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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended JULY 31, 2003 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-1851059
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of Principal Executive Offices) (Zip Code)
732-747-7800
(Registrant's Telephone Number, Including Area Code)
Same
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (l) has filed all
reports required to be filed by Section l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding l2 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [
X ] No [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [
]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 22,596,588
Class A Common Shares and 7,426,051 Class B Common Shares were
outstanding as of September 5, 2003
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE
NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at July 31,
2003 (unaudited) and October 31, 2002 4
Consolidated Statements of Income for the three
and nine months ended July 31, 2003 and 2002
(unaudited) 6
Consolidated Statements of Stockholders' Equity
for the nine months ended July 31, 2003
(unaudited) 7
Consolidated Statements of Cash Flows for
the nine months ended July 31, 2003
and 2002 (unaudited) 8
Notes to Consolidated Financial
Statements (unaudited) 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 36
Item 4. Controls and Procedures 37
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K. 37
(a)
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Certificate of Incorporation of the Registrant.
Exhibit 3(c) Restated Bylaws of the Registrant. (3)
Exhibit 10(a) Third Amended and Restated Credit
Agreement dated June 19, 2003. (2)
Exhibit 10(b) First Amendment to First Restated
K. Hovnanian Mortgage, Inc. Revolving Credit
Agreement dated July 31, 2003.
Exhibit 31(a) Rule 13a-14(a)/15d-14(a) Certification
of Chief Executive Officer.
Exhibit 31(b) Rule 13a-14(a)/15d-14(a) Certification
of Chief Financial Officer.
Exhibit 32(a) Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of The Sarbanes-
Oxley Act of 2002.
Exhibit 32(b) Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of The Sarbanes-
Oxley Act of 2002.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Annual
Report on Form 10-K for the year ended
February 28, 1994 of the Registrant.
(3) Incorporated by reference to Exhibits to Registration
Statement (No. 333-106761) on Form S-3 of the
Registrant.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during
the quarter for which this report is filed. The
following
report on Form 8-K has been furnished during the quarter
for which this report is filed:
On May 23, 2003, the Company furnished a report
on Form 8-K, Item 9 (pursuant to Item 12 in accordance
with SEC Release 33-8216; 34-47583; IC-25983; March 27,
2003), relating to the Company's press release dated
May 28, 2003 relating to its preliminary financial
results for the second quarter ended April 30, 2003.
Signatures 39
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
ASSETS 2003 2002
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents..................... $ 110,820 $ 262,675
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development............................... 1,090,908 803,829
----------- -----------
Land and land options held for future
development or sale....................... 280,706 171,081
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options.............. 72,436 67,183
Variable interest entities................ 93,252
Other options............................. 54,377 39,489
----------- -----------
Total Consolidated Inventory Not Owned.. 220,065 106,672
----------- -----------
Total Inventories..................... 1,591,679 1,081,582
----------- -----------
Receivables, deposits, and notes ............. 45,742 26,276
----------- -----------
Property, plant, and equipment - net.......... 27,110 19,242
----------- -----------
Senior residential rental properties - net.... 9,215 9,504
----------- -----------
Prepaid expenses and other assets............. 93,695 86,582
----------- -----------
Goodwill and indefinite life intangibles...... 82,283 82,275
----------- -----------
Definite life intangibles..................... 59,244
----------- -----------
Total Homebuilding.................... 2,019,788 1,568,136
----------- -----------
Financial Services:
Cash and cash equivalents..................... 8,819 7,315
Mortgage loans held for sale.................. 152,211 91,451
Other assets.................................. 3,119 11,226
----------- -----------
Total Financial Services.............. 164,149 109,992
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits...................................... 11,717
----------- -----------
Total Assets.................................... $2,195,654 $1,678,128
=========== ===========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Per Share Data)
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages..................... $ 29,173 $ 11,593
Accounts payable and other liabilities......... 211,054 198,290
Customers' deposits............................ 61,263 40,422
Nonrecourse mortgages secured by operating
properties................................... 3,177 3,274
Liabilities from inventory not owned........... 116,597 97,983
----------- -----------
Total Homebuilding......................... 421,264 351,562
----------- -----------
Financial Services:
Accounts payable and other liabilities......... 6,641 4,857
Mortgage warehouse line of credit.............. 137,039 85,498
----------- -----------
Total Financial Services................... 143,680 90,355
----------- -----------
Notes Payable:
Term loan...................................... 115,000 115,000
Senior notes................................... 387,029 396,390
Senior subordinated notes...................... 300,000 150,000
Accrued interest............................... 17,738 9,555
----------- -----------
Total Notes Payable........................ 819,767 670,945
----------- -----------
Income Taxes Payable - Net of deferred tax benefits. 777
----------- -----------
Total Liabilities.......................... 1,384,711 1,113,639
----------- -----------
Minority interest from inventory not owned....... 80,137
----------- -----------
Minority interest from consolidated joint ventures.. 1,860 1,940
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued..........................
