrative
Corporate general and administrative expenses includes the operations at
the Company's headquarters in Red Bank, New Jersey. As a percentage of total
revenues, such expenses were 2.2%, 1.9%, and 1.7% for the years ended October
31, 1998, 1997, and 1996, respectively. In 1998, the increase was primarily
attributed to increased bonus accruals (there were no bonus accruals based on
the Return on Equity incentive program in 1997), increased depreciation from the
amortization of capitalized process redesign costs in prior years and increased
expenditures for long term improvement initiatives. The Company's long term
improvement initiatives include total quality, process redesign (net of
capitalized expenses), and training. Such initiatives resulted in additional
expenses for the years ended October 31, 1998, 1997, and 1996 amounting to $3.8
million, $2.2 million, and $1.6 million, respectively.
Interest
Interest expense includes housing, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Year Ended
-------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(In Thousands)
Sale of homes.................. $ 31,499 $ 29,505 $ 25,992
Land and lot sales............. 652 962 657
Rental properties.............. 2,272 5,308 5,508
--------- --------- ---------
Total.......................... $ 34,423 $ 35,775 $ 32,157
========= ========= =========
Housing interest as a percentage of sale of home revenues amounted to 3.5%,
4.0%, and 3.4% for the years ended October 31, 1998, 1997, and 1996,
respectively. The decrease in the percentage for the year ended October 31,
1998 was primarily due to decreased levels of debt during the year compared to
1997. This decrease was the result of the Company delivering a more even flow
of homes during 1998. The increase in the percentage for the year ended October
31, 1997 was primarily the result of the Company discontinuing the
capitalization of interest on communities in planning which were not under
active development. As a result, interest expense increased approximately $2.8
million for the year ended October 31, 1997.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations, amortization of subordinated note issuance expenses, and corporate
owned life insurance loan interest.
Total Taxes
Total taxes as a percentage of income before income taxes amounted to 36.7%
and 30.9% for the years ended October 31, 1998 and 1996, respectively. Net tax
benefits as a percentage of the loss before income taxes amounted to 42.5% for
the year ended October 31, 1997. Deferred federal and state income tax assets
primarily represent the deferred tax benefits arising from temporary differences
between book and tax income which will be recognized in future years. (See
"Notes to Consolidated Financial Statements - Note 9" for an additional
explanation of taxes.)
Extraordinary Loss
In October 1998, the Company redeemed $44,551,000 of its outstanding
11 1/4% Subordinated Notes due 2002 at an average price of 101.6% of par
which resulted in an extraordinary loss of $748,000 net of income taxes of
$403,000.
Year 2000 Issues
The Company has assessed and formulated a plan to resolve its information
technology ("IT") and non-IT system year 2000 issues. The Company has
designated a full-time year 2000 project leader, engaged consultants to review
and evaluate its plan, completed the identification of Company IT and non-IT
noncompliant systems and is in the process of evaluating subcontractors' and
suppliers' state of readiness. The Company's plan has prioritized its efforts
on its software systems and computer hardware equipment. The Company has
upgraded, fixed or retired 80% of its noncompliant systems. The Company expects
to have substantially all critical IT software year 2000 capable and tested by
June 30, 1999. All other Company IT and non-IT systems are not considered
critical to Company operations, and if noncapable for year 2000, would only be
an inconvenience. The Company does not anticipate the costs of implementation
of its plan to have a material impact on future earnings and is expected to be
funded through operations.
The Company is concerned about the readiness of its subcontractors and
suppliers. The Company is in the process of communicating with these third
parties. If the Company finds third parties whose lack of readiness as to year
2000 issues would have a substantial impact on the Company's operations, the
Company will look to replace such subcontractors and suppliers. In most cases,
the Company uses more than one subcontractor and supplier so it believes finding
replacements will not be difficult.
The Company believes it is on track to solve its year 2000 issues. It does
not believe it will have material lost revenues due to the year 2000 issues.
Based on the above, it sees no need to develop a worst-case year 2000 scenario.
However, the Company is in the process of developing year 2000 contingency plans
which are approximately 75% complete.
Inflation
Inflation has a long-term effect on the Company because increasing costs of
land, materials and labor result in increasing sales prices of its homes. In
general, these price increases have been commensurate with the general rate of
inflation in the Company's housing markets and have not had a significant
adverse effect on the sale of the Company's homes. A significant inflationary
risk faced by the housing industry generally is that rising housing costs,
including land and interest costs, will substantially outpace increases in the
income of potential purchasers. In recent years, in the price ranges in which
it sells homes, the Company has not found this risk to be a significant problem.
Inflation has a lesser short-term effect on the Company because the Company
generally negotiates fixed price contracts with its subcontractors and material
suppliers for the construction of its homes. These prices usually are
applicable for a specified number of residential buildings or for a time period
of between four to twelve months. Construction costs for residential buildings
represent approximately 55% of the Company's homebuilding cost of sales.
Item 7(A) - Quantitative and Qualitative Disclosures About Market Risk.
The primary market risk facing the Company is interest rate risk on it's
long term debt. In connection with the Company's mortgage operations, mortgage
loans held for sale and the associated mortgage warehouse line of credit are
subject to interest rate risk; however, such obligations reprice frequently and
are short-term in duration and accordingly the risk is not material. The
Company does not hedge interest rate risk using financial instruments. The
Company is also subject to foreign currency risk but this risk is not material.
The following table sets forth as of October 31, 1998, the Company's long term
debt obligations, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value ("FMV").
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------- FMV @
1999 2000 2001 2002 2003 Thereafter Total 10/31/98
------ ------ ------ ------ ------ ---------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Debt(1):
Fixed Rate.......$ 115 $ 119 $ 132 $50,804 $2,581 $100,685 $154,436 $145,186
Average interest
rate........... 7.59% 7.62% 7.60% 10.70% 7.04% 9.74% 10.01% -
Variable Rate....$1,932 $ 600 $ 926 $ 0 $ 0 $ 0 $ 3,458 $ 3,458
Average interest
rate........... 9.22% 8.00% 8.64% - - - 8.85% -
(1) Does not include bonds collateralized by mortgages receivable.
</TABLE>
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its consolidated
subsidiaries are set forth herein beginning on Page F-1.
Item 9 - CHANGES IN OR DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
During the years ended October 31, 1998, 1997, and 1996, there have not
been any changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item l0, except as set forth below under the
heading "Executive Officers of the Registrant", is incorporated herein by
reference to the Company's definitive proxy statement to be filed pursuant to
Regulation l4A, in connection with the Company's annual meeting of shareholders
to be held on March 23, 1999, which will involve the election of directors.
Executive Officers of the Registrant
The executive officers of the Company are listed below and brief summaries
of their business experience and certain other information with respect to them
are set forth following the table. Each executive officer holds such office for
a one year term.
Year Started
Name Age Position With Company
Kevork S. Hovnanian 75 Chairman of the Board and l967
Director of the Company.
Ara K. Hovnanian 41 Chief Executive Officer, President 1979
and Director of the Company.
Paul W. Buchanan 48 Senior Vice President-Corporate l981
Controller and Director of the
Company.
William L. Carpitella 44 Senior Vice President,
Organizational Development 1997
Peter S. Reinhart 48 Senior Vice President and General 1978
Counsel and Director of the
Company.
John D. Roberts 36 Vice President Process Redesign 1998
J. Larry Sorsby 43 Senior Vice President, Treasurer 1988
and Chief Financial Officer and
Director of the Company
Mr. K. Hovnanian founded the predecessor of the Company in l959 (Hovnanian
Brothers, Inc.) and has served as Chairman of the Board of the Company since its
incorporation in l967. Mr. K. Hovnanian was also Chief Executive Officer of the
Company from 1967 to July 1997.
Mr. A. Hovnanian was appointed President in April 1988, after serving as
Executive Vice President from March 1983. He has also served as Chief Executive
Officer since July 1997. Mr. A. Hovnanian was elected a Director of the Company
in December l98l. Mr. A. Hovnanian is the son of Mr. K. Hovnanian.
Mr. Buchanan has been Senior Vice President-Corporate Controller since May
l990. Mr. Buchanan was elected a Director of the Company in March l982.
Mr. Carpitella joined the Company in September 1997 as Senior Vice
President, Organizational Development. Prior to joining the Company Mr.
Carpitella was Vice President, Human Resources for a division of Pulte Home
Corp. from April 1995 to August 1997. From February 1992 Mr. Carpitella was
Vice President Human Resources for Geo. J. Ball Co.
Mr. Reinhart has been Senior Vice President and General Counsel since April
1985. Mr. Reinhart was elected a Director of the Company in December l98l.
Mr. Roberts joined the Company in January 1998 as Vice President Process
Redesign. Prior to joining the Company Mr. Roberts worked for Deloitte & Touche
Consulting Group ("D & T") from August 1993. At D & T Mr.Roberts was Senior
Consultant until August 1994, then Manager until August 1995 and then Senior
Manager until he joined the Company.
Mr. Sorsby was appointed Senior Vice President, Treasurer and Chief
Financial Officer of the Company in February, 1996 after serving as Senior Vice
President-Finance/Treasurer of the Company since March 1991.
Item 11 - EXECUTIVE COMPENSATION
The information called for by Item ll is incorporated herein by reference
to the Company's definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with the Company's annual meeting of shareholders to be held
on March 5, 1999, which will involve the election of directors.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item l2 is incorporated herein by reference
to the Company's definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with the Company's annual meeting of shareholders to be held
on March 5, l999, which will involve the election of directors.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item l3 is incorporated herein by reference
to the Company's definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with the Company's annual meeting of shareholders to be held
on March 5, 1999, which will involve the election of directors.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
Page
Financial Statements:
Index to Consolidated Financial Statements....................... F-1
Independent Auditors' Report..................................... F-2
Consolidated Balance Sheets at October 31, 1998 and 1997......... F-3
Consolidated Statements of Operations for the years ended
October 31, 1998, 1997, and 1996.............................. F-5
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 1998, 1997, and 1996........................ F-6
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997, and 1996.............................. F-7
Notes to Consolidated Financial Statements......................... F-8
Financial Statement Schedules:
XI Real Estate and Accumulated Depreciation................... F-21
All other schedules are either not applicable to the Company or have been
omitted because the required information is included in the financial statements
or notes thereto.
Exhibits:
3(a) Certificate of Incorporation of the Registrant.(1)
3(b) Certificate of Amendment of Certificate of Incorporation of the
Registrant.(6)
3(c) Bylaws of the Registrant.(6)
4(a) Specimen Class A Common Stock Certificate.(6)
4(b) Specimen Class B Common Stock Certificate.(6)
4(c) Indenture dated as of April 29, 1992, relating to 11 1/4%
Subordinated Notes between the Registrant and First Fidelity Bank,
including form of 11 1/4% Subordinated Notes due April 15,
2002.(2)
4(d) Indenture dated as of May 28, 1993, relating to 9 3/4%
Subordinated Notes between Registrant and First Fidelity Bank,
National Association, New Jersey, as Trustee, including form of
9 3/4% Subordinated Note due 2005.(4)
10(a) Amended and Restated Credit Agreement dated July 29, 1998 among
K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.,
certain Subsidiaries Thereof, PNC Bank, National Association,
First Union National Bank, NationsBank, National Association,
First National Bank of Boston, Bank of America National Trust and
Savings Association, The First National Bank of Chicago, Comerica
Bank, Credit Lyonnais New York Branch and Guaranty Federal F.S.B.
10(b) Description of Management Bonus Arrangements.(6)
10(c) Description of Savings and Investment Retirement Plan.(1)
10(d) Stock Option Plan.
10(e) Management Agreement dated August 12, 1983 for the management of
properties by K. Hovnanian Investment Properties, Inc.(1)
10(f) Agreement dated July 8, 1981 between Hovnanian Properties of
Atlantic County, Inc. and Kevork S. Hovnanian.(2)
10(g) Management Agreement dated December 15, 1985, for the management
of properties by K. Hovnanian Investment Properties, Inc.(3)
10(h) Description of Deferred Compensation Plan.(5)
22 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedules
(1) Incorporated by reference to Exhibits to Registration
Statement (No. 2-85198) on Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Registration Statement
(No. 33-46064) on Form S-3 of the Registrant.
(3) Incorporated by reference to Exhibits to Annual Report on Form 10
-K for the year ended February 28, 1986 of the Registrant.
(4) Incorporated by reference to Exhibits to Registration Statement
(No. 33-61778) on Form S-3 of the Registrant.
(5) Incorporated by reference to Exhibits to Annual Report on Form 10-
K for the year ended February 28, 1990 of the Registrant.
(6) Incorporated by reference to Exhibits to Annual Report on Form 10-
K for the year ended February 28, 1994 of the Registrant.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
October 31, 1998.
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities
Exchange Act of l934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Hovnanian Enterprises, Inc.
By:
/S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of l934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
/S/KEVORK S. HOVNANIAN Chairman of The Board 1/15/99
Kevork S. Hovnanian and Director
/S/ARA K. HOVNANIAN Chief Executive Officer, 1/15/99
Ara K. Hovnanian President and Director
/S/PAUL W. BUCHANAN Senior Vice President 1/15/99
Paul W. Buchanan Corporate Controller and
Director
/S/PETER S. REINHART Senior Vice President and 1/15/99
Peter S. Reinhart General Counsel and Director
/S/J. LARRY SORSBY Senior Vice President, 1/15/99
J. Larry Sorsby Treasurer, Chief Financial
Officer and Director
/S/WILLIAM L. CARPITELLA Senior Vice President, 1/15/99
William L. Carpitella Organizational Development
HOVNANIAN ENTERPRISES, INC.
Index to Consolidated Financial Statements
Page
Financial Statements:
Independent Auditors' Report................................... F-2
Consolidated Balance Sheets as of October 31, 1998 and 1997.... F-3
Consolidated Statements of Operations for the Years Ended
October 31, 1998, 1997, and 1996............................... F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 1998, 1997, and 1996......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1998, 1997, and 1996............................... F-7
Notes to Consolidated Financial Statements........................ F-8
Financial Statement Schedules:
XI Real Estate and Accumulated Depreciation.................. F-21
All other schedules have been omitted because the required information of such
other schedules is not present, is not present in amounts sufficient to require
submission of the schedule or because the required information is included in
the financial statements and notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors of
Hovnanian Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Hovnanian
Enterprises, Inc. and subsidiaries as of October 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended October 31, 1998. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hovnanian Enterprises, Inc. and subsidiaries at October 31, 1998 and 1997 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended October 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/S/ERNST & YOUNG LLP
Ernst & Young LLP
New York, New York
December 15, 1998
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
October 31, October 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
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.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
October 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
<S> <C> <C>
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.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
<CAPTION>
Year Ended
-------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
<S> <C> <C> <C>
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.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<CAPTION>
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Treasury
Outstanding Amount Outstanding Amount Capital Earnings Stock Total
----------- ------ ----------- ------ ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31, 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.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Year Ended
----------------------------------
October October October
31, 1998 31, 1997 31, 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
</TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 1998, 1997, AND 1996.
1. SUMMARY OF ACCOUNTING POLICIES
Operations - The Company, a Delaware Corporation, principally develops
housing communities in New Jersey, Pennsylvania, New York, Florida, North
Carolina, Virginia, California and Poland. In addition, the Company provides
financial services to its homebuilding customers and third parties. The Company
also developed and held for investment income producing properties but has
exited from this business.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and all wholly-owned or majority-
owned subsidiaries after elimination of all significant intercompany balances
and transactions. The Company's investments in joint ventures in which the
Company's interest is 50% or less are accounted for by the equity method of
accounting.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and these differences could have a significant impact on the financial
statements.
Income Recognition - Income from sales is recorded when title is conveyed
to the buyer, subject to the buyer's financial commitment being sufficient to
provide economic substance to the transaction.
Cash - Cash includes cash deposited in checking accounts, overnight
repurchase agreements, certificates of deposit, Treasury bills and government
money market funds with original maturities of less than 90 days at date of
issuance.
Fair Value of Financial Instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. The Company's financial instruments
consist of cash equivalents, mortgages and notes receivable, mortgages and notes
payable, and the subordinated notes payable. Unless otherwise disclosed, the
fair value of financial instruments approximates their recorded values.
Inventories - For inventories of communities under development, a loss is
recorded when events and circumstances indicate impairment and the undiscounted
future cash flows generated are less than the related carrying amounts. The
impairment loss is based on expected revenue, cost to complete including
interest, and selling costs. Inventories and long-lived assets held for sale
are recorded at the lower of cost or fair value less selling costs. Fair value
is defined in Statement of Financial Accounting Standard No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("FAS 121") as the amount at which an asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. Construction costs are accumulated during the period of
construction and charged to cost of sales under specific identification methods.
Land, land development, and common facility costs in a community are amortized
equally based upon the number of homes to be constructed in each housing
community.
Interest costs related to properties in progress are capitalized during the
construction period and expensed along with the associated cost of sales as the
related inventories are sold (see Note 6).
The cost of land options is capitalized when incurred and either included
as part of the purchase price when the land is acquired or charged to operations
when the Company determines it will not exercise the option.
Property - Rental operations of the Company arise primarily from rental of
commercial properties. In addition, the Company has, from time to time, rented
under short-term leases condominium homes not yet under contract of sale. Such
homes are reclassified from inventory and depreciated after a reasonable selling
period not to exceed one year.
Post Development Completion Costs - In those instances where a development
is substantially completed and sold and the Company has additional construction
work to be incurred, an estimated liability is provided to cover the cost of
such work.
Deferred Income Tax - Deferred income taxes or income tax benefits are
provided for temporary differences between amounts recorded for financial
reporting and for income tax purposes.
Common Stock - Each share of Class A Common Stock entitles its holder to
one vote per share and each share of Class B Common Stock entitles its holder
to ten votes per share. The amount of any regular cash dividend payable on a
share of Class A Common Stock will be an amount equal to 110% of the
corresponding regular cash dividend payable on a share of Class B Common
Stock. If a shareholder desires to sell shares of Class B Common Stock,
such stock must be converted into shares of Class A Common Stock.
On December 10, 1998, the Company's Board of Directors approved an increase
in the stock repurchase plan to purchase up to 3 million shares. The 3 million
shares equals 13.0% of the Company's total and outstanding shares as of December
16, 1996 when the initial repurchase plan was approved by the Board. As of
October 31, 1998, 1,591,500 shares have been repurchased under this program.
Depreciation - The straight-line method is used for both financial and tax
reporting purposes for all assets except office furniture and equipment which
are depreciated using the declining balance method over their estimated useful
lives.
Prepaid Expense - Prepaid expenses which relate to specific housing
communities (marketing materials, model setup, architectural fees, homeowner
warranty, etc.) are amortized to costs of sales as the applicable inventories
are sold. All other prepaid expenses are amortized over a specific time period
or as used and charged to overhead expense.
Stock Options - Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" establishes a fair value-based method
of accounting for stock-based compensation plans, including stock options.
Registrants may elect to continue accounting for stock option plans under
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," but are required to provide proforma net income and
earnings per share information "as if" the new fair value approach had been
adopted. The Company intends to continue accounting for its stock option plan
under APB 25. Under APB 25, no compensation expense was recognized because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant (see Note 12).
Per Share Calculations - New Accounting Pronouncement - Statement of
Financial Accounting Standards No. 128 ("FAS 128") "Earnings Per Share" requires
the presentation of basic earnings per share and diluted earnings per share, and
is effective for annual periods ending after December 15, 1997. The Company has
adopted FAS 128 for the year ending October 31, 1998. Basic earnings per common
share is computed using the weighted average number of shares outstanding and is
the same calculation as reported in prior years. Diluted earnings per common
share has been presented for prior years and is computed using the weighted
average number of shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock of 235,000, 97,000,
and 83,000 for the years ended October 31, 1998, 1997, and 1996, respectively.
New Accounting Pronouncement - Statement of Financial Accounting Standards
No. 131 ("FAS 131") "Disclosures About Segments of an Enterprise and Related
Information" requires disclosure about operating segments and is effective for
fiscal years beginning after December 15, 1997. At October 31, 1998, the
Company has not adopted FAS 131. The Company believes the requirements of FAS
131 is not expected to materially impact the Company.
2. CORPORATE INITIATIVES
The Company has embarked on long term improvement initiatives of total
quality, process redesign, and training. Included in Corporate General and
Administration is $3,756,000, $2,216,000, and $1,601,000 for the years ended
October 31, 1998, 1997, and 1996, respectively, related to such initiatives.
3. PROPERTY
Homebuilding property, plant, and equipment consists of land, land
improvements, buildings, building improvements, furniture and equipment used by
the Company and its subsidiaries to conduct day to day business. Homebuilding
accumulated depreciation related to these assets at October 31, 1998 and October
31, 1997 amounted to $15,088,000 and $15,338,000, respectively. At October 31,
1997, held for sale - rental property consisted of two office buildings, three
office warehouse facilities and one retail shopping center. All held for sale -
rental property was sold during the year ended October 31, 1998 for $33,442,000
resultingin a pretax gain of $6,475,000. In addition at October 31, 1998 and
1997, two senior residential rental properties were classified as held for
investment - rental property. Accumulated depreciation on rental property at
October 31, 1998 and October 31, 1997 amounted to $1,826,000 and $10,450,000,
respectively. The Company owned and held for sale three parcels of commercial
land at October 31, 1998. All three parcels are under contract and are expected
to close during the year ended October 31, 1999 for $20,955,000. During the
year ended October 31, 1998 a 50%-owned partnership also sold its retail center
resulting in the Company recording a pretax gain of $1,418,000.
4. ESCROW CASH
The Company holds escrow cash amounting to $4,775,000 and $3,248,000 at
October 31, 1998 and October 31, 1997, respectively, which primarily represents
customers' deposits which are restricted from use by the Company. The Company
is able to release escrow cash by pledging letters of credit. At October 31,
1998 and October 31, 1997, $14,000,000 and $13,500,000 was released from escrow
and letters of credit were pledged, respectively. Escrow cash accounts are
substantially invested in short-term certificates of deposit or time deposits.
5. MORTGAGES AND NOTES RECEIVABLE
The Company's wholly-owned mortgage banking subsidiary originates mortgage
loans, primarily from the sale of the Company's homes. Such mortgage loans are
sold in the secondary mortgage market servicing released, or prior to February
28, 1987 pledged against, collateralized mortgage obligations ("CMOs"). At
October 31, 1998 and October 31, 1997, respectively, $71,002,000 and $47,660,000
of such mortgages were pledged against, the Company's mortgage warehouse line
(see "Notes to Consolidated Financial Statements - Note 6"). The Company may
incur risk with respect to mortgages that are delinquent and not pledged against
CMOs, but only to the extent the losses are not covered by mortgage insurance or
resale value of the home. Historically, the Company has incurred minimal credit
losses. The mortgage loans held for sale are carried at the lower of cost or
market value, determined on an aggregate basis. There was no valuation
adjustment at October 31, 1998.
6. MORTGAGES AND NOTES PAYABLE
Substantially all of the nonrecourse land mortgages are short-term
borrowings. Nonrecourse mortgages secured by operating properties are
installment obligations having annual principal maturities in the following
years ending October 31, of approximately $115,000 in 1999, $119,000 in 2000,
$132,000 in 2001, $138,000 in 2002, $2,581,000 in 2003, and $685,000 after 2003.
The interest rates on these obligations range from 7.000% to 8.375%.
The Company has an unsecured Revolving Credit Agreement ("Agreement") with
a group of banks which provides up to $280,000,000 through July 2001. Interest
is payable monthly and at various rates of either the prime rate or LIBOR plus
1.45%. In addition, the Company pays .325% per annum on the weighted average
unused portion of the line.
Interest costs incurred, expensed and capitalized were:
Year Ended
----------------------------
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
(Dollars in Thousands)
Interest incurred (1):
Residential(3)................. $26,675 $29,469 $30,058
Commercial(4).................. 2,272 5,308 5,493
------- ------- -------
Total incurred................. $28,947 $34,777 $35,551
======= ======= =======
Interest expensed:
Residential(3)................. $32,151 $30,467 $26,649
Commercial(4).................. 2,272 5,308 5,508
------- ------- -------
Total expensed................. $34,423 $35,775 $32,157
======= ======= =======
Interest capitalized at
beginning of year.............. $35,950 $39,152 $36,182
Plus interest incurred........... 28,947 34,777 35,551
Less interest expensed........... 34,423 35,775 32,157
Less impairment adjustments...... -- 275 424
Less property written off........ 460 945 --
Less sale of assets.............. 4,469 984 --
------- ------- -------
Interest capitalized at
end of year.................... $25,545 $35,950 $39,152
======= ======= =======
Interest capitalized at
end of year (5):
Residential(3)................. $23,868 $29,804 $32,669
Commercial(2).................. 1,677 6,146 6,483
------- ------- -------
Total interest
capitalized................... $25,545 $35,950 $39,152
======= ======= =======
(1) Data does not include interest incurred by the Company's mortgage and
finance subsidiaries.
(2) Data does not include a reduction for depreciation.
(3) Represents acquisition interest for construction, land and development
costs which is charged to interest expense when land is not under active
development and when homes are delivered.
(4) Represents interest allocated to or incurred on long term debt for
investment properties and charged to interest expense.
(5) Commercial interest for October 31, 1997 includes $832,000 reported at
October 31, 1996 as capitalized residential interest. This
reclassification was the result of the transfer of two parcels of
land and related capitalized interest from homebuilding to investment
properties.
Average interest rates and average balances outstanding for short-term debt
are as follows:
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
(Dollars In Thousands)
Average outstanding
borrowings................. $ 98,090 $133,760 $127,770
Average interest rate during
period..................... 8.4% 8.2% 8.5%
Average interest rate at end
of period(1)............... 6.9% 7.8% 7.6%
Maximum outstanding at any
month end.................. $125,325 $184,550 $157,125
(1) Average interest rate at the end of the period excludes any charges on
unused loan balances.
7. SUBORDINATED NOTES
On April 29, 1992, the Company issued $100,000,000 principal amount of 11
1/4% Subordinated Notes due April 15, 2002. Interest is payable semi-annually.
In November and December 1996, the Company redeemed $10,000,000 principal amount
at an average price of 100.3% of par. In October 1998, the Company also
redeemed $44,551,000 principal amount at an average price of 101.6% of par. The
funds for this redemption were provided by the Revolving Credit Agreement and
resulted in an extraordinary loss of $748,000 net of an income tax benefit of
$403,000. The remaining principal amount is due April 2002.
On June 7, 1993, the Company issued $100,000,000 principal amount of 9 3/4%
Subordinated Notes due June 1, 2005. Interest is payable semi-annually. The
notes are redeemable in whole or in part at the Company's option, initially at
104.875% of their principal amount on or after June 1, 1999 and reducing to 100%
of their principal amount on or after June 1, 2002.
The indentures relating to the subordinated notes and the Revolving Credit
Agreement contain restrictions on the payment of cash dividends. At October 31,
1998, $42,995,000 of retained earnings were free of such restrictions.
The fair value of the Subordinated Notes is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The combined fair value
of the Subordinated Notes is estimated at $136,329,000 as of October 31, 1998.
8. RETIREMENT PLAN
In December 1982, the Company established a defined contribution savings
and investment retirement plan. Under such plan there are no prior service
costs. All associates are eligible to participate in the retirement plan and
employer contributions are based on a percentage of associate contributions.
Plan costs charged to operations amount to $1,523,000, $1,520,000, and
$1,406,000 for the years ended October 31, 1998, 1997, and 1996, respectively.
9. INCOME TAXES
Income Taxes payable (receivable) including deferred benefits, consists of
the following:
October October
31, 1998 31, 1997
--------- ---------
(In Thousands)
State income taxes:
Current.......................... $ 2,897 $ 1,387
Deferred......................... (1,495) (1,586)
Federal income taxes:
Current.......................... 36 (1,611)
Deferred......................... (8,769) (10,755)
--------- ---------
Total.......................... $ (7,331) $(12,565)
========= =========
The provision for income taxes is composed of the following charges
(benefits):
Year Ended
-----------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(In Thousands)
Current income tax expense:
Federal(1)....................... $ 9,177 $ (2,381) $ 7,205
State............................ 3,484 2,051 1,768
--------- --------- ---------
12,661 (330) 8,973
--------- --------- ---------
Deferred income tax expense:
Federal.......................... 1,989 (4,569) (822)
State............................ 88 (255) (432)
--------- --------- ---------
2,077 (4,824) (1,254)
--------- --------- ---------
Total.......................... $ 14,738 $ (5,154) $ 7,719
========= ========= =========
(1) The current federal income tax expense includes a tax benefit of $403,00
in the year ended October 31, 1998 relating to the loss on the
redemption of Subordinated Notes that was reported as an extraordinary
item in the "Statement of Operations."
The deferred tax liabilities or assets have been recognized in the
consolidated balance sheets due to temporary differences as follows:
October October
31, 1998 31, 1997
-------- ---------
(In Thousands)
Deferred tax assets:
Deferred income...................... $ 40 $ 321
Maintenance guarantee reserves....... 701 481
Provision to reduce inventory to
net realizable value............... 136 95
Inventory impairment loss............ 6,077 8,621
Uniform capitalization of overhead... 2,967 3,972
Post development completion costs.... 1,379 509
State net operating loss
carryforwards...................... 27,205 22,227
Other................................ 843 639
-------- ---------
Total.............................. 39,348 36,865
Valuation allowance(2)............... (27,205) (22,227)
-------- ---------
Deferred tax assets.................. 12,143 14,638
-------- ---------
Deferred tax liabilities:
Deferred interest.................... 31 31
Installment sales.................... 137 208
Accelerated depreciation............. 1,711 2,058
-------- ---------
Total............................... 1,879 2,297
-------- ---------
Net deferred tax assets................ $ 10,264 $ 12,341
======== =========
(2) The net change in the valuation allowance of $4,978,000 results from an
increase in the separate company state net operating losses that may
not be fully utilized.
