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Filed by Hovnanian Enterprises, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Hovnanian Enterprises, Inc.
Commission File No. 001-08551
HOVNANIAN ENTERPRISES
CONFERENCE CALL -- SEPTEMBER 7, 2000, 4:00 P.M., EDT
FINANCIAL RELATIONS BOARD
MODERATOR: NICOLE INNARELLA
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Operator Good afternoon, ladies and gentlemen, and welcome to the
Hovnanian third quarter conference call. At this time all
participants are in a listen only mode. Later we will
conduct a question and answer session and instructions will
follow at that time. If anyone should require assistance
during the call, please press the star followed by the zero
on your touchtone phone. As a reminder, ladies and
gentlemen, this conference is being recorded.
I would now like to introduce Nicole Innarella of the
Financial Relations Board. Please go ahead, ma'am.
N. Innarella Good morning and thank you all for joining us today for
Hovnanian's conference call to discuss the company's third
quarter results. By now you should have all received a faxed
copy of the press release. However, if anyone is missing the
copy and would like one please contact our office at
212-661-8030 and we will send one right over to you and
ensure that you are on Hovnanian's distribution list. There
will be a replay for the call, which will begin one hour
after the call and run for one week. The replay can be
accessed by dialing 1-800-696-1588 or 303-804-1727 passcode
801727.
On the line with us today is Ara Hovnanian, President and
Chief Executive Officer; Larry Sorsby, Senior Vice President
and Chief Financial Officer; Paul Buchanan, Senior Vice
President and Controller; and Kevin Hake, Vice President of
Finance and Treasurer. Management will make some opening
remarks about the quarter, then we'll open the line for
questions.
Before we begin, I would like to remind everyone of the
cautionary language about forward-looking statements
contained in the release. The same language applies to any
comments made during the call. Ara, would you like to begin?
A. Hovnanian Yes, good afternoon, everyone. The end of the summer has
been an eventful
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one for our company. Last week we announced an exciting
merger with Washington Homes of Landover, Maryland, which is
expected to close before the end of calendar 2000. The
transaction will greatly enhance Hovnanian's market position
in the Metro Washington, D.C., market as well as the North
Carolina market and will be another landmark event in the
continuing evolution of our company into a larger and more
efficient and overall better building company.
As significant as this merger will be for Hovnanian
Enterprises, we are equally pleased to release our third
quarter results today showing that we remain on track to
achieve a record year even prior to the consummation of the
merger. For the quarter we slightly exceeded consensus
analysts' expectations and last year's results by reporting
net income of about $8.1 million or 37 cents per share on
$285 million in total revenues. Despite higher interest
rates during the quarter and indications of a slowing
economy, our sales pace has remained very healthy. The
number of sales contracts in the third quarter increased
20.8% over the same period last year. In dollars, the net
sales contracts increased 35.3%. As a result of these strong
sales our backlog is well positioned for the fourth quarter
and for the beginning of fiscal 2001. As of July 31, 2000
our contract backlog was 2,270 homes valued at $584 million.
That's a 48% increase over last year's backlog value. Even
if we took out our Texas acquisition, our backlog would have
increased by 32% on a same basis. Yesterday we announced
August orders which showed a continuation of the positive
trend, were up 43% in the number of homes and 41% in sales
value over August of '99.
At the beginning of the current fiscal year we forecasted
weak comparisons for the first two quarters compared with
the similar periods in '99 principally due to the
combination of community mix and the expenses associated
with a larger number of community openings scheduled to
occur during the year. As expected, the first two quarters
did come in below the prior year's results. The third
quarter was relatively equal to '99's third quarter.
However, we remain confident that the fourth quarter
earnings will far surpass last year's fourth quarter
performance and will bring our total earnings for the year
to a new record once again. Our fourth quarter will begin to
capture the full benefit of our recent community openings
and is projected to nearly double last year's earnings.