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 27,875,001 shares at
July 31, 2003 and 27,452,481 shares at October 31,
2002 (including 5,342,599 shares at July 31, 2003
and 4,343,240 shares at October 31, 2002 held
in Treasury)................................. 279 275
Common Stock,Class B,$.01 par value (convertible to
Class A at time of sale) authorized 13,000,000
shares; issued 7,772,342 shares at July 31, 2003
and 7,788,061 shares at October 31, 2002
(including 345,874 shares at July 31, 2003 and
October 31, 2002 held in Treasury)........... 78 78
Paid in Capital................................ 160,479 152,977
Retained Earnings.............................. 613,933 447,802
Deferred Compensation.......................... (21)
Treasury Stock - at cost....................... (45,823) (38,562)
----------- -----------
Total Stockholders' Equity................. 728,946 562,549
----------- -----------
Total Liabilities and Stockholders' Equity....... $2,195,654 $1,678,128
=========== ===========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- ----------------------
2003 2002 2003 2002
--------- --------- ---------- ----------
Revenues:
Homebuilding:
Sale of homes......................$ 830,734 $ 681,329 $2,104,788 $1,656,813
Land sales and other revenues...... 4,441 12,651 16,445 34,564
--------- --------- ---------- ----------
Total Homebuilding............... 835,175 693,980 2,121,233 1,691,377
Financial Services................... 13,642 10,656 35,036 28,319
--------- --------- ---------- ----------
Total Revenues................... 848,817 704,636 2,156,269 1,719,696
--------- --------- ---------- ----------
Expenses:
Homebuilding:
Cost of sales...................... 621,897 539,676 1,582,294 1,327,685
Selling, general and administrative 66,136 52,882 180,035 138,177
Inventory impairment loss.......... 149 426 1,633 2,755
--------- --------- ---------- ----------
Total Homebuilding............... 688,182 592,984 1,763,962 1,468,617
Financial Services................... 7,635 5,694 19,629 16,156
Corporate General and Administrative. 16,978 12,195 45,026 33,700
Interest............................. 17,204 15,849 44,308 42,353
Other Operations..................... 9,010 3,953 17,972 13,539
Restructuring Charges/Asset Writeoff. 12,000 12,000
--------- --------- ---------- ----------
Total Expenses................... 739,009 642,675 1,890,897 1,586,365
--------- --------- ---------- ----------
Income Before Income Taxes............. 109,808 61,961 265,372 133,331
--------- --------- ---------- ----------
State and Federal Income Taxes:
State................................ 5,439 1,679 11,874 5,086
Federal.............................. 35,567 21,095 87,367 44,987
--------- --------- ---------- ----------
Total Taxes........................ 41,006 22,774 99,241 50,073
--------- --------- ---------- ----------
Net Income.............................$ 68,802 $ 39,187 $ 166,131 $ 83,258
========= ========= ========== ==========
Per Share Data:
Basic:
Income per common share..............$ 2.25 $ 1.27 $ 5.35 $ 2.76
========= ========= ========== ==========
Weighted average number of common
shares outstanding................. 30,630 30,877 31,044 30,188
Assuming dilution:
Income per common share..............$ 2.11 $ 1.20 $ 5.06 $ 2.61
========= ========= ========== ==========
Weighted average number of common
shares outstanding................ 32,543 32,730 32,806 31,922
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Capital Earnings Comp Stock
Total
----------- ------ ----------- ------ ------- -------- -------- -------- ------
- ---
Balance, October 31, 2002 23,109,241 $275 7,442,187 $78 $152,977 $447,802 $ (21) $(38,562) $ 562,549
Shares returned in
connnection with prior
year acquisition........ (749,359)
Sale of common stock under
Employee stock option
plan.................... 318,660 3 7,421 7,424
Stock bonus plan.......... 88,141 1 81 82
Conversion of Class B to
Class A Common Stock.... 15,719 (15,719)
Deferred compensation..... 21 21
Treasury stock purchases.. (250,000) (7,261) (7,261)
Net Income................ 166,131 166,131
----------- ------ ----------- ------ ------- -------- -------- -------- ---------
Balance, July 31, 2003.... 22,532,402 $279 7,426,468 $78 $160,479 $613,933 $ -- $(45,823) $ 728,946
(Unaudited) =========== ====== =========== ====== ======= ======== ======== ======== =========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
Nine Months Ended
July 31,
---------------------
2003 2002
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 166,131 $ 83,258
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation.................................... 4,946 5,003
Amortization of definite life intangibles....... 5,465 -
Loss on sale and retirement of property
and assets.................................... 44 11,858
Deferred income taxes........................... (6,123) (5,742)
Impairment losses............................... 1,633 2,755
Decrease (increase) in assets:
Mortgage notes receivable..................... (59,049) 43,162
Receivables, prepaids and other assets........ (14,444) 9,512
Inventories................................... (338,374) (80,489)
Increase (decrease) in liabilities:
State and Federal income taxes................ 403 5,208
Tax effect from exercise of stock options..... (6,774) (1,074)
Customers' deposits........................... 21,352 4,102
Interest and other accrued liabilities........ 14,719 17,960
Post development completion costs............. 1,952 (901)
Accounts payable.............................. (11,373) 7,769
---------- ----------
Net cash (used in) provided by operating
activities................................ (219,492) 102,381
---------- ----------
Cash Flows From Investing Activities:
Net Proceeds from sale of property and assets....... 482 611
Purchase of property,equipment and other fixed
assets and acquisitions of homebuilding companies. (141,796) (142,860)
Distribution from (investment in and advance to)
unconsolidated affiliates......................... 1,150 (8,679)
---------- ----------
Net cash (used in) investing activities..... (140,164) (150,928)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes...................1,090,816 1,587,017
Proceeds from senior debt........................... 99,152
Proceeds from senior subordinated debt.............. 150,000 150,000
Principal payments on mortgages and notes..........(1,022,006)(1,603,320)
Principal payments on senior debt................... (9,750) (99,747)
Purchase of treasury stock.......................... (7,261) (1,089)
Proceeds from sale of stock and employee stock plan. 7,506 4,022
---------- ----------
Net cash provided by financing activities... 209,305 136,035
---------- ----------
Net (Decrease) Increase In Cash and Cash Equivalents.. (150,351) 87,488
Cash and Cash Equivalents Balance,
Beginning Of Period................................. 269,990 16,149
---------- ----------
Cash and Cash Equivalents Balance, End Of Period.....$ 119,639 $ 103,637
========== ==========
Supplemental Disclosures of Cash Flow
Cash paid during the period for:
Interest..........................................$ 41,198 $ 39,450
========== ==========
Income taxes......................................$ 104,962 $ 52,777
========== ==========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options......................$ 64,743 $ 24,710
Variable interest entities........................ 81,537
Other options..................................... 50,486
---------- ----------
Total Inventory Not Owned...........................$ 196,766 $ 24,710
========== ==========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, all adjustments for interim periods
presented have been made, which include only normal recurring accruals
and deferrals necessary for a fair presentation of consolidated financial
position, results of operations, and changes in cash flows. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates and these differences could have a significant
impact on the financial statements. Results for the interim periods are
not necessarily indicative of the results which might be expected for a
full year. The balance sheet at October 31, 2002 has been derived from
the audited financial statements at that date but does not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
2. Stock Option Plan - We adopted Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25")
and related Interpretations in Accounting for our employee stock options.
Under APB No. 25, no compensation expense is recognized because the
exercise price of our Company's employee stock options equals the market
price of the underlying stock on the date of the grant.
Pro forma information regarding net income and earnings per share
is to be calculated as if we had accounted for our stock options under
the fair value method of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation". The fair value for those
options is established at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2003
and 2002 respectively: risk-free interest rate of 4.3% and 4.3%,
respectively; dividend yield of zero; volatility factor of the expected
market price of our common stock of 0.43 and 0.43, respectively; and a
weighted-average expected life of the option of 5.1 and 5.5 years,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because our employee stock options have
characteristics significantly different from those of our traded options,
and changes in the subjective input assumptions can materially affect the
fair value estimate, management believes the existing models do not
necessarily provide a reliable measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
Our pro forma information follows (dollars in thousands except for
earnings per share information):
Three Months Ended Nine Months Ended
------------------- -------------------
July July July July
31, 2003 31, 2002 31, 2003 31, 2002
--------- -------- -------- --------
Net income to common shareholders;
as reported.........................$ 68,802 $ 39,187 $166,131 $ 83,258
Deduct: total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of minority interest 539 140 1,515 420
Pro forma net income..................$ 68,263 $ 39,047 $164,616 $ 82,838
========= ======== ======== ========
Pro forma basic earnings per share....$ 2.23 $ 1.26 $ 5.30 $ 2.74
========= ======== ======== ========
Basic earnings per share as reported..$ 2.25 $ 1.27 $ 5.35 $ 2.76
========= ======== ======== ========
Pro forma diluted earnings per share..$ 2.10 $ 1.19 $ 5.02 $ 2.60
========= ======== ======== ========
Diluted earnings per share as
Reported............................$ 2.11 $ 1.20 $ 5.06 $ 2.61
========= ======== ======== ========
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period.........$ 25,480 $ 24,876 $ 22,159 $ 25,124
Plus Interest Incurred(1)(2).. 17,807 15,746 48,232 42,002
Less Interest Expensed(2)..... 17,204 15,849 44,308 42,353
-------- -------- -------- --------
Interest Capitalized at
End of Period (2).......... $ 26,083 $ 24,773 $ 26,083 $ 24,773
======== ======== ======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Represents interest on borrowings for construction, land and
development costs which are charged to interest expense when
homes are delivered or when land is not under active development.