The effective tax rates varied from the expected rate. The sources
of these differences were as follows:
Year Ended
------------------------------
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
Computed "expected" tax rate...... 35.0 % (35.0)% 35.0 %
State income taxes, net of Federal
income tax benefit.............. 6.0 % 11.6 % 3.2 %
Company owned life insurance...... (1.6)% (6.2)% (2.9)%
Low income housing tax credit..... (3.4)% (11.2)% (5.3)%
Other............................. .7 % (1.9)% .9 %
-------- -------- --------
Effective tax rate................ 36.7 % (42.7)% 30.9 %
======== ======== ========
The Company has state net operating loss carryforwards for financial
reporting and tax purposes of $359,000,000 due to expire between the years
October 31, 1999 and October 31, 2013.
10. REDUCTION OF INVENTORY TO FAIR VALUE
In accordance with FAS 121, the Company records impairment losses on
inventories related to communities under development when events and
circumstances indicate that they may be impaired and the undiscounted cashflows
estimated to be generated by those assets are less than their related carrying
amounts. As of October 31, 1998, 1997 and 1996, inventory with a carrying amount
of $3,077,000, $33,143,000 and $2,240,000, respectively, was written down by
$353,000, $9,258,000 and $1,289,000, respectively, to its fair value. This was
based on the Company's evaluation of the expected revenue, cost to complete
including interest and selling cost. The writedown during the year ended
October 31, 1998 was attributed to one community in Florida where homes are
being discounted to accelerate sales. The writedowns during the year ended
October 31, 1997 were attributable to numerous communities in Florida after the
Company decided to reduce its investment in that state and two communities in
New Jersey resulting from a product type change and unforeseen development
costs.
Also in accordance with FAS 121, the Company records impairment losses on
inventories and long-lived assets held for sale when the related carrying amount
exceeds the fair value less the selling cost. As of October 31, 1998, 1997 and
1996, inventory and commercial properties with a carrying amount of $4,629,000,
$32,008,000 and $12,031,000, respectively, was written down by $2,588,000,
$12,690,000 and $3,795,000, respectively, to its fair value. The writedowns
during the year ended October 31, 1998 were attributed to one parcel of land
being sold as lots and a commercial retail center parcel of land which incurred
higher land development costs, both in New Jersey. The writedowns during the
year ended October 31, 1997 were attributable to four residential parcels of
land in Florida, one residential parcel of land in New Jersey, one multi-use
commercial parcel of land in New Jersey and two Florida commercial facilities
with expansion land attached to one facility. During the year ended October 31,
1998, when these commercial facilities were liquidated, the Company recovered
the carrying value. During the years ended October 31, 1998, 1997 and 1996, the
Company recovered the carrying value or recognized nominal losses on the land
held for sale which was subsequently liquidated.
The total aggregate impairment losses, which are presented in the
consolidated statements of operations, on the inventory held for development and
the land or commercial facilities held for sale were $2,941,000, $21,948,000,
and $1,608,000 for the years ended October 31, 1998, 1997 and 1996,
respectively.
On the statement of operations the lines entitled "Homebuilding - Inventory
impairment loss" and "Investment Properties - Provision for impairment loss"
also include writeoffs of options including approval, engineering and
capitalized interest costs. During the year ended October 31, 1998, the
writeoffs amounted to $2,091,000 and zero, respectively. During the year ended
October 31, 1997, the writeoffs amounted to $4,761,000 and $1,756,000,
respectively. During 1998, the Company did not exercise three residential
options because of changes in local market conditions and difficulties in
obtaining government approvals. During 1997, the Company decided not to
exercise three residential options due to environmental problems or the
property's proforma did not produce an adequate return on investment
commensurate with the risk and one commercial property option because an anchor
tenant with an acceptable credit rating could not be found.
11. TRANSACTIONS WITH RELATED PARTIES
The Company's Board of Directors has adopted a general policy providing
that it will not make loans to officers or directors of the Company or their
relatives at an interest rate less than the interest rate at the date of the
loan on six month U.S. Treasury Bills, that the aggregate of such loans will not
exceed $3,000,000 at any one time, and that such loans will be made only with
the approval of the members of the Company's Board of Directors who have no
interest in the transaction. At October 31, 1998 and 1997 included in
receivables, deposits and notes are related party receivables from officers and
directors amounted to $2,117,000 and $1,889,000, respectively. Notwithstanding
the policy stated above, the Board of Directors of the Company concluded that
the following transactions were in the best interests of the Company.
The Company provides property management services to various limited
partnerships including one partnership in which Mr. A. Hovnanian, Chief
Executive Officer, President and a Director of the Company, is a general
partner, and members of his family and certain officers and directors of the
Company are limited partners. At October 31, 1998, no amounts were due the
Company by these partnerships.
12. STOCK OPTION PLAN
The Company has a stock option plan for certain officers and key employees.
Options are granted by a Committee appointed by the Board of Directors. The
exercise price of all stock options must be at least equal to the fair market
value of the underlying shares on the date of the grant. Options granted prior
to May 14, 1998 vest in three equal installments on the first, second and third
anniversaries of the date of the grant. Options granted on or after May 14,
1998 vest in four equal installments on the third, fourth, fifth and sixth
anniversaries of the date of the grant. All options expire after ten years
after the date of the grant. In addition, during the year ended October 31,
1997 each of the three outside directors of the Company were granted options to
purchase 5,000 shares at the same price and terms as those granted to officers
and key employees. Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
October Exercise October Exercise October Exercise
31, 1998 Price 31, 1997 Price 31, 1996 Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
Pro forma information regarding net income and earnings per share is
required under the fair value method of Financial Accounting Standards No. 123
("FAS 123") "Accounting for Stock-Based compensation" and is to be calculated as
if the Company had accounted for its stock options under the fair value method
of FAS 123. The fair value for these options is established at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1998 and 1997: risk- free interest rate of 4.5% and
5.8%, respectively; divided yield of zero; volatility factor of the expected
market price of the Company's common stock of 0.46 and 0.47, respectively; and a
weighted-average expected life of the option of 7.5 and 7.0 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective imput assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and are not
likely to be representative of the effects on reported net income for future
years, if applicable.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
Year Ended
-----------------------------------
October October October
31, 1998 31, 1997 31, 1996(1)
---------- ---------- -----------
Pro forma net income (loss)............. $ 25,107 $ (7,131) $ 17,287
========== ========== ===========
Pro forma basic earnings (loss)
per share............................. $ 1.15 $ (0.32) $ 0.75
========== ========== ===========
Pro forma diluted earnings (loss)
per share............................. $ 1.14 $ (0.32) $ 0.75
========== ========== ===========
(1) No options were granted in 1996, as a result pro forma amounts equal actual
per the income statement.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company.
As of October 31, 1998 and 1997, respectively, the Company is obligated
under various performance letters of credit amounting to $6,934,000 and
$6,834,000.
14. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the years ended October 31,
1998, 1997, and 1996 is as follows:
Three Months Ended
-----------------------------------------
October July April January
31, 1998 31, 1998 30, 1998 31, 1998
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $267,542 $248,125 $212,320 $213,960
Expenses........................... $255,268 $235,735 $204,710 $204,942
Income before income taxes and
extraordinary loss............... $ 12,274 $ 12,390 $ 7,610 $ 9,018
State and Federal income tax....... $ 4,762 $ 4,677 $ 2,597 $ 3,105
Extraordinary loss from extinguish-
ment of debt, net of income taxes $ (748)
Net income......................... $ 6,764 $ 7,713 $ 5,013 $ 5,913
Per Share Data:
Basic:
Income per common share before
extraordinary loss............. $ 0.35 $ 0.35 $ 0.23 $ 0.27
Extraordinary loss............... $ (.03)
Net Income....................... $ 0.32 $ 0.35 $ 0.23 $ 0.27
Weighted average number of
common shares outstanding...... 21,661 21,785 21,848 21,834
Assuming Dilution:
Income per common share
before extraordinary loss...... $ 0.34 $ 0.35 $ 0.23 $ 0.27
Extraordinary loss............... $ (.03)
Net Income....................... $ 0.31 $ 0.35 $ 0.23 $ 0.27
Weighted average number of
common shares outstanding...... 21,896 22,018 22,042 21,985
Three Months Ended(1)
------------------------------------------
October July April January
31, 1997 31, 1997 30, 1997 31, 1997
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $315,150 $205,107 $143,526 $120,353
Expenses........................... $302,494 $196,105 $173,453 $124,208
Income before income taxes and
extraordinary loss............... $ 12,656 $ 9,002 $(29,927) $ (3,855)
State and Federal income tax....... $ 4,930 $ 2,782 $(10,785) $ (2,081)
Net income (loss).................. $ 7,726 $ 6,220 $(19,142) $ (1,774)
Per Share Data:
Basic:
Net income (loss) per common
share.......................... $ 0.35 $ 0.27 $ (0.83) $ (.08)
Weighted average number of
common shares outstanding...... 22,098 22,409 22,925 23,037
Assuming dilution:
Net income (loss) per common
share......................... $ 0.35 $ 0.27 $ (0.83) $ (.08)
Weighted average number of
common shares outstanding...... 22,195 22,485 22,999 23,121
Three Months Ended(1)
-----------------------------------------
October July April January
31, 1996 31, 1996 30, 1996 31, 1996
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $342,049 $195,812 $152,464 $117,139
Expenses........................... $323,474 $191,280 $150,881 $116,823
Income before income taxes......... $ 18,575 $ 4,532 $ 1,583 $ 316
State and Federal income tax....... $ 6,146 $ 1,422 $ 335 $ (184)
Net income......................... $ 12,429 $ 3,110 $ 1,248 $ 500
Per Share Data:
Basic:
Net income per common share..... $ 0.54 $ 0.13 $ 0.06 $ 0.02
Weighted average number of
common shares outstanding...... 23,037 23,037 23,037 23,037
Assuming dilution:
Net income per common share..... $ 0.54 $ 0.13 $ 0.06 $ 0.02
Weighted average number of
common shares outstanding...... 23,120 23,115 23,112 23,093
(1) The earnings per share for the years ended October 31, 1997 and 1996 have
been restated as required to comply with FAS 128. For further discussion
of earnings per share and the impact of FAS 128, see Note 1.
<TABLE>
SCHEDULE XI
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
OCTOBER 31, 1998
<CAPTION>
Gross Amounts (A)(B)(C)
---------------------------
Building/ Tax Accumulated
Description Land Improvements Total Basis Depreciation
- --------------------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1 Hidden Meadows $ 544,000 $ 5,750,000 $ 6,294,000 $ 6,294,000 $854,000
Ocean Twp, NJ
Senior Rentals
2 Norfolk Village 640,000 5,573,000 6,213,000 6,213,000 618,000
Mahwah, NJ
Senior Rentals
3 Hovnanian Corp. Center 0 9,127,000 9,127,000 12,143,000 0
North Brunswick, NJ
Land/Land Improvement
Approval & Flex Building
Under Construction
4 Land Improvement and
Approval Costs
Merrimack Commercial 75,000 100,000 175,000 300,000 0
Merrimack, NH
Land/Land Improvement
Costs
5 NB Theatre 3,000 5,372,000 5,375,000 8,314,000 0
North Brunswick,NJ
Land/Land
Improvement
6 Allaire 50,000 56,000 106,000 106,000 0
Wall, NJ
Land/Land Improvement
7 Wall Town Center 3,200,000 645,000 2,807,000 4,883,000 0
Wall, NJ
Land/Land Improvement
----------- ------------ ----------- ----------- ------------
$ 4,512,000 $ 26,623,000 $30,097,000 $38,253,000 $1,472,000
=========== ============ =========== =========== ============
(A) Fiscal Year Construction Completed:
1 - 1993
2 - 1995
3 through 7 - not completed
</TABLE>
SCHEDULE XI (CONCLUDED)
(B) Depreciable Life:
40 years - Depreciation expense was $446,000 for the year ended
October 31, 1998.
Depreciation expense was $1,854,000 for the year ended October 31, 1997.
Depreciation expense was $2,665,000 for the year ended October 31, 1996.
Depreciation expense was $1,973,000 for the year ended October 31, 1995.
(C) Items marked 4 through 7 consist of land improvement, building
construction, and approval costs on land held for future development.
Balance - October 31, 1995 84,119,000
Additions: Improvements 1,115,000
Deletions: Cost of rental condominiums sold (152,000)
Cost of commercial center sold (8,457,000)
Cost of commercial land sold (114,000)
Cost of inventory sold (9,000)
-------------
Balance - October 31, 1996 76,502,000
Additions: Improvements 193,000
Land purchase and development 11,100,000
Deletions: Transfer to inventory (258,000)
Cost of commercial center sold (12,283,000)
Provision for impairment loss (14,446,000)
-------------
Balance - October 31, 1997 60,808,000
Additions: Land purchase and development 5,466,000
Deletions: Cost of commercial properties sold (33,522,000)
Cost of inventory sold (1,617,000)
Provision for impairment loss (1,038,000)
-------------
Balance - October 31, 1998 $ 30,097,000
=============
Balance at October 31, 1998 is reported on the consolidated balance sheet as
investment properties held for sale and held for investment.
EXHIBIT 21
SUBSIDIARY LISTING
K. Hovnanian Equities, Inc.
EXC, Inc.
K. Hovnanian Companies of North Carolina, Inc.
KHL, Inc.
Hovnanian Texas, Inc.
Hovnanian Georgia, Inc.
Hovnanian Financial Services III, Inc.
K. Hovnanian Mortgage USA, Inc.
Hovnanian Financial Services IV, Inc.
K. Hovnanian Developments of New Jersey, Inc.
KHE Finance, Inc.
K. Hov International, Inc.
Hovnanian Financial Services II, Inc.
New Fortis Investment
Hovnanian Financial Services I, Inc.
K. Hovnanian Enterprises, Inc.
Hovnanian Pennsylvania, Inc.
Recreational Development Co., Inc.
K. Hovnanian Marine, Inc.
K. Hovnanian Aviation, Inc.
K. Hovnanian Companies of North Jersey, Inc.
K. Hovnanian at Montville, Inc.
K. Hovnanian at Wayne, Inc.
K. Hovnanian at Mahwah IV, Inc
K. Hovnanian at Morris II, Inc.
K. Hovnanian at Mahwah II, Inc.
K. Hovnanian at Mahwah III, Inc.
K. Hovnanian @ Northern Westchester, Inc.
K. Hovnanian at Hanover, Inc.
K. Hovnanian at Montville II, Inc.
K. Hovnanian @ Newark Urban Renewal Corp.I, Inc.
K. Hovnanian @ Newark I, Inc.
K. Hovnanian @ Newark Urban Renewal Corp.II, Inc.
Jersey City Danforth CSO
K. Hovnanian @ Newark Urban Renewal Corp.III, Inc.
K. Hovnanian @ Newark Urban Renewal Corp. IV, Inc.
K. Hovnanian @ Newark Urban Renewal Corp. V, Inc.
K. Hovnanian at Jersey City I, Inc.
K. Hovnanian at Jersey City II, Inc.(Phase 2A)
K. Hovnanian at Jersey City III, Inc.
K. Hovnanian at Mahwah VI, Inc.
K. Hovnanian at Jersey City II, Inc.(Phase 2B)
K. Hovnanian at Mahwah VII, Inc.
K. Hovnanian at Montclair, N.J., Inc.
K. Hovnanian at Horizon Heights, Inc.
K. Hovnanian at Reservoir Ridge, Inc.
K. Hovnanian at Mahwah V, Inc.
K. Hovnanian at Mahwah VIII, Inc.
K. Hovnanian of North Jersey, Inc. (Hudson River)
Montego Bay I Acquisition Corp., Inc.
Montego Bay Associates Limited I, LP (MBAI)
Montego Bay II Acquisition Corp., Inc.
Montego Bay Associates Limited II, LP (MBAII)
0515 Co., Inc.
K. Hovnanian at North Brunswick IV, Inc.
K. Hovnanian Properties of North Brunswick IV, Inc.
Arrow Properties, Inc.
KHIPE, Inc.
Pine Brook Company, Inc.
K. Hovnanian Properties of North Brunswick II, Inc.
K. Hovnanian Properties of Galloway, Inc.
K. Hovnanian @ Cedar Grove I, Inc.
K. Hovnanian @ Cedar Grove II, Inc.
K. Hovnanian Properties of Piscataway, Inc.
K. Hovnanian Properties of North Brunswick I, Inc.
Molly Pitcher Renovations, Inc.
K. Hovnanian Properties of East Brunswick II,Inc.
K. Hovnanian Investment Properties of N.J., Inc.
K. Hovnanian Investment Properties, Inc.
Hovnanian Properties of Atlantic County, Inc.
K. Hovnanian Properties of Newark Urban Renewal Corporation, Inc.
K. Hovnanian Properties of Hamilton, Inc.
K. Hovnanian Properites of Franklin, Inc.
K. Hovnanian Properties of North Brunswick III, Inc.
K. Hovnanian Properties of Franklin II, Inc.
K. Hovnanian at Jacksonville, Inc.
K. Hovnanian Properties of North Brunswick V, Inc.
K. Hovnanian Properties of Wall, Inc.
K.Hovnanian at Pompano Beach, Inc.
Hovnanian Properties of Lake Worth, Inc.
Landarama, Inc.
K. Hovnanian Companies Northeast, Inc.
Parthenon Group
Minerva Group
K. Hovnanian Companies of Central Jersey, Inc.
K. Hovnanian Real Estate Investment, Inc.
K. Hovnanian at Princeton, Inc.
K. Hovnanian at South Brunswick III, Inc.
K. Hovnanian at South Brunswick IV, Inc.
K. Hovnanian at Plainsboro I, Inc.
K. Hovnanian at Plainsboro II, Inc.
K. Hovnanian at Klockner Farms, Inc.
K. Hovnanian at South Brunswick II, Inc.
K. Hovnanian at Hopewell III, Inc.
K. Hovnanian at Hopewell I, Inc.
K. Hovnanian at South Brunswick, Inc.
K. Hovnanian at East Windsor I, Inc.
K. Hovnanian at North Brunswick II, Inc.
K. Hovnanian at North Brunswick III, Inc.
K. Hovnanian at Hopewell II, Inc.
K. Hovnanian at Somerset VIII, Inc.
K. Hovnanian at Lawrence Square, Inc.
Dryer Associates, Inc.
K. Hovnanian at East Brunswick V, Inc.
K. Hovnanian at Bernards II, Inc.
K. Hovnanian at Bridgewater III, Inc.
K. Hovnanian at Plainsboro III, Inc.
K. Hovnanian at Somerset V, Inc.
K. Hovnanian at Somerset VI, Inc.
Eastern Title Agency, Inc.
K. Hovnanian Mortgage, Inc.
Governors Abstract
Eastern National Title Insurance Agency, Inc.
Founders Title Agency, Inc.
K. Hovnanian Companies North Central Jersey, Inc.
K. Hovnanian at Bedminster, Inc.
K. Hovnanian at Bridgewater IV, Inc.
K. Hovnanian at Branchburg III, Inc.
K. Hovnanian at Spring Ridge, Inc.
K. Hovnanian at Bridgewater V, Inc.
K. Hovnanian at Readington, Inc.
K. Hovnanian at Branchburg II, Inc.
K. Hovnanian at Bridgewater II, Inc.
K. Hovnanian at Branchburg I, Inc.
K. Hovnanian Companies Jersey Shore, Inc.
K. Hovnanian at Wall Township, Inc.
K. Hovnanian at Galloway VIII, Inc.
K. Hovnanian at Dover Township, Inc.
K. Hovnanian at Galloway VII, Inc.
K. Hovnanian at Tinton Falls II, Inc.
K. Hovnanian at Ocean Township, Inc.
K. Hovnanian at Wall Township II, Inc.
K. Hovnanian at Wall Township III, Inc.
K. Hovnanian at Holmdel Township, Inc.
K. Hovnanian at Wall Township IV, Inc.
K. Hovnanian at Wall Township V, Inc.
K. Hovnanian at Atlantic City, Inc.
K. Hovnanian at Ocean Township II, Inc.
K. Hovnanian at Ocean Township, Inc.
K. Hovnanian at Marlboro Township, Inc.
K. Hovnanian at Howell Township, Inc.
K. Hovnanian at Howell Township II, Inc.
K. Hovnanian at Woodbury Oaks, Inc.
K. Hovnanian at Freehold Township, Inc.
K. Hovnanian at Lakewood, Inc.
K. Hovnanian Companies of the Delaware Valley, Inc.
K. Hovnanian Co. of Delaware Valley, Inc. Brokerage Company
K. Hovnanian at Lower Saucon, Inc
K. Hovnanian at Perkiomen I, Inc.
K. Hovnanian at Montgomery I, Inc.
K. Hovnanian at Upper Merion, Inc.
K. Hovnanian at Perkiomen II, Inc.
K. Hovnanian Companies of South Jersey, Inc.
K. Hovnanian at Valleybrook, Inc.
Kings Grant Evesham Corp.
K. Hovnanian at Burlington, Inc.
K. Hovnanian at Medford I, Inc.
K. Hovnanian at The Reserve @ Medford, Inc
K. Hovnanian at Kings Grant I, Inc.
K. Hovnanian at Valleybrook II, Inc.
K. Hovnanian Real Estate of Florida, Inc.
Hovnanian Developments of Florida, Inc.
K. Hovnanian Companies of Florida, Inc.
Hovnanian of Palm Beach II, Inc.
Hovnanian of Palm Beach III, Inc.
Hovnanian of Palm Beach IV, Inc.
Hovnanian of Palm Beach V, Inc.
Hovnanian of Palm Beach VI, Inc.
Hovnanian of Palm Beach VII, Inc.
Hovnanian of Palm Beach VIII, Inc.
Hovnanian of Palm Beach IX, Inc.
Hovnanian at Tarpon Lakes I, Inc.
Hovnanian at Tarpon Lakes II, Inc.
Hovnanian at Tarpon Lakes III, Inc.
K. Hovnanian at Pasco I, Inc.
K. Hovnanian at Ft. Myers I, Inc.
K. Hovnanian at Palm Beach XI, Inc.
K. Hovnanian at Jensen Beach, Inc.
Hovnanian of Palm Beach X, Inc.
K. Hovnanian at Martin Downs I, Inc.
K. Hovnanian at Jacksonville I, Inc.
K. Hovnanian at Ft. Myers II, Inc.
K. Hovnanian at Lawrence Grove, Inc.
K. Hovnanian at Jacksonville II, Inc.
K. Hovnanian of Palm Beach XIII, Inc.
Hovnanian of Palm Beach, Inc.
K. Hovnanian at Half Moon Bay, Inc.
K. Hovnanian at Woodridge Estates, Inc.
Pike Utilities, Inc.
Tropical Service Builders, Inc.
K. Hovnanian at Embassy Lakes, Inc.
K. Hovnanian at Delray Beach II, Inc.
K. Hovnanian at Orlando I, Inc.
K. Hovnanian at Orlando II, Inc.
K. Hovnanian at Orlando III, Inc.
K. Hovnanian at Martin Downs II, Inc.
K. Hovnanian at Orlando IV, Inc.
K. Hovnanian Properties of Orlando, Inc.
K. Hovnanian at Delray Beach I, Inc.
K. Hovnanian at Pasco II, Inc.
K. Hovnanian at Port St. Lucie I, Inc.
K. Hovnanian at Delray Beach, Inc.
Eastern National Title Insurance Agency, Inc.
K. Hovnanian Mortgage of Florida, Inc.
South Florida Residential Title Agency, Inc.
Eastern National Title Insurance Agency I, Inc.
Western Financial Services, Inc.
r. e. Scott Mortgage co. of Florida, Inc.
New K. Hovnanian Developments of Florida, Inc.
New K. Hovnanian Companies of Florida, Inc.
K. Hovnanian at Fairway Views, Inc.
K. Hovanian at Lake Charleston, Inc.
K. Hovnanian at Carolina Country Club I, Inc.
K. Hovnanian at Chapel Trail, Inc.
K. Hovnanian at Winston Trails, Inc.
K. Hovnanian at Lakes of Boca Raton, Inc.
K. Hovnanian at Lake Charleston II, Inc.
K. Hovnanian at Lake Charleston III, Inc.
K. Hovnanian at Carolina Country Club II, Inc.
K. Hovnanian at Winston Trails, Inc.
K. Hovnanian at Pembroke Isles, Ins.
K. Hovnanian at Carolina Country Club III, Inc.
K. Hovnanian at Coconut Creek, Inc.
K. Hovnanian at Polo Trace, Inc.
K. Hovnanian Companies of New York, Inc.
K. Hovnanian at Westchester, Inc.
K. Hovnanian at Peekskill, Inc.
K. Hovnanian at Washingtonville, Inc.
K. Hovnanian at Mahopac, Inc.
K. Hovnanian at Carmel, Inc.
K. Hovnanian Developments of New York, Inc.
Cedar Hill Water Corporation
Cedar Hill Sewer Corporation
R.C.K. Community Management Co., Inc.
K. Hovnanian Companies of Massachusetts, Inc.
K. Hovnanian at Merrimack, Inc.
K. Hovnanian at Merrimack II, Inc.
K. Hovnanian at Taunton, Inc.
New England Community Management Co., Inc.
K. Hovnanian Cos. of Metro Washington, Inc.
K. Hovnanian at Ashburn Village, Inc.
K. Hovnanian at Woodmont,, Inc.
K. Hovnanian at Sully Station, Inc.
K. Hovnanian at Bull Run, Inc.
K. Hovnanian at Montclair, Inc.
K. Hovnanian at River Oaks, Inc.
K. Hovnanian at Holly Crest, Inc.
K. Hovnanian at Woodmont, Inc.
K. Hovnanian at Montclair, Inc.(Montclair Condos)
K. Hovnanian at Fair Lakes, Inc.
K. Hovnanian at Ashburn Village, Inc.
K. Hovnanian at Park Ridge, Inc.
K. Hovnanian at Belmont, Inc.
K. Hovnanian at Fair Lakes Glen, Inc.
K. Hovnanian Developments of Metro Washington, Inc.
K. Hovnanian at River Oaks, Inc.
K. Hovnanian at Montclair, Inc. (Montclair Laing)
K. Hovnanian Companies of California, Inc.
K. Hovnanian at Clarkstown, Inc.
K. Hovnanian at West Orange, Inc.
K. Hovnanian at Wayne III, Inc.
K. Hovnanian at Wayne IV, Inc.
K. Hovnanian at Wayne V, Inc.
K. Hovnanian at Hackettstown, Inc.
K. Hovnanian at Spring Mountain, Inc.
K. Hovnaian at East Windsor II, Inc.
K. Hovnanian Treasure Coast, Inc.
K. Hovnanian at La Terraza, Inc.
K. Hovnanian at Highland Vineyards, Inc.
K. Hovnanian Companies of Southern California II, Inc.
K. Hovnanian at Vail Ranch, Inc.
K. Hovnanian at Carmel Del Mar, Inc.
K. Hovnanian at Calabria, Inc.
K. Hovnanian Developments of California, Inc.
K. Hovnanian at Ballantrae, Inc.
Ballantrae Home Sales, Inc.
K. Hovnanian at Hunter Estates, Inc.
K. Hovnanian Developments of Maryland, Inc.
K. Hovnanian Companies of Maryland, Inc.
K. Hovnanian at Seneca Crossing, Inc.
K. Hovnanian at Exeter Hills, Inc.
K. Hovnanian Southeast Florida, Inc.
K. Hovnanian Florida Region, Inc.
K. Hovnanian at East Brunswick VI, Inc.
K. Hovnanian at Berlin, Inc.
K. Hovnanian at Bedminster II, Inc.
K. Hovnanian at Marlboro Township II, Inc.
K. Hovnanian at Inverrary I, Inc.
K. Hovnanian at Mahwah IX, Inc.
K. Hovnanian at Hopewell IV, Inc.
K. Hovnanian at Northlake, Inc.
K. Hovnanian at Castile, Inc.
K. Hovnanian at Tierrasanta, Inc.
K. Hovnnaian at Bridgewater VI, Inc.
K. Hovnanian at Preston, Inc.
K. Hovnanian at Bernards III, Inc.
K. Hovnanian at Wayne VI, Inc.
K. Hovnanian at Rancho Cristianitos, Inc.
K. Hovnanian at La Trovata, Inc.
K. Hovnanian at Watchung Reserve, Inc.
K. Hovnanian at Windsong East Brunswick, Inc.
K. Hovnanian at South Brunswick V, Inc.
K. Hovnanian at Wall Township III, Inc.
K. Hovnanian at Tannery Hill, Inc.
K. Hovnanian at Upper Freehold Township I, Inc.
K. Hovnanian at Jefferson, Inc.
K. Hovnanian at Hershey's Mill, Inc.
K. Hovnanian at Bernards VI, Inc.
K. Hovnanian at Port Imperial North, Inc.
K. Hovnanian at Hopewell V, Inc.
K. Hovnanian at Hopewell VI, Inc.
K. Hovnanian at Manalapan II, Inc.
K. Hovnanian at Union Township, Inc.
K. Hovnanian at Wayne VII, Inc.
K. Hovnanian at Scotch Plains II, Inc.
K. Hovnanian at Thornbury, Inc.
K. Hovnanian at Cameron Chase, Inc.
K. Hovnanian at Marlboro Township IV, Inc.
K. Hovnanian at Port Imperial Urban Renewal, Inc.
K. Hovnanian at East Whiteland, Inc.
K. Hovnanian at Stonegate, Inc.
K. Hovnanian Companies of Southern California, Inc.
K. Hovnanian at Crestline, Inc.
K. Hovnanian at Sycamore, Inc.
K. Hovnanian at Saratoga, Inc.
K. Hovnanian at Sone Canyon, Inc.
K. Hovnanian at Chaparral, Inc.
K. Hovnanian at Ocean Walk, Inc.
K. Hovnanian at Maplewood, Inc.
K. Hovnanian at Tuxedo, Inc.
K. Hovnanian at Bridgeport, Inc.
K. Hovnanian at Stonegate, Inc. (California)
K. Hovnanian at Lower Saucon II, Inc.
K. Hovnanian at Barrington, Inc.
K. Hovnanian at The Glen, Inc.
K. Hovnanian at Hampton Oaks, Inc.
K. Hovnanian at Summerwood, Inc.
K. Hovnanian at Chester I, LLC
K. Hovnanian at West Windsor, LLC
K. Hovnanian at Barnards V, LLC
K. Hovnanian's Four Seasons of the Palm Beaches, Inc.
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 14,792
<SECURITIES> 0
<RECEIVABLES> 29,490
<ALLOWANCES> 0
<INVENTORY> 375,733
<CURRENT-ASSETS> 536,618
<PP&E> 31,919
<DEPRECIATION> 15,088
<TOTAL-ASSETS> 589,102
<CURRENT-LIABILITIES> 232,839
<BONDS> 154,871
<COMMON> 237
0
0
<OTHER-SE> 201,155
<TOTAL-LIABILITY-AND-EQUITY> 589,102
<SALES> 904,280
<TOTAL-REVENUES> 941,947
<CGS> 748,941
<TOTAL-COSTS> 866,232
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,423
<INCOME-PRETAX> 41,292
<INCOME-TAX> 15,141
<INCOME-CONTINUING> 25,403
<DISCONTINUED> 0
<EXTRAORDINARY> (748)
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<NET-INCOME> 25,403
<EPS-PRIMARY> 1.17
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</TABLE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
Form S-3 No. 333-51991 of Hovnanian Enterprises, Inc. and K. Hovnanian
Enterprises, Inc. of our report dated December 15, 1998, with respect to the
consolidated financial statements and schedules of Hovnanian Enterprises, Inc.
included in this Annual Report Form 10-K for the year ended October 31, 1998.
