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