4. Homebuilding accumulated depreciation at July 31, 2003 and
October 31, 2002 amounted to $22.0 million and $18.5 milion,
respectively. Senior residential rental property accumulated
depreciation at July 31, 2003 and October 31, 2002 amounted to $3.4
million and $3.1 million, respectively.
5. In accordance with Financial Accounting Standards No. 144
("SFAS 144") "Accounting for the Impairment of or Disposal of Long Lived
Assets", we record impairment losses on inventories related to
communities under development when events and circumstances indicate that
they may be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than their carrying amounts. In
addition, from time to time, we will write off certain residential land
options including approval, engineering and capitalized interest costs
for land management decided not to purchase. We wrote off such costs
amounting to $1.6 million during the nine months ended July 31, 2003.
During the nine months ended July 31, 2002 we wrote off such costs in the
amount of $1.6 million in Poland, $0.8 million due to the exit of our
Mid-South operations, and $0.4 million in other geographical areas.
Residential inventory impairment losses and option write-offs are
reported in the Consolidated Statements of Income as "Homebuilding-
Inventory Impairment Loss."
6. We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
us.
7. As of July 31, 2003 and October 31, 2002, respectively, we are
obligated under various performance letters of credit amounting to $132.9
million and $100.0 million.
8. We have an unsecured Revolving Credit Agreement (the
"Agreement") with a group of banks which was amended and restated on June
19, 2003. Pursuant to the agreement, our credit line increased to $590.0
million. The Agreement bears an expiration date of July 2006 and
interest is payable monthly and at various rates of either the prime rate
plus 0.275% or LIBOR plus 1.75%. In addition, we pay a fee equal to
0.350% per annum on the weighted average unused portion of the line. As
of July 31, 2003 and October 31, 2002, there were no borrowings under the
Agreement.
Our mortgage warehouse line of credit was amended and restated on
July 31, 2003. Pursuant to the agreement, our credit line matures in
July 2004 and we have the option to borrow up to $200.0 million.
Interest is payable monthly at the Federal Funds Rate plus 1.375%. As of
July 31, 2003 and October 31, 2002 borrowings were $137.0 million and
$85.5 million, respectively.
9. On May 9, 2003, we issued $150 million 7 3/4% Senior
Subordinated Notes due 2013. The net proceeds of the note offering were
used to repay the current outstanding indebtedness under the Agreement
and the remainder for general corporate purposes. During the third
quarter ended July 31, 2003 we paid down $9.8 million of our $150 million
10 1/2% Senior Notes due 2007.
At July 31, 2003, our long-term debt consisted of: $140.3 million
10 1/2% Senior Notes due 2007, $150 million 9 1/8% Senior Notes due 2009,
$100 million 8% Senior Notes due 2012 (aggregating $387 million, net of
discount), $150 million 8 7/8% Senior Subordinated Notes due 2012, $150
million 7 3/4% Senior Subordinated Notes due 2013 and a $165 million Term
Loan due 2007 which bears interest at either the prime rate plus 1.25% or
LIBOR plus 2.5%. As of July 31, 2003 borrowings under the Term Loan were
$115 million.
10. Per Share Calculations - Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share" requires the presentation
of basic earnings per share and diluted earnings per share. Basic
earnings per share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using
the basic weighted average number of shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase common
stock.
11. Recent Accounting Pronouncements - In April 2002, the
Financial Accounting Standards Board issued (SFAS) No. 145, "Reported
Gains and Losses from Extinguishment of Debt", which rescinded SFAS No.
4, No. 44, and No. 64 and amended SFAS No. 13. The new standard
addresses the income statement classification of gains or losses from the
extinguishment of debt and criteria for classification as extraordinary
items. We adopted SFAS No. 145 on November 1, 2002. We reclassified a
$0.9 million extraordinary loss from extinguishment of debt to other
operations and a $0.3 million reduction to State and Federal Income Taxes
on our Consolidated Statements of Income to conform to the new
presentation.
In June 2002, the Financial Accounting Standards Board issued
(SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including certain costs incurred in a restructuring)".
SFAS No. 146 requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred as
opposed to when the entity commits to an exit plan as prescribed under
EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. We adopted SFAS No. 146 on January 1,
2003. The initial adoption of SFAS 146 did not have a material effect on
the financial position or results of operations of our Company. However,
SFAS No. 146 could impact the amount or timing of liabilities to be
recognized in the event that we engage in exit or disposal activities in
the future.
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its
interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties. The
initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and initial measurement
provisions of FIN 45 did not have a material effect on our financial
position or results of operations. Our disclosure of guarantees is
included in Note 14 to the consolidated financial statements - unaudited.
In December 2002, the Financial Accounting Standards Board issued
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which amends (SFAS) No. 123. The new standard provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
It also requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the affect of the method used on reported
results. We have not elected to change to the fair value based method of
accounting for stock-based employee compensation. We adopted the
disclosure provisions of SFAS No. 148 in our second fiscal quarter ending
April 30, 2003. Our disclosure of accounting for stock-based
compensation is included in Note 2 to the consolidated financial
statements - unaudited.
In January 2003, the Financial Accounting Standards Board issued
FASB Interpretation No. 46 "Consolidation of Variable Interest Entities"
an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity
("VIE") is created when (i) the equity investment at risk is not
sufficient to permit the entity from financing its activities without
additional subordinated financial support from other parties or (ii)
equity holders either (a) lack direct or indirect ability to make
decisions about the entity, (b) are not obligated to absorb expected
losses of the entity or (c) do not have the right to receive expected
residual returns of the entity if they occur. If an entity is deemed to
be a VIE, pursuant to FIN 46, an enterprise that absorbs a majority of
the expected losses of the VIE is considered the primary beneficiary and
must consolidate the VIE. FIN 46 is effective immediately for VIE's
created after January 31, 2003. For VIE's created before January 31,
2003, FIN 46 must be applied at the beginning of the first interim or
annual reporting period beginning after June 15, 2003.
Based on the provisions of FIN 46, we have concluded that whenever
we option land or lots from an entity and pay a non-refundable deposit, a
VIE is created under condition (ii) (b) and (c) of the previous
paragraph. We have been deemed to have provided subordinated financial
support, which refers to variable interests that will absorb some or all
of an entity's expected theoretical losses if they occur. For each VIE
created we will compute expected losses and residual returns based on the
probability of future cash flows as outlined in FIN 46. If we are deemed
to be the primary beneficiary of the VIE we will consolidate it on our
balance sheet. The fair value of the VIE's inventory will be reported as
"Consolidated Inventory Not Owned - Variable Interest Entities".