/S/ ERNST & YOUNG LLP
Ernst & Young LLP
New York, New York
January 14, 1999
HOVNANIAN ENTERPRISES, INC.
1989 Stock Option Plan
(As amended and restated May 4, 1990,
and amended through May 14, 1998)
The purpose of the 1983 Stock Option Plan (the "Plan") is to make stock
options for Common Stock of Hovnanian Enterprises, Inc. (the "Company")
available to certain officers and key employees of the Company and its
subsidiaries to give them a greater personal interest in the success of the
enterprise and an added incentive to continue and advance in their
employment.
1. AMOUNT AND SOURCE OF STOCK: Except as otherwise permitted pursuant
to paragraph 8 hereof, the total number of shares of the Company's Common Stock
which may be issued under the Plan shall not exceed 1,000,000. These shares may
be authorized and unissued shares or issued and reacquired shares, as the Board
of Directors of the Company (the "Board of Directors") may from time to time
determine. The number of shares of the Company's Common Stock available for
grant of options under the Plan shall be decreased by the sum of the number of
shares with respect to which options have been issued and are then outstanding
and the number of shares issued upon exercise of options, and shall be increased
due to the expiration or termination of options which have not been exercised.
2. EFFECTIVE DATE AND TERM OF PLAN: This Plan (as amended and
restated) shall, subject to shareholder approval, be effective May 4, 1990.
Options may be granted under the Plan on or before May 3, 2000.
3. ADMINISTRATION: The Plan shall be administered by a committee of
the Board of Directors (the "Committee") consisting of not less than three
directors of the Company to be appointed by, and to serve at the pleasure of,
the Board of Directors. The Committee shall have full power to interpret the
Plan and to establish and amend rules and regulations for its administration.
The Board of Directors may from time to time appoint members of the Board of
Directors in substitution for or in addition to members previously appointed and
may fill vacancies in the Committee. The Board of Directors or the Committee
may establish a subcommittee (the "Subcommittee") to award options to such key
employees (other than executive officers) as the Subcommittee shall determine
subject to such limitations as may be set by the Board of Directors. The
Subcommittee shall consist of one or more directors of the
Company who shall be appointed by the Board of Directors or by the Committee and
who may but need not be members of the Committee.
4. SELECTION: From time to time the Committee shall determine, from
among the key employees of the Company or its subsidiaries, which of such
employees shall be granted options under the Plan (the "Optionees"), the number
of shares subject to each option, and whether each option shall comply with the
provisions of Section 422A of the Internal Revenue Code of 1986,
as amended (the "Code") and be designated an Incentive Stock Option.
5. TERMS OF OPTIONS: (a) Option Period and Exercise of Options: The
Committee shall determine in its discretion the dates after which each option
granted under the Plan (an "Option") may be exercised in whole or in part and
the date after which such Option may no longer be exercised (the "Termination
Date"), which date shall not be later than the day preceding the
tenth anniversary of the date when granted. The Committee may, in its sole
discretion, accelerate the date after which an Option may be exercised in whole
or in part. In exercising an Option, the Optionee may exercise less than the
full installment available to the Optionee, but the Optionee must exercise the
Option in full shares of Common Stock of the Company. An Option
which has not been exercised on or prior to its Termination Date shall be
cancelled.
(b) Option Price: The purchase price per share of Common Stock
purchased under Options granted pursuant to the Plan (the "Option Price") shall
be determined by the Committee and shall not be less than the Fair Market Value
of the Common Stock of the Company on the date the Option is granted. The "Fair
Market Value" of the Common Stock of the Company on the date of the Company's
initial public offering of Common Stock shall be
the public offering price. On any subsequent date, the "Fair Market Value"
shall be deemed, for all purposes under this Plan, to be the mean between the
high and low sale prices of the Common Stock of the Company reported as having
occurred on any Stock Exchange on which the Company's Common Stock may be listed
and traded on the date the Option is granted, or if there is no such
sale on that date, then on the last preceding date on which such a sale was
reported. The Option Price shall be paid in full upon the exercise of the
Option be certified or bank cashier's check payable to the order of the Company,
by the surrender or delivery to the Company of shares of its Common Stock or by
any other means acceptable to the Committee, and the stock purchased shall
thereupon be promptly delivered, provided, however, that the
Committee may, in its discretion, require that an Optionee pay to the Company at
the time of exercise, or at such later date as the Company shall specify, such
amount as the Committee deems necessary to satisfy the Company's obligation to
withhold Federal, state or local income or other taxes incurred by reason of the
exercise or the transfer of shares thereupon. No Optionee
or his legal representatives, legatees or distributees, as the case may be, will
be deemed to be a holder of any shares pursuant to exercise of an Option until
the date of the issuance of a stock certificate to him for such shares. Any
cash proceeds of the sale of stock subject to Options are to be added to the
general funds of the Company and used for its general corporate purposes. In no
event shall the Option Price be less than the par value of a share of Common
Stock of the Company.
(c) Special Rules Regarding Incentive Stock Options Granted to Certain
Employees: Notwithstanding the provisions of subsections (a) and (b) of this
section, no Incentive Stock Option shall be granted to any employee who, at the
time the Option is granted, owns (directly, or within the meaning of Section
425(d) of the Code) more than ten percent of the total combined voting power of
all classes of stock of the Company or any subsidiary corporation, unless (a)
the Option Price under them Option is at least 110 percent of the Fair Market
Value of the stock subject to the Option at the time of the grant and (b) the
Option by its terms is not exercisable after the expiration of five years from
the date it is granted.
(d) Escrow Account and Special Rules Regarding Incentive Stock Options
Granted Prior to May 4, 1990: Notwithstanding the foregoing paragraphs, the
Optionee may, in the sole discretion of the Committee, purchase the full number
of shares of Common Stock with respect to which the Option has been granted,
subject to the condition that any shares of Common Stock transferred to the
Optionee under installments of the Option which would not have been currently
exercisable (in accordance with the terms of the preceding paragraph) shall be
placed in an escrow account ("Escrow Account"). Shares held in the Escrow
Account shall be registered in the name of the Optionee, and all dividend,
voting, liquidation and other rights of ownership with respect to shares held in
the Escrow Account shall belong to the Optionee, except that the Optionee may
not sell, pledge, or otherwise transfer such shares. As shares held in the
Escrow Account would have become exercisable (in accordance with the terms of
the preceding paragraph) they shall be withdrawn from the Escrow Account. The
Optionee shall have free and clear title to all shares withdrawn from the Escrow
Account, including the
right to sell, pledge or otherwise transfer the shares. Upon termination of the
Optionee's employment with the Company or a subsidiary thereof, all shares held
in the Escrow Account on the date of termination of employment shall be subject
to a right of repurchase in favor of the Company. The period of the right of
repurchase shall run for 30 days commencing with the date the Optionee's
employment with the Company or a subsidiary thereof terminates. During the
period of the right of repurchase the Company shall have the right to repurchase
from the Optionee at the Option Price all shares held in the Escrow Account.
Notwithstanding the foregoing paragraphs, Incentive Stock Options
granted prior to May 4, 1990 shall, by their terms, not be exercisable while
there is outstanding any Incentive Stock Option which was granted, before the
granting of such option, to such Optionee to purchase stock in the Company or in
a corporation which at the time of the granting of such option is a subsidiary
corporation of the Company or in a predecessor corporation of the Company or any
such subsidiary. For the purpose of this paragraph an Incentive Stock Option is
outstanding until it is exercised in full or expires by reason of lapse of time.
For the purposes of this paragraph the term
"predecessor corporation" means a corporation which was a party to a transaction
described in Section 425(a) of the Code (irrespective of whether a substitution
or assumption under such section was in fact effected) with the Company or a
corporation which at the time the new Incentive Stock Option is granted is a
related corporation of the Company or a predecessor corporation of any such
corporations.
(e) Nontransferability of Options: Each Option shall, during the
Optionee's lifetime, be exercisable only by the Optionee, and neither it nor any
right hereunder shall be transferable otherwise than by will or the laws of
descent and distribution or be subject to attachment, execution or other
similar process. In the event of any attempt by the Optionee to alienate,
assign, pledge, hypothecate or otherwise dispose of his Option or of any right
hereunder, except as provided for herein, or in the event of any levy or any
attachment, execution or similar process upon the rights or interest hereby
conferred, the Company may terminate his Option by notice to the Optionee and it
shall thereupon become null and void.
(f) Cessation of Employment of Optionee: If, prior to the Termination
Date, the Optionee ceases to be employed by the Company or a subsidiary thereof
(otherwise than by reason of death or disability within the meaning of Code
section 22(e)(3)), each Option to the extent not previously exercised shall
immediately terminate together with all other rights hereunder.
(g) Death or Disability of Optionee: In the event of the death of the
Optionee, prior to the Termination Date, while employed by the Company or a
subsidiary thereof, each Option shall remain exercisable prior to the
Termination Date for a period of one year after the date of the Optionee's death
by the person or persons to whom the Optionee's rights under each Option
shall pass by will or by the applicable laws of descent and distribution to the
extent that the Optionee was entitled to exercise the Option on the date of his
death, and thereafter all Options to the extent not previously exercised shall
terminate together with all other rights hereunder. If prior to the Termination
Date the Optionee ceases to be employed by the Company or a subsidiary thereof
by reason of disability within the meaning of Code section 22(e)(3), each Option
to the extent not previously exercised shall remain exercisable prior to the
Termination Date for a period of one year from the date of cessation of
employment, and thereafter all Options to the extent not previously exercised
shall terminate together with all other rights hereunder.
6. LIMITATION ON GRANTS OF INCENTIVE STOCK OPTIONS: With respect to
Incentive Stock Options granted prior to May 4, 1990, the aggregate fair market
value (determined as of the date the Option is granted) of the Common Stock for
which any employee may be granted Incentive Stock Options in any calendar year
under this and any other stock option plan maintained by the Company and/or its
subsidiaries shall not exceed (a) $100,000 plus (b) the "carryover amount" for
that calendar year. The "carryover amount" with respect to a calendar year
shall equal (a) one-half of the sum of the excess, for each of the preceding
three calendar years (excluding years prior to 1981) of $100,000 over the fair
market value (determined as of the time the option
is granted) of the Common Stock for which the employee was granted incentive
stock options under this and any other stock option plan maintained by the
Company and/or its subsidiaries, minus (b) the amount of any such excess used as
a carryover amount in the grant of incentive stock options in any preceding
calendar year. For purposes of this paragraph, the amount of options granted in
any calendar year shall be treated as first using up the $100,000 limitation for
that year and any additional grants shall be treated as using up unused
carryover amounts in the order of the calendar years in which the carryover
amounts arose.
With respect to Incentive Stock Options granted subsequent to December
31, 1986, the aggregate fair market value (determined as of the date the Option
is granted) of the Common Stock with respect to which Incentive Stock Options
are exercisable for the first time in any calendar year under this and any other
stock option plan maintained by the Company and/or its subsidiaries shall not
exceed $100,000.
7. INSTRUMENT OF GRANT: The terms and conditions of each Option
granted under the Plan shall be set forth in an instrument designated "Incentive
Stock Option Agreement" substantially in the form of Exhibit 1 attached hereto
and made a part hereof if the Committee determines that such Option shall be an
Incentive Stock Option under the provisions of section 422A of the Code.
Otherwise, the terms and conditions of each Option granted under the Plan shall
be set forth in an instrument designated "Stock Option Agreement" substantially
in the form of Exhibit 2 attached hereto and made a part hereof. The Committee
may make such modifications in the provisions of the instrument of grant as it
shall deem advisable or as may be required by any provision of the Code.
8. ADJUSTMENTS UPON CHANGES IN STOCK: If (a) the Company shall at any
time be involved in a transaction to which subsection (a) of section 425 of the
Code is applicable; (b) the Company shall declare a dividend payable in, or
shall subdivide or combine, its Common Stock; or (c) any other event shall occur
which in the judgment of the Board of Directors necessitates action by way of
adjusting the terms of the outstanding Options, the Board of Directors shall
forthwith take any such action as in its judgment shall be necessary to preserve
for the Optionees rights substantially proportionate to the rights existing
prior to such event and to the extent that such action shall include an increase
or decrease in the number of shares of Common Stock
subject to outstanding Options, the number of shares available under paragraph 1
above shall be increased or decreased, as the case may be, proportionately. The
judgment of the Board of Directors with respect to any matter referred to in
this paragraph shall be conclusive and binding upon each Optionee.
9. AMENDMENTS AND TERMINATION: The Board of Directors may amend or
terminate the Plan but may not (i) without the consent of the Optionee alter or
impair any rights or obligations under any Option theretofore granted or (ii)
without the approval of the holders of a majority of the shares of the Company
voting thereon make any alteration in the Plan, except as provided in
paragraph 8 hereof, which operates:
(a) to increase the total number of shares which may be issued under
the Plan;
(b) to extend the term during which Options may be granted under the
Plan;
(c) to permit the exercise of an Option after the date on which such
Option would otherwise terminate pursuant to the terms hereof;
(d) to reduce the Option Price per share to less than the Fair Market
Value of the Common Stock on the date the Option is granted; or
(e) to change the class of persons eligible to receive Options under
the Plan.
10. PLAN DOES NOT CONFER EMPLOYMENT OR STOCKHOLDER RIGHTS: The right
of the Company or any subsidiary thereof to terminate (whether by dismissal,
discharge, retirement or otherwise) the Optionee's employment with it at any
time at will, or as otherwise provided by any agreement between the Company and
the Optionee, is specifically reserved. Neither the Optionee nor
any person entitled to exercise the Optionee's rights in the event of the
Optionee's death shall have any rights of a stockholder with respect to the
shares subject to each Option, except to the extent that a certificate for such
shares shall have been issued upon the exercise of each Option as provided for
herein.
11. DEFINITION: As used in the Plan the term "subsidiary" shall have
the meaning assigned to such term in Section 425 of the Code and in addition
shall include both foreign and domestic subsidiaries and any corporation which
becomes a subsidiary after the date of adoption of the Plan.
Amended and Restated
Credit Agreement
Dated as of July 29, 1998
among
K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc. and Certain
Subsidiaries Thereof Named Herein,
The Financial Institutions Named Herein,
and
PNC Bank, National Association
as Agent
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . .1
1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . .1
1.2. Use of Defined Terms. . . . . . . . . . . . . . . . . 22
1.3. Accounting Terms. . . . . . . . . . . . . . . . . . . 22
SECTION 2. AMOUNT AND TERMS OF LOANS. . . . . . . . . . . . . 23
2.1. Revolving Credit Commitments. . . . . . . . . . . . . 23
2.2. Swing Loan Commitment . . . . . . . . . . . . . . . . 23
2.3. Notes . . . . . . . . . . . . . . . . . . . . . . . . 23
2.4. Drawdowns . . . . . . . . . . . . . . . . . . . . . . 24
2.5. Payments of Principal and Interest; Computation of Interest25
2.6. Use of Loan Proceeds. . . . . . . . . . . . . . . . . 25
2.7. Prepayments . . . . . . . . . . . . . . . . . . . . . 25
2.8. Letter of Credit Line . . . . . . . . . . . . . . . . 26
2.9. Participation in Letters of Credit. . . . . . . . . . 30
SECTION 3. INTEREST AND FEES. . . . . . . . . . . . . . . . . 32
3.1. Elected Interest Rate . . . . . . . . . . . . . . . . 32
3.2. [INTENTIONALLY OMITTED] . . . . . . . . . . . . . . 33
3.3. Computation of Interest Period. . . . . . . . . . . . 33
3.4. Default Rate. . . . . . . . . . . . . . . . . . . . . 33
3.5. Commitment Fee. . . . . . . . . . . . . . . . . . . . 34
3.6. Facility Fee. . . . . . . . . . . . . . . . . . . . . 34
3.7. Illegality. . . . . . . . . . . . . . . . . . . . . . 34
3.8. Applicable Interest Limitations . . . . . . . . . . . 35
3.9. Libor Indemnification . . . . . . . . . . . . . . . . 35
3.10. Capital Adequacy . . . . . . . . . . . . . . . . 35
3.11. Taxes. . . . . . . . . . . . . . . . . . . . . . 36
SECTION 4. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 37
SECTION 5. CONDITIONS . . . . . . . . . . . . . . . . . . . . 41
5.1. Initial Conditions. . . . . . . . . . . . . . . . . . 41
5.2. Continuing Conditions . . . . . . . . . . . . . . . . 42
SECTION 6. COVENANTS. . . . . . . . . . . . . . . . . . . . . 42
6.1. Affirmative Covenants . . . . . . . . . . . . . . . . 42
6.2. Negative Covenants. . . . . . . . . . . . . . . . . . 46
SECTION 7. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . 52
SECTION 8. THE BANKS. . . . . . . . . . . . . . . . . . . . . 55
8.1. Non-reliance; Notice of Default . . . . . . . . . . . 55
8.2. Enforcement of Remedies . . . . . . . . . . . . . . . 55
8.3. Payments Prior to Acceleration. . . . . . . . . . . . 55
8.4. Payments After Acceleration . . . . . . . . . . . . . 56
8.5. Sharing of Payments . . . . . . . . . . . . . . . . . 56
8.6. Pro Rata Sharing of Revolving Credit Loan Losses. . . 56
8.7. Participations; Assignments of Commitments; Additional Banks;
Substitution of
Banks . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 9. THE AGENTS . . . . . . . . . . . . . . . . . . . . 58
9.1. Appointment . . . . . . . . . . . . . . . . . . . . . 58
9.2. Nature of Duties. . . . . . . . . . . . . . . . . . . 59
9.3. Rights, Exculpation, Etc. . . . . . . . . . . . . . . 59
9.4. Reliance. . . . . . . . . . . . . . . . . . . . . . . 60
9.5. Indemnification . . . . . . . . . . . . . . . . . . . 60
9.6. The Agent Individually. . . . . . . . . . . . . . . . 60
9.7. Successor Agent . . . . . . . . . . . . . . . . . . . 61
9.8. Managing Agents . . . . . . . . . . . . . . . . . . . 61
SECTION 10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . 61
10.1. Amendments . . . . . . . . . . . . . . . . . . . 61
10.2. No Waiver; Cumulative Remedies . . . . . . . . . 62
10.3. Notices. . . . . . . . . . . . . . . . . . . . . 62
10.4. Payment of Expenses and Taxes. . . . . . . . . . 63
10.5. Set-Off. . . . . . . . . . . . . . . . . . . . . 63
10.6. Counterparts; Effective Date . . . . . . . . . . 64
10.7. Incorporation of Exhibits and Schedules. . . . . 64
10.8. Titles and Headings. . . . . . . . . . . . . . . 64
10.9. No Third Party Beneficiaries . . . . . . . . . . 64
10.10. Construction . . . . . . . . . . . . . . . . . . 64
10.11. Entire Agreement . . . . . . . . . . . . . . . . 64
10.12. Survival of Representations and Warranties, etc. 65
10.13. Successors and Assigns . . . . . . . . . . . . . 65
10.14. Governing Law. . . . . . . . . . . . . . . . . . 65
10.15. Waiver of Jury Trial . . . . . . . . . . . . . . 65
Amended And Restated
Credit Agreement
THIS AGREEMENT dated as of the 29th day of July, 1998 among K. HOVNANIAN
ENTERPRISES, INC., a New Jersey corporation, (the "Company"), HOVNANIAN
ENTERPRISES, INC., a Delaware corporation ("Hovnanian"), the subsidiaries of
Hovnanian listed on the signature pages hereto (each, together with Hovnanian, a
"Guarantor", and collectively, the "Guarantors"), and PNC Bank, National
Association ("PNC"), First Union National Bank ("First Union"), NationsBank,
National Association ("NationsBank"), First National Bank of Boston ("Bank of
Boston"), Bank of America National Trust and Savings Association ("B of A"), The
First National Bank of Chicago ("First of Chicago"), Comerica Bank ("Comerica")
and Credit Lyonnais New York Branch ("Credit Lyonnais"), and Guaranty Federal
Bank F.S.B. ("Guaranty Federal"), (each such banking institution individually
referred to as a "Bank" and collectively as the "Banks"), and PNC Bank, National
Association, as Agent for the Banks ("Agent").
In consideration of the premises, covenants and representations contained
herein, and for other good and valuable consideration, the parties hereto agree
as follows:
SECTION 1. DEFINITIONS
1.1. Defined Terms. As used in this Agreement the following terms shall
have the following meanings, unless the context otherwise requires:
"Adjusted Base Rate Margin" means the Initial Base Rate Margin as
adjusted by 10 basis points in the case of each negative Rating Change to the
fourth tier or the fifth tier and each positive Rating Change to the fourth tier
or the third tier by one of the Rating Agencies in such agency's Implied Senior
Debt Rating applicable to the Company.
"Adjusted Commitment Fee" shall mean the Initial Commitment Fee as
adjusted, up or down, by 2 basis points for each Rating Change (other than, if
applicable, a Rating Change between the first and second tiers, in which case
the adjustment shall be 1-1/4 basis points) by one of the Rating Agencies in
such agency's Implied Senior Debt Rating applicable to the Company.
"Adjusted Letter of Credit Fee" shall mean the Initial Letter of Credit
Fee as adjusted, up or down, by 10 basis points for each Rating Change by one of
the Rating Agencies in such agency's Implied Senior Debt Rating applicable to
the Company.
"Adjusted Libor Margin" means the Initial Libor Margin as adjusted, up
or down, by 10 basis points for each Rating Change by one of the Rating Agencies
in such agency's Implied Senior Debt Rating applicable to the Company.
"Adjusted Operating Income" shall mean, at any time, Consolidated Net
Income before (i) Income Taxes, (ii) any Interest Expense , (iii) Letter of
Credit Fees, (iv) depreciation, (v) amortization of assets, and without
duplication (vi) Net Income attributable to the Mortgage Subsidiaries, (vii) Net
Income from Income Producing Property Subsidiaries, and (viii) Net Income
attributable to the Finance Subsidiaries, plus (a) cash Distributions received
from Mortgage Subsidiaries, (b) cash Distributions received from Income
Producing Property Subsidiaries, (c) cash Distributions received from Finance
Subsidiaries, and (d) non-cash valuation reserves.
"Adjusted Tangible Net Worth" shall mean, at any time, the excess, if
any, of (i) Shareholders' Equity of Hovnanian and the Consolidated Subsidiaries
(excluding any Consolidated Subsidiary which has initiated a relevant event
covered by Subsection 7(f) hereof) at such date plus the outstanding principal
amount of Subordinated Debt, over (ii) all amounts carried on the books of
Hovnanian and its Consolidated Subsidiaries (without duplication) for (a) any
write-up in the Book Value of any assets of Hovnanian or any of the Consolidated
Subsidiaries resulting from a revaluation thereof subsequent to the Starting
Date, (b) the Cost of Investments in excess of the Market Value at time of
acquisition of assets acquired by Hovnanian or any Consolidated Subsidiaries,
(c) all Intangibles of Hovnanian and the Consolidated Subsidiaries, (d) all
Investments in Finance Subsidiaries, (e) all Investments in Mortgage
Subsidiaries (including, but not limited to, the Permitted Guarantee of a
Warehouse Line of Credit for such Subsidiaries and loans by Hovnanian or a
Consolidated Subsidiary to any Mortgage Subsidiary), (f) the amount by which the
Cost of securities held as Investments exceeds the Market Value of such
securities, (g) all equity in residential Inventory Properties encumbered by
non-recourse mortgages, (h) Investments in Income Producing Property
Subsidiaries, including, but not limited to, Permitted Guarantees of
Indebtedness on Income Producing Properties, and (i) Investments in Joint
Ventures.
"Affiliate" of any Person shall mean any other Person controlling,
controlled by or under common control with such Person. For purposes of this
definition, "control" shall include the ownership of 10% or more of the voting
securities or interests of such Person.
"Agent" shall mean PNC Bank, National Association, in its capacity as
Agent for the Banks hereunder pursuant to Section 9 and not in its capacity as a
Bank, and any successor Agent appointed pursuant to Section 9.
"Agreement" shall mean this Amended and Restated Credit Agreement, as
the same may from time to time be further amended or supplemented.
"Alternate Minimum Equity" shall mean the lesser of (i) Minimum Equity
as of the end of the most recent Equity Issuance Quarter (taking into account
the proceeds realized from the Minimum Equity Securities Issuance) and (ii)
Adjusted Tangible Net Worth as of the end of the most recent Equity Issuance
Quarter less Subordinated Debt less $25,000,000.
"Alternative Interest Rates" shall mean the Base Rate and the Libor
Based Rate.
"Applicable Base Rate Margin" means the Initial Base Rate Margin or, as
the case may be, the Adjusted Base Rate Margin.
"Applicable Commitment Fee" shall mean the Initial Commitment Fee or,
as the case may be, the Adjusted Commitment Fee.
"Applicable Letter of Credit Fee" shall mean the Initial Letter of
Credit Fee or, as the case may be, the Adjusted Letter of Credit Fee.
"Applicable Libor Margin" means the Initial Libor Margin or, as the
case may be, the Adjusted Libor Margin.
"Bank" shall mean each of the Banks identified at the beginning of this
Agreement as a "Bank" and each Additional Bank and their respective successors
and their respective assigns pursuant to the provisions of Subsection 8.7
hereof; all of which are referred to herein collectively as the "Banks."
"Base Minimum Equity" shall mean (i) Adjusted Tangible Net Worth less
Subordinated Debt each as of the Starting Date, less (ii) $25,000,000.
"Base Rate" shall mean that rate of interest per annum which is equal
to the Index Rate, plus the Applicable Base Rate Margin. Notwithstanding
anything to the contrary contained in, or any calculation otherwise resulting
from, the definition of Adjusted Base Rate Margin, the Base Rate shall at no
time be less than the Index Rate.
"Bona Fide Sales Contract" shall mean any binding sales agreement with
a third party where all conditions precedent and contingencies have been
satisfied and where the purchaser has paid a non-refundable deposit in an amount
equal to or exceeding the standard deposit in the particular market area.
"Book Value" shall mean the amount carried on the books and records of
Hovnanian and its Consolidated Subsidiaries determined in accordance with GAAP
consistently applied.
"Borrowing Base" shall mean, at any date, an amount equal to the sum of
(i) 30% (or (a) 45% if outstanding Other Senior Homebuilding Indebtedness
exceeds $50,000,000 but is less than $100,000,000 and the Company has repaid the
Indebtedness referenced in clause (i) of the definition of Subordinated Debt and
(b) 55% if outstanding Other Senior Homebuilding Indebtedness equals or exceeds
$100,000,000 and the Company has repaid the Indebtedness referenced in clause
(i) of the definition of Subordinated Debt) of Unencumbered Land Under
Development; (ii) 70% of Unencumbered Unsold Lots/Homes Under Construction, and
(iii) 100% of Unencumbered Sold Land/Lots/Homes, excluding, in each case, the
cost of any land upon which Hovnanian holds a purchase option until such time as
Hovnanian actually exercises the option and takes title to the property. In the
event of any dispute as to the amount of the Borrowing Base at any time, the
determination of the Banks shall be conclusive and binding on the Company,
absent manifest error.
"Business Day" shall mean, with respect to each Bank, a day other than
a Saturday, Sunday or other day on which commercial banks in the State of New
Jersey are required or authorized by law to close.
"Capital Stock Retirement" shall mean any redemption, acquisition,
purchase or other retirement of any capital stock or ownership interest of
Hovnanian (including preferred stock) or of any warrants, rights or other
options to purchase such capital stock or ownership interest, other than upon
any conversion thereof into or exchange thereof for other shares of Hovnanian's
capital stock.
"Capitalized Lease" shall mean a lease under which the obligations of
the lessee would, in accordance with GAAP consistently applied, be included in
determining total liabilities as shown on the liability side of a balance sheet
of the lessee.
"Capitalized Lease Obligations" shall mean the amount of the liability
reflecting the aggregate discounted amount of future payments under all
Capitalized Leases calculated in accordance with GAAP consistently applied and
Statement of Financial Accounting Standards No. 13.
"Cash Flow" means Adjusted Operating Income plus any decrease in
Inventory which is not the result of a valuation reserve (or minus any increase
in Inventory).
"Cash Flow Coverage Ratio" shall mean, as of the end of any fiscal
quarter of Hovnanian, the ratio of the last twelve months of Cash Flow divided
by four times the Fixed Charges for the last quarter of such twelve-month
period.