Now that three quarters of fiscal 2000 are behind us we are
refining our earnings projections, still within our original
range but we're narrowing it to between $1.50 and $1.55 per
share for the full year representing about a 10% increase
over last year. We expect approximately 4,400 home
deliveries and
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revenues approaching $1.15 billion for the year. This is
occurring despite record rainfall in our core Northeast
region over the last six weeks which isn't perfect timing
given that we have a large fourth quarter and on top of that
we've budgeted all along a 10% decrease in our Northeast
region anyway as a result of the lengthy time requirements
for a variety of community approvals during the latter part
of '99. And as you know, the Northeast region is one of our
most profitable regions.
We're now benefiting from approximately 55 community and
model openings that occurred in the first nine months of
fiscal 2000. As a result, our active community count has
increased significantly from 79 communities on average in
'99 to 118 as of July 31st. This increase in store fronts
will position us for an even more profitable 2001. We expect
our earnings per share without the impact of the Washington
Homes merger to easily surpass the consensus projection by
analysts of $1.70 per share. We overall continue to see a
stable housing market and project the continued conditions
for 2001.
I'd like to now turn it over to Larry Sorsby, our Chief
Financial Officer, who will discuss our financial
performance in a little greater detail.
L. Sorsby Thank you, Ara. For the quarter ended July 31st, 2000, we
reported net income of $8.1 million or 37 cents per fully
diluted share on $285 million in revenue. This compares with
net income of $7.6 million or 36 cents per share, including
the impact of a 4 cent per share extraordinary loss due to
the early retirement of debt on revenue of $236.3 million in
last year's third quarter. For the nine months ended July
31st, 2000, net income was $15 million or 68 cents per fully
diluted share. Last year the first nine months had a net
income of $21.2 million or 99 cents per share. We remain
confident that the fourth quarter will noticeably
out-perform the earnings from the same period in fiscal 1999
and will carry the year to a record earning level.
Homebuilding gross margins excluding land sales increased
further to 20.9% in the third quarter continuing a trend of
improvement from 18.2% for the first quarter and 20.2% in
the second quarter. However, compared to last year's third
quarter, homebuilding gross margins declined 70 basis points
from 21.6%. For the nine months ended July 31st, 2000 our
gross margins declined 170 basis points from 21.5% to 19.8%.
The decline from last year was due to fewer deliveries from
our higher margin Northeast region communities and the fact
that roughly 21% of our delivery volume came from our Texas
acquisition, which closed in October, 1999. In our Texas
market they historically report lower margins than our
average, yet obtain
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higher inventory turns, which allows them to achieve strong
returns on investment.
Excluding our Texas acquisitions, gross margins for the July
quarter were 21.6%, unchanged from the prior year's results.
We expect our homebuilding gross margins for the full year
to approximate 20%, consistent with our third quarter and
homes in backlog.
As we've explained previously, our pretax margins in Texas
also are lower because of our contractual earn out
provisions. These earn out provisions are most impactful
this year. The effect of the earn out steadily decreases
each of the next three years. Net contracts for the quarter
increased 20.8%, from 921 homes last year to 1,113 homes in
this year's third quarter. The dollar volume of contracts
rose 35.3% to $272 million from $201 million recorded last
year. Once again, the dollar volumes of net contracts
increased in every market except North Carolina, which was
off only 2.2%. For the nine months ended July 31, 2000,
contracts increased to 3,426 homes or $832 million from
2,659 homes or $578 million, a 28.8% increase in homes and a
43.9% increase in dollars.
Excluding Texas, dollar volumes of net contracts for the
quarter increased about 8.1%, from $201 million to $217
million and for the nine months, dollar contracts rose 19.5%
from $578 million to $691 million. Average sales price per
home delivered company-wide for the three months increased
7.4%, to $256,000 from $238,000.
Total SG&A including corporate was 12.9% of total revenues
for the quarter, a slight increase over last year's 12.6%.
As we mentioned previously, we expected this percentage to
increase this year due to the large number of new community
and model openings and our investment in implementing a new,
enterprise wide software system. The growth we've achieved
in fiscal 2000 along with a summer peak in inventories
related to the build out of our sales backlog has increased
our leverage slightly as of July 31st. We expect our
leverage to decline significantly by year end as our
revolving credit facility is paid down with proceeds from
the large number of home closings slated in our fourth
quarter.
Our average leverage in fiscal 2001 is anticipated to be
lower than our average leverage this year even after the
effects of the merger with Washington Homes.