Management believes FIN 46 was not clearly thought out for
application in the homebuilding industry for land and lot options. Under
FIN 46, we can have an option and put down a small deposit as a
percentage of the purchase price and still have to consolidate the
entity. Our exposure to loss as a result of our involvement with the VIE
is only the deposit, not it's total assets consolidated on the balance
sheet. In certain cases we will have to place inventory on our balance
sheet the VIE has optioned to other developers. In addition, if the VIE
has creditors, it's debt will be placed on our balance sheet even though
the creditors have no recourse against our Company. Based on these
observations we believe consolidating VIE's based on land and lot option
deposits does not reflect the economic realities or risks of owning and
developing land.
At July 31, 2003 we consolidated nine VIE's created from February
1, 2003 to July 31, 2003 as a result of our option to purchase land or
lots from the selling entities. We paid cash or issued letters of credit
deposits to these nine VIE's totaling $11.7 million. Our option deposits
represent our maximum exposure to loss. The fair value of the property
owned by the VIE's was $93.2 million of which $6.2 million was not
optioned to our Company. We were able to ascertain that one VIE had
third party debt amounting to $1.4 million. Since we could not get the
remainder of the selling entities to provide us with any financial
information, the fair value of the optioned property less our cash
deposits and liabilities from inventory not owned, which totaled $80.1
million, was reported on the balance sheet as Minority Interest.
Creditors, if any, of these VIE's have no recourse against our Company.
We will continue to secure land and lots using options. Including
the deposits with the nine VIE's above, at July 31, 2003 we have total
cash and letters of credit deposits amounting to approximately $180.2
million to purchase land and lots with a total purchase price of $2.4
billion. Not all our deposits are with VIE's. The maximum exposure to
loss is limited to the deposits although some deposits are refundable at
our request or refundable if certain conditions are not met. We are in
the process of evaluating all option purchase agreements in effect as of
January 31, 2003. Options with VIE's where we are the primary
beneficiary will be consolidated by our fiscal year end October 31, 2003.
12. On November 1, 2002 and December 31, 2002 we acquired two
Houston homebuilding companies, for an approximate aggregate purchase
price of $100 million. On April 9, 2003 we acquired a build-on-your-own-
lot homebuilder based in Canton, Ohio. On August 8, 2003, we acquired a
homebuilder in Phoenix, Arizona. All of these acquisitions were
accounted for as a purchase, with the results of operations of these
entities included in our consolidated financial statements as of the date
of acquisition. The purchase price was allocated based on estimated fair
value at the date of acquisition. As a result, estimated definite life
intangible assets of $63.5 million were recorded on the consolidated
balance sheet. We expect to amortize the definite life intangibles over
their estimated lives.
13. Intangible Assets - As reported on the balance sheet we have
goodwill and indefinite life intangibles amounting to $82.3 million and
definite life intangibles amounting to $59.2 million. Our intangible
assets consist of goodwill, tradenames, architectural designs, and
contractual agreements. In accordance with the Financial Accounting
Standards No. 142 ("SFAS No. 142") "Goodwill and Other Intangible
Assets"; we no longer amortize goodwill or indefinite life intangibles,
but instead assess them periodically for impairment. We are amortizing
the definite life intangibles over their expected useful life. The
amortization expense of $3.2 million and $5.5 million is reported in
other operations on our Consolidated Statement of Income for the three
and nine months ended July 31, 2003, respectively. No amortization
expense was recorded during the three and nine months ended July 31,
2002, respectively.
14. Hovnanian Enterprises, Inc., the parent company (the
"Parent"), is the issuer of publicly traded common stock. One of its
wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the
"Subsidiary Issuer"), acts as a finance entity that as of July 31, 2003
had issued and outstanding approximately $300 million senior subordinated
notes, $390 million face value senior notes, a term loan with an
outstanding balance of $115 million, and a revolving credit agreement
with no outstanding balance. The senior subordinated notes, senior
notes, the revolving credit agreement, and term loan are fully and
unconditionally guaranteed by the Parent.
In addition to the Parent, each of the wholly owned subsidiaries of
the Parent other than the Subsidiary Issuer (collectively, the "Guarantor
Subsidiaries"), with the exception of various subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, a
mortgage lending subsidiary, a subsidiary engaged in homebuilding
activity in Poland, our title subsidiaries, and joint ventures
(collectively the "Non-Guarantor Subsidiaries"), have guaranteed fully
and unconditionally, on a joint and several basis, the obligation of the
Subsidiary Issuer to pay principal and interest under the senior notes,
senior subordinated notes, the term loan and the Agreement.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying consolidating
condensed financial statements. Management does not believe that
separate financial statements of the Guarantor Subsidiaries are material
to investors. Therefore, separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information present
the results of operations, financial position, and cash flows of (i) the
Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries of
the Parent, (iv) the Non-Guarantor Subsidiaries, and (v) the eliminations
to arrive at the information for the Parent on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
JULY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding......................$ 26 $ 92,122 $1,904,126 $ 23,514 $ $2,019,788
Financial Services................ 109 164,040 164,149
Income Taxes (Payable) Receivable. (12,316) (1,240) 26,068 (795) 11,717
Investments in and amounts due to
and from consolidated
subsidiaries.................... 741,236 741,658 (1,009,648) (24,151) (449,095)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets......................$728,946 $ 832,540 $ 920,655 $ 162,608 $(449,095) $2,195,654
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding......................$ $ $ 421,200 $ 64 $ $ 421,264
Financial Services................ 143,680 143,680
Notes Payable..................... 819,055 712 819,767
Income Taxes Payable(Receivables)
Minority Interest................. 80,137 1,860 81,997
Stockholders' Equity.............. 728,946 13,485 418,606 17,004 (449,095) 728,946
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity..........................$728,946 $ 832,540 $ 920,655 $ 162,608 $(449,095) $2,195,654
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 1,501 $ 261,107 $1,269,514 $ 36,014 $ $1,568,136
Financial Services................. 111 109,881 109,992
Income Taxes (Payable) Receivable..