"Commitment Fee" shall mean the fee payable by the Company pursuant to
Subsection 3.5 hereunder.
"Commitment Termination Date" shall mean, with respect to each Bank,
July 31, 2001, provided, however, that on or before April 30 of each year, each
Bank will review its respective commitment and, in its sole discretion, may
extend the Commitment Termination Date for a period of twelve months, provided,
that in no event shall the Commitment Termination Date be so extended unless and
until all Banks agree to such extension in writing.
"Compliance Letter" shall mean a letter submitted to each Bank
periodically in accordance with this Agreement which shall be certified by the
principal financial officer or principal accounting officer of the Company and
shall indicate that (i) the Company, Hovnanian and all Consolidated Subsidiaries
are in compliance with the covenants of this Agreement, (ii) all advances have
been utilized only for the purposes allowed by this Agreement, and (iii) there
are no new Consolidated Subsidiaries, or if there are new Consolidated
Subsidiaries, list those and, unless they have already done so, or are not
required to do so, have them execute an agreement joining in the guarantee
("Joinder Agreement") and enclose said Joinder Agreement. Each Compliance
Letter shall also include a list of all outstanding Letters of Credit, setting
forth the issuance date, the issuing LOC Bank, the face amount, the beneficiary
and expiration date for each Letter of Credit. Each Compliance Letter shall be
accompanied by the relevant financial statements required by Subsection 6.1(a)
hereof and shall be in the form of Exhibit F attached hereto.
"Consolidated Net Income" means the aggregate Net Income of Hovnanian
and all Consolidated Subsidiaries.
"Consolidated Subsidiaries" shall mean, at any date, the Subsidiaries
and other entities whose assets and liabilities are consolidated with those of
Hovnanian in its consolidated financial statements as of such date in accordance
with GAAP. A list of all Consolidated Subsidiaries as of the date hereof is
attached as Schedule 1 to this Agreement.
"Contingent Obligation" shall mean, as to any Person, any obligation of
such Person guaranteeing or in effect guaranteeing any Indebtedness, leases,
Distributions or other obligations ("primary obligations") of any other Person
(other than Hovnanian or any Restricted Consolidated Subsidiary) (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, any obligation of such Person, whether or not contingent, (a) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (b) to advance or supply funds (i) for the purchase
or payment of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any primary
obligation of the ability of the primary obligor to make payment of such primary
obligation or (d) otherwise to assure or to hold harmless the owner of such
primary obligation against loss in respect thereof; provided, however, that
Contingent Obligation shall not include (A) endorsements of instruments for
deposit or collection in the ordinary course of business or (B) guarantees of
surety, maintenance and performance bonds, and letters of credit delivered in
lieu of surety guarantees or maintenance and performance bonds by Hovnanian or
any Consolidated Subsidiary in the ordinary course of business and consistent
with past practice.
"Controlled Group" shall mean the "controlled group of corporations",
as that term is defined in Section 414 of the Internal Revenue Code, of which
Hovnanian and the Consolidated Subsidiaries are a part from time to time.
"Core States" shall mean (i) New Jersey, (ii) Pennsylvania, (iii) North
Carolina, (iv) Florida, (v) New York, (vi) Virginia/Washington DC, (vii)
California, (viii) Poland, and (ix) any additional state in which Hovnanian and
the Consolidated Subsidiaries have sales (evidenced by Bona Fide Sales
Contracts) after the Starting Date aggregating at least $4,000,000.
"Cost" shall mean the cost of any asset used for the purposes of
determining Book Value, determined in accordance with GAAP consistently applied.
"Defaulting Bank" shall mean any Bank which has defaulted in its
obligation to make any Loan or issue any Letter of Credit hereunder or make any
payment to an LOC Bank.
"Default Rate" shall have the meaning set forth in Section 3.4 hereof.
"Distribution" shall mean any dividend or distribution by a corporation
or other entity with respect to its capital stock or other ownership interests,
whether in cash, securities (including common and preferred stock) or other
property.
"Distributions from Income Producing Property Subsidiaries" shall mean
any and all cash that is transferred from an Income Producing Property
Subsidiary to a Restricted Subsidiary, Hovnanian, EXC, Inc. or to the Company.
"Distributions from Mortgage Subsidiaries" shall mean any and all cash
that is transferred from a Mortgage Subsidiary to a Restricted Subsidiary,
Hovnanian, EXC, Inc. or the Company.
"Elected Interest Rate" shall mean, with respect to each Interest
Period, the Alternative Interest Rate designated pursuant to Section 3 hereof
with respect to such Interest Period.
"Encumbrance" shall mean any security interest, lien, pledge, bailment
(in the nature of a pledge or for purposes of security), mortgage, deed of
trust, the grant of a power to confess judgment, conditional sales and title
retention agreement (including any lease in the nature thereof), charge,
encumbrance, assignment, trust, or other similar arrangement or interest in real
or personal property.
"ERISA" shall mean, at any time, the Employment Retirement Security Act
of 1974 and the regulations thereunder, all as in effect at such time.
"ERISA Affiliate" as applied to any entity shall mean any Person which
is a member of a Controlled Group of which that entity is a member.
"Equity Issuance Quarter" shall mean any fiscal quarter of Hovnanian in
which a Minimum Equity Securities Issuance has occurred.
"Equity Securities" shall mean (i) common stock, (ii) preferred stock,
and (iii) options, warrants, and rights to acquire common stock or preferred
stock.
"Event of Default" shall mean any of the events specified in Section 7
hereof, provided that there has been satisfied any requirement, if applicable
thereunder, in connection with such event for the giving of notice or the lapse
of time, or both.
"Excess Other Senior Homebuilding Indebtedness" shall mean the amount,
if any, from time to time by which the aggregate Other Senior Homebuilding
Indebtedness exceeds $100,000,000.
"Excluded Subsidiary" shall mean, for the purpose of Subsections 7(f)
and (g) hereof, any Consolidated Subsidiary the sole tangible asset of which is
an Income Producing Property which is subject to a non-recourse mortgage.
"Facility Commitments" shall mean the Revolving Credit Commitments and
the Swing Line Commitment.
"Facility Fee" shall mean the fee payable by the Company pursuant to
Subsection 3.6 herein.
"Facility Percentage" shall mean, with respect to any Bank at any time,
the amount of such Bank's Facility Commitment divided by the aggregate amount of
the Facility Commitments of all of the Banks, as set forth on Schedule 9
attached hereto.
"Federal Funds Rate" means on any one day the weighted average of the
rate on overnight Federal Funds Transactions with members of the Federal Reserve
System only arranged by Federal Funds Brokers as published as of such day by the
Federal Reserve Bank of New York or if not so published, the rate then used by
first class banks in extending overnight loans to other first class banks.
"Finance Subsidiary(ies)" shall mean each and every Consolidated
Subsidiary other than Mortgage Subsidiaries engaged in the business of financing
the sales of properties made by other Consolidated Subsidiaries. All
Consolidated Subsidiaries which are Finance Subsidiaries as of the date hereof
are noted on Schedule 1 attached hereto.
"Fixed Charges" shall mean, as of the end of any fiscal quarter of
Hovnanian, an amount equal to the sum of (i) Interest Incurred on the Loans over
such fiscal quarter, (ii) Interest Incurred on the Subordinated Debt over such
fiscal quarter, (iii) 50% of the Interest Incurred on all Purchase Money
Mortgages over such fiscal quarter, (iv) Interest Incurred over such fiscal
quarter on all Other Senior Homebuilding Indebtedness, (v) Letter of Credit Fees
accrued over such fiscal quarter, and (vi) Interest Incurred on all Capitalized
Leases over such fiscal quarter.
"Fixed Charge Coverage Ratio" shall mean, as of the end of any fiscal
quarter of Hovnanian, the ratio of the last twelve months of Adjusted Operating
Income divided by four times the Fixed Charges for the last quarter of such
twelve-month period.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time and applicable to
Hovnanian and the Consolidated Subsidiaries.
"Governmental Authority" shall mean any nation or government, any state
or other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Guarantee" shall mean any guarantee of the payment or performance of
any Indebtedness or other obligation and any other arrangement whereby credit is
extended to one obligor on the basis of any promise of another Person, whether
that promise is expressed in terms of an obligation to pay the Indebtedness of
such obligor, or to purchase an obligation owed by such obligor, or to purchase
goods and services from such obligor pursuant to a contract, or to maintain the
capital, working capital, solvency or general financial condition of such
obligor, whether or not any such arrangement is listed on the balance sheet of
such other Person, or referred to in a footnote thereto, but shall not include
endorsements of items for collection in the ordinary course of business.
"Guaranties" shall mean, collectively, the joint and several guaranties
of the Guarantors to the Banks substantially in the respective forms of
guaranties attached hereto as Exhibits E-1 through E-4; each of which is also
sometimes referred to herein individually as a "Guaranty."
"Guarantors" shall mean Hovnanian and all Homebuilding Subsidiaries,
all Operating Property Subsidiaries and all Other Corporate Subsidiaries as
specified in Schedule 1 attached hereto, as such Schedule 1 may be supplemented
from time to time in accordance with Subsection 6.1(i) to include Homebuilding
Subsidiaries, Operating Property Subsidiaries and Other Corporate Subsidiaries
of Hovnanian created or acquired after the date of this Agreement, each of which
is also sometimes referred to herein individually as a "Guarantor."
"Homebuilding Indebtedness" shall mean, at any time, an amount equal to
the sum of (i) Senior Homebuilding Indebtedness, and (ii) the unpaid principal
balance of Subordinated Debt. Homebuilding Indebtedness shall not include (i)
non-recourse Indebtedness on Income Producing Properties, (ii) Indebtedness of
any Mortgage Subsidiary, (iii) Indebtedness of any Finance Subsidiary, and (iv)
non-recourse Purchase Money Mortgages.
"Homebuilding Subsidiary(ies)" shall mean each and every Consolidated
Subsidiary whose business is the construction or management of residential
housing for sale. Notwithstanding anything to the contrary herein, K. Hovnanian
Mortgage, USA, Inc., shall be deemed to be a Homebuilding Subsidiary (and not a
member of any other Subsidiary Group) for the purposes of this Agreement. All
Consolidated Subsidiaries which are Homebuilding Subsidiaries as of the date
hereof are noted on Schedule 1 attached hereto.
"Implied Senior Debt Rating" means the rating, if any, designated by
one of the Rating Agencies as its Implied Senior Debt Rating for the Company.
"Income Producing Property(ies)" shall mean, at any date, any
residential or commercial property owned by Hovnanian or any Consolidated
Subsidiary of which 50% or more of the total square feet is leased or held for
purposes of leasing primarily to unaffiliated third parties; each of which is
also sometimes referred to herein individually as an "Income Producing
Property."
"Income Producing Property Subsidiary(ies)" shall mean each and every
Consolidated Subsidiary whose business is the owning of Income Producing
Property. All Consolidated Subsidiaries which are Income Producing Property
Subsidiaries as of the date hereof are noted on Schedule 1 attached hereto.
"Income Taxes" shall mean the amount required by GAAP to be recorded as
a current or deferred expense for federal, state and local income taxes, whether
or not actually paid.
"Indebtedness" of any Person as of any date shall mean without
duplication, (i) all obligations, unconditional, contingent or otherwise, of
such Person for borrowed money or for the deferred purchase price of property or
services (including, without limitation, all obligations, unconditional,
contingent or otherwise, of such Person in connection with any letters of
credit, letter of credit facilities, acceptance facilities or other similar
facilities and in connection with any agreement to purchase, redeem, exchange,
convert or otherwise acquire for value any capital stock of such Person, or any
warrants, rights or options to acquire such capital stock, now or hereafter
outstanding), except any such obligation that constitutes a trade payable
arising in the ordinary course of business not overdue by more than 90 days or
that is being contested in good faith by appropriate proceedings, if and to the
extent any of the foregoing "indebtedness" would appear as a liability upon a
balance sheet of such Person prepared on a consolidated basis in accordance with
GAAP, (ii) all obligations of such Person evidenced by bonds, notes, debentures
or other similar instruments, (iii) all indebtedness created or arising under
any conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), except any such indebtedness that constitutes a trade
payable arising in the ordinary course of business not overdue by more than 90
days or that is being contested in good faith by appropriate proceedings, if and
to the extent any of the foregoing indebtedness would appear as a liability upon
a balance sheet of such Person prepared on a consolidated basis in accordance
with GAAP, (iv) all Capitalized Lease Obligations of such Person, (v) all
indebtedness of the types referred to in clause (i), (ii), (iii) or (iv) above
secured by (or for which the holder of such indebtedness has an existing right,
contingent or otherwise, to be secured by) any lien, upon or in property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness, and (vi) any Contingent Obligation (including any
obligation which is the economic equivalent of a Contingent Obligation) with
respect to any item of this definition (regardless of whether such item would
appear on a balance sheet); provided, however, that Indebtedness shall not
include
guarantees of surety, maintenance and performance bonds, and letters of credit
delivered in lieu of surety guarantees or maintenance and performance bonds by
Hovnanian or any Consolidated Subsidiary in the ordinary course of business
consistent with past practice.
"Indentures" shall mean, collectively, the Indentures described in
clauses (i) and (ii) of the definition of "Subordinated Debt."
"Index Rate" shall mean the higher of (i) the Prime Rate of Agent or
(ii) the Federal Funds Rate plus 25 basis points.
"Initial Commitment Fee" shall mean 32 basis points as of the date of
this Agreement.
"Initial Letter of Credit Fee" shall mean 132 basis points as of the
date of this Agreement.
"Initial Libor Margin" shall mean 145 basis points as of the date of
this Agreement.
"Initial Base Rate Margin" shall mean 0 basis points as of the date of
this Agreement.
"Intangibles" shall mean all patents, patent applications, copyrights,
trademarks, trade names, goodwill, experimental or organizational expenses and
other like items of Hovnanian and the Consolidated Subsidiaries treated as
intangibles under GAAP.
"Interest Expense" shall mean, with respect to any fiscal period of
Hovnanian, the amount reported in accordance with GAAP as a current expense for
interest for Hovnanian and the Consolidated Subsidiaries. Interest Expense
shall be calculated as (i) Interest Incurred on any Indebtedness in the fiscal
period, less (ii) the amount of Interest capitalized during the period with
respect to Inventory, plus (iii) the amount of previously capitalized interest
which was expensed during the period in conjunction with the sale of Inventory,
each in accordance with GAAP.
"Interest Incurred" shall mean, with respect to any Indebtedness and
any fiscal period of Hovnanian, the amount of interest, fees or other related
payments (other than repayments of principal) determined, in accordance with
GAAP, as a cost attributable to the period.
"Interest Payment Date" shall mean the first day of each month except,
in the case of the Libor Based Rate, it shall mean the final day of the
applicable Interest Period.
"Interest Period" shall mean each period ascertained in accordance with
Section 3 hereof.
"Interim Compliance Letter" shall mean a letter to be submitted to each
Bank as required by Subsection 6.1(a)(ix) hereof and in the form of Exhibit I
attached hereto.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986,
as amended.
"Inventory or Inventory Property(ies)" shall mean, at any date, the sum
of (i) Land in Planning, (ii) Land Under Development, (iii) Unsold Lots/Homes
Under Construction and (iv) Sold Land/Lots/Homes.
"Investments" shall mean amounts paid or agreed to be paid by way of
investment in or purchase of stock, securities, liabilities, properties, or
assets of, or contributed to, other Persons, determined in accordance with GAAP
consistently applied. An Investment in any Consolidated Subsidiary shall be
equal to the Shareholders' Equity of such Subsidiary determined on a
consolidating basis plus any outstanding loans or advances by the Company,
Hovnanian or another Guarantor to such Consolidated Subsidiary plus any
guarantees by the Company, Hovnanian or another Guarantor of the Indebtedness of
such Subsidiary. An Investment in any Joint Venture shall be equal to the sum
of (i) outstanding loans and advances to said Joint Venture by the Company,
Hovnanian and any other Guarantor, (ii) guarantees of Indebtedness of such Joint
Venture by the Company, Hovnanian or any other Guarantor, and (iii) the product
of (a) the percent ownership interest in said Joint Venture held by Hovnanian
and the Consolidated Subsidiaries and (b) Shareholder's Equity of such Joint
Venture.
"Joinder Agreement" shall mean the agreement substantially in the form
of Exhibit G hereto pursuant to which each Homebuilding Subsidiary, Operating
Property Subsidiary or Other Corporate Subsidiary formed after the date hereof
becomes a Guarantor hereunder and under the Guaranties.
"Joint Venture" shall mean any entity in which Hovnanian and/or any
Consolidated Subsidiary has an ownership interest and whose assets and
liabilities are not consolidated with those of Hovnanian (but excluding any
issuer referred to in Subsection 6.2(d)(v)). A list of all Joint Ventures as of
the date hereof is attached as Schedule 2.
"KHL" shall mean KHL, Inc., a Delaware corporation and a wholly-owned
subsidiary of Hovnanian, which is not a Guarantor but is a Restricted
Subsidiary.
"Land in Planning" shall mean, at any date, an amount equal to the
lower of Cost or Market Value (determined in accordance with GAAP consistently
applied) of any land which has not been granted "Preliminary Approvals" for
residential development. For purposes of this calculation, Cost shall include
only land cost and all capitalized expenses.
"Land Under Development" shall mean, at any date, an amount equal to
the lower of Cost or Market Value (determined in accordance with GAAP
consistently applied) of any land that has been granted "Preliminary Approvals"
for residential development but neither the slab nor foundation is complete nor
has a third party purchaser paid a cash deposit. For purposes of this
calculation, Cost shall include land cost and all capitalized expenses.
"Letter(s) of Credit" shall have the meaning ascribed to such term in
Subsection 2.8 hereof.
"Letter of Credit Fees" shall mean all fees and similar payments paid
in connection with the issuance of Letters of Credit which under GAAP are
required to be recorded as a current expense.
"Libor" shall mean, with respect to a specified Interest Period, that
rate of interest per annum determined by the Agent (whose determination shall be
final and conclusive save for any manifest error) to be equal to the average of
the rates per annum (set forth on Telerate display page 3750 or such other
display page on the Telerate System as may replace such page to evidence the
average of rates quoted by banks designated by the British Bankers' Association
(or appropriate successor or, if the British Bankers' Association or its
successor ceases to provide such quotes, a comparable replacement determined by
the Agent) at which deposits of United States Dollars of an amount comparable to
the amount of the borrowing hereunder or the outstanding principal amount, as
the case may be, from the Banks, and for a period equal to the duration of the
specified Interest Period, are offered to the Agent in the London Interbank
Eurodollar Market at or about eleven a.m. (London time) on the second Business
Day immediately preceding the first day of such Interest Period for delivery on
the first day of such Interest Period.
"Libor Based Rate" shall mean, with respect to a specified Interest
Period, that rate of interest per annum which is equal to Libor as determined by
the Agent plus the Applicable Libor Margin, plus, the cost (as determined by the
Agent whose determination shall be final and conclusive save for manifest error)
of maintaining the Reserve Percentage required for Eurocurrency funding
(currently referred to as "Eurocurrency Liabilities" in Regulation D of the
Regulations of the Board of Governors of the Federal Reserve System).
"Loan Percentage" shall mean, as of the date a remittance is to be made
by the Agent to the Banks hereunder, the aggregate principal amount outstanding
under all Notes held by a Bank divided by the aggregate principal amount
outstanding under all Notes held by all Banks.
"Loans" shall mean the aggregate of all outstanding Revolving Credit
Loans and the Swing Loan.
"LOC Bank" shall mean each of the Banks and any successors thereto or
assigns thereof, all of which are also referred to herein sometimes collectively
as the "LOC Banks."
"Losses" shall have the meaning set forth in Section 9.5 hereof.
"Managing Agent" shall mean B of A.
"Mandatory Principal Payments" shall mean at any time, the principal
payments scheduled to be paid on Subordinated Debt. The Mandatory Principal
Payments for Subordinated Debt outstanding on the date hereof are set forth on
Schedule 3 attached hereto.
"Market Value" shall mean the fair market value of any asset used for
purposes of determining Book Value (where such value is less than Cost),
determined in accordance with GAAP consistently applied.
"Material Adverse Effect" shall mean (i) any material adverse change in
the business, properties, assets, liabilities, financial condition, operations,
results of operations, or business prospects, of Hovnanian and its Consolidated
Subsidiaries as a whole, (ii) a material adverse effect on the ability of the
Company to pay or perform its obligations hereunder and under the Notes or on
the ability of the Guarantors taken as a whole to pay or perform their
respective obligations hereunder and under the Guaranties, or (iii) a material
adverse effect on the validity or enforceability of this Agreement, Notes or
Guaranties.
"Minimum Equity" shall mean, at any time, the sum of the following:
(i)(x) (as of the Starting Date) Base Minimum Equity and (y) (for the period
following the Starting Date) Minimum Equity as of the last day of the
immediately preceding fiscal year (or for each fiscal quarter following and in
the same fiscal year as an Equity Issuance Quarter, the Alternate Minimum Equity
as of the end of such preceding Equity Issuance Quarter), (ii) 50% of each
fiscal quarter's Consolidated Net Income, if such quarter's Consolidated Net
Income is positive, earned since the end of the immediately preceding fiscal
year (or if Alternate Minimum Equity is used in clause (i) above, then earned
after the end of such preceding Equity Issuance Quarter), and (iii) 50% of all
proceeds realized by Hovnanian from the issuance of any Equity Securities after
the immediately preceding fiscal year-end (or if Alternate Minimum Equity is
used in clause (i) above, then realized after the end of such preceding Equity
Issuance Quarter), except that at the end of any Equity Issuance Quarter,
Minimum Equity shall be equal to Alternate Minimum Equity. Notwithstanding the
provisions of clause (ii) above, the calculation under such clause (ii) for the
final quarter of each fiscal year shall take into account 50% of all
Consolidated Net Income (but only if such amount is positive) earned in such
fiscal year.
"Minimum Equity Securities Issuance" shall mean the issuance by
Hovnanian of Equity Securities pursuant to which Hovnanian receives at least
$10,000,000 of net proceeds.
"Moody's" means Moody's Investors Service, Inc., or any successor.
"Mortgage Receivables" shall mean all present and future individual
residential mortgage receivables held by Hovnanian or any Consolidated
Subsidiary.
"Mortgage Subsidiary(ies)" shall mean each and every Consolidated
Subsidiary whose business is the making of mortgage loans. All Consolidated
Subsidiaries which are Mortgage Subsidiaries as of the date hereof are noted on
Schedule 1 (as supplemented) attached hereto.
"Multiemployer Plan" shall mean any Plan which is a "multiemployer
plan" as defined in Section 3(37) of ERISA.
"Net Income" shall mean for any period the net income (or loss) after
Income Taxes for such period determined in accordance with GAAP consistently
applied.
"Net Income From Income Producing Property(ies)" shall mean Net Income
of any Income Producing Property Subsidiary.
"Net Worth Amount" shall mean Adjusted Tangible Net Worth less
Subordinated Debt.
"Notes" shall mean the Revolving Credit Notes and the Swing Line Note,
each of which is also sometimes referred to herein individually as a "Note."
"Operating Lease" shall mean for any Person any lease of property which
would not be classified as a Capitalized Lease under GAAP consistently applied,
other than a lease under which such Person is the lessor.
"Operating Property" shall mean any property owned by Hovnanian or any
Consolidated Subsidiary of which more than 50% of the total square feet is
occupied by Hovnanian and/or a Consolidated Subsidiary.
"Operating Property Subsidiary(ies)" shall mean each and every
Consolidated Subsidiary which owns Operating Property. All Operating Property
Subsidiaries as of the date hereof are noted on Schedule 1 attached hereto.
"Optional Sinking Fund Payment(s)" shall mean any amount of money paid
to reduce the amount due on the Subordinated Debt made in excess of or prior to
the due date of Mandatory Principal Payments. If Hovnanian or the Company, as
the case may be, prepays in full an issue of Subordinated Debt and refinances
the issue no more than 60 days after such prepayment, then such prepayment shall
not be an Optional Sinking Fund Payment provided the new issue shall be equally
subordinated and shall contain terms and conditions that are equal or more
favorable to Hovnanian or the Company, as the case may be, with respect to
interest, maturity and payment schedule. For any period for which Optional
Sinking Fund Payments are to be determined for any purpose under this Agreement,
a credit shall be given in such calculation equal to that portion of any
Mandatory Principal Payment due during such period which was not required to be
made as a result of the prior payment (during or prior to such period) of any
Optional Sinking Fund Payment(s). Notwithstanding the foregoing, no prepayment
of the Indebtedness referenced in clause (i) of the definition of Subordinated
Debt shall be treated as an Optional Sinking Fund Payment.
"Other Corporate Subsidiary(ies)" shall mean each and every
Consolidated Subsidiary which is not a Homebuilding Subsidiary, a Finance
Subsidiary, an Income Producing Property Subsidiary, a Mortgage Subsidiary, an
Operating Property Subsidiary, the Company or KHL. All Other Corporate
Subsidiaries as of the date hereof are noted on Schedule 1 attached hereto.
"Other Senior Homebuilding Indebtedness" shall mean, at any time, the
aggregate amount of unsecured Senior Homebuilding Indebtedness which is either
(x) term indebtedness having a maturity date subsequent to the Commitment
Termination Date or (y) committed revolving credit indebtedness with a maturity
date of less than 365 days from its date of issuance less (i) the outstanding
principal balance of the Loans, (ii) the aggregate face amount of Letters of
Credit issued under the Revolving Credit Commitment, and (iii) Guarantees made
by Hovnanian or any Restricted Subsidiary in the ordinary course of business.
"Out of Compliance Period" shall mean any fiscal quarter as of the end
of which the Fixed Charge Coverage Ratio is lower than 1.25 and the Cash Flow
Coverage Ratio is lower than 1.35.
"Out of Compliance Period Adjustments" shall mean (i) for three (3) or
more consecutive Out of Compliance Periods, a reduction of .25 in the Total Debt
Multiplier, (ii) for more than three (3) consecutive Out of Compliance Periods,
an additional reduction in the Total Debt Multiplier equal to .10 times the
number of consecutive Out of Compliance Periods in excess of three, and (iii) if
an Out of Compliance Period occurs and as of the end of any one or more
subsequent fiscal quarters either the Fixed Charge Coverage Ratio exceeds 1.25
or the Cash Flow Coverage Ratio exceeds 1.35, an increase of .25 in the Total
Debt Multiplier for each such fiscal quarter.
"Outstanding Letters of Credit" shall mean those letters of credit
issued under the Prior Credit Agreement and outstanding as of the date hereof
as listed on Schedule 12 attached hereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA, or any other governmental agency,
department or instrumentality succeeding to the functions of such corporation.
"Performance Letters of Credit" shall mean Letters of Credit described
in clause (ii) of the first sentence of Subsection 2.8(a).
"Permitted Encumbrances" shall mean the Encumbrances permitted to be
created, assumed or suffered by Company, Hovnanian or the Consolidated
Subsidiaries in accordance with Subsection 6.2(b) herein.
"Permitted Guarantees" shall mean the Contingent Obligations permitted
in accordance with Subsection 6.2 (c) herein.
"Permitted Indebtedness" shall mean the Indebtedness permitted to be
incurred by Company, Hovnanian and/or Consolidated Subsidiaries in accordance
with Subsection 6.2(a) herein.
"Permitted Investments" shall mean Investments permitted in accordance
with Subsection 6.2(d) herein.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, limited
liability company or partnership, joint venture, Governmental Authority or other
entity.
"Plan" shall mean any plan, including single employer, multiple
employer and multiemployer plans, subject to Title IV of ERISA and established,
maintained or contributed by Hovnanian or any member of the Controlled Group at
any time during the two-year period ending on the date hereof or at any time
hereafter.
"Pledge Agreement" shall mean the pledge agreement of Hovnanian
substantially in the form of Exhibit H attached hereto and made a part hereof,
pledging to the Banks all of the issued and outstanding shares of stock of KHL
as collateral security for the obligations of Hovnanian pursuant to the
Guaranties.
"Potential Event of Default" shall mean any occurrence, condition, act
or omission which with the passage of time or the giving of notice or both would
result in an Event of Default hereunder.
"Preliminary Approvals" shall mean the following: (i) in New Jersey,
as defined in the Municipal Land Use Law (N.J.S.A. 40:55D-1 et seq.) and (ii)
for states other than New Jersey, a point in time equivalent thereto.
"Prime Rate" shall mean the fluctuating rate of interest announced from
time to time by the Agent as its "prime rate," "prime lending rate," "base rate"
or "base lending rate." This rate of interest is determined from time to time by
the Agent as a means of pricing some loans to customers and is neither tied to
any external rate of interest or index nor does it necessarily reflect the
lowest rate of interest actually charged by the Agent or any Bank to any
particular class or category of customers of the Agent or any Bank.
"Prior Credit Agreement" shall mean that certain Credit Agreement dated
as of July 30, 1993 among Hovnanian, the Company, certain Subsidiaries thereof
named therein, the financial institutions named therein and PNC Bank, National
Association, as Agent, as amended.
"Purchase Money Mortgages" shall mean non-recourse mortgages granted to
secure Indebtedness incurred for the acquisition of Inventory Property.
"Rating Agency" means each of S&P and Moody's.
"Rating Change" means a change in the applicable rating among the five
tiers on the following chart assigned by one of the respective Rating Agencies
as its Implied Senior Debt Rating for the Company (the present assigned rating
by each Rating Agency being at (or in the case of Moody's deemed at) the third
tier shown below), or if no Implied Senior Debt Rating is then assigned, then at
the fifth tier shown below:
S & P Moody'sTiers BB+ (or better)Ba1 (or better)First BBBa2Second BB-
Ba3Third B+B1Fourth B (or worse)B2 (or worse)Fifth
"Related Businesses" shall mean non-publicly owned companies,
partnerships and other entities whose business is residential housing for sale.
"Reportable Event" shall mean any of the events which are reportable
under Section 4043 of ERISA and the regulations thereunder.
"Requisite Banks" shall mean Banks having or holding 66-2/3%, or a
greater percentage, of the aggregate Facility Commitments of all Banks.