We remain committed to our stated objective of achieving a
1.1 to 1 ratio of
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debt to equity. We anticipate achieving this objective by
fiscal 2003. However, we may be delayed in the pace at which
we reach this goal if we continue our program of
repurchasing shares, which we will do if our stock continues
to trade at substantial discounts to its book value. While
our stock has ticked up a notch along with those of other
large builders recently, currently our stock is still
trading at a 40% discount to today's book value and a 44%
discount to our year end projected book value. At our recent
trading and earnings levels, repurchasing our stock yields
an after tax return for the company above 25%.
Our Board of Directors has authorized the purchase of up to
4 million shares of Class A Common Stock. As of July 31st,
2000, 3.2 million shares were repurchased under this
program. Of these shares, 440,000 were repurchased in the
three months ended July 31st, 2000 at an average cost of
$5.96 per share. We continue to stand by our long term
strategy of creating more float in the stock and the
issuance of additional shares under the merger agreement
with Washington Homes will be one step in that direction.
However, if the stock continues to sell at a steep discount
to book value and earnings continue to increase, the company
will continue to be a buyer and not an issuer of stock.
I'll now turn it back over to Ara who will make a few
additional comments.
A. Hovnanian I'd like to just give a brief update on our enterprise wide
software system that we've spoken about before. As we stated
in our second quarter conference call, we will begin a
complete roll out of the system once all enhancements from
our pilot have been implemented. We anticipate completing
the improvements in December of this year and will begin
setting up our next new communities on the system at that
time. Starting in the first calendar quarter of 2001 we plan
to roll out our new system as we open new single family
communities in the Northeast region.
We continue to expect a full company wide roll out will take
at least two years with the expected productivity gains
beginning to be apparent toward the end of that period. This
new system is going to enable us to embark on an e-commerce
strategy that few other builders will be able to match
because the system is directly linked to a real time
backbone system that fully integrates sales, product design,
architecture, purchasing, construction scheduling,
accounting and many other areas. We're spending and
expensing significant dollars relating to this effort and
our corporate overhead expense is higher than some of our
competitors as a result. While these expenses are clearly
having an impact on our profits over the short term, we will
be better
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prepared for the requirements of e-commerce and an
integrated enterprise wide operation than any other
homebuilder. We fully expect to recover these costs many
times over in the form of significantly enhanced returns.
Our effort to develop enterprise wide software is not the
only initiative we're working on as part of our strategy to
develop and demonstrate a more efficient and profitable
operating model for our industry. We are now just beginning
to enjoy some of the benefits of our past initiatives, which
include computerized scheduling, vendor consolidation,
national purchasing and a few other areas.
We're also currently working on some non-technology
initiatives that will have a significant benefit on our
operations and further boost our returns. These include the
standardization of our products in each of our markets and
streamlining our construction processes while applying even
flow production techniques. Our intensive training and
personnel development are also having positive effects
although obviously it's more of a long term benefit. But
given today's labor market, it's a critical investment to
make.
Each of these initiatives is moving us further along the
path toward becoming a preeminent homebuilding company.
While we have moved forward on these initiatives, which we
think are necessary and vital for the long term success in
our industry, we've never taken our eye off the basic
business. And we will not let our pending merger with
Washington Homes or other events distract us from our
internal focus on that business, which is managing the
development of residential communities in diverse markets, a
business that requires paying close attention to the numbers
on a daily basis, a fundamental reliance on having the best
regional and divisional managers, community builders, sales
associates and support people in the industry, a single
minded focus on acquiring the best locations in the best
communities and offering a value oriented, high quality, top
product with top notch service.
We believe that Washington Homes has a similar culture to
our company and a like minded focus on excellence in their
homebuilding operations. We're very excited about the
benefits of the merger for our company and the blending of
Washington Homes management team and associates into our
organization. We're also looking forward to a great fourth
quarter and a great fiscal 2001.
With that, I'd be pleased to open it up for questions.
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Operator Thank you. Ladies and gentlemen, at this time if you have a
question, you will need to press the one on your touchtone
phone and you will hear a tone acknowledging your request.
Your questions will be taken in the order that they are
received. If your question has already been answered you may
remove yourself from queue by pressing the pound key. Also
if using a speakerphone, please pick up your handset before
pressing the buttons. One moment.