Investments in and amounts due to
and from consolidated
subsidiaries..................... 584,103 432,130 (630,186) (32,376) (353,671)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$585,604 $ 693,237 $ 639,439 $ 113,519 $ (353,671)$1,678,128
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 35,736 $ 312,231 $ 3,595 $ $ 351,562
Financial Services................. 90,355 90,355
Notes Payable...................... 661,390 2,345 7,210 670,945
Income Taxes Payable (Receivable).. 23,055 (3,147) (18,184) (947) 777
Minority Interest.................. 1,940 1,940
Stockholders' Equity............... 562,549 (742) 343,047 11,366 (353,671) 562,549
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$585,604 $ 693,237 $ 639,439 $ 113,519 $ (353,671)$1,678,128
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ (45)$ 835,191 $ 4 $ 25 $ 835,175
Financial Services............... 2,033 11,609 13,642
Intercompany Charges............. (61,982) 51,085 10,897
Equity In Pretax Income of
consolidated Subsidiaries...... 109,808 (109,808)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $109,808 $ (62,027)$ 888,309 $ 11,613 $ (98,886)$ 848,817
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (84,286) 820,362 142 (4,844) 731,374
Financial Services............... 772 7,254 (391) 7,635
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (84,286) 821,134 7,396 (5,235) 739,009
-------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 109,808 22,259 67,175 4,217 (93,651) 109,808
State and Federal Income Taxes..... 41,006 8,420 25,121 1,812 (35,353) 41,006
-------- ---------- ---------- ------------ ---------- ----------
Net Income ....................... $ 68,802 $ 13,839$ 42,054 $ 2,405 $ (58,298)$ 68,802
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 295 $ 693,357 $ 7,807 $ (7,479) $ 693,980
Financial Services............... 2,270 8,386 10,656
Intercompany Charges............. 54,869 (10,326) (44,543)
Equity In Pretax Income of
Consolidated Subsidiaries...... 61,961 (61,961)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $61,961 $ 55,164 $ 685,301 $ 16,193 $(113,983) $ 704,636
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 55,164 644,464 322 (62,969) 636,981
Financial Services............... 683 5,266 (255) 5,694
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 55,164 645,147 5,588 (63,224) 642,675
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 61,961 40,154 10,605 (50,759) 61,961
State and Federal Income Taxes..... 22,774 (26) 14,971 3,908 (18,853) 22,774
------- ---------- ---------- ------------ ---------- ----------
Net Income ....................... $39,187 $ 26 $ 25,183 $ 6,697 $ (31,906) $ 39,187
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 593 $2,120,611 $ 14 $ 15 $2,121,233
Financial Services................ 5,496 29,540 35,036
Intercompany Charges............. 23,389 62,544 (85,933)
Equity In Pretax Income of
Consolidated Subsidiaries...... 265,372 (265,372)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $265,372 $ 23,982 $2,188,651 $ 29,554 $ (351,290)$2,156,269
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 1,723 1,961,389 361 (92,205) 1,871,268
Financial Services............... 1,907 18,971 (1,249) 19,629
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 1,723 1,963,296 19,332 (93,454) 1,890,897
-------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 265,372 22,259 225,355 10,222 (257,836) 265,372
State and Federal Income Taxes..... 99,241 7,791 84,552 4,261 (96,604) 99,241
-------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$166,131 $ 14,468 $ 140,803 $ 5,961 $ (161,232)$ 166,131
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 565 $1,689,257 $ 20,475 $ (18,920) $1,691,377
Financial Services............... 4,956 23,363 28,319
Intercompany Charges............. 119,275 (3,663) (115,612)
Equity In Pretax Income of
Consolidated Subsidiaries......133,331 (133,331)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................$133,331 $119,840 $1,690,550 $ 43,838 $(267,863) $1,719,696
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 119,840 1,588,505 1,981 (140,117) 1,570,209
Financial Services............... 1,768 15,437 (1,049) 16,156
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 119,840 1,590,273 17,418 (141,166) 1,586,365
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes.........133,331 100,277 26,420 (126,697) 133,331
State and Federal Income Taxes..... 50,073 (180) 37,982 10,058 (47,860) 50,073
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$83,258 $ 180 $ 62,295 $ 16,362 $ (78,837) $ 83,258
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$166,131 $ 14,468 $ 140,803 $ 5,961 $ (161,232)$ 166,131
Adjustments to reconcile net income
to net cash (Used In) Provided
By operating activities.......... (2,534) 10,709 (510,053) (44,977) 161,232 (385,623)
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 163,597 25,177 (369,250) (39,016) (219,492)
Net Cash (Used In) Provided By
Investing Activities............... (7,588) (132,321) (255) (140,164)
Net Cash (Used In) Provided By
Financing Activities............... (7,261) 140,639 24,990 50,937 209,305
Intercompany Investing and Financing
Activities - Net...................(148,743) (309,555) 468,463 (10,165)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 5 (143,739) (8,118) 1,501 (150,351)
Cash and Cash Equivalents Balance,
Beginning of Period................ 10 218,844 43,689 7,447 269,990
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 15 $ 75,105 $ 35,571 $ 8,948 $ $ 119,639
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 83,258 $ (402) $ 63,190 $ 16,362 $ (79,150) $ 83,258
Adjustments to reconcile net income
to net cash (Used In) Provided
By operating activities.......... 99,463 11,817 (182,793) 11,486 79,150 19,123
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 182,721 11,415 (119,603) 27,848 102,381
Net Cash (Used In) Provided By
Investing Activities............... (46,087) (1,929) (103,096) 184 (150,928)
Net Cash (Used In) Provided By
Financing Activities............... (1,089) 264,726 (85,867) (41,735) 136,035
Intercompany Investing and Financing
Activities - Net...................(135,545) (188,403) 310,301 13,647
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 85,809 1,735 (56) 87,488
Cash and Cash Equivalents Balance,
Beginning of Period................ 10 (5,840) 15,616 6,363 16,149
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 10 $ 79,969 $ 17,351 $ 6,307 $ $ 103,637
======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management believes that the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
Business Combinations - When we make an acquisition of another
company, we use the purchase method of accounting in accordance with the
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations". Under SFAS No. 141 (for acquisitions subsequent to June
30, 2001) and APB 16 (for acquisitions prior to June 30, 2001) we record
as our cost the estimated fair value of the acquired assets less
liabilities assumed. Any difference between the cost of an acquired
company and the sum of the fair values of tangible assets less
liabilities is recorded as goodwill, indefinite or definite life
intangibles. The reported income of an acquired company includes the
operations of the acquired company from the date of acquisition.
Income Recognition from Home and Land Sales - Income from home and
land sales are recorded when title is conveyed to the buyer, adequate
cash payment has been received and there is no continued involvement.
Income Recognition from Mortgage Loans - Profits and losses
relating to the sale of mortgage loans are recognized when legal control
passes to the buyer and the sales price is collected.
Inventories - For inventories of communities under development, a
loss is recorded when events and circumstances indicate impairment and
the undiscounted future cash flows generated are less than the related
carrying amounts. The impairment loss is based on discounted future cash
flows generated from expected revenue, cost to complete including
interest, and selling costs. Inventories and long-lived assets held for
sale are recorded at the lower of cost or fair value less selling costs.
Fair value is defined in the Statement of Financial Accounting Standards
(SFAS) No. 144 "Accounting for the Impairment of or Disposal of Long-
Lived Assets" as the amount at which an asset could be bought or sold in
a current transaction between willing parties, that is, other than in a
forced or liquidation sale. Construction costs are accumulated during
the period of construction and charged to cost of sales under specific
identification methods. Land, land development, and common facility
costs are allocated based on buildable acres to product types within each
community, then amortized equally based upon the number of homes to be
constructed in the community.