"Reserve Percentage" shall mean, for any day, that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the reserve requirement for a member bank of the Federal Reserve
System in the Second District with deposits exceeding one billion dollars in
respect of new time deposits in dollars having a maturity comparable to the
applicable Interest Period and in an amount of $100,000 or more. For purposes
of this computation under the provisions of Regulation D, it shall be assumed
that such bank's reserve ratio on such time deposits shall be adjusted
automatically on and as of the effective date of any change in the Reserve
Percentage.
"Restricted Investments" shall mean (i) Investments in Related
Businesses, (ii) Investments in Joint Ventures, and (iii) loans by Hovnanian to
any Mortgage Subsidiary.
"Restricted Payments" shall mean (i) Distributions by Hovnanian, (ii)
Capital Stock Retirements, and (iii) Optional Sinking Fund Payments.
"Restricted Subsidiary(ies)" shall mean, at any time, the Company, all
Homebuilding Subsidiaries, and KHL, Inc.
"Revolving Credit Commitments" means the collective commitments of all
the Banks to make Revolving Credit Loans to the Company pursuant to this
Agreement in an aggregate principal amount not to exceed, at any time
outstanding, $270,000,000, as such amount may be increased pursuant to
Subsection 8.7(c) hereof up to a maximum collective amount of $285,000,000,
provided, however, that the Revolving Credit Commitment of each Bank shall at
all times be reduced by an amount equal to each such Bank's Revolving Credit
Commitment Percentage of any then outstanding Excess Other Senior Homebuilding
Indebtedness and the "Revolving Credit Commitment" of any Bank at any particular
time means the respective commitment of such Bank to make Revolving Credit Loans
to the Company pursuant to this Agreement in an amount equal to its Revolving
Credit Commitment Percentage multiplied by the aggregate principal amount of the
Revolving Credit Commitments, all as set forth on Schedule 9 attached hereto.
"Revolving Credit Commitment Percentage" shall mean, with respect to
any Bank at any time, the amount of such Bank's Revolving Credit Commitment
divided by the aggregate amount of the Revolving Credit Commitments of all the
Banks, as set forth on Schedule 9 attached hereto.
"Revolving Credit Facility" shall have the meaning specified in
Subsection 2.1 hereof.
"Revolving Credit Loan(s)" shall have the meaning specified in
Subsection 2.1 hereof.
"Revolving Credit Notes" shall mean the promissory notes of the Company
described in Subsection 2.2 hereof, each of which is also sometimes referred to
herein individually as a "Revolving Credit Note."
"S&P" means Standard & Poor's Ratings Services, a Division of The
McGraw-Hill Companies, Inc., or any successor.
"Senior Homebuilding Indebtedness" shall mean, at any time, the sum of
the following: (i) outstanding Letters of Credit, (ii) Guarantees made by
Hovnanian or any Restricted Subsidiary in the normal course of business, (iii)
outstanding principal balance of the Loans, (iv) all other Indebtedness not
included above, for which the obligor is Hovnanian and/or a Restricted
Subsidiary. Specifically excluded from Senior Homebuilding Indebtedness are the
following: (i) Indebtedness on or Hovnanian's Guarantee of Indebtedness on
Income Producing Properties, (ii) Indebtedness of any Mortgage Subsidiary, (iii)
Indebtedness of the Finance Subsidiaries, (iv) Indebtedness secured by non-
recourse Purchase Money Mortgages, (v) Indebtedness incurred pursuant to
Subsection 6.2(a)(v), (vi) Permitted Guarantees of indebtedness of any
Consolidated Subsidiary, and (vii) Subordinated Debt.
"Shareholders Equity" shall mean the stockholders' equity (excluding
redeemable preferred stock) of Hovnanian, determined in accordance with GAAP
consistently applied, except that there shall be deducted from stockholders'
equity any amount reflected as treasury stock.
"Sold Land/Lots/Homes" shall mean, at any time, the capitalized
construction costs (determined in accordance with GAAP consistently applied) of
any home/unit upon which a third party purchaser has paid a cash deposit. This
shall include the proportional costs of the land under the unit, site
improvements, and soft costs incurred to date as well as direct construction
costs.
"Starting Date" shall mean January 31, 1998.
"Subordinated Debt" shall mean (i) the Company's 11.25% Subordinated
Notes due April 15, 2002 in an original principal amount of $100,000,000, issued
pursuant to an Indenture dated as of April 15, 1992 between the Company and
First Fidelity Bank, National Association, New Jersey (having since merged into
First Union National Bank), as Trustee, having a outstanding principal balance
of $90,000,000 as of the Starting Date, (ii) the Company's 9-3/4% Subordinated
Notes due June 1, 2005 in an original principal amount of $100,000,000, issued
pursuant to an Indenture dated as of May 28, 1993 between the Company and First
Fidelity Bank, National Association, New Jersey (having since merged into First
Union National Bank), as Trustee, having a current outstanding principal balance
of $100,000,000, and (iii) any other unsecured indebtedness of Hovnanian, the
Company or any Consolidated Subsidiary which is subordinated by its terms to the
prior payment in full of the Indebtedness evidenced by this Agreement, the Notes
and the Letters of Credit, as may be outstanding from time to time, in a manner
no less favorable to the Banks than the terms of the Subordinated Debt described
in clause (i) or (ii) above and which contains covenants that are not materially
less favorable to Hovnanian, the Company or any Consolidated Subsidiary than
those contained in the Subordinated Debt described in clause (i) or (ii) above.
"Subsidiary" shall mean any corporation more than 50 percent of the
voting stock power of which at the time is owned or controlled (whether now
existing or hereafter authorized or acquired) directly by Hovnanian or any
Subsidiary or by any combination of Hovnanian and any one or more Subsidiaries.
"Subsidiary Groups" shall mean Homebuilding Subsidiaries, Mortgage
Subsidiaries, Finance Subsidiaries and Income Producing Property Subsidiaries.
"Swing Loan" shall have the meaning specified in Subsection 2.2 hereof.
"Swing Loan Commitment" shall mean the commitment of the Swing Loan.
Lender to make Swing Loans to the Company pursuant to this Agreement in an
aggregate principal amount not to exceed, at any time outstanding, $10,000,000.
"Swing Loan Lender" shall mean PNC Bank, National Association.
"Swing Loan Note" shall mean the promissory note of the Company
described in Subsection 2.3(b) hereof.
"Total Debt Multiplier" shall mean 2.75, subject to Out of Compliance
Period Adjustments which cannot, in any event, cause the Total Debt Multiplier
to exceed 2.75.
"Unencumbered" shall mean, with respect to Inventory Properties and
Income Producing Properties, such Properties on which there is no Encumbrance of
any kind except (i) liens for taxes, assessments, levies, fees, water and sewer
rents, and other governmental and similar charges, (ii) liens of mechanics,
materialmen and laborers for work or services performed or materials furnished
in connection with such Properties, which, or the amount or validity of which,
are being contested in good faith and on which execution is stayed or which have
been due for less than 30 days, and (iii) easements, restrictions and other
similar encumbrances which do not materially affect the value or use of such
Properties.
"Unsold Lots/Homes Under Construction" shall mean, at any time, the
capitalized construction costs (determined in accordance with GAAP consistently
applied) of any home/unit being built for which construction of slab or
foundation has been completed and upon which no cash deposit has been paid.
This shall include the proportional costs of the land under the unit, site
improvements and soft costs incurred to date.
"Warehouse Line of Credit" shall mean a line of credit provided to any
Mortgage Subsidiary for the purpose of financing Mortgage Receivables.
1.2. Use of Defined Terms. All terms defined in this Agreement shall have
the defined meanings when used in the Schedules and Exhibits hereto, and in the
Notes, the Guaranties and the Pledge Agreement, and any certificates, reports or
other documents made or delivered pursuant to this Agreement, unless the context
otherwise requires.
1.3. Accounting Terms. Each accounting term not defined in this Agreement,
and each accounting term partly defined in this Agreement to the extent not
defined, shall have the meaning given to it under GAAP consistent with those
principles utilized in preparing the audited financial statements of Hovnanian
dated the Starting Date.
SECTION 2. AMOUNT AND TERMS OF LOANS
2.1. Revolving Credit Commitments. Subject to the terms and conditions of
this Agreement, each Bank severally agrees to make cash advances in the nature
of revolving credit loans (each a "Revolving Credit Loan" and collectively the
"Revolving Credit Loans") to the Company, from time to time from the date hereof
until the Commitment Termination Date, in an aggregate principal amount at any
one time outstanding not to exceed the amount of its respective Revolving Credit
Commitment. During the aforesaid period, the Company may borrow, prepay in whole
or in part and re-borrow, all in accordance with the terms and conditions
hereof. Each Revolving Credit Loan hereunder shall be in the minimum lending
group aggregate principal amount of $100,000 or any larger integral multiple of
$100,000 (except that any such Revolving Credit Loan may be in the aggregate
amount of the unused Revolving Credit Commitments) and shall be made ratably
from the several Banks in proportion to their respective Revolving Credit
Commitment Percentages. All outstanding Revolving Credit Loans, unless
otherwise due and payable under the terms hereof, shall be due and payable on
the Commitment Termination Date. Except as may be expressly stated in this
Agreement, no Bank shall at any time be liable for or have any duty to provide
funding for all or any portion of Revolving Credit Loans to be made by or any
other undertaking to be performed by, any other Bank hereunder.
2.2.Swing Loan Commitment. Subject to the terms and conditions of this
Agreement, the Swing Loan Lender agrees to make certain temporary loans (each a
"Swing Loan" and collectively the "Swing Loans") to the Company, from time to
time from the date hereof until the Commitment Termination Date, in an aggregate
principal amount at any one time outstanding not to exceed the amount of the
Swing Loan Commitment. During the aforesaid period, the Company may borrow,
prepay in whole or part and reborrow, all in accordance with the terms and
conditions hereof. In the event that Swing Loans are outstanding for any period
of nine (9) consecutive Business Days, the Company shall repay to the Swing Loan
Lender the unpaid principal balance of all outstanding Swing Loans on the
following Business Day up to an amount representing the difference, on such
Business Day, between the aggregate Revolving Credit Commitments and the
aggregate outstanding principal amount of the Revolving Credit Loans and the
Letters of Credit. All outstanding Swing Loans, unless otherwise due and
payable under the terms hereof, shall be due and payable on the Commitment
Termination Date.
2.3. Notes.
(a)The Revolving Credit Loans from each Bank pursuant to Subsection 2.1
hereof shall be evidenced by a separate promissory note substantially in the
respective forms attached hereto as Exhibits A-1 through A-4 hereto, payable to
the order of such Bank in a principal amount equal to the amount of its
Revolving Credit Commitment, (each individually, a"Revolving Credit Note", and
collectively, the "Revolving Credit Notes"). The Revolving CreditNotes shall
each (i) be dated the date hereof, (ii) be stated to mature on the Commitment
Termination Date, and (iii) bear interest on the unpaid principal amount thereof
from the date thereof at a rate per annum determined in accordance with the
provisions of Section 3 of this Agreement, payable on the Interest Payment Dates
as specified in Section 3 of this Agreement until payment in full of the
principal balance thereof.
(b)The Swing Loans from the Swing Loan Lender pursuant to Subsection 2.2
hereof shall be evidenced by a separate promissory note substantially in the
form attached hereto as Exhibit "B" payable to the order of the Swing Loan
Lender in a principal amount equal to the Swing Loan Commitment (the "Swing Loan
Note"). The Swing Loan Note shall (a) be dated the date hereof, (b) be stated
to mature on the Commitment Termination Date, and (c) bear interest on the
unpaid principal balance thereof from the date thereof at a rate per annum
determined in accordance with the provisions of Section 3 of this Agreement,
payable on the Interest Payment Date as specified in Section 3 of this Agreement
until payment in full of the principal balance thereof.
2.4. Drawdowns.
(a)Prior to each Revolving Credit Loan hereunder, the Company shall give
the Agent not less than three (3) Business Days' irrevocable notice thereof (if
the Libor Based Rate is specified) or irrevocable notice thereof on the day the
Revolving Credit Loan is to be made (if the Prime Based Rate is specified), in
each case by telephone, followed by written notice substantially in the form of
the Notice of Drawdown set forth as Exhibit "C-1" attached hereto and made a
part hereof. Each such Revolving Credit Loan shall be effected by transferring
the amount thereof to the Company in accordance with the payment instructions
set forth in the Notice of Drawdown on the date specified in such Notice of
Drawdown.
(b)Prior to each Swing Loan hereunder, the Company shall give the Swing
Loan Lender irrevocable notice thereof in each case by telephone, followed by
written notice substantially in the form of the Notice of Drawdown set forth as
Exhibit "C-2" attached hereto and made a part hereof. Each such Swing Loan
shall be effected by transferring the amount thereof to the Company in
accordance with the payment instructions set forth in the Notice of Drawdown on
the date specified in such Notice of Drawdown.
(c)(i) All requests by the Company for Revolving Credit Loans shall be
made by 11:00 a.m., New Jersey time, on the day specified in subparagraph (a)
hereof. Upon receiving a request for a Revolving Credit Loan in accordance with
subparagraphs (a) and (c) hereof, Agent shall notify all Banks of the request as
soon as practical thereafter in writing by facsimile transmission, but no later
than twelve o'clock (12:00) noon, New Jersey time or as soon as is reasonably
practicable thereafter. Each Bank shall remit its applicable Revolving Credit
Commitment Percentage of the requested Revolving Credit Loan to Agent by
remitting federal funds immediately available, to Agent pursuant to Agent's
instructions prior to two-thirty (2:30) p.m. New Jersey time on the date the
Revolving Credit Loan is to be made. Subject to the satisfaction of the terms
and conditions hereof, Agent shall make the requested Revolving Credit Loan
available to the Company (to the extent of those portions of the Revolving
Credit Loan actually received from the Banks) by crediting such amount to the
Company's operating account with Agent as soon as reasonably practicable after
two-thirty (2:30) p.m. New Jersey time on the day the requested Revolving Credit
Loan is to be made. If any Bank fails to make available to the Agent on a
timely basis, as provided above, its applicable share of the requested Revolving
Credit Loan, the Agent shall also be entitled to advance on behalf of such Bank,
at the sole discretion of the Agent, the share of such Bank and then recover
from such Bank (together with the amount so advanced) interest at the Federal
Funds Rate on such unpaid share for each day such amount is not so remitted to
the Agent.
(ii)All requests by the Company for Swing Line Loans shall be made by two
o'clock (2:00) p.m. New Jersey time, on the day such Loan is to be made and,
subject to the terms and conditions of this Agreement, the Swing Line Lender
shall make the requested Swing Line Loan available to the Company by crediting
such amount to the Company's operating account with Agent as soon as reasonably
practicable thereafter.
2.5. Payments of Principal and Interest; Computation of Interest. All
payments (including prepayments) by the Company of the principal of and interest
on the Notes shall be made at the offices of the Agent, for the benefit of each
Bank, as set forth in this Agreement, or at such other place as the Agent may
from time to time designate, in lawful money of the United States of America
and, in the case of principal payments, in immediately available funds and, in
the case of interest payments, except as otherwise provided in any of the Notes,
by check subject to collection. Interest shall be calculated on the basis of
actual days elapsed in a year of 360 days. Each Bank shall have the right to
charge any deposit account of the Company or any Guarantor with such Bank for
the amount of any obligation then due and owing hereunder to such Bank. If any
payment hereunder becomes payable on a day which is not a Business Day, such due
date shall be extended to the next succeeding Business Day and interest thereon
shall be payable at the then applicable rate during such extended period.
2.6. Use of Loan Proceeds. The proceeds of the borrowings hereunder shall
be used by the Company for general corporate purposes of Hovnanian and the
Restricted Subsidiaries or to make Investments in other Subsidiaries as allowed
hereunder.
2.7. Prepayments. The Company may, at any time or from time to time, prepay
the Notes, in whole or in part, without premium or penalty; provided, however,
that any prepayment of the Notes shall be made first (if no Event of Default is
then outstanding) to accrued and unpaid interest ratably to the Banks in
proportion to the accrued interest on their respective Notes, next to any
accrued and unpaid fees provided for herein, next to the unpaid principal
balance of the Swing Loan Note, and then ratably to the several Banks in
proportion to the principal amounts outstanding on the respective Revolving
Credit Notes. Any prepayment of any Revolving Credit Loan for which the Company
has specified the Libor Based Rate as the Elected Interest Rate made on any day
other than the final day of an Interest Period with respect thereto shall be
accompanied by any amounts owing pursuant to Subsection 3.9 hereof. All
prepayments of the Notes other than in respect of Loans bearing interest at the
Prime Based Rate shall be made upon at least two (2) Business Days' notice in
each case by telephone, followed by written notice to the Agent specifying the
date and the amount of prepayment and upon the payment of accrued interest on
the amount of principal prepaid. All partial prepayments shall be in the
minimum amount of $100,000 or any integral multiple thereof.
2.8. Letter of Credit Line.
(a) Subject to the terms and conditions of this Subsection 2.8 and Section
5, the Company may utilize a portion of the amounts available under the
Revolving Credit Commitments of the Banks, in an aggregate amount not to exceed
$40,000,000 with respect to all of the LOC Banks and not to exceed a maximum
amount for each LOC Bank at any time as set forth on Schedule 11 attached
hereto and made part hereof, in the form of letters of credit (each a "Letter of
Credit" and, collectively, the "Letters of Credit") (i) to secure payment of
customer escrow deposits, (ii) to serve as performance bonds, or to serve as
collateral, directly or indirectly, to support performance bonds, and (iii) to
serve as collateral for outstanding non-recourse notes. All Outstanding Letters
of Credit shall be deemed issued under this Agreement. The Letters of Credit
shall be issued by a LOC Bank for the joint and several account of the Company
and the Consolidated Subsidiary of Hovnanian requesting issuance of the Letter
of Credit upon at least three (3) Business Days' prior written notice from the
Company or such Consolidated Subsidiary to such LOC Bank requesting such
issuance and specifying the stated amount of the Letter of Credit requested, the
requested date of issuance, the expiration date thereof and the beneficiary
thereof. No Letter of Credit shall be issued hereunder with an expiration date
on or after one (1) Business Day immediately preceding the Commitment
Termination Date. Unless the LOC Bank has received notice from any Bank on or
before the Business Day immediately preceding the date the LOC Bank is to issue
the requested Letter of Credit that one or more of the conditions specified in
Subsection 5.2 are not then satisfied, then subject to the terms and conditions
of this Subsection 2.8 and provided that the applicable conditions set forth in
Subsection 5.2 hereof have been satisfied, the LOC Bank shall, on the requested
date, issue such Letter of Credit in accordance with the LOC Bank's usual and
customary business practices; provided, however, that the LOC Bank shall not be
under any
obligation to issue any Letter of Credit if:
(i) any order, judgment or decree of any Governmental Authority or
arbitrator shall purport by its terms to enjoin or restrain the LOC Bank from
issuing such Letter of Credit or any requirement of any law applicable to the
LOC Bank or any request or directive (whether or not having the force of law)
from any Governmental Authority with jurisdiction over the LOC Bank shall
prohibit, or request that the LOC Bank refrain from, the issuance of letters of
credit generally or such Letter of Credit in particular or shall impose upon the
LOC Bank with respect to such Letter of Credit any restriction or reserve or
capital requirement (for which the LOC Bank is not otherwise compensated) not in
effect on the date hereof, or any unreimbursed loss, cost or expense which was
not applicable, in effect or known to the LOC Bank as of the date hereof, and
which the LOC Bank in good faith deems material to it; or
(ii) the LOC Bank shall have received written notice from any Bank or the
Company on or before the Business Day immediately preceding the requested date
of issuance of such Letter of Credit that one or more of the conditions
contained in Subsection 5.2 is not then satisfied. The beneficiary of any
Letter of Credit issued shall be authorized to draw upon the LOC Bank on the
terms and subject to the conditions set forth in such Letter of Credit. When
requesting a Letter of Credit from any LOC Bank, the Company shall
simultaneously supply a copy of such request to the Agent.
(b) All Letters of Credit shall be issued in accordance with and subject to
the LOC Bank's then current application and reimbursement agreement for, and
policies relating to, its letters of credit and, to the extent not otherwise
provided for in such application, shall be issued subject to and shall be
governed by the Uniform Customs and Practice for Documentary Credits of the
International Chamber of Commerce ("UCP") as in effect from time to time and, as
to matters not governed by the UCP, shall be governed by Article 5 of the
Uniform Commercial Code as in effect and as construed in the jurisdiction of the
LOC Bank. With respect to each Letter of Credit, the Company for itself and on
behalf of the Consolidated Subsidiary requesting such Letter of Credit shall
provide to the LOC Bank, at least three (3) Business Days prior to the requested
issuance date, a completed application, signed on a joint and several basis by
the Company and such Consolidated Subsidiary, for such Letter of Credit in such
form as the LOC Bank shall require, together with such other documents or items
as may be required pursuant to the terms thereof. Any Letters of Credit
outstanding at the time of acceleration of any Note shall be either fully
collateralized by cash, United States government securities or replaced by the
Company with letters of credit issued by another banking institution acceptable
to the beneficiaries of such outstanding Letters of Credit. Notwithstanding the
provisions of Section 2.8(b) of this Agreement to the contrary, a completed
Letter of Credit application signed only by a Consolidated Subsidiary located in
and with its principal business activities conducted in the State of California,
and not by the Company as well, shall be acceptable to the LOC Bank to which
such application is submitted (subject to the satisfactory completion or
fulfillment of all other conditions to the issuance of Letters of Credit set
forth in this Agreement), provided, however, that by reason hereof, without
further consent, agreement or document from the Company, the Company shall
automatically be deemed to have unconditionally guaranteed, as surety, the
reimbursement obligations of such Consolidated Subsidiary to the LOC Bank with
respect to any such Letter(s) of Credit. All other provisions of this
Agreement, specifically including without limitation Sections 2.8 and 2.9, shall
be applicable to all Letters of Credit issued pursuant to this paragraph as if
the application had been signed by both such Consolidated Subsidiary and the
Company.
(c) The amount paid by a LOC Bank pursuant to any draw on a Letter of
Credit shallcreate an immediate reimbursement obligation on the part of the
Company which obligation shall bear interest at the Base Rate; provided,
however, that in the event that at the time of such drawing all of the
conditions set forth in Subsection 5.2 have been met, then, at the Company's
request in accordance with the provisions of Subsection 2.4, the amount to be
reimbursed to a LOC Bank may be advanced as a Revolving Credit Loan or a Swing
Line Loan hereunder and treated by the Banks as a borrowing by the Company in
accordance with Section 2 of this Agreement, except that any such Loan shall not
be subject to the minimum borrowing amounts specified in Subsection 2.1 of this
Agreement. The stated amount of all outstanding Letters of Credit issued under
this Subsection shall also be treated by the Banks as borrowings by the Company
for purposes of determining the aggregate amount remaining available under the
Revolving Credit Commitments and for all other purposes under this Agreement.
(d) With respect to any Letter of Credit issued pursuant to this Subsection
the Company shall pay a letter of credit fee (computed on the basis of a 360 day
year) on the face amount of each Letter of Credit, payable on a quarterly basis
in arrears on the last day of each quarter, as follows: twelve and one half (12-
1/2) basis points shall be payable to the Agent solely for the benefit of the
issuing LOC Bank and the Applicable Letter of Credit Fee shall be payable to the
Agent for the pro rata benefit of each of the Banks (including the issuing LOC
Bank) in an amount equal to such Bank's Revolving Credit Commitment Percentage
of such portion of the letter of credit fee payment. With respect to each
Letter of Credit, the Company shall also pay to the LOC Bank issuing such Letter
of Credit such LOC Bank's standard issuance, administrative and drawing fees
payable in connection with letters of credit.
(e)With respect to each Letter of Credit issued pursuant to this
Subsection, the Company agrees to all risks of acts or omissions of any
beneficiary or transferee of any Letter of Credit. In furtherance of, and not
in limitation of, the rights and powers of the LOC Bank under the UCP, but
subject to all other provisions of this Subsection 2.8(f), it is understood and
agreed with respect to each Letter of Credit, that the LOC Bank shall not have
any liability for and the Company assumes all responsibility for: (i) the
genuineness of any signature; (ii) the form,correctness, validity, sufficiency,
genuineness, falsification and legal effect of any draft, certification or other
document required by any Letter of Credit or the authority of the person signing
the same; (iii) the failure of any instrument to bear any reference or adequate
reference to any Letter of Credit or the failure of any person to note the
amount of any instrument on the reverse of any Letter of Credit or to surrender
any Letter of Credit or to forward documents in the manner required by any
Letter of Credit or otherwise to comply with the terms and conditions of the
Letter of Credit; (iv) the good faith or acts of any Person other than the LOC
Bank and its agents and employees; (v) the existence, form, sufficiency or
breach of or default under any agreement or instrument of any nature whatsoever;
(vi) any delay in giving or failure to give any notice, demand or protest; and
(vii) any error, omission, delay in or nondelivery of any notice or other
communication, however sent. The determination as to whether the required
documents are presented prior to the expiration of any Letter of Credit and
whether such other documents are in proper and sufficient form for compliance
with any Letter of Credit shall be
made by the LOC Bank in its sole discretion, which determination shall be
conclusive and binding upon the Company. Any action, inaction or omission on
the part of a LOC Bank under or in connection with any Letter of Credit or
related instruments or documents, if in good faith and in conformity with such
laws, regulations or commercial or banking customs as the LOC Bank may deem to
be applicable, shall be binding upon the Company, shall not place the LOC Bank
under any liability to the Company, and shall not affect, impair or prevent the
vesting of any of the rights or powers of the LOC Bank hereunder or the
Company's obligation to make reimbursements of any amount paid on any Letters of
Credit. If the Company and the beneficiary under any Letter of Credit, in
writing or orally, request or consent to any modification or extension of any
Letter of Credit or waive failure of any draft, certificate or other document to
comply with the terms of any Letter of Credit, the LOC Bank shall be deemed to
have relied and be entitled to rely on such request, consent or waiver with
respect to any action taken or omitted by the LOC Bank pursuant to any such
request, consent or waiver, and such extension, modification, increase or waiver
shall be binding upon the Company.
(f) If, after the date hereof, the adoption of, or any change (other than
a change in the rate of tax on net income) in, (1) any law, executive order, or
regulation, (2) any request or directive of any administrative or Governmental
Authority (whether or not having the force of law) or (3) interpretation of any
of the foregoing by any court or administrative or Governmental Authority
charged with the administration thereof shall either (i) impose, modify or deem
applicable any reserve, special deposit or similar requirement against any
Letters of Credit issued pursuant hereto, or (ii) impose on a LOC Bank any other
condition regarding this Agreement and any Letters of Credit issued pursuant
hereto, and the effect of any such change shall be to increase the cost to the
LOC Bank of issuing or maintaining any Letters of Credit, then the LOC Bank
shall immediately notify the Company of such change and calculate and advise the
Company of the additional amounts which would compensate the LOC Bank for such
increased cost; provided, however, that the Company shall not pay any such
increased cost for any period prior to the next anniversary date of this
Agreement following the date of such change. Effective as of the next such
anniversary date of this Agreement, the LOC Bank may increase the letter of
credit fee payable by the Company pursuant to Subsection 2.8(d) by the
additional amount necessary to compensate the LOC Bank for such increased costs
for periods subsequent to such anniversary date of this Agreement. The LOC
Bank's determination of the amount of such costs and the allocation, if any, of
such costs among the Company and other customers which have arrangements with
the LOC Bank similar to those contained herein relating to letters of credit, if
done in good faith and if such allocation is made on an equitable basis shall,
in the absence of manifest error, be conclusive. Upon request from the Company,
the LOC Bank shall provide an explanation of the basis for such allocation.
(g)The Company shall provide to the Agent a copy of each application
submitted to an LOC Bank for the issuance of a Letter of Credit,
contemporaneously with the submission thereof to such LOC Bank. The LOC Bank
shall provide to the Agent a copy of each Letter of Credit, and each amendment
to a Letter of Credit, upon issuance thereof.
(h)The original of each bill from an LOC Bank for administrative or
amendment fees with respect to Letters of Credit shall be forwarded to the Agent
which shall provide the Company not later than the fifth day of each month, with
a monthly bill covering administrative and amendment fees as well as commissions
for new and renewed Letters of Credit (based upon Letter of Credit documentation
and bills provided to the Agent). For the purposes of such billing procedure,
the Agent shall use a commission period equal to the lesser of six (6) months or
the term of the Letter of Credit. Payments by the Company of such billings
shall be made not later than the last day of the month in which it receives the
above described billing.
2.9. Participation in Letters of Credit.
(a)Immediately upon the issuance by a LOC Bank of each Letter of Credit in
accordance with the terms and conditions of this Agreement, the LOC Bank shall
be deemed to have sold and transferred to each Bank, and each Bank shall be
deemed irrevocably and unconditionally to have purchased and received from the
LOC Bank, without recourse or warranty, an undivided interest and participation,
to the extent of such Bank's Revolving Credit Commitment Percentage, in such
Letter of Credit issued by the LOC Bank and the joint and several obligations of
the Company and the Restricted Consolidated Subsidiary requesting issuance of
such Letter of Credit with respect thereto and in each case any security
therefor and guarantee pertaining thereto.
(b) In determining whether to pay under any Letter of Credit, a LOC Bank
shall not have any obligation relative to the Banks other than to confirm that
any documents required to be delivered under such Letter of Credit appear to
have been delivered and that they appear to comply on their face with the
requirements of such Letter of Credit. Any action taken or omitted to be taken
by a LOC Bank under or in connection with any Letter of Credit, if taken or
omitted in the absence of gross negligence or willful misconduct, shall not put
the LOC Bank under any resulting liability to any Bank.