Once again, ladies and gentlemen, if you did have a question
you will need to press the one on your touchtone phone.
Arthur Winston, please state your company name followed by
your question.
A. Winston Balis. What is the projected book value at the end of the
fourth quarter and then on a pro forma basis, what does the
book value become per share after the Washington Homes is
bought?
A. Hovnanian Larry, you want to address that?
L. Sorsby We'll make the count real quick, Arthur. We just don't have
it at our fingertips but we'll do that.
A. Winston But what do you think? $7 is 44%, the stock is $7 so you
just take......
K. Hake We'll get it. What was the second part of the question,
Arthur?
A. Winston What would be the book value, everything else being equal,
after Washington Homes is purchased? How do you even do
that?
K. Hake Through purchase accounting, which we're currently working
on those pro forma data.
A. Winston So that means book value doesn't change?
A. Hovnanian No, I think my recollection is book value per share shrinks
just slightly......
A. Winston Less than $1 a share.
A. Hovnanian I think that's about right. My ballpark numbers and they'll
give you the exact numbers......
A. Winston No, I don't need the exact numbers, that's close enough and
I thank you very
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much.
A. Hovnanian Okay.
Operator Ken Bann, please state your company name followed by your
question.
K. Bann Jeffries & Company. Two things, on Washington Homes, their
SG&A as a percent of revenue seems to be a lot higher than
yours. What's the reason for that and is there substantial
reductions in their SG&A expenses that can be achieved once
you merge with them?
A. Hovnanian Clearly as a smaller independent homebuilder, it would be a
little higher number. We think there will be a variety of
opportunities for savings, just the cost of being public is
a duplicative cost of $1 to $2 million and there are a
variety of areas. We haven't studied all of them yet but we
certainly think there are some good opportunities for us.
L. Sorsby The other issue is every homebuilder puts different things
in SG&A accounts.
K. Bann Right, right.
L. Sorsby One of the things Washington Homes does is it puts sales
commissions in SG&A whereas we put it in cost of goods sold.
So that's part of the explanation for it. You know, we think
the right way to measure apples to apples it the pretax
return or a return on equity and in both of those they
actually have returns stronger than ours this year. So we
think on an apples to apples basis they have very, very good
returns.
K. Bann Okay.
A. Hovnanian Their return on equity is just below 20% and we're buying
them slightly below equity so it should be a very good
investment and merger for our company.
K. Bann Right. And you said that you expect borrowings to come down
fairly significantly in the fourth quarter. Obviously it
seems to me that......
A. Hovnanian I'm sorry, we expect what to come down?
K. Bann Your borrowings, your debt?
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A. Hovnanian Oh, right.
K. Bann It seems to me if I look back at the history of the company
you probably right now have the most debt that you've ever
had, is that correct, I think, going back?
A. Hovnanian I don't have those numbers at the tip of my fingers but I
wouldn't be surprised. It's certainly not the highest debt
to equity, however, because our equity has improved
substantially over the last few years.
K. Bann Right. Can you give us an idea of how much you expect
borrowings to come down in the fourth quarter and will we
see another ramp up in borrowings during the building period
next year?
A. Hovnanian Our projected debt to equity off the top of my head and
Larry, you can correct me if I'm wrong but......
L. Sorsby I actually have the numbers, Ara.
A. Hovnanian Okay.
L. Sorsby The projected debt to equity at year end is about 1.44 to
1 and compared to 1.69 to 1 as of the July quarter, Ken. And
next year we do not expect to have the same peaking of
inventories and unevenness of earnings flow that we did in
fiscal 2000. And we think that the average debt to equity
during the year will drop below 1.4 to 1.
K. Bann Okay. The 1.4 to 1 at year end, is that pro forma for the
merger?
L. Sorsby No, this is just Hovnanian on itself and what we've said
about it is post the merger, we will average a lower debt to
equity ratio in 2001 than we did in 2000.
K. Bann Okay. All right, thanks.
A. Hovnanian Just to refresh the timing, the actual merger probably will
not occur until toward the end of the fiscal year end --
excuse me, until the end of the calendar year end. It will
be after our fiscal year end is over.