Insurance Deductible Reserves - Our deductible is $150,000 per
occurrence for our worker's compensation and general liability insurance.
Reserves have been established based upon actuarial analysis of estimated
future losses.
Interest - Costs related to properties under development are
capitalized during the land development and home construction period and
expensed along with the associated cost of sales as the related
inventories are sold. Costs related to properties not under development
are charged to interest expense.
Land Options - Costs are capitalized when incurred and either
included as part of the purchase price when the land is acquired or
charged to operations when we determine we will not exercise the option.
In accordance with FIN 46, SFAS 49, SFAS 98, and EITF 97-10 we record
specific performance options, options with variable interest entities and
other options under Consolidated Inventory Not Owned with the offset to
Liabilities from inventory not owned and Minority interest from inventory
not owned on our Consolidated Balance Sheets.
Intangible Assets - The intangible assets recorded on our balance
sheet consist of goodwill, tradenames, architectural designs and
contractual agreements with both definite and indefinite lives resulting
from company acquisitions. In accordance with the Financial Accounting
Standards No. 142 ("SFAS No. 142") " Goodwill and Other Intangible
Assets", we no longer amortize goodwill or indefinite life intangibles,
but instead assess them periodically for impairment. We are amortizing
the definite life intangibles over their expected useful life.
Post Development Completion Costs - In those instances where a
development is substantially completed and sold and we have additional
construction work to be incurred, an estimated liability is provided to
cover the cost of such work and is recorded in Accounts Payable and other
liabilities in the Consolidated Balance Sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the nine months ended July 31, 2003 were for
operating expenses, increases in housing inventories, construction,
income taxes, interest, the repurchase of common stock, and the
acquisition of three homebuilders. We provided for our cash requirements
from housing and land sales, the revolving credit facility, the issuance
of $150 million Senior Subordinated Notes, financial service revenues,
and other revenues. We believe that these sources of cash are sufficient
to finance our working capital requirements and other needs.
On December 31, 2000, our stock repurchase program to purchase up
to 4 million shares of Class A Common Stock expired. As of December 31,
2000, 3,391,047 shares had been purchased under this program. On July 3,
2001, our Board of Directors authorized a revision to our stock
repurchase program to purchase up to 2 million shares of Class A Common
Stock. As of July 31, 2003, 856,319 shares have been purchased under
this program of which 250,000 were repurchased during the nine months
ended July 31, 2003.
Our homebuilding bank borrowings are made pursuant to an amended
and restated revolving credit agreement (the "Agreement") that provides a
revolving credit line and letter of credit line of $590 million through
July 2006. Interest is payable monthly and at various rates of either
the prime rate plus 0.275% or Libor plus 1.75%. In addition, we pay a
fee equal to 0.350% per annum on the weighted average unused portion of
the line. We believe that we will be able either to extend the Agreement
beyond July 2006 or negotiate a replacement facility, but there can be no
assurance of such extension or replacement facility. We currently are in
compliance and intend to maintain compliance with the covenants under the
Agreement. Each of our significant subsidiaries except for our financial
services subsidiaries is a guarantor under the revolving credit
agreement. As of July 31, 2003, there were no borrowings under the
Agreement.
At July 31, 2003 we had $390.3 million of outstanding senior debt
($387 million, net of discount), comprised of $140.3 million 10 1/2%
Senior Notes due 2007, $150 million 9 1/8% Senior Notes due 2009, and
$100 million 8% Senior Notes due 2012. At July 31, 2003, we had $300
million outstanding senior subordinated debt comprised of $150 million 8
7/8% Senior Subordinated Notes due 2012, and $150 million 7 3/4% Senior
Subordinated Notes due 2013. Each of our significant subsidiaries except
for our financial services subsidiaries is a guarantor under the Senior
Notes and Senior Subordinated Notes.
On January 22, 2002 we issued a $165 million five-year Term Loan.
The term loan matures in January 2007, and bears interest at either the
prime rate plus 1.25% or Libor plus 2.5%. Each of our significant
subsidiaries except for our financial services subsidiaries is a
guarantor under the Term Loan. At July 31, 2003, borrowings under the
Term Loan were $115 million.
Our mortgage banking subsidiary's warehousing agreement was amended
and restated on July 31, 2003. Pursuant to the agreement, we may borrow
up to $200 million. The agreement bears an expiration date of July 2004
and interest is payable monthly at the Federal Funds Rate plus 1.375%.
We believe that we will be able either to extend this agreement beyond
July 2004 or negotiate a replacement facility, but there can be no
assurance of such extension or replacement facility. As of July 31,
2003, the aggregate principal amount of all such borrowings was $137
million.
Total inventory increased $396.7 million during the nine months
ended July 31, 2003. This increase excluded the change in Consolidated
Inventory Not Owned of $113.4 million consisting of specific performance
options and other options that were added to our balance sheet in
accordance with SFAS 49, SFAS 98, and EITF 97-10 and Variable Interest
Entities in accordance with FIN 46. The $396.7 million increase in
inventory was due to increases in inventory levels in all of our housing
markets as well as our acquisitions. Excluding the impact from
acquisitions of $90.3 million, our Northeast Region increased $117.9
million and California increased $111.9 million, with the balance spread
out in our other markets. The increase in our existing markets was
primarily the result of seasonality factors and planned future organic
growth. Substantially all homes under construction or completed and
included in inventory at July 31, 2003 are expected to be closed during
the next twelve months. Most inventory completed or under development is
financed through our line of credit, term loan, and senior and senior
subordinated indebtedness.
We usually option property for development prior to
acquisition. By optioning property, we are only subject to the loss of
an option fee and predevelopment costs if we choose not to exercise the
option. As a result, our commitment for major land acquisitions is
reduced.
The following table summarizes housing lots included in our total
residential real estate. The July 31, 2003 numbers excluded lots owned
and options in locations that we have ceased development.
Active Proposed
Active Selling Developable Grand Total
Communities Lots Lots Lots
----------- ------- ----------- -----------
July 31, 2003:
Northeast Region.. 30 7,091 14,960 22,051
North Carolina.... 71 6,489 799 7,288
Metro D.C......... 36 4,393 10,685 15,078
California........ 37 5,025 10,981 16,006
Texas............. 71 5,587 3,613 9,200
----------- ------- ---------- -----------
245 28,585 41,038 69,623
=========== ======= ========== ===========
Owned.......... 12,841 4,302 17,143
Optioned....... 15,744 36,736 52,480
------ ---------- -----------
Total........ 28,585 41,038 69,623
======= ========= ===========
Active Proposed
Active Selling Developable Grand Total
Communities Lots Lots Lots
----------- ------- ----------- -----------
October 31, 2002:
Northeast Region.. 28 5,699 15,700 21,399
North Carolina.... 64 5,186 2,283 7,469
Metro D.C......... 27 3,182 7,394 10,576
California........ 42 5,974 4,457 10,431
Texas............. 35 2,566 1,518 4,084
Other............. -- 29 -- 29
----------- ------- ---------- -----------
196 22,636 31,352 53,988
=========== ======= ========== ===========
Owned.......... 11,088 2,274 13,362
Optioned....... 11,548 29,078 40,626
------- ---------- -----------
Total........ 22,636 31,352 53,988
======= ========== ===========
Active selling lots under contract at July 31, 2003 and October 31, 2002
were 5,033 and 3,831, respectively. Such amounts do not include our
build on your own lot contracts.