(c) A LOC Bank shall promptly notify the Agent upon receipt by the LOC Bank
of a draft under any Letter of Credit, which notice shall specify the amount
being drawn and the payment date of such drawing. In the event that a LOC Bank
makes any payment under any Letter of Credit and the Company shall not have
reimbursed such amount in full to the LOC Bank, the LOC Bank shall promptly
notify the Agent of such failure, and each Bank upon notice by Agent shall
promptly and unconditionally pay to the Agent the amount of such Bank's
Revolving Credit Commitment Percentage of such unreimbursed payment in same day
funds. If the LOC Bank so notifies, prior to 1:00 P.M. (New York time) on any
Business Day, any Bank, such Bank shall make available to the LOC Bank an amount
equal to its Revolving Credit Commitment Percentage of the amount of such
payment on such Business Day in same day funds. If and to the extent any Bank
shall not have so made an amount equal to its Revolving Credit Commitment
Percentage of the amount of such payment available to the LOC Bank, such Bank
agrees to pay to the LOC Bank forthwith after notice such amount, together with
interest thereon, for each day from the date of notice until the date such
amount is paid to the LOC Bank, at the Federal Funds Rate. The LOC Bank is
hereby authorized, at any time and from time to time, to the fullest extent
permitted by law, to set off and apply any and all deposits at any time held and
other indebtedness at any time owing by the LOC Bank to or for the credit or the
account of any Bank against any amounts unpaid by such Bank to the LOC Bank
pursuant to this clause (c). The failure of any Bank to make available to the
LOC Bank an amount equal to its Revolving Credit Commitment Percentage of any
payment under any Letter of Credit shall not relieve any other Bank of its
obligation hereunder to make available to the LOC Bank an amount equal to its
Revolving Credit Commitment Percentage of any payment under the Letter of Credit
on the date required, as specified above, and, in the event of such failure of
any Defaulting Bank to make available to the LOC Bank an amount equal to such
Defaulting Bank's Revolving Credit Commitment Percentage of any such payment
(the "Shortfall"), the other Banks shall reimburse and indemnify such LOC Bank
in an amount equal to each other Bank's proportionate share of the Shortfall;
provided, however, that (i) in no event shall any Bank be required to fund any
amount in respect of the Shortfall if and to the extent that such amount,
together with all other amounts advanced by such Bank under its Revolving Credit
Commitment, would exceed the aggregate principal amount of such Bank's Revolving
Credit Commitment; and (ii) any payment by a Bank with respect to a Shortfall
shall reduce that Bank's Revolving Credit Commitment accordingly.
(d) Whenever a LOC Bank receives a payment in reimbursement of a draw under
a Letter of Credit as to which the LOC Bank has received any payments from the
Banks pursuant to clause (c) above, the LOC Bank shall pay to each Bank which
has paid an amount equal to its Revolving Credit Commitment Percentage thereof,
in same day funds, an amount equal to such Percentage thereof. If the LOC Bank
receives payment prior to 1:00 p.m. on a Business Day and does not make payment
as provided above to each Bank on the same Business Day, each such Bank shall be
entitled to receive interest thereon from the LOC Bank at the Federal Funds Rate
for each day until the date such payment is made.
(e) Upon the request of any Bank, a LOC Bank shall furnish to such Bank
copies of any letter of credit application and reimbursement agreement to which
the LOC Bank is party and such other documentation relating thereto and
available to the LOC Bank as may reasonably be requested by such Bank.
(f) The obligations of the Banks to make payments to the LOC Banks with
respect to Letters of Credit shall be irrevocable and not subject to any
qualification, exception, deduction or setoff whatsoever and shall be made in
accordance with the terms and conditions of this Agreement under all
circumstances (except as expressly provided in clause (b) above), including,
without limitation, any of the following circumstances:
(i)any lack of validity or enforceability of this Agreement, any of the
Notes or any of the Guaranties;
(ii) the existence of any claim, set-off, defense or other right which the
Company or any Guarantor may have at any time against a beneficiary named in a
Letter of Credit, any transferee of any Letter of Credit (or any Person for whom
any such transferee may be acting), the Agent, the LOC Bank, any Bank, or any
other Person, whether in connection with this Agreement or any Letter of Credit,
the transactions contemplated hereby or any unrelated transactions (including
any underlying transaction between the Company or any Guarantor and the
beneficiary named in any such Letter of Credit);
(iii)any draft, certificate or any other document presented under the
Letter of Credit proving to be forged, fraudulent, invalid or insufficient in
any respect or any statement therein being untrue or inaccurate in any respect;
(iv) the surrender or impairment of any security for the performance or
observance of any of the terms of any Letter of Credit, this Agreement, any Note
or any Guaranty;
(v) any failure by the LOC Bank to give notice to the Banks of the amount
of any Letter of Credit or of any payment required by the Banks with respect
thereto; or
(vi)the occurrence of any Default or Event of Default.
SECTION 3. INTEREST AND FEES
3.1. Elected Interest Rate.
(a)Each Revolving Credit Loan shall bear interest on the outstanding
principal amount thereof at the Elected Interest Rate with respect to such
Revolving Credit Loan. With respect to each Revolving Credit Loan, and subject
to the terms of this Section 3 (including without limitation Subsection 3.2),
the Company shall have the right to specify, to the extent available under the
terms hereof, which Alternative Interest Rate shall be the Elected Interest Rate
by giving the Agent notice thereof by telephone (a) at least three (3) Business
Days before the first day of such Interest Period if the Libor Based Rate is
specified or (b) the first day of such Interest Period if the Base Rate is
specified, followed in each instance by written confirmation mailed the same day
and if the Alternative Interest Rate is the Libor Based Rate, specifying in such
notice whether the duration of the Interest Period during which the election of
such Elected Interest Rate applies shall be thirty (30) days, sixty (60) days,
ninety (90) days, or one hundred eighty (180) days. The written confirmation of
notice given by the Company pursuant to this Subsection 3.1 shall be
substantially in the form of the Notice of Election set forth as Exhibit D
hereto and made a part hereof. No Bank shall in any event be obligated to make
a Libor Based Rate available to the Company if an Event of Default is
outstanding. At no time shall the Banks be obligated to advance more than six
(6) Revolving Credit Loans in any calendar month, provided however that if such
monthly maximum has been reached, the Company may nevertheless request
additional Revolving Credit Loans from the Banks (subject to the conditions
precedent specified in Subsection 5.2 hereof), only to the extent necessary to
satisfy its obligation set forth in the next to last sentence of Subsection 2.2
hereof.
(b)Each Swing Line Loan shall bear interest on the outstanding principal
amount thereof at the Base Rate.
(c)If there is a discrepancy between telephone notice and written notice,
written notice shall govern. Notwithstanding anything to the contrary contained
in this Subsection 3.1, the Company's right to select the Libor Based Rate as
the Elected Interest Rate shall be conditioned (as determined by such Bank) upon
the availability to such Bank on the London Interbank Eurodollar Market of
deposits in United States Dollars of an amount equal to the amount of the
borrowing or the outstanding principal amount, as the case may be, for the
applicable Interest Period. If such deposits are not available to a Bank or
Banks, its/their obligation to make the Libor Based Rate available to Company
shall be suspended until such deposits once again become available. With
respect to any Revolving Credit Loan, if the Company fails at any time to
specify the Elected Interest Rate and/or the duration of any Interest Period in
accordance with the foregoing, then the Company shall be deemed to have
specified the Base Rate.
(d)Interest on all Loans shall be payable on each applicable Interest
Payment Date. Notwithstanding anything to the contrary in this Subsection 3.1,
whenever any unpaid principal amount of any Revolving Credit Note shall become
due and payable (whether at maturity, by acceleration or otherwise), interest on
all unpaid Revolving Credit Loans outstanding thereunder shall thereafter be
payable, until such amount shall be paid, at the rate per annum elected by the
Agent from among the Alternative Interest Rates available to the Company from
the Agent.
3.2.[INTENTIONALLY OMITTED]
3.3. Computation of Interest Period. With respect to each Revolving Credit
Loan, the first Interest Period shall commence on the day such Revolving Credit
Loan pursuant to Subsection 2.4 hereof is first made and each subsequent and
successive Interest Period shall commence on the day after the last day of the
immediately preceding Interest Period.
Notwithstanding the foregoing:
(a)If the final Interest Period would otherwise end on a day other than the
Commitment Termination Date, such Interest Period shall end on such Date;
(b)If the Company shall have specified or be deemed to have specified the
Base Rate as the Elected Interest Rate, the Company shall be deemed
automatically to have specified one (1) day as the Interest Period in
conjunction therewith.
3.4.Default Rate. Following acceleration of the obligations of the Company
hereunder, and notwithstanding any other provision hereof (except Subsection 3.8
below), the Elected Interest Rate shall be automatically increased by three (3)
percentage points above the rate otherwise applicable under the terms hereof.
3.5.Commitment Fee. The Company shall pay to the Agent, for the benefit of
each Bank, a fee (calculated on a per annum basis, based on a year of 360 days)
equal to the Applicable Commitment Fee computed against the average daily amount
by which the Facility Commitment of such Bank exceeds the sum of the aggregate
principal amounts outstanding on the Revolving Credit Note to such Bank (and as
to the Swing Loan Lender, also on the Swing Loan Note) and
such Bank's Revolving Credit Commitment Percentage of the aggregate face amount
of outstanding Letters of Credit. Such fee shall be payable in arrears on the
fifteenth day of each calendar quarter, commencing July 1, 1998, and also on the
Commitment Termination Date. The Agent shall provide the Company with a bill
for such fee within five (5) days of the end of each quarter.
3.6.Facility Fee. Contemporaneously with the execution hereof, the Company
shall pay to the Agent, for the benefit of the Banks, a facility fee in
consideration of the creation of the credit facilities described herein as
follows:
(a)to each Bank hereunder who was a party to the Prior Credit Agreement
immediately prior to the execution hereof, a facility fee in an amount equal to
five (5) basis points of the amount of its Facility Commitment in effect under
the Prior Credit Agreement prior to the execution hereof and (if applicable) ten
(10) basis points of the amount of any increase in its Facility Commitment as a
result hereof (as reflected on Schedule 9); and
(b)to each Bank hereunder who was not a party to the Prior Credit
Agreement, a facility fee in an amount equal to ten (10) basis points of the
amount of its Facility Commitment hereunder.
3.7.Illegality. In the event that, as a result of the adoption of, or any
change in, any applicable law or regulation or the interpretation thereof, it
becomes unlawful for a Bank to maintain Eurodollar liabilities sufficient to
fund any Loan subject to the Libor Based Rate, then such Bank shall immediately
notify Agent and the Company thereof and such Bank's obligation to make, convert
to, or maintain a Loan subject to the Libor Based Rate shall be suspended until
such time as such Bank may again cause the Libor Based Rate to be applicable to
its share of any Loans and such Bank's share of the Loans subject to the Libor
Based Rate shall accrue interest at the Base Rate. Promptly after becoming
aware that it is no longer unlawful for such Bank to maintain such Eurodollar
liabilities, such Bank shall notify Agent and the Company thereof and such
suspension shall cease to exist. In the event that it becomes unlawful for a
Bank, other than PNC, to maintain Eurodollar liabilities as described in this
paragraph, the Company shall have the option to replace such Bank with another
financial institution (acceptable to Agent) who will purchase all (but not part)
of such Bank's Revolving Credit Loans and assume such Bank's Revolving Credit
Commitment. Such Bank shall be required to assign and transfer to the financial
institution obtained by Company, pursuant to an agreement reasonably
satisfactory to such Bank, its respective Revolving Credit Loans in exchange for
a full payment of the outstanding balance thereof, with accrued interest and
unpaid fees.
3.8.Applicable Interest Limitations: In no contingency or event whatsoever
shall the aggregate of all amounts deemed interest hereunder and charged or
collected pursuant to the terms of this Agreement exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such court
determines Banks have charged or received interest hereunder in excess of the
highest applicable rate, each Bank shall, in its sole discretion, apply and set
off such excess interest received by such Bank against other indebtedness due or
to become due hereunder and such rate shall automatically be reduced to the
maximum rate permitted by such law.
3.9.Libor Indemnification. The Company and each Guarantor shall indemnify,
defend and hold harmless Agent and Banks against any and all loss, liability,
cost or expense which Agent and any Bank or Banks may sustain or incur as a
consequence of (a) any failure of Company to obtain, convert or extend any Loan
subject to a Libor Based Rate after notice thereof has been given to the
relevant Bank(s) or (b) any payment, prepayment, termination or conversion of a
Loan subject to a Libor Based Rate made for any reason on a date other than the
last day of the applicable Interest Period. Company and each Guarantor shall
pay on demand the full amount thereof to the relevant Bank(s). Without limiting
the foregoing, such loss shall equal the present value (using as the discount
rate an interest rate equal to the rate determined under (2) below) of the
excess, if any of (1) the amount of interest which otherwise would have accrued
on the Loan so paid, prepaid, terminated or converted (or not borrowed,
converted or extended) for the period from the date of such payment, prepayment,
termination or conversion (or failure to borrow, convert or extend) to the last
day of the then current applicable Interest Period for the Loan (or in the case
of a failure to borrow, convert or extend, to the last day of the applicable
Interest Period for the Loan which would have commenced on the date specified in
the relevant notice) at the applicable rate of interest for the Loan provided
for herein (excluding any margin above Libor), over (2) the amount of interest
(as reasonably determined by the Bank(s)) which would have accrued to the
Bank(s) on the principal amount of such Loan by placing such amount on deposit
for a comparable period with leading banks in the interbank Eurodollar market.
A determination by the Bank(s) as to the amounts payable pursuant to this
section shall be conclusive absent manifest error.
3.10.Capital Adequacy: If after the date hereof, the adoption of, or any
change in, any law, governmental rule, regulation, policy, guideline, directive
or similar requirement (whether or not having the force of law) imposes,
modifies, or deems applicable any capital adequacy, capital maintenance or
similar requirement which affects the manner in which any Bank allocates capital
resources to its commitments (including any commitments hereunder), and as a
result thereof, in the opinion of such Bank, the rate of return on such Bank's
capital with regard to the Loans and/or its obligations hereunder is reduced to
a level below that which such Bank could have achieved but for such
circumstances taking into account such Bank's policies regarding capital
adequacy, then in such case and upon notice from Agent to Company, Company shall
pay such Bank such additional amount or amounts as shall compensate such Bank
for such reduction in its rate of return. Such notice shall contain the
statement of such Bank with regard to any such amount or amounts which shall, in
the absence of manifest error, be binding upon Company. In determining such
amount, such Bank may use any reasonable method of averaging and attribution
that it deems applicable. In the event that a Bank, other than PNC, exercises
its rights under this Subsection 3.10, Company shall have the option to replace
such Bank with another financial institution (acceptable to Agent) who will
purchase all (but not part) of such Bank's Revolving Credit Loans and assume
such Bank's Revolving Credit Commitment. Such Bank shall be required to assign
and transfer to the financial institution obtained by Company, pursuant to an
agreement reasonably satisfactory to such Bank, its respective Revolving Credit
Loans in exchange for full payment of the outstanding balance thereof, with
accrued interest, unpaid fees and all amounts owing under this Subsection 3.10.
3.11.Taxes:
(a)All payments made by the Company under the Credit Agreement and the
Revolving Credit Notes issued from time to time thereunder shall be made free
and clear of, and without deduction or withholding for or on account of, any
present or future income, stamp or other taxes, levies, imposts, duties,
charges, fees, deductions or withholdings, now or hereafter imposed, levied,
collected, withheld or assessed by any Governmental Authority, excluding net
income taxes and franchise taxes (imposed in lieu of net income taxes) imposed
on the Agent or any Bank as a result of a present or former connection between
the Agent or such Bank and the jurisdiction of the Governmental Authority
imposing such tax or any political subdivision or taxing authority thereof or
therein (other than any such connection arising solely from the Agent or such
Bank having executed, delivered or performed its obligations or received a
payment under, or enforced, this Agreement or the Revolving Credit Notes). If
any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions
or withholdings ("Non-Excluded Taxes") are required to be withheld from any
amounts payable to the Agent or any Bank hereunder or under the Revolving Credit
Notes, the amounts so payable to the Agent or such Bank shall be increased to
the extent necessary to yield to the Agent or such Bank (after payment of all
Non- Excluded Taxes) interest or any such other amounts payable hereunder at the
rates or in the amounts specified in the Credit Agreement and the Revolving
Credit Notes, provided, however, that the Company shall not be required to
increase any such amounts payable to any Bank that is not organized under the
laws of the United States of America or a state thereof if (i) such Bank fails
to comply with the requirements of paragraph (b) of this subsection or (ii)
either of the certifications made by such Bank as set forth in such paragraph is
not true and correct with respect to such Bank. Whenever any Non-Excluded Taxes
are payable by the Company, as promptly as possible thereunder the Company shall
send to the Agent for its own account or for the account of such Bank, as the
case may be, a certified copy of an original official receipt received by the
Company showing payment thereof. If the Company fails to pay any Non- Excluded
Taxes when due to the appropriate taxing authority or fails to remit to the
Agent the required receipts or other required documentary evidence, the Company
shall indemnify the Agent and the Banks for any incremental taxes, interest or
penalties that may become payable by the Agent or any Bank as a result of any
such failure. The agreements in this subsection shall survive the termination
of the Credit Agreement and the payment of the Revolving Credit Notes and all
other amounts payable hereunder.
(b)Each Bank that is not incorporated under the laws of the United States
of America or a state thereof shall:
(i)deliver to the Company and the Agent (A) two duly completed copies of
United States internal Revenue Service Form 1001 or 4224, or successor
applicable form, as the case may be, and (B) an Internal Revenue Service Form W-
8 or W-9, or successor applicable form, as the case may be;
(ii)deliver to the Company and the Agent two further copies of any such
form or certification on or before the date that such form or certification
expires or becomes obsolete and after the occurrence of any event requiring a
change in the most recent form previously delivered by it to the Company; and
(iii) obtain such extensions of time for filing and complete such forms or
certifications as may reasonably be requested by the Company or the Agent;
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Bank from duly completing and delivering any such
form with respect to it and such Bank so advises the Company and the Agent.
Such Bank shall certify (i) in the case of a Form W-8 or W-9, that it is
entitled to an exemption from United States backup withholding tax. Each Person
that shall become a Bank or a participant pursuant to subsection 8.7 of the
Credit Agreement shall, upon the effectiveness of the related transfer, be
required to provide all of the forms and statements required pursuant to this
subsection, provided that in the case of a participant such participant shall
furnish all such required forms and statements to the Bank from which the
related participation shall have been purchased.
SECTION 4. REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to enter into this Agreement and to extend
credit as herein provided, the Company and each of the Guarantors represents and
warrants to the Banks that:
(a) The Company and each of the Guarantors is a corporation or other
entity duly organized, validly existing and in good standing under the laws of
the state of its incorporation or organization, has the corporate power to
transact the business in which it is engaged and presently intends to be
engaged, and is duly qualified and in good standing as a foreign corporation (or
organization) under the laws of any other jurisdiction in which the conduct of
its business or the ownership of its assets requires such qualification except
where the failure to so qualify is not likely to have a Material Adverse Effect.
(b) The Company has full power, authority and legal right (i) to execute
and deliver this Agreement and the Notes, (ii) to borrow under this Agreement,
and (iii) to perform and observe the terms and provisions of this Agreement and
the Notes. The execution, delivery and performance by the Company of this
Agreement and the Notes have been duly authorized by all necessary corporate (or
other approved) action and are in furtherance of its business purposes.
(c) The Guarantors each have full power, authority and legal right (i) to
execute and deliver this Agreement and the Guaranties, and (ii) to perform and
observe the terms and provisions of this Agreement and the Guaranties. The
execution, delivery and performance by each Guarantor of this Agreement and its
Guaranty have been duly authorized by all necessary corporate action and are in
furtherance of its respective corporate purposes.
(d) No consent of any other Person (including shareholders of the Company
or of any of the Guarantors) and no consent, license, approval or authorization
of, or registration or declaration with, any governmental body, authority,
bureau or agency is required in connection with the execution, delivery and
performance by the Company and the Guarantors of this Agreement, the Notes, or
the Guaranties.
(e) Neither the Company nor any of the Guarantors or KHL is in violation of
any term of (i) its certificate of incorporation (or organization) or bylaws (or
operating agreement), (ii) any agreement, indenture, mortgage, lease,
assignment, note or other instrument to which it is a party or which purports to
be binding upon it or upon any of its properties or assets, or (iii) any
judgment, decree, order, law, statute, ordinance, rule or governmental
regulation applicable to it, except to the extent that any such violations, in
the aggregate, could not reasonably be expected to have a Material Adverse
Effect; and the execution, delivery and performance of and
compliance with this Agreement and the Notes, in the case of the Company, and
with this Agreement and the Guaranties, in the case of each Guarantor, will not
result in any violation of or be in conflict with or constitute a default under
any such term, or result in the creation of Encumbrance upon any of its
properties or assets pursuant to any such term. All judgments, decrees and
orders to which the Company and/or any Guarantor is subject as of the date
hereof are listed on Schedule 4 attached hereto.
(f) There is no action, suit, investigation (of which the Company or any
Guarantor has received notice) or proceeding (whether or not purportedly on
behalf of the Company or any Guarantor) pending or, to the knowledge of the
Company or any Guarantor, threatened (or any basis thereof known to the Company
or any Guarantor) which (i) questions the validity of this Agreement, the Notes,
the Guaranties or the Pledge Agreement or any action taken or to be taken
pursuant hereto or thereto, or (ii) could reasonably be expected to result,
either in any case or in the aggregate, in a Material Adverse Effect. All
material pending litigation and investigations (of which the Company or any
Guarantor has received notice) to which the Company and/or any Guarantor is
subject as of the date hereof are listed on Schedule 5 attached hereto.
(g) Each of the Company, each Guarantor and KHL has filed all tax returns
and reports required by law to be filed, and has paid all material taxes,
assessments, fees and other governmental charges levied upon it or upon any of
its properties, assets, income or franchises which are due and payable, other
than those presently payable without penalty or interest or which are being
contested in good faith by appropriate legal proceedings and for which
appropriate reserves in accordance with GAAP are being maintained. There are no
known material contingent liabilities or liabilities for taxes of Hovnanian and
the Consolidated Subsidiaries as of October 31, 1997 which are not reflected in
the consolidated balance sheet of Hovnanian and the Consolidated Subsidiaries as
of October 31, 1997.
(h) The Company, each of the Guarantors and KHL have obtained all licenses,
permits and approvals necessary to operate their respective businesses and own
their respective properties, the absence of which could reasonably be expected
to have a Material Adverse Effect.
(i) As of the date hereof, the Company has no Subsidiaries, and Hovnanian
has no Subsidiaries except those specified on Schedule 1 attached hereto, and
all Joint Ventures to which the Company or any Guarantor is a party are listed
on Schedule 2 attached hereto.
(j) Neither the Company nor any Guarantor or KHL is a party to or bound by
any agreement, indenture, mortgage, lease, assignment or any other instrument,
nor is it subject to any charter or corporate restriction or any judgment,
decree, order, law, statute, ordinance, rule or regulation of any court,
arbitrator, grand jury or governmental agency or instrumentality, which has, or
in the future (so far as it can reasonably foresee) could reasonably be expected
to have, a Material Adverse Effect or a material adverse effect on the ability
of Hovnanian to perform its obligations under the Pledge Agreement.
(k) The Company has furnished to the Banks copies of the consolidated
balance sheet of Hovnanian and the Consolidated Subsidiaries as of October 31,
1997, and the related consolidated statements of income and of cash flows for
the year ended on such date, all as certified by Ernst & Young LLP. Such
balance sheet and statements (including the related schedules and notes) are
complete and correct and present fairly, in accordance with generally accepted
accounting principles consistently applied throughout the periods provided, the
financial position of Hovnanian and the Consolidated Subsidiaries as of October
31, 1997 and the income, and cash flows for the fiscal year ended October 31,
1997. Except as disclosed or reflected in such October 31, 1997 balance sheet
or statements, as of October 31, 1997, Hovnanian and the Consolidated
Subsidiaries had no material liabilities, contingent or otherwise.
(l)Since October 31, 1997, there has occurred no Material Adverse Effect.
(m) Each Plan maintained by the Company or any of the Consolidated
Subsidiaries or any Guarantor or to which any of them makes any contributions is
in compliance with the applicable provisions of ERISA, except for instances of
noncompliance which, singly or in the aggregate, do not and will not have a
Material Adverse Effect. The Company, each of the Consolidated Subsidiaries and
each of the Guarantors has met all of the funding standards applicable to its
Plans in all material respects, and there exists no event or condition which is
reasonably likely to result in the imposition of a lien upon the assets or
properties of the Company or any of the Consolidated Subsidiaries or the
termination of any such Plan under Section 4042 of ERISA.
(n) All financial statements, reports, prospectuses, proxy statements and
other documents and information furnished to the Banks by or on behalf of the
Company or any Guarantor were, at the time the same were so furnished, complete
and correct in all material respects to the extent necessary to give the Banks a
true and accurate knowledge of the subject matter. No fact is currently known
to the Company or any Guarantor which has a Material Adverse Effect or in the
future could reasonably be expected to (so far as the Company or any Guarantor
can reasonably foresee) have a Material Adverse Effect or a material adverse
effect on the ability of Hovnanian to perform its obligations under the Pledge
Agreement which has not been set forth or referred to herein or in such
documents or otherwise specifically disclosed in writing to the Banks.
(o) All of the issued and outstanding stock of the Company and each
Guarantor (otherthan Hovnanian) has been duly authorized and issued, is fully
paid and non-assessable and is owned by Hovnanian or another Guarantor, free and
clear of any Encumbrance not permitted
hereby.
(p) KHL is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, has the corporate power to
transact the business in which it is engaged and presently intends to be
engaged, and is duly qualified and in good standing as a foreign corporation
under the laws of any other jurisdiction in which the conduct of its business or
the ownership of its assets requires such qualification, except where the
failure to so qualify could not reasonably be expected to have a Material
Adverse Effect. All of the issued and outstanding stock of KHL has been duly
authorized and issued, is fully paid and nonassessable and is owned,
beneficially and of record, by Hovnanian, free and clear of any Encumbrance, or
rights under any agreement of sale, option or other conditional agreement or
undertaking. KHL has no Subsidiaries.
(q) Hovnanian has full power, authority and legal right to execute and
deliver, and to perform and observe the terms and provisions of, the Pledge
Agreement. The execution, delivery and performance by Hovnanian of the Pledge
Agreement has been duly authorized by all necessary corporate action and is in
furtherance of its corporate purposes.
(r) No consent of any other party and no consent, license, approval or
authorization of, or registration or declaration with, any governmental body,
authority, bureau or agency is required in connection with the execution,
delivery and performance by Hovnanian of the Pledge Agreement, and such
execution, delivery and performance will not result in any violation of or
be in conflict with or constitute a default under any term of (i) its
certificate of incorporation or by-laws, (ii) agreement, indenture, mortgage,
lease, assignment or other instrument to which it is a party or which purports
to be binding upon it or upon any of its properties or assets, or (iii), any
judgment, decree, order, law, statute, ordinance, rule or governmental
regulation applicable to it, or, except as contemplated by the Pledge Agreement,
result in the creation of any Encumbrance upon any of its properties or assets
pursuant to any such term.
(s)The Company has conducted a comprehensive review and assessment of the
computer applications of the Company and the Guarantors with respect to the
"year 2000 problem" (that is, the risk that computer applications may not be
able to properly recognize and process date-sensitive data and perform date-
sensitive functions after December 31, 1999), and based on that review and
inquiry, the Company does not reasonably believe the year 2000 problem will have
a Material Adverse Effect.
SECTION 5. CONDITIONS
5.1.Initial Conditions. The agreement of each Bank to make the initial
extension of credit requested to be made by it is subject to the satisfaction,
immediately prior to or concurrently with the making of such extension of
credit, of the following conditions precedent:
(a)The Agreement, the Notes, the Guaranties and all documents incidental
thereto shall have been executed and delivered by the Company and/or the
Guarantors, as the case may be, to the Banks.
(b)Each Bank shall have received the opinion of Peter S. Reinhart, Esquire,
counsel for the Company and the Guarantors, dated the date hereof. Such opinion
shall also cover such other matters incident to the transactions contemplated by
this Agreement as the Banks or their counsel may reasonably request.
(c)Hovnanian shall have duly executed and delivered to the Banks the Pledge
Agreement, and all documents and instruments incidental thereto.
(d)The Company and each of the Guarantors shall have delivered to the Banks
a copy of the resolutions of their respective boards of directors authorizing
the execution, delivery and performance of this Agreement and the Notes, in the
case of the Company, this Agreement and the Guaranties, in the case of each of
the Guarantors, and the Pledge Agreement, in the case of
Hovnanian, in each case certified by their respective secretaries.
(e)The Banks who are parties to this Agreement as of the date hereof shall
have received full payment of the Facility Fee.
(f)Hovnanian and the Company shall have delivered to the Banks copies of
their respective Articles and Certificates of Incorporation and ByLaws.
(g)All legal matters incident to the transactions contemplated by this
Agreement, the Notes and the Guaranties shall be satisfactory to counsel to the
Banks.
5.2. Continuing Conditions. The Banks shall not be required to make any
Revolving Credit Loans (and the Swing Loan Lender shall not be required to make
any Swing Loan) to the Company hereunder, and the LOC Banks shall not be
required to issue any Letters of Credit hereunder, unless on the date of any
borrowing or issuance:
(a)This Agreement, the Notes, the Guaranties and the Pledge Agreement shall
be in full force and effect and no Event of Default or Potential Event of
Default (expressly including without limitation any violation of Subsection
6.2(aa) herein) shall have occurred and be continuing hereunder or thereunder or
would be caused by the making of any such Revolving Credit Loans or Swing Loans
or the issuance of any such Letter(s) of Credit;
(b) The respective representations and warranties of the Company and each
of the Guarantors contained herein shall be true and complete and correct in all
material respects (or as to any representation or warranty which is expressly
qualified by reference to the term "Material Adverse Effect", then in all
respects) as if made on and as of such date.