Operator Arthur Winston, please go ahead.
A. Winston I have two questions. Is the decline in the pay out dollars,
everything else
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being equal to the people in Dallas, does that amount to
anything or is that pretty small? You said that's one of the
reasons the margins would have been better.
A. Hovnanian Yes. No, the earn out, I know it's a private company so the
numbers are significant but the earn out is a significant
dollar amount. So the reductions the first year are not huge
but they really gain momentum in the subsequent two years,
so it does have an impact on our profitability over the
short term, but we're extremely pleased with that
acquisition. They've been on budget virtually every month
and the sales have just been fantastic. It's a very strong
market there right now.
A. Winston Very good. My second question relates to the SG&A difference
that the man from Jeffries talked about and also relates to
the prior conference call. Is there something contractually
that you've agreed to where you're really not permitted to
reduce duplicate employees to bring down the SG&A that maybe
in two years you'll be able to do it but you can't do it in
the first year?
A. Hovnanian No, not at all. It's as you might imagine a sensitive area
at this point.
A. Winston Right.
A. Hovnanian And we just made the announcement not long ago, let's say
maybe a week and half ago, and there is a lot of studying to
do to determine the right course of action and the
opportunities that are there.
A. Winston Do they really keep a different, stuff that you have in cost
of goods sold they put in SG&A, is that part of the issue?
L. Sorsby That explains the increase in higher SG&A costs because they
put different things in SG&A that we put in cost of goods
sold.
A. Winston That's a fact? Okay.
L. Sorsby Yes.
A. Winston Okay, good. Okay, thank you.
Operator Ladies and gentlemen, if there are any additional questions,
please press the one at this time.
Richard Henderson, please state your company name followed
by your
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question.
R. Henderson Pershing. Ara, I had a question on, I think you said that
in fiscal 2001 that your earnings would be substantially
ahead of the average estimate and I think the number was
$1.70 without the Washington acquisition. Now, a couple of
things. First, in terms of the acquisition of Washington,
the estimate was disclosed that would positively impact you
between 5 and 10 cents. Now just doing quick math, it seems
to me that everything else being equal, there would probably
be at least a dime contribution excluding any benefits or
synergies involved in bringing the two organizations
together which you kind of implied. Now against that I think
you said that unlike you, that on an October year the
transaction would occur or be completed at the end of the
calendar year so that would shade that dime.
The other observation was that you mentioned that the
Northeast region in this year has been hampered by securing
various......
A. Hovnanian Approvals.
R. Henderson Approvals, etc., and you also spoke about the earn out with
the Texas acquisition. Now, I guess the first question is
one, do you have kind of an outlook for the general industry
next year that would be substantially more positive than
kind of the consensus estimate, which I don't think? And
second of all, is it because of the kind of community count
that you guys have worked so hard this year and that you're
confident you will secure the approvals that will give you
the momentum to take advantage of the more profitable
Northeast and those sorts of things to kind of round out
that statement that at this point you would think that the
earnings would be substantially better than the consensus
estimates?
A. Hovnanian It's the latter. We are making good progress on the
approvals. It's a difficult thing and it's not entirely
within our control, that's the bad part about it. The good
part about it is it really limits the competition so our
margins tend to be solid in our core Northeast region, which
is the most unpredictable. But we feel quite good about our
community flow. As we've mentioned we've opened a lot of
communities and they've all gotten off to a very good start.
And on top of that we are growing a bit even without
Washington Homes. We're seeing some good internal growth and
some of the other efforts we have in place are starting to
show some fruit. So we're feeling quite good about the next
year.
We also think, those that have followed our company for some
time know
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years ago we really had a problem with even quarterly
deliveries and for the last two years prior to this year, we
made huge progress and really evened out our deliveries.
Unfortunately this year largely because of the factors I
mentioned earlier, we did go back to our old fourth quarter
bulge but for very different reasons. I'm pleased to say we
don't think that's going to be the case this year coming up.
We should start off with a solid first and second quarter
this year and we're building a great backlog to make that
happen right now.