The following table summarizes our started or completed unsold
homes and models:
July 31, October 31,
2003 2002
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 90 56 146 73 46 119
North Carolina...... 148 19 167 191 32 223
Metro D.C........... 32 20 52 34 31 65
California.......... 153 91 244 193 65 258
Texas............... 577 72 649 261 31 292
Other............... - - - 2 -- 2
------ ------ ----- ------ ------ -----
Total 1,000 258 1,258 754 205 959
====== ====== ===== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $152.1 million and $91.3
million at July 31, 2003 and October 31, 2002, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage
market. The balance of such mortgages is being held as an investment by
us. We may incur risk with respect to mortgages that are delinquent, but
only to the extent the losses are not covered by mortgage insurance or
resale value of the house. Historically, we have incurred minimal credit
losses.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2003
COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 2002
Our operations consist primarily of residential housing development
and sales in our Northeast Region (New Jersey, southern New York State,
eastern Pennsylvania, and Ohio), North Carolina, Metro D. C. (northern
Virginia, eastern West Virginia, and Maryland), California, and Texas.
In addition, we provide financial services to our homebuilding customers.
Total Revenues:
Compared to the same prior period, revenues increased as follows:
Three Months Ended
------------------------------------------
July 31, July 31, Dollar Percentage
2003 2002 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $ 830,734 $ 681,329 $149,405 21.9%
Land sales and other
revenues........... 4,441 12,651 (8,210) (64.9%)
Financial Services... 13,642 10,656 2,986 28.0%
---------- ---------- -------- --------
Total Revenues... $ 848,817 $ 704,636 $144,181 20.5%
========== ========== ======== ========
Nine Months Ended
------------------------------------------
July 31, July 31, Dollar Percentage
2003 2002 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $2,104,788 $1,656,813 $447,975 27.0%
Land sales and other
revenues........... 16,445 34,564 (18,119) (52.4%)
Financial Services... 35,036 28,319 6,717 23.7%
---------- --------- -------- --------
Total Revenues... $2,156,269 $1,719,696 $436,573 25.4%
========== ========= ======== ========
Homebuilding:
Revenues from the sale of homes increased $149.4 million or 21.9%
during the three months ended July 31, 2003, and increased $448 million
or 27% during the nine months ended July 31, 2003 compared to the same
periods last year. Revenues from the sale of homes are recorded at the
time each home is delivered and title and possession have been
transferred to the buyer.
Information on homes delivered by market area is set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- ---------------------
2003 2002 2003 2002
--------- -------- ----------- ---------
(Dollars in Thousands)
Northeast Region(1):
Housing Revenues..... $210,039 $177,153 $ 494,957 $ 455,171
Homes Delivered...... 647 570 1,540 1,469
North Carolina:
Housing Revenues..... $ 65,399 $ 72,437 $ 173,938 $ 193,902
Homes Delivered...... 365 393 965 1,044
Metro D. C.:
Housing Revenues..... $100,184 $110,030 $ 305,927 $ 258,755
Homes Delivered...... 324 386 968 944
California(2):
Housing Revenues..... $325,205 $242,631 $ 819,369 $ 535,961
Homes Delivered...... 1,090 926 2,846 2,094
Texas(1):
Housing Revenues..... $129,907 $ 65,432 $ 309,336 $ 172,778
Homes Delivered...... 640 286 1,519 746
Other:
Housing Revenues..... $ -- $ 13,646 $ 1,261 $ 40,246
Homes Delivered...... -- 86 9 258
Totals:
Housing Revenues..... $830,734 $681,329 $2,104,788 $1,656,813
Homes Delivered...... 3,066 2,647 7,847 6,555
(1) July 31, 2003 includes deliveries from our Houston, Texas and
Ohio acquisitions beginning on November 1, 2002, January 1,
2003, and April 1, 2003, respectively.
(2) July 31, 2002 includes deliveries from our California acquisition
beginning on January 10, 2002.
The increase in housing revenues was partially due to the
acquisition of two homebuilders in Houston, Texas and an Ohio homebuilder
for the three and nine months ended July 31, 2003 and a full nine months
of deliveries from our acquisition in California for the nine months
ended July 31, 2003. In addition, these increases were the result of
organic growth in Metro D. C. and California (excluding our California
acquisition) and increased average sales prices in most of our markets.
Important indicators of our future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract (using base sales prices) by market area
is set forth below:
Sales Contracts for the
Nine Months Ended Contract Backlog
July 31, as of July 31,
------------------------- ---------------------
2003 2002 2003 2002
----------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region(2)(4):
Dollars.............$ 582,015 $ 423,227 $ 613,884 $ 442,037
Homes............... 1,896 1,478 2,266 1,578
North Carolina:
Dollars.............$ 214,700 $ 198,848 $ 128,997 $ 108,502
Homes............... 1,171 1,074 672 564
Metro D.C.(4):
Dollars.............$ 422,477 $ 341,919 $ 368,910 $ 292,044
Homes............... 1,229 1,085 1,035 920
California(3):
Dollars.............$ 882,976 $ 634,009 $ 359,821 $ 286,876
Homes............... 2,994 2,394 1,103 1,007
Texas(1)(4):
Dollars.............$ 338,197 $ 171,409 $ 127,636 $ 69,556
Homes............... 1,722 778 642 295
Other:
Dollars.............$ 313 $ 26,861 $ -- $ 6,456
Homes............... 2 172 -- 39
Totals:
Dollars.............$2,440,678 $1,796,273 1,599,248 $1,205,471
Homes............... 9,014 6,981 5,718 4,403
(1) July 31, 2003 includes sales contracts signed from our Houston,
Texas and Ohio acquisitions beginning November 1, 2002 and
January 1, 2003, respectively.
(2) July 31, 2003 includes sales contracts signed from our Ohio
acquisition beginning April 1, 2003.
(3) July 31, 2002 includes sales contracts signed from our California
acquisition beginning January 10, 2002.
(4) We acquired contract backlog during the nine months ended
July 31, 2003 and 2002 of 694 homes valued at $93.8 million
and 535 homes valued at $117 million, respectively.
During August 2003, we signed an additional 1,085 contracts compared to
782 in the same month last year.
Cost of sales includes expenses for housing and land and lot sales.