(c) Each Bank and Agent shall have received a certificate executed by the
chief executive officer or the principal financial officer or the principal
accounting officer or other duly authorized representative of Hovnanian
certifying that the Borrowing Base as of the date of the most recent financial
statements of Hovnanian and the Consolidated Subsidiaries required to be
furnished pursuant to Subsection 6.1(a)(ii), (ix) and (x) of this Agreement (or
if no financial statement is yet required thereunder, then as of May 31, 1998)
is sufficient to enable the Company to incur the relevant Loan or become
obligated in respect of the relevant Letter of Credit.
(d)Each Bank shall have received such additional certificates, documents,
information or legal opinions as it may reasonably require.
SECTION 6. COVENANTS
6.1. Affirmative Covenants. The Company and each of the Guarantors covenants
and agrees that so long as any Note or any Letter of Credit is outstanding and
the Banks remain obligated under the Facility Commitments:
(a) Hovnanian will furnish to each Bank (i) as soon as available, and in
any event within ninety (90) days after the end of each fiscal year of
Hovnanian, a consolidated balance sheet of Hovnanian and the Consolidated
Subsidiaries as of the end of such fiscal year and consolidated statements of
income and of cash flows of Hovnanian and the Consolidated Subsidiaries for such
fiscal year, all in reasonable detail, prepared in accordance with GAAP applied
on a basis consistently maintained throughout the period involved, except for
such changes in accounting principles as may be disclosed therein, and certified
by independent public accountants of recognized standing selected by Hovnanian
and acceptable to the Requisite Banks; (ii) as soon as
available, and in any event within fifty-five (55) days after the end of each of
the first three quarters of each fiscal year of Hovnanian, a consolidated
balance sheet of Hovnanian and the Consolidated Subsidiaries as of the end of
each of such quarters and consolidated statements of income and of cash flows of
Hovnanian and the Consolidated Subsidiaries for each of such quarters, all in
reasonable detail, prepared in accordance with GAAP applied on a basis
consistently maintained throughout the period involved, except for such changes
in accounting principles as may be disclosed therein, and certified by the
principal financial or accounting officer of Hovnanian, (subject to normal year-
end audit adjustments); (iii) concurrently with the delivery of the financial
statements referred to in clauses (i) and (ii) above separate financial
statements (or separate figures as part of the financial statements referred in
clauses (i) and (ii) above) containing consolidated summary figures for each of
the Subsidiary Groups on a form substantially similar to Exhibit J attached
hereto; (iv) concurrently with the delivery of the financial statements referred
to in clauses (i) and (ii) above, financial statements for each Joint Venture,
all in reasonable detail and prepared in accordance with GAAP applied on a basis
consistently maintained throughout the period involved; (v) concurrently with
or promptly following the delivery of the financial statements referred to in
clause (i) above, a certificate of the independent public accountants who
certified such statements, stating that in making the examination necessary for
the audit of such financial statements they obtained no knowledge of the
existence of any Potential Event of Default or Event of Default, or if they
shall have obtained knowledge thereof, specifying the same; (vi) concurrently
with the delivery of the financial statements referred to in clauses (i) and
(ii) above, a certificate of the principal executive officer or the principal
financial officer or the principal accounting officer of Hovnanian and the
Company to the effect that no Event of Default or Potential Event of Default has
occurred and is continuing (or, if any Event of Default or Potential Event of
Default shall exist, specifying the nature and status thereof) and a Compliance
Letter substantially in the form of Exhibit F attached hereto and made a part
hereof signed by the principal executive officer or the principal financial
officer or the principal accounting officer of Hovnanian and the Company; (vii)
promptly after the same are available, (1) all proxy statements, financial
statements and reports as Hovnanian shall send or make available generally to
the holders of its securities, (2) all regular and periodic reports which
Hovnanian may be required to file with the Securities and Exchange Commission or
any other governmental department, commission, board, bureau or agency, or with
any securitie exchange, and (3) any analysts' reports with respect to Hovnanian
received by the principal accounting officer of Hovnanian or the Company from
brokerage firms or rating agencies; (viii) as long as Hovnanian is required
under GAAP to prepare financial statements on a consolidated basis with
Subsidiaries which are not Restricted Subsidiaries, concurrently with or
promptly following the delivery of the financial statements referred to in
clause (i) and (ii) above, a consolidated balance sheet which reflects
accurately the financial position at such date on a consolidated basis of the
Company, the Guarantors and KHL (together with, to the extent not otherwise
included, the management companies and immediate parent holding companies of the
Homebuilding Subsidiaries) of Hovnanian only; (ix) within fifty-five (55) days
after the end of each month which is not the last month of a fiscal quarter, a
written report signed by the principal financial officer or principal accounting
officer of Hovnanian and the Company certifying whether or not the Company was
in compliance with Subsection 6.2(aa) hereof as of such month-end and setting
forth the aggregate principal balance of Loans then owing to each Bank as well
as a detailed calculation (as of such month-end) showing compliance or
noncompliance, as the case may then be, with such Subsection 6.2(aa), on a form
substantially similar to Exhibit I attached hereto; (x) within fifty-five (55)
days after each fiscal year-end, a certificate containing the calculations to
determine the Borrowing Base as well as the calculations to determine compliance
or noncompliance, as the case may then be, with Subsection 6.2(aa), in each case
as of such fiscal year-end; and (xi) from time to time, such additional
financial and other information as any Bank or Agent may reasonably request,
including without limitation a copy of any actual Letter(s) of Credit to any
Bank requesting such document(s).
(b) The Company and each of the Guarantors will, and Hovnanian will cause
KHL to, pay and discharge, when due, all of its obligations and liabilities
where the failure to do so could reasonably be expected to have a Material
Adverse Effect except where the same may be contested in good faith and the
Company, such Guarantor or KHL, as the case may be, maintains, in accordance
with GAAP, appropriate reserves for the accrual of the same.
(c) The Company and each of the Guarantors will, and Hovnanian will cause
KHL to, promptly give written notice to the Banks of (i) any event of default
known to it with respect to any of its obligations for borrowed money or for the
deferred purchase price of property, in each case in a principal amount in
excess of $250,000, other than nonrecourse Indebtedness, including an Event of
Default under this Agreement, (ii) any event of default known to it under, or
any other material notice received concerning, any of the Indentures or with
respect to any of the Subordinated Debt, (iii) any legal, judicial or regulatory
proceedings affecting it or any of its properties or assets in which the amount
involved is more than $500,000 and such amount is not fully covered by
insurance, and (iv) any dispute between it and any governmental regulatory body
or any other party which, if adversely determined, could reasonably be expected
to have a Material Adverse Effect.
(d)The Company and each of the Guarantors, at its expense, will, and
Hovnanian will cause KHL to, maintain insurance with respect to its properties
and assets and its business with financially sound and reputable insurers
against loss or damage of the kinds customarily insured against by corporations
of established reputation engaged in the same or a similar business and
similarly constituted, in such types and amounts as are customarily carried
under similar circumstances by such other corporations. The Company and each of
the Guarantors will furnish to the Banks such evidence of insurance as the Banks
may reasonably require.
(e) Except as otherwise expressly permitted by Subsection 6.2(e), the
Company and each of the Guarantors will, and Hovnanian shall cause KHL to,
preserve and maintain its corporate existence and qualify and remain qualified
as a foreign corporation authorized to do business in each jurisdiction in which
the character of its properties or the nature of its operations
requires such qualification or authorization except where the failure to so
qualify could not reasonably be expected to have a Material Adverse Effect, and
preserve and maintain those of its rights, franchises and privileges the loss of
which, singly or in the aggregate, would have Material Adverse Effect.
(f) The Company and each of the Guarantors will maintain or cause to be
maintained in good repair, working order and condition all material properties
used or useful in its business (whether owned or held under lease), and from
time to time make or cause to be made all needed and appropriate repairs,
renewals, replacements, additions, betterments and improvements thereto, so that
the business carried on in connection herewith may be properly and
advantageously conducted at all times.
(g) The Company and each of the Guarantors will permit any authorized
representatives designated by the Agent or any of the Banks, at that Bank's
expense (or in the case of Agent, at the Banks' expense), to visit and inspect
its properties, inspect its books of account, and to discuss its affairs,
finances and accounts with its officers, all at such times during normal
business hours and as often as any of the Banks may reasonably request.
(h) Hovnanian at all times will maintain accurate and complete records of
the status of the real property that makes up Inventory Properties and the
Income Producing Properties. The Banks shall have the right to make test
verifications of the properties which are the components of the Borrowing Base
at any time, in any manner and through any medium the Banks reasonably consider
advisable, and the Company and each of the Guarantors shall render
any necessary assistance to the Banks in this regard.
(i) The Company and each of the Guarantors will, upon the creation or
acquisition by it after the date hereof of a Homebuilding Subsidiary, an
Operating Property Subsidiary or Other Corporate Subsidiary, cause such
Subsidiary to deliver to each of the Banks (i) an executed Joinder Agreement
substantially in the form of Exhibit G attached hereto, pursuant to which
such Subsidiary shall become a Guarantor hereunder and under the Guaranties,
(ii) the opinion of counsel to the Company, dated the date of such Joinder
Agreement and satisfactory in form and substance to the Banks and their counsel,
which shall cover the matters contained in Annex A to the form of Joinder
Agreement attached hereto as Exhibit G, (iii) a copy of the resolutions of the
board of directors of such Subsidiary authorizing the execution, delivery and
performance of the Joinder Agreement, certified by its Secretary, and (iv) a
copy of the certificate of incorporation of such Subsidiary, certified by the
Secretary of State of the state of incorporation,
and the bylaws of such Subsidiary, certified by its secretary.
(j) Hovnanian will cause the Consolidated Subsidiaries to pay to the
Company, by way of repayment of any loan owing to the Company, or to Hovnanian
(for Hovnanian to loan or otherwise provide to the Company) by way of repayment
of any loan owing to Hovnanian or by dividend, or otherwise, all amounts
necessary to permit the Company to meet, as and when due, its obligations
hereunder and under the Notes.
(k) Hovnanian will cause KHL to pay to Hovnanian, at least annually, by way
of dividends, all net income of KHL.
(l)Hovnanian and its Consolidated Subsidiaries will promptly (but in any
event within thirty (30) days) notify each Bank of any modification to their
existing accounting policies and reporting procedures (which notice shall
explain in reasonable detail the nature of and reason for the modification).
(m)The Company shall take all action necessary to assure that computer-
based systems of the Company and the Guarantors are able to operate and
effectively process data and perform functions, including dates on and after
January 1, 2000, in a manner so that the year 2000 problem will not have a
Material Adverse Effect. At the request of the Agent, the Company shall provide
the Banks information reasonably acceptable to the Banks as to the year 2000
compatibility of the Company and the Guarantors.
6.2. Negative Covenants. The Company and each of the Guarantors covenants
that so long as any Note or any Letter of Credit is outstanding or the Banks
remain obligated under the Facility Commitments, unless written consent from the
Requisite Banks is first obtained:
(a) The Company and each of the Guarantors will not, and Hovnanian will not
permit any of the Consolidated Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Indebtedness, except the following
("Permitted Indebtedness"): (i) the Indebtedness described in Schedule 6
attached hereto; (ii) the Indebtedness evidenced by the Notes and the Letters of
Credit; (iii) any Indebtedness secured by Permitted Encumbrances; (iv)
Subordinated Debt; (v) any Indebtedness of Hovnanian to any Consolidated
Subsidiary or of any Consolidated Subsidiary to Hovnanian or any other
Consolidated Subsidiary; (vi) non-recourse Purchase Money Mortgage Indebtedness;
(vii) to the extent not prohibited by Subsection 6.2(s) hereof,
permanent financing Indebtedness secured only by a non-recourse mortgage on an
Income Producing Property; (viii) to the extent not prohibited by Subsection
6.2(j) hereof, Warehouse Lines of Credit obtained in the ordinary course of
business by any Mortgage Subsidiary; (ix) Indebtedness constituting Permitted
Guarantees; and (x) Other Senior Homebuilding Indebtedness not prohibited by
Subsection 6.2(q) hereof.
(b) The Company and each of the Guarantors will not, and Hovnanian will not
permit any of the Consolidated Subsidiaries to, directly or indirectly, create,
assume or suffer to exist any Encumbrance of any kind upon any of its properties
or assets, whether now owned or hereafter acquired, except the following
("Permitted Encumbrances") (i) the liens described in Schedule 7
attached hereto; (ii) 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; (iii)
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 period longer than 30 days or which are being contested in good faith by
appropriate proceedings; (iv) 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
GAAP; (v) Purchase Money Mortgages securing purchase money Indebtedness; (vi)
non-recourse mortgages on Income Producing Properties securing Indebtedness not
prohibited by Subsection 6.2(s) hereof; (vii) liens on assets of a Mortgage
Subsidiary to secure only a Warehouse Line of Credit provided to such
Subsidiary which is not prohibited by Subsection 6.2(j) hereof; and (viii)
easements, rights-of-way, restrictions and other similar encumbrances incurred
in the ordinary course of business which, in the aggregate, are not substantial
in amount and which do not in any case materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of Hovnanian, the Company and the Consolidated Subsidiaries, or
(ix) liens in connection with capital leases or sale leaseback transactions
permitted hereby not securing any other indebtedness.
(c) The Company and each of the Guarantors will not, and Hovnanian will not
permit any of the Consolidated Subsidiaries to, directly or indirectly, become
or remain liable, directly or indirectly, in connection with any Contingent
Obligation except the following ("Permitted Guarantees"): (i) guarantees listed
on Schedule 8 attached hereto; (ii) guarantees as of the date hereof of
Indebtedness of Income Producing Property Subsidiaries permitted under
Subsection 6.2(a)(vii); (iii) guarantees by Hovnanian or the Company serving as
credit support for obligations of Mortgage Subsidiaries in respect of Warehouse
Lines of Credit permitted under Subsection 6.2(a)(viii) above so long as the
aggregate outstanding amount of such guarantees does not exceed $10,000,000 at
any one time; (iv) the Guaranties provided to the Banks; (v) guarantees by
Hovnanian and/or any Consolidated Subsidiary of Other Senior Homebuilding
Indebtedness; (vi) guarantees by Hovnanian and/or any Consolidated Subsidiary of
any Subordinated Debt so long as such guarantees are subordinated by their terms
to the prior payment in full of the Indebtedness evidenced by this Agreement,
the Notes and the Letters of Credit outstanding from time to time in a manner
and under an agreement acceptable to the Requisite Banks; and (vii) other
guarantees given by the Company, Hovnanian or a Consolidated Subsidiary in the
ordinary course of its business so long as no Event of Default is then
outstanding.
(d) The Company and each of the Guarantors will not, and Hovnanian will not
permit any of the Consolidated Subsidiaries to, directly or indirectly, make or
suffer to exist any Investment in, or, except as otherwise provided in
Subsection 6.2(g) below, make or suffer to exist any advances or loans to, any
Person except the following ("Permitted Investments"): (I) Investments and loans
listed on Schedule 10 attached hereto; (ii) advances to employees in the
ordinary course of business; (iii) Investments in or purchases of cash,
marketable direct obligations of the United States of America or any agency
thereof, and certificates of deposit or repurchase agreements issued by any bank
with a capital and surplus of at least $25,000,000 organized under the laws of
the United States of America or any state thereof, provided that such
obligations, certificates of deposit and repurchase agreements have a maturity
of less than one year from the date of purchase; (iv) purchases of investment
grade commercial paper or debt having a maturity date of one year or less from
the date of purchase; (v) purchases of marketable securities of issuers in the
residential real estate development industry or similar industries, provided
such securities are traded on a national securities exchange or in the over-the-
counter market on the NASDAQ National Market System and have a cost not
exceeding $3,000,000 in the aggregate; (vi) Investments in the Company or in
Guarantors, provided however that the aggregate amount of all Investments in
Poland shall not exceed $10,000,000 outstanding at any one time; (vii)
Investments in wholly-owned Finance Subsidiaries; (viii) to the extent not
prohibited by Subsection 6.2(k) hereof, Investments by Hovnanian or the Company
in Related Businesses and/or Joint Ventures; (ix) Investments in Income
Producing Properties if at the time of the Investment the total Investment,
including the Investment to be made, in such Properties since the Starting Date
would not exceed (1) $15,000,000, plus (2) 25% of increases in Adjusted Tangible
Net Worth since the Starting Date plus (3) cumulative Distributions from Income
Producing Property Subsidiaries since the Starting Date; (x) promissory notes
issued in connection with any disposition of assets made in accordance with
Subsection 6.2(e); (xi) Investments by Mortgage Subsidiaries in Joint Ventures;
(xii) Investments by Hovnanian or the
Company in any Mortgage Subsidiary so long as there is then no outstanding
violation of Subsection 6.2(j) hereof; and (xiii) Investments in funds holding
assets primarily consisting of those described in clause (iii) hereof.
(e) The Company and each of the Guarantors will not, and Hovnanian will not
permit any of the Consolidated Subsidiaries to, directly or indirectly, enter
into any transaction of merger or consolidation, or liquidate or dissolve itself
(or suffer any liquidation or dissolution),or convey, sell, lease or otherwise
dispose of all or any substantial part of its property, assets or business,
except (i) the sale or lease of Inventory Properties in the ordinary course of
business, (ii) the sale or lease of Income Producing Properties in the ordinary
course of business, (iii) the sale of Mortgage Receivables by any Mortgage
Subsidiary, (iv) any sale-leaseback not prohibited by Subsection 6.2(f), (v) any
sale of capital stock not prohibited by Subsection 6.2(x), (vi) any other sale
of assets by the Company or a Consolidated Subsidiary to the Company or another
Consolidated Subsidiary so long as any such sale by the Company or a Guarantor
shall only be made to another Guarantor or the Company, and (vii) any merger of
any Consolidated Subsidiary or KHL into the Company or any other Consolidated
Subsidiary, so long as (1) if such merger involves a Guarantor, a Guarantor or
the Company is the surviving entity and (2) no Material Adverse Effect will
result from such transaction.
(f) The Company and each of the Guarantors will not, and Hovnanian will not
permit any of the Consolidated Subsidiaries to, directly or indirectly, sell,
transfer or otherwise dispose of real and/or personal property with a view
directly or indirectly to the leasing back of the same or of any similar
property except for (i) sales and leasebacks of sample model homes; and (ii) a
sale and leaseback of its Red Bank, New Jersey office building and/or a sale and
leaseback of its West Palm Beach, Florida office building, if the terms of any
such sale/leaseback arrangement(s) are comparable to those which could be
obtained in an arm's length transaction with an independent third party and the
lease payments pursuant thereto do not exceed fair market rental for such
property.
(g) The Company and each of the Guarantors will not, and Hovnanian will not
permit any of the Consolidated Subsidiaries to, directly or indirectly, lend
money to or for the benefit of any officers or directors of the Company, any of
the Consolidated Subsidiaries or any Guarantor, or any relatives of such
officers or directors, (i) at an interest rate less than the interest rate on
the date of any such loan of six-month U.S. Treasury Bills and (ii) in any event
in an aggregate amount at any time outstanding for all such loans in excess of
$3,000,000.
(h) The Company and each of the Guarantors will not, and Hovnanian will not
permit any of the Consolidated Subsidiaries to, directly or indirectly, declare
or pay any Distributions (other than dividends payable solely in shares of its
capital stock), or purchase, redeem, retire or otherwise acquire any shares of
its capital stock, except that (i) any of the Restricted Subsidiaries or
Guarantors may pay cash dividends out of legally available funds in any amount
solely to Hovnanian or to other Restricted Subsidiaries or Guarantors; (ii)
Consolidated Subsidiaries (other than Restricted Subsidiaries or Guarantors) may
pay cash dividends to any Consolidated Subsidiary or to Hovnanian; (iii) if no
Event of Default exists hereunder, or would be caused
thereby, Hovnanian may pay cash dividends out of legally available funds in an
aggregate amount not to exceed $10,000,000 in any period of twelve (12)
consecutive months; and (iv) if no Event of Default exists hereunder, or would
be caused thereby, Capital Stock Retirements may be made at any time in an
aggregate amount not to exceed $15,000,000 after the Starting Date.
(i)Adjusted Tangible Net Worth less Subordinated Debt shall not be less
than Minimum Equity.
(j)No Mortgage Subsidiary shall, and Hovnanian will not permit any Mortgage
Subsidiary to, incur Indebtedness if the ratio of all Indebtedness of such
Subsidiary (including the Indebtedness to be incurred) to such Subsidiary's
equity is greater than 12 to 1. For the purposes hereof, the outstanding
balance of Indebtedness of such Mortgage Subsidiary covered by a
Permitted Guarantee made by Hovnanian or the Company and the outstanding balance
of loans made by Hovnanian or the Company to such entity shall be added to and
deemed part of such entity's equity.
(k)The aggregate of Restricted Payments and Restricted Investments after
the Starting Date shall not exceed (i) $36,000,000, plus (ii) 50% of all
Consolidated Net Income (on a cumulative basis) earned after the Starting Date,
plus (iii) 50% of all proceeds realized by Hovnanian from the issuance of Equity
Securities after the Starting Date.
(l)Land in Planning shall not at any time exceed twenty percent (20%) of
Adjusted Tangible Net Worth.
(m)The sum of Land under Development and Land in Planning shall not at any
time exceed Adjusted Tangible Net Worth.
(n)Unsold Lots/Homes Under Construction, excluding the Book Value of model
homes, shall not at any time exceed thirty percent (30%) of Adjusted Tangible
Net Worth.
(o)Units representing Unsold Lots/Homes Under Construction shall not at any
time exceed the greater of (i) forty-five percent (45%) of total units then
under construction (beyond the slab or foundation stage of construction) and
(ii) twenty-five percent (25%) of total units delivered to customers within the
twelve (12) month period preceding the date of calculation.
(p)[INTENTIONALLY OMITTED]
(q)Other Senior Homebuilding Indebtedness shall not exceed $200,000,000.
(r)Homebuilding Indebtedness shall not exceed the product of (1) the Total
Debt Multiplier times (2) the Net Worth Amount.
(s)No Consolidated Subsidiary shall, and Hovnanian shall not permit any
Consolidated Subsidiary to, incur Indebtedness related to Income Producing
Properties except Indebtedness incurred at a time when the aggregate
Indebtedness related to Income Producing Properties (including the Indebtedness
to be incurred) is less than seventy (70%) percent of the
aggregate Book Value (before accumulated depreciation) of all Income Producing
Properties.
(t)Investments after the Starting Date in states which are not Core States
shall not exceed in the aggregate ten percent (10%) of Adjusted Tangible Net
Worth.
(u) The Company and each of the Guarantors and any Plan of any of them will
not (i) engage in any "Prohibited Transaction" (as such term is defined in
Section 406 or Section 2003(a) of ERISA), or incur any "accumulated funding
deficiency" (as such term is defined in Section 302 of ERISA) whether or not
waived, except to the extent that the foregoing, individually or in the
aggregate, do not have or could not reasonably be expected to have a Material
Adverse Effect or (ii) terminate any such Plan in a manner which results in or
could reasonably be expected to result in the imposition of a lien on any
property of the Company or any Guarantor pursuant to Section 4068 of ERISA.
(v) [INTENTIONALLY OMITTED]
(w) Neither the Company nor any of the Guarantors shall purchase, redeem,
retire, defease, or otherwise prepay, all or any portion of the Subordinated
Debt, except if no Event of Default is then outstanding (i) Mandatory Principal
Payments may be made in respect of the Subordinated Debt; (ii) unless the
Indebtedness referenced in clause (iv) hereof has been paid in
its entirety without issuance of $100,000,000 of new Subordinated Debt, Optional
Sinking Fund Payments may be made in any fiscal year up to an aggregate amount
equal to the lesser of (1) $15,000,000 plus 100% of the amount permitted to be
applied to make Optional Sinking Fund Payments in the immediately preceding
fiscal year but not in fact so applied and (2) $25,000,000;
(iii) Subordinated Debt may be refinanced in the manner contemplated by the
second sentence of the definition of "Optional Sinking Fund Payment;" and (iv)
the Company may purchase, in whole or in part, the Subordinated Debt referenced
in clause (i) of the definition thereof.
(x) Neither the Company nor any of the Guarantors shall sell, transfer,
convey or dispose of any shares of capital stock of any Subsidiary except for
sales, transfers or conveyances to the Company or a Guarantor or sales of Income
Producing Property Subsidiaries in the ordinary course of business.
(y) Neither the Company nor any of the Guarantors (except Hovnanian) shall
authorize or issue any additional shares of its capital stock other than to the
Company or another Guarantor.
(z) Hovnanian shall not permit KHL to, and shall take all appropriate
action to insure that KHL does not, directly or indirectly, create, incur,
assume or suffer to exist (i) any Indebtedness, or (ii) any Encumbrance of any
kind upon any of KHL's properties or assets, whether now owned or hereafter
acquired (other than Encumbrances imposed by operation of law).
(aa) Neither the Company nor the Guarantors will allow the aggregate
principal amount at any time outstanding of Senior Homebuilding Indebtedness,
less the aggregate face amount of all outstanding Performance Letters of Credit,
to exceed the Borrowing Base.
(bb)Hovnanian's (or as the case may be, the Company's or any Consolidated
Subsidiary's) share of the Indebtedness of all Joint Ventures, (calculated by
multiplying the ownership interest of the applicable entity by the aggregate
Indebtedness of such Joint Venture) shall not exceed $35,000,000.
(cc)No Joint Venture shall have aggregate Indebtedness in excess of seventy
percent (70%) of the aggregate Book Value (measured as of the date financing is
obtained with respect to each such asset without deduction for accumulated
depreciation) of the fixed assets of such entity.
(dd)During any fiscal quarter which is the third consecutive fiscal quarter
as of the last day of which the Fixed Charge Coverage Ratio is lower than 1.00
and the Cash Flow Coverage Ratio is lower than 1.10, Hovnanian and the
Consolidated Subsidiaries will not make in the aggregate purchases of land in
excess of the lesser of (i) fifty percent (50%) of the average cost of
land sold (land component of cost with respect to each sale) for the immediately
prior four (4) fiscal quarters and (ii) the cost of land sold (as determined
above) for the immediately prior fiscal quarter.