Just across our markets overall, we continue to see a very
strong Northeast region. The whole New Jersey, New York,
Pennsylvania market continues to be strong. It's probably,
it was really accelerating at an unsustainable pace from
some months back. That's cooled off just a bit but I think
that's fine, it's cooled off to a very solid and good
healthy level. We'd be very happy if this stayed on for a
while. And we don't see any indication that should change,
the supply of lots is very limited and that creates for a
healthy balance. The D.C. market is very strong and that's
one of the reasons we're particularly excited about our
transaction with Washington Homes. They've got a great land
position there but even our own operations are doing quite a
bit better there. They're really benefiting in that market
from the whole internet boom. AOL is based here, a variety
of telecommunications companies are based here, so it's
drawn quite a bit of job growth and it's been a strong
market. Maryland is not quite as strong as Northern Virginia
but still quite reasonable. North Carolina, nothing surging
like it is in the Northeast or in the D.C. market, but a
good, strong solid market. Texas, our Dallas market is very
strong and we're projecting it to continue on at the
immediate time. In the California market we're seeing a
little slowness and actually I just read Kaufman and Broad's
release, they reported 21% decrease in their sales last
quarter in California. I don't know what the precise number
is off the top of my head for California but we are seeing a
little sluggishness there. But overall we're pretty pleased
with the market conditions in our markets.
R. Henderson Thank you.
Operator Angela Ronzio, please state your company name followed by
your question.
A. Ronzio Times Square Capital. I just had a housekeeping question.
What was your revolver availability for the quarter?
K. Hake About $174 million at the end of the quarter.
A. Ronzio Okay, great. Thanks.
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L. Sorsby And just in response to Winston's question about the book
value at year end, it's approximately $12.50 a share for
Hovnanian projected at year end.
Operator Ladies and gentlemen, if there are any additional questions
please press the one at this time.
I show no further questions, please continue.
A. Hovnanian Very good. Well, thank you very much. We look forward to
talking to all of you in our fourth quarter and reporting
some very positive news. Thanks again and as usual our team
is around to field questions afterwards. Thank you.
Operator Ladies and gentlemen, that does conclude today's conference
call. You may all disconnect and thank you for
participating.
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FORWARD-LOOKING STATEMENTS This document contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Any
such statements may involve unstated risks, uncertainties and other factors that
may cause actual results to differ materially from those described in any
forward-looking statements. Any such risks, uncertainties and other factors
include, but are not limited to, the risk that the businesses of Hovnanian and
Washington Homes will not be combined successfully, the risk that the growth
opportunities and cost savings from the merger may not be fully realized or may
take longer to realize than expected, changes in general economic conditions,
fluctuations in interest rates, increases in costs of materials, supplies and
labor, adverse governmental or regulatory policies, and general competitive
conditions. This list of risk factors may not be exhaustive. Actual results
could differ materially from those set forth in any forward-looking statements
for many reasons, including the risk factors listed above. Any forward-looking
statements speak only as of the date they are made, and Hovnanian disclaims any
obligation to provide updates or revise any forward-looking statements.
In connection with the proposed merger, Hovnanian and Washington Homes have
filed with the SEC a preliminary joint proxy statement describing the proposed
merger of Washington Homes and Hovnanian and the proposed terms and conditions
of the merger. Additionally, Hovnanian will file with the SEC a registration
statement on SEC Form S-4, containing the definitive joint proxy
statement/prospectus, which describes the proposed merger and the proposed terms
and conditions of the merger. Stockholders are urged to read the definitive
joint proxy statement/prospectus when it becomes available because it will
contain important information. The preliminary joint proxy statement filed by
Hovnanian and Washington Homes is available for free, and the registration
statement to be filed by Hovnanian, including the definitive joint proxy
statement/prospectus and the SEC filings that will be incorporated by reference
in the definitive joint proxy statement/prospectus, will be available for free
after it is filed, both on the
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SEC's web site (www.sec.gov) and by contacting either Washington Homes, Inc,
1802 Brightseat Road, Landover, Maryland 20785-4235, Attention: Christopher
Spendley, telephone (301) 772-8900; or Hovnanian Enterprises, Inc., 10
Highway 35, P.O. Box 500, Red Bank, New Jersey 07701, Attention: J. Larry
Sorsby, telephone (732) 747-7800.
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