SECTION 7. EVENTS OF DEFAULT
If any of the following events (herein called "Events of Default") shall
occur and shall not have been remedied:
(a) Failure to pay any monetary obligation(s) owing to any Bank or Banks
pursuant to this Agreement, including principal of or interest on any Note, when
due (in the case of payments of principal), or within three (3) Business Days
after the date due (in the case of payments of other obligations);
(b) Any representation or warranty made by the Company or any Guarantor in
this Agreement, or in any certificate, financial or other statement furnished by
the Company or any Guarantor pursuant hereto or thereto, is untrue in any
material respect (or as to any representation or warranty which is expressly
qualified by reference to the term "Material Adverse Effect", then in any
respect) at the time when made;
(c) Default by the Company or any Guarantor in the observance or
performance of any of the covenants or agreements contained in this Agreement
(except Subsection 6.2(aa) hereof), and the continuance of the same unremedied
for a period of thirty (30) days after notice thereof shall have been given to
the Company or such Guarantor, as the case may be, by Agent or any of the Banks
(provided, however, that any such remedy shall be deemed effective only if the
Company has given written notice to Agent and each Bank prior to the end of such
30 day period describing such remedy and certifying that such remedy has been
effected);
(d) Default by the Company in the observance of the covenant contained in
Subsection 6.2(aa) hereof, and the continuance of the same unremedied for a
period of five (5) days after notice thereof shall have been given to the
Company by Agent or any of the Banks;
(e) The Company or any of the Consolidated Subsidiaries or any Guarantor
shall (I) default in the payment of any obligation for borrowed money (other
than the Notes), including but not limited to any Subordinated Debt, or for the
deferred purchase price of property (other than Indebtedness relating to any
nonrecourse Purchase Money Mortgages or any non-recourse mortgages on any Income
Producing Properties) beyond the period of grace, if any, provided with
respect thereto or (ii) default in the performance or observance of any other
term, condition or agreement relating thereto, including but not limited to the
Indentures or any other instrument with respect to any Subordinated Debt, if the
effect of such default is to cause, or permit the holder or holders of such
obligation (or a trustee on behalf of such holder or holders) to cause,
such obligation to become due prior to its stated maturity; provided, however,
that the aggregate dollar amount of the obligation with respect to which the
default has occurred at any time exceeds $500,000;
(f) Filing by the Company, any of the Consolidated Subsidiaries (other than
an Excluded Subsidiary) or any Guarantor (other than an Excluded Subsidiary) of
a voluntary petition or other proceeding in bankruptcy or a voluntary petition,
answer or other proceeding seeking reorganization, arrangement, readjustment of
its debts or for any other relief under any
bankruptcy, insolvency or other similar act or law, state or federal, now or
hereafter existing, or any action by the Company, any of the Consolidated
Subsidiaries (other than an Excluded Subsidiary) or any Guarantor (other than an
Excluded Subsidiary) indicating its consent to, approval of, or acquiescence in,
any such petition or proceeding; the application by the Company, any of the
Consolidated Subsidiaries (other than an Excluded Subsidiary) or any Guarantor
(other than an Excluded Subsidiary) for or the appointment by consent or
acquiescence of a receiver or trustee for itself or for all or a substantial
part of its property; the making by the Company, any
of the Consolidated Subsidiaries (other than an Excluded Subsidiary) or any
Guarantor (other than an Excluded Subsidiary) of an assignment for the benefit
of creditors; the inability of the Company, any of the Consolidated Subsidiaries
(other than an Excluded Subsidiary) or any Guarantor (other than an Excluded
Subsidiary), or the admission by the Company, any of the Consolidated
Subsidiaries (other than an Excluded Subsidiary) or any Guarantor (other than an
Excluded Subsidiary) in writing of its inability, to pay its debts as they
mature, provided however, that so long as Agent receives prior notice of each
relevant event covered hereby no Event of Default shall have occurred under this
Subsection 7(f) unless and until a relevant event covered
hereby occurs with respect to either (1) the Company, (2) Hovnanian, or (3)
those Consolidated Subsidiaries owning (as of the date of the relevant event
covered hereby) three percent (3%) or more of the assets of the Consolidated
Subsidiaries taken as a whole;
(g) Filing of an involuntary petition or other proceeding against the
Company, any of the Consolidated Subsidiaries (other than an Excluded
Subsidiary) or any Guarantor (other than an Excluded Subsidiary) in bankruptcy
or seeking reorganization, arrangement, readjustment of its debts or for any
other relief under any bankruptcy, insolvency or other similar act or law, state
or federal, now or hereafter existing; or the involuntary appointment of a
receiver or trustee of the Company, any of the Consolidated Subsidiaries (other
than an Excluded Subsidiary) or any Guarantor (other than an Excluded
Subsidiary) or for all or a substantial part of its property; or the issuance of
a warrant of attachment, execution or similar process against any substantial
part of the property of the Company, any of the Consolidated Subsidiaries (other
than an Excluded Subsidiary) or any Guarantor (other than an Excluded
Subsidiary), and the continuance of any of such events for 30 days as to the
Company or Hovnanian or 60 days as to any Consolidated Subsidiary (other than
the Company) undismissed, unbonded or undischarged;
(h)All or any material part of the property of the Company, the
Consolidated Subsidiaries and the Guarantors, taken as a whole, shall be
condemned, seized or otherwise appropriated, or custody or control of such
property shall be assumed by any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency, and shall be retained
for a period of 30 days;
(i)Members of the Hovnanian family shall at any time cease to own, of
record or beneficially, shares representing at least fifty-one percent (51%) of
the total voting power of the common stock of Hovnanian. "Members of the
Hovnanian family" shall mean 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;
(j) Any amendment, modification or waiver, including for the purpose of
curing a default, of any term or provision of any of the Indentures (other than
amendments, modifications or waivers which are of a technical or clarifying
nature, or which extend the due date or reduce the amount of any payment owing
thereunder, so long as they do not in any event change the
subordination language of such Indenture) shall have been made without the
written consent of the Requisite Banks, which consent shall not be unreasonably
withheld;
(k)Any Guaranty shall, at any time after its execution and delivery and for
any reason, cease to be in full force and effect, or shall be declared null and
void, or the validity or enforceability of this Agreement, any of the Notes or
any of the Guarantees shall be contested by the Company or any Guarantor, or the
Company or any Guarantor shall deny it has any further liability or obligation
under any of such agreements (other than, in the case of any Guaranty, as a
result of the sale, liquidation or merger of any Guarantor permitted by this
Agreement);
(l) The Pledge Agreement shall, at any time, after its execution and
delivery and for any reason, cease to be in full force and effect or shall be
declared null and void, or the validity or enforceability thereof shall be
contested by Hovnanian, or Hovnanian shall deny it has any further liability or
obligation under the Pledge Agreement; or
(m)Company or any Guarantor shall be indicted for or convicted of engaging
in any type of criminal activity, or any investigation shall be undertaken with
respect to the engaging in of any type of criminal activity by the Company or
any Guarantor which investigation results in or shall be reasonably likely to
result in a Material Adverse Effect; then, and in any such event (except the
events described in Subsections 7(f) or (g) with respect to the Company or
Hovnanian) the Requisite Banks may, without notice to the Company, direct the
Agent to declare the Notes to be forthwith due and payable (and upon the
occurrence of any event described in Subsection 7(f) or (g) with respect to the
Company or Hovnanian, the Notes shall be automatically due and payable),
whereupon the then outstanding aggregate principal amount of the Notes, together
with accrued interest thereon, and all other obligations of any nature
thereunder and hereunder, whether due or to become due, direct or indirect,
matured or contingent, shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived, anything contained herein or in any Note to the
contrary notwithstanding. To the extent a default described in Subsection 7(a)
above with respect to a payment of principal or interest owing to any Bank but
not as to all Banks has occurred and continued for at least thirty (30) days
past its due date, then such Bank affected thereby may, without notice to the
Company, direct the Agent to declare the Note (or Notes in
the case of the Swing Loan Lender) issued to such Bank to be forthwith due and
payable with the same force and effect hereunder as to such Note(s) as would be
applicable hereunder upon an acceleration of all Notes, which right of any such
Bank shall be independent of and shall not limit the right of the Requisite
Banks described above to cause an acceleration of all Notes upon the
occurrence of such Event of Default (whether exercised by the Requisite Banks
before or after any such Bank affected thereby has exercised its right
hereunder).
SECTION 8. THE BANKS
8.1. Non-reliance; Notice of Default. Each of the Banks acknowledges that
it is acting on its own behalf with respect to the transactions herein
contemplated, no other Bank is acting as agent or representative for it except
as and to the extent expressly provided herein, and neither any of the other
Banks nor the Agent has made any representations or warranties with respect
to, and shall in no way be responsible for, the accuracy or any information
given or to be given to it by the Company or any of the Guarantors, or the
validity, enforceability or legal effect of this Agreement, the Notes, the
Guaranties, the Pledge Agreement, or of any other documents delivered in
connection herewith, or be bound to ascertain or inquire as to the performance
or observance of any of the terms hereof or thereof. Neither the Agent nor any
Bank shall be liable to any other Bank for any action taken or omitted by it
hereunder so long as it has acted in good faith unless grossly negligent. Each
of the Banks agrees to give to the Agent and the other Banks prompt notice of
the occurrence of any Event of Default or Potential Event of Default or of any
other matter which in its judgment materially affects the interests of the
Banks.
8.2.Enforcement of Remedies If the Notes shall have become due and payable
pursuant to Section 7 hereof, Agent shall, on behalf of the Banks, proceed to
accelerate (unless, pursuant to Section 7, acceleration is automatic) payment of
the Notes and Guaranties, and, in such manner and order and using such
procedures as it may determine, shall enforce any other right or remedy
available to it and Banks, or any of them, against the Company and/or any one or
more of the Guarantors to protect, preserve and defend the interests of the
Banks and collect the obligations of the Company and the Guarantors, and each
Bank shall be entitled to exercise any right of setoff available at law or
equity to enforce its rights against the Company or any or
all of the Guarantors.
8.3. Payments Prior to Acceleration. Notwithstanding any provision to the
contrary contained in this Agreement, the Notes or any related agreements, all
payments of principal, premium (if any), interest and fees due and payable to
any Bank under this Agreement, the Notes and all related agreements and
documents shall be paid to the Agent which shall promptly remit all such
payments to each Bank in accordance with the respective Loan Percentage of each
Bank. Any payment received by the Agent in good funds prior to twelve o'clock
(12:00) noon on a Business Day shall be remitted to the Banks on the same
Business Day and any payment thereafter received shall be remitted on the next
Business Day. The Banks shall each be entitled to recover from the Agent
interest at the Federal Funds Rate on any amount not timely remitted to them as
provided above for each day such amount is not so remitted.
8.4. Payments After Acceleration. In the event of receipt of any payments
(whether voluntary or involuntary) by the Agent or a Bank, whether by set-off,
collection or otherwise, from the Company or any of the Guarantors after
acceleration of all of the Notes, such payments shall not be applied by any Bank
to its Loans but instead shall be held in trust by the Agent (as and when
received by the Agent) or, as the case may be, by each Bank directly receiving
any such payment, each such Bank being obligated to remit any such payments
promptly to the Agent. Agent shall promptly remit all such payments, subject
only to deduction of expenses incurred by Agent for the benefit of the Banks, to
each Bank who shall then apply the same pro rata to payment of the Notes in
accordance with the respective Loan Percentage of each Bank. To the extent
required by applicable law to carry out the terms hereof, the Bank(s) receiving
payment(s) shall purchase, forthwith upon notice from the Agent, from the other
Banks participations in the Loans owing to such other Banks in the same manner
and under the same terms as set forth in Subsection 8.5 for the purchase of
participations.
8.5. Sharing of Payments. In the event that, after acceleration of all of
the Notes, any Bank shall obtain and retain any payment (whether voluntary,
involuntary, through the exercise of any right of set-off, collection or
otherwise) on account of any amounts owing to it in excess of its Loan
Percentage on the day of acceleration, whether as a result of a violation of
Subsection 8.4 above or otherwise, such Bank shall forthwith purchase from the
other Banks such participations in the Loans owing to such other Banks as shall
be necessary to cause such purchasing Bank to share the excess payment ratably
(in accordance with their respective Loan Percentages) with each of them,
provided, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Bank, such purchase from each Bank
shall be rescinded and such Bank shall repay to the purchasing Bank the purchase
price to the extent of such recovery together with an amount equal to such
Bank's ratable share (according to the proportion of (a) the amount of such
Bank's required payment to (b) the total amount so recovered from the purchasing
Bank) of any interest or other amount paid or payable by the
purchasing Bank in respect of the total amount so recovered. The Company and
each Guarantor agree that any Bank so purchasing a participation from another
Bank pursuant to this Subsection 8.5 may, to the fullest extent permitted by
law, exercise all its rights of payment (including the right of set-off) with
respect to such participation as fully as if such Bank were the direct creditor
of the Company and the Guarantor in the amount of such participation.
8.6. Pro Rata Sharing of Revolving Credit Loan Losses. In the event that,
after acceleration of all of the Notes, the principal amount of Revolving Credit
Loans outstanding under the Revolving Credit Note of any Bank exceeds an amount
equal to such Bank's Revolving Credit Commitment Percentage of the aggregate
outstanding Revolving Credit Loans, such Bank shall be entitled to sell, and all
of the other Banks shall, forthwith purchase, ratably in accordance with their
respective Revolving Credit Commitment Percentages, such participations in such
selling Bank's Revolving Credit Loans as shall be necessary to cause the
outstanding principal amount of such selling Bank's Revolving Credit Loans to
equal its Revolving Credit Commitment Percentage of the aggregate outstanding
Revolving Credit Loans, for the purpose of insuring that all losses hereunder
with respect to the Revolving Credit Loans shall be borne ratably by the Banks
in accordance with their respective Revolving Credit Commitment Percentages.
The Company and each Guarantor agree that any Bank so purchasing a participation
from another Bank pursuant to this Subsection 8.6 may, to the fullest extent
permitted by law, exercise all of its rights of payment (including the right of
set-off) with respect to the participation as fully as if such Bank were the
direct creditor of the Company and the Guarantor in the amount of such
participation.
8.7. Participations; Assignments of Commitments; Additional Banks;
Substitution of Banks.
(a) Each Bank shall have the right, in its sole discretion, to sell or
assign participating interests in any portion of its Facility Commitment, its
interest in the Loans, and any of its other rights hereunder or under its Note
and Guaranty or the Pledge Agreement, to one or more participants in such
amounts and under such terms and conditions as such Bank shall determine.
In the event of any such sale by any Bank of participating interests to a
participant, such Bank's obligations under this Agreement shall remain
unchanged, such Bank shall remain solely responsible for the performance
thereof, such Bank shall remain the holder of its Note for all purposes under
this Agreement, and the Company and the Agent shall continue to deal solely and
directly with such Bank in connection with such Bank's rights and obligations
under this Agreement. Notwithstanding the foregoing, the Company agrees that
each participant shall be entitled to the benefits of Subsection 3.5 hereof with
respect to its participation in the Loans outstanding from time to time to the
extent the same are granted to such participant in its
participation agreement. Each Bank agrees that any agreement between such Bank
and any such participant in respect of such participating interests shall not
restrict or impair such Bank's right to agree to amendments, modifications or
waivers (or direct the taking of actions) with respect to the provisions of this
Agreement, its Note or Guaranty or the Pledge Agreement except provisions
relating to interest rate, maturity and principal amount.
(b) Subject to the prior written approval of the Company and of the
Requisite Banks (other than a sale by PNC of up to $10,000,000 of its Facility
Commitment to another Bank as to which sale approval of the Requisite Banks is
not required), each Bank shall have the right to sell or assign up to fifty
percent (50%) of the original amount of its Facility Commitment and a like
portion of its interest in the Loans and its other rights and obligations
hereunder and under its Note, Guaranty and Pledge Agreement, to another lending
institution. If an Event of Default is outstanding, each Bank may sell up to
one hundred percent (100%) of the original amount of its Facility Commitment
without the necessity of obtaining the approval of any other Person. In each
such case, the Bank a portion of whose Facility Commitment is being assigned and
assumed and the lending institution assuming such portion of such Bank's
Facility Commitment shall execute such instruments and documents of assignment
and assumption and shall furnish such certificates and opinions as counsel for
the Agent may deem necessary or advisable and thereafter such lending
institution should be deemed to be a Bank hereunder, subject to all of the
terms, provisions and obligations relating to the Banks and entitled to all of
the benefits to which a Bank is entitled hereunder and the Bank a portion of
whose Facility Commitment was sold or assigned shall thereafter be discharged
with respect to any obligations and rights relating to the portion of its
Facility Commitment so assigned. Nothing herein contained shall prevent any
Bank from transferring its Revolving Credit Loans, Revolving Credit Note and
Revolving Credit Commitment to another branch of the same institution.
(c)The Company shall have the option, exercisable so long as no Event of
Default is outstanding hereunder, to have one or more additional banking
institution(s) acceptable to Agent join in, and assume a Revolving Credit
Commitment under, this Agreement and thereby become an additional "Bank(s)"
under this Agreement ("Additional Bank(s)"), provided, however, that (i) the
Revolving Credit Commitment of each Additional Bank shall not be less than
$10,000,000, (ii) each Additional Bank shall execute a joinder agreement
acceptable to the Company and the Agent under which such Additional Bank assumes
and agrees to be bound by its Revolving Credit Commitment, joins in this
Agreement as a "Bank" and thereby obtains all benefits and rights of
and agrees to perform all duties and obligations of a Bank hereunder, (iii) the
Company executes and delivers to such Additional Bank a Revolving Credit Note in
the amount of the Revolving Credit Commitment of such Additional Bank and the
Guarantors each execute and deliver their Guaranty to the Additional Banks, and
(iv) this Agreement shall be automatically deemed to be amended to the extent
necessary to give effect to the modifications to the Facility Percentages, Loan
Percentages and Revolving Credit Commitment Percentages of each Bank caused by
the joinder of the Additional Bank into this Agreement.
(d)Subject to the prior written approval of the Requisite Banks, the
Company shall have the right to require any Bank to sell its Facility
Commitment, together with its interest in the Loans and its other rights and
obligations hereunder and under its Note, Guaranty and Pledge Agreement, to
another lending institution. In each case, the Bank whose Facility Commitment
is being sold and the lending institution assuming such Bank's Facility
Commitment shall execute such instruments and documents of assignment and
assumption and shall furnish such certificates and opinions as counsel for the
Agent may deem necessary or advisable, and thereafter such lending institution
shall be deemed to be a Bank hereunder, subject to all of the terms, provisions
and obligations relating to the Banks and entitled to all of the benefits to
which a Bank is entitled hereunder, and the Bank whose Facility Commitment was
sold shall thereafter be discharged with respect to any obligations and rights
relating to its Commitment so sold.
SECTION 9. THE AGENTS
9.1.Appointment. Each Bank hereby designates and appoints PNC as the
Agent of such Bank under this Agreement, and each Bank hereby irrevocably
authorizes, and each holder of any Note by the acceptance thereof will be deemed
irrevocably to authorize, the Agent to take such action on its behalf under the
provisions of this Agreement and to exercise such powers are as set forth
herein, together with such other powers as are reasonably incidental thereto.
The Agent agrees to act as such on the express conditions contained in this
Section 9. The Agent may perform any of its duties hereunder by or through its
agents, representatives or employees.
9.2.Nature of Duties.
(a) The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement. The duties of the Agent shall be
mechanical and administrative in nature and Agent shall carry out and satisfy
such duties with the same degree of care as Agent would employ with regard to a
similar facility in which it was the only lender. The Agent shall not have by
reason of this Agreement a fiduciary relationship in respect of any Bank.
Nothing in this Agreement, expressed or implied, is intended to or shall be
construed to impose upon the Agent any obligations in respect of this Agreement
except as expressly set forth herein. Each Bank agrees to make its own
independent investigation of the financial condition and affairs of the Company
and the Guarantors in connection with the making and the continuance of the
Loans hereunder and shall make its own appraisal of the creditworthiness of the
Company and the Guarantors, and the Agent shall have no duty or responsibility,
either initially or on a continuing basis, to provide any Bank with any credit
or other information with respect thereto, whether coming into its possession
before the making of the Loans or at any time or times thereafter.
(b) The Agent's duties under this Agreement shall include the following:
(i) If the Agent obtains actual knowledge of any Event of Default or
Potential Event of Default under this Agreement, any Note, any Guaranty or the
Pledge Agreement, the Agent shall promptly report (to the extent the officer
obtaining such knowledge knows of the obligation to report same to the Banks)
such occurrence to the Banks;
(ii) The Agent shall be responsible for coordinating any actions (including
extensions of the Commitment Termination Date as may be considered in accordance
with the definition of "Commitment Termination Date" and the granting of waivers
and/or amendments pursuant to Subsection 10.1 hereof) among the Banks and
between the Banks and the Company and/or any Guarantor; and
(iii) The Agent shall, subject to the terms hereof, be responsible for
enforcing the rights and claims of the Banks hereunder, or under the Notes,
Guaranties or Pledge Agreement, following an acceleration of any Note or Notes.
9.3.Rights, Exculpation, Etc. Neither the Agent nor any of its officers,
directors, employees, representatives or agents shall be liable to any Bank for
any action taken or omitted by it hereunder, or in connection herewith, unless
caused by its gross negligence or willful misconduct. The Agent shall not be
responsible to any Bank for any recitals, statements, representations or
warranties herein or for the execution, effectiveness, genuineness, validity,
enforceability, collectibility, or sufficiency of this Agreement or any other
agreement relating to the transactions contemplated hereby or the financial
condition of the Company or any Guarantor. The Agent shall not be required to
make any inquiry concerning either the performance or observance of any of the
terms, provisions or conditions of this Agreement or the financial condition of
the Company or any Guarantor or the existence of any noncompliance or Event of
Default. The Agent may at any time request instructions from the Banks with
respect to any actions or approvals which by the terms of this Agreement the
Agent is permitted or required to take or to grant, and if such instructions are
promptly requested, the Agent shall be
absolutely entitled to refrain from taking any action or to withhold any
approval and shall not be under any liability whatsoever to any Person for
refraining from any action or withholding any approval until it shall have
received such instructions from the Requisite Banks. Without limiting the
foregoing, no Bank shall have any right of action whatsoever against the Agent
as a result of the Agent acting or refraining from acting under this Agreement,
the Notes, the Guaranties, or the Pledge Agreement in accordance with the terms
of this Agreement.
9.4.Reliance. The Agent shall be entitled to rely upon any written notice,
statement, certificate, order or other document or any telephone message
believed by it to be genuine and correct and to have been signed, sent or made
by a proper Person, and with respect to all matters pertaining to this Agreement
and its duties hereunder or thereunder, upon advice of counsel
selected by it.
9.5.Indemnification. To the extent that the Agent is not promptly
reimbursed and indemnified by the Company or the Guarantors, the Banks will
reimburse and indemnify the Agent for and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses (including reasonable attorneys' fees and expenses) or disbursements of
any kind or nature whatsoever (collectively, "Losses") which may be imposed
on, incurred by, or asserted against the Agent, acting pursuant hereto, in any
way relating to or arising out of this Agreement or the Notes or Guarantees or
any action taken or omitted by the Agent under this Agreement in proportion to
each Bank's Facility Percentages (or Loan Percentages with respect to Losses
imposed, incurred or asserted after an acceleration of the Notes); provided that
no Bank shall be liable for any portion of such Losses resulting from
Agent's gross negligence or willful misconduct. The obligations of the Banks
under this Subsection 9.5 shall survive the payment in full of the Notes and the
termination of this Agreement.
9.6.The Agent Individually. With respect to its pro rata share of the
Facility Commitments hereunder, the Loans made by it, and any Note or Guaranty
issued to or held by it, the Agent shall have and may exercise the same rights
and powers hereunder and is subject to the same obligations and liabilities as
and to the extent set forth herein for any other Bank or holder of a Note. The
term "Banks" or any similar term shall, unless the context clearly otherwise
indicates, include the Agent in its individual capacity as a Bank. The Agent may
accept deposits from, lend money to, and generally engage in any kind of
banking, trust or other business with the Company and the Guarantors as if it
were not acting as Agent pursuant hereto.
9.7.Successor Agent.
(a) The Agent may resign from the performance of all its functions and
duties hereunder at any time by giving at least thirty (30) days' prior written
notice to the Company and the Banks and may be removed by direction of the
Requisite Banks upon commission by the Agent of any wilful misconduct or gross
negligence. Such resignation or removal shall take effect upon the acceptance
by a successor Agent or appointment pursuant to clauses (b) and (c) below or as
otherwise provided below.
(b) Upon any such notice of resignation or removal, the Requisite Banks
shall appoint a successor Agent who shall be satisfactory to the Company and
shall be an incorporated bank or trust company.
(c) If a successor Agent shall not have been so appointed within said 30
day period, the retiring Agent, with the consent of the Company, shall then
appoint a successor Agent who shall serve as Agent until such time, if any, as
the Requisite Banks, with the consent of the Company, appoint a successor Agent
as provided above.
9.8.Managing Agents. The parties hereto covenant and agree that B of A
shall be a managing agent (the "Managing Agent") who shall perform such duties
and responsibilities as the Company, the Agent and the Banks may hereafter
request and the Managing Agent shall accept. Without the prior written consent
of the Agent, no duty, responsibility, right or option granted to the Agent
shall be delegated to the Managing Agent and no compensation payable to the
Agent shall be shared with the Managing Agent. Except as limited by this
paragraph, each disclaimer, exculpation provision, indemnity and other provision
contained in Section 9 of the Credit Agreement provided for the benefit of the
Agent shall likewise be deemed given to and provided
for the Managing Agent.
SECTION 10. MISCELLANEOUS
10.1. Amendments.
(a) Neither this Agreement nor the Pledge Agreement can be changed or
terminated orally. Any term, covenant, agreement or condition of this Agreement
or the Pledge Agreement may, with the consent of the Company, be amended, or
compliance therewith may be waived (either generally or in any particular
instance and either retroactively or prospectively), by one or more
substantially concurrent written instruments signed by the Requisite Banks;
provided, however, that
(i) no such amendment or waiver shall, without the consent of all Banks,
increase the amount of any Bank's Facility Commitment or Revolving Credit
Commitment, or extend or waive any payment due and payable on the Commitment
Termination Date, or modify the definition of Requisite Banks;
(ii)no such amendment or waiver shall, without the consent of the Bank
affected thereby, reduce the interest rate on, or extend the time of payment of
principal or interest under, any Note (without limiting clause (i) above as it
applies to extensions of or waivers with respect to payments due and payable on
the Commitment Termination Date);
(iii)no such amendment shall modify any of the terms and provisions
hereof with respect to the Letters of Credit without the consent of the LOC
Banks; and
(iv)no such amendment may modify the rights or duties of the Agent without
the Agent's consent.
Any amendment or waiver pursuant to this Subsection 10.1 shall apply equally to
all of the holders of the Notes and shall be binding upon them, upon each future
holder of any Note, upon the Company and the Guarantors.
10.2. No Waiver; Cumulative Remedies. No failure or delay on the part of
any Bank or the Agent in exercising any right, power or privilege under this
Agreement, under any Note or Guaranty, or under the Pledge Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power, or privilege hereunder or thereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein and therein provided are cumulative
and not exclusive of any rights or remedies provided by law.
10.3. Notices. All notices, requests and demands to or upon any party
hereto shall be in writing and shall be delivered or mailed, certified mail,
return receipt requested, or forwarded by nationally recognized overnight
courier, addressed to such party as follows or to such other address as may be
hereafter designated in writing by such party to the other party hereto:
The Company:K. Hovnanian Enterprises, Inc.
10 Route 35
Red Bank, New Jersey 07701
Attn: General Counsel
The Guarantors: c/o K. Hovnanian Enterprises, Inc.
10 Route 35
Red Bank, New Jersey 07701
Attn: General Counsel
The Agent: PNC Bank, National Association
Real Estate Group
Two Tower Center/18th Floor
East Brunswick, NJ 08816
Attn: Douglas G. Paul, Vice President
With copies to: Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attn: Harvey I. Forman, Esquire
The Banks: At the addresses for the respective Banks provided in
Schedule 9.
10.4. Payment of Expenses and Taxes. The Company and each of the
Guarantors jointly and severally agree to pay all reasonable costs and expenses
of the Agent in connection with the preparation, execution, delivery and
administration of this Agreement, the Notes, the Guaranties and the Pledge
Agreement, and any amendments thereto (including, without limitation, the
reasonable fees and disbursements of one law firm acting as counsel to the Agent
and to the Banks), and to pay all costs and expenses of the Agent and the Banks
in connection with the enforcement of this Agreement, the Notes, the Guaranties
and the Pledge Agreement, as well as all costs and expenses incurred by the
Agent and the Banks in protecting, preserving and defending their respective
interests under this Agreement, the Notes, the Guaranties or the Pledge
Agreement, including enforcement, protection, preservation and defense in any
bankruptcy or insolvency proceeding, including, in each case, legal fees and
disbursements arising in connection therewith. The Company and each of the
Guarantors jointly and severally also agree to pay all recording and filing
fees, as well as all stamp and other taxes, if any, which may be payable or
determined to be payable in connection with the execution and delivery of, or
the consummation of any of the transactions contemplated by, this Agreement, the
Notes, the Guaranties and the Pledge Agreement, or any modifications thereof,
and to indemnify, defend and hold the Agent and the Banks harmless from and
against any and all Losses with respect to or resulting from any delay in paying
such fees and taxes.
10.5. Set-Off. Upon the occurrence and during the continuance of any
Event of Default, each Bank is hereby authorized, at any time and from time to
time, to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by such Bank to or for the
credit or the account of the Company or any Guarantor (a) against any and all of
the obligations under this Agreement, the Notes and the Guaranties then due and
payable (whether at stated maturity, acceleration or otherwise) or (b) at the
direction or with the consent of the Requisite Banks, against any and all of the
outstanding obligations under this Agreement, the Notes and the
Guaranties whether or not then due and payable and irrespective of whether or
not maturity or acceleration has occurred under this Agreement or any Note(s) or
Guaranty and whether such obligations may be unmatured or contingent. Each Bank
agrees promptly to notify the Company or Guarantor, as the case may be, after
any such set-off and application. The rights of each Bank under this Subsection
10.5 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which such Bank may have, but are subject
(regardless of whether acceleration has occurred) to the sharing provisions of
Subsection 8.4 hereof.
10.6.Counterparts; Effective Date. This Agreement may be executed by one
or more of the parties hereto on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the counterparts of this Agreement signed by all parties
shall be lodged with the Company and the Agent. This Agreement shall become
effective upon the receipt by the Agent of executed counterparts (or
telex, telecopy or telephonic confirmation of the execution of counterparts) of
this Agreement by each of the parties hereto.
10.7.Incorporation of Exhibits and Schedules. The Exhibits and Schedules
attached hereto are hereby incorporated in this Agreement.
10.8.Titles and Headings. The Table of Contents, titles and headings of
sections of this Agreement are intended for convenience only and shall not in
any way affect the meaning of construction of any provision of this Agreement.
10.9.No Third Party Beneficiaries. This Agreement is solely for the
benefit of the Banks, the Company and the Guarantors and nothing contained in
this Agreement shall be deemed to confer upon any Person other than the Company,
the Guarantors and the Banks (and the Agent on their behalf) any right to insist
upon or to enforce the performance or observance of any of the obligations
contained herein. All conditions to the obligations of the Banks to make loans
or extend credit hereunder are imposed solely and exclusively for the benefit of
the Banks and no other Person shall have standing to require satisfaction of
such conditions in accordance
with their terms or be entitled to assume the Banks will refuse to make loans or
extend credit in the absence of strict compliance with any or all thereof and no
other Person shall under any circumstances be deemed to be a beneficiary of such
conditions, any or all of which may be freely waived in whole or in part by the
Banks at any time if, in each Bank's sole discretion, the Banks deem it
advisable or desirable to do so.
10.10.Construction. The parties acknowledge that each party and its
counsel havereviewed and revised this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments or exhibits hereto.
10.11.Entire Agreement. This Agreement, taken together with the Notes, the
Guaranties and the Pledge Agreement, and all certificates and other documents
delivered by the Company or any Guarantor to the Banks, embody the entire
agreement and supersede all prior agreements, written and oral, relating to the
subject matter hereof (except to the extent expressly referenced herein or
therein).
10.12.Survival of Representations and Warranties, etc. All representations
and warranties made in this Agreement and in all certificates delivered pursuant
hereto, shall survive the execution and delivery of this Agreement, the Notes
and the Guaranties, and performance hereunder and thereunder, and the provisions
of Subsections 2.8, 2.10, 3.5 and 10.4 hereof shall survive payment of the
Notes.
10.13. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Company, each of the Guarantors, Agent and each
Bank, and their respective successors and assigns, except that the Company and
the Guarantors may not assign or transfer their respective rights hereunder
without the prior written consent of the Banks and a Bank may transfer its
respective rights and obligations hereunder only in accordance with the
provisions of Subsection 8.7 hereof, as a result of a sale or merger of such
Bank, or otherwise by operation of law.
10.14.Governing Law. This Agreement, the Notes, the Guaranties and the
Pledge Agreement and the rights and obligations of the parties hereunder and
thereunder, shall be governed by, and construed and interpreted in accordance
with, the internal laws of the State of New Jersey, without regard to principles
of conflict of laws.
10.15.Waiver of Jury Trial: Company, Each Guarantor, the Banks and Agent
Hereby Each Waive Any and All Rights Each May Have to a Jury Trial in
Connection with Any Litigation Commenced by or Against Agent or Any Bank or
Banks or the Company or Any Guarantor or Guarantors with Respect to Rights and
Obligations of the Parties Hereto or under the Notes, the Guaranties or the
Pledge Agreement.
In Witness Whereof, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