A breakout of such expenses for housing sales and housing gross margin is
set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- ---------------------
2003 2002 2003 2002
-------- -------- ---------- ---------
(Dollars in Thousands)
Sale of Homes................ $830,734 $681,329 $2,104,788 $1,656,813
Cost of Sales................ 618,650 530,154 1,572,306 1,303,637
-------- -------- ---------- ---------
Housing Gross Margin......... $212,084 $151,175 $ 532,482 $ 353,176
======== ======== ========== ==========
Gross Margin Percentage...... 25.5% 22.2% 25.3% 21.3%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 67.1% 70.7% 67.2% 71.0%
Commissions............ 2.0% 2.2% 2.1% 2.2%
Financing concessions.. 0.9% 0.9% 0.9% 1.0%
Overheads.............. 4.5% 4.0% 4.5% 4.5%
-------- -------- -------- --------
Total Cost of Sales.......... 74.5% 77.8% 74.7% 78.7%
-------- -------- -------- --------
Gross Margin................. 25.5% 22.2% 25.3% 21.3%
======== ======== ======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the mix of
both communities and of home types delivered, consolidated quarterly
gross margin will fluctuate up or down and may not be representative of
the consolidated gross margin for the year. We achieved higher gross
margins during the three and nine months ended July 31, 2003 compared to
the same period last year. The consolidated gross margin increased 3.3%
and 4.0% for the three and nine months ended July 31, 2003, respectively.
These increased margins are the result of higher sales prices and lower
costs resulting from our improvement initiatives.
Selling, general, and administrative expenses as a percentage of
total homebuilding revenues increased to 7.9% for the three months ended
July 31, 2003 from 7.6% for the prior year's three months, and increased
to 8.5% for the nine months ended July 31, 2003 from 8.2% for the prior
year's nine months. Such expenses increased during the three and nine
months ended July 31, 2003 by $13.3 million and $41.9 million,
repsectively, compared to the same periods last year. The percentage
increase for the three and nine months ended July 31, 2003 was due to the
modification of our sales associate compensation plan, an increase in
administrataive costs associated with opening additional communities, and
higher bonus incentives due to higher returns. The dollar increase in
selling, general and administrative is primarily due to our 2003
acquisitions as well as a full nine months of expenses from our 2002
California acquisition.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot
sales. A breakout of land and lot sales is set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Land and Lot Sales.............. $ 3,314 $ 10,587 $ 13,064 $29,127
Cost of Sales................... 3,247 9,522 9,988 24,048
-------- -------- -------- --------
Land and Lot Sales Gross Margin.. 67 1,065 3,076 5,079
Interest Expense................ 153 112 508 760
-------- -------- -------- --------
Land and Lot Sales Profit (Loss)
Before Tax.................... $ (86) $ 953 $ 2,568 $ 4,319
======== ======== ======== ========
Land and lot sales are incidental to our residential housing
operations and are expected to continue in the future but may
significantly fluctuate up or down.
Financial Services
Financial services consist primarily of originating mortgages from
our homebuyers, selling such mortgages in the secondary market, and title
insurance activities. For the three and nine months ended July 31, 2003
financial services provided a $6.0 million and $15.4 million profit
before income taxes compared to a profit of $5.0 million and $12.2
million for the same period in 2002. These increases are primarily due
to reduced costs, increased mortgage loan amounts, and the addition of a
mortgage joint venture from our California acquisition for a full nine
months.
Corporate General and Administrative
Corporate general and administrative expenses include the
operations at our headquarters in Red Bank, New Jersey. Such expenses
include our executive offices, information services, human resources,
corporate accounting, training, treasury, process redesign, internal
audit, construction services, and administration of insurance, quality,
and safety. As a percentage of total revenues, such expenses increased
to 2.0% for the three months ended July 31, 2003 from 1.7% for the prior
year's three months and increased to 2.1% for the nine months ended July
31, 2003 from 2.0% for the prior year's nine months. Corporate general
and administrative expenses increased $4.8 million and $11.3 million
during the three and nine months ended July 31, 2003, respectively,
compared to the same periods last year. Increases in corporate general
and administrative dollar expenses are primarily attributed to higher
employee incentives due to a higher return on equity.
Interest
Interest expense includes housing and land and lot interest.
Interest expense is broken down as follows:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sale of Homes.............. $ 17,051 $ 15,737 $43,800 $41,593
Land and Lot Sales......... 153 112 508 760
-------- -------- -------- --------
Total...................... $ 17,204 $ 15,849 $44,308 $42,353
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues
decreased to 2.1% for the three and nine months ended July 31, 2003,
respectively, compared to 2.3% and 2.5% for the three and nine months
ended July 31, 2002, respectively. These percentage decreases are
primarily attributed to a decrease in debt leverage of our Company due to
the growth in equity from earnings, and lower interest rates.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior residential property operations,
amortization of senior and senior subordinated note issuance expenses,
earnout payments from homebuilding company acquisitions, amortization of
consultant's agreement and the right of first refusal agreement from our
California acquisition, amortization of definite life intangibles from
our acquisitions, minority interest relating to joint ventures, and
corporate-owned life insurance loan interest.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued
(SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt",
which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13.
The new standard addresses the income statement classification of gains
or losses from the extinguishment of debt and criteria for classification
as extraordinary items. We adopted SFAS No. 145 on November 1, 2002. We
reclassified $0.9 million extraordinary loss from extinguishment of debt
to other operations and ($0.3) million to state and Federal Income Taxes
on our Consolidated Statements of Income to conform to the new
presentation.
In June 2002, the Financial Accounting Standards Board issued
(SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including certain costs incurred in a restructuring)".
SFAS No. 146 requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred as
opposed to when the entity commits to an exit plan as prescribed under
EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. We adopted SFAS No. 146 January 1,
2003. The initial adoption of SFAS No. 146 did not have an effect on the
financial position or results of operations of our Company. However,
SFAS No. 146 could impact the amount or timing of liabilities to be
recognized in the event that we engage in exit or disposal activities in
the future.
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its
interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties. The
initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and initial measurement
provisions of FIN 45 did not have a material effect on our financial
position or results of operations. Our disclosure of guarantees is
included in Note 14 to the consolidated financial statements - unaudited.
In December 2002, the Financial Accounting Standards Board issued
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which amends (SFAS) No. 123. The new standard provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
It also requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the affect of the method used on reported
results. We have not elected to change to the fair value based method of
accounting for stock-based employee compensation. We adopted the
disclosure provisions of SFAS No. 148 in our second fiscal quarter ending
April 30, 2003. Our disclosure of accounting for stock-based
compensation is included in Note 2 to the consolidated financial
statements - unaudited.
In January 2003, the Financial Accounting Standards Board issued
FASB Interpretation No. 46 "Consolidation of Variable Interest Entities"
an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity
("VIE") is created when (i) the equity investment at risk is not
sufficient to permit the entity from financing its activities without
additional subordinated financial support from other parties or (ii)
equity holders either (a) lack direct or indirect ability to make
decisions about the entity, (b) are not obligated to absorb expected
losses of the entity or (c) do not have the right to receive expected
residual returns of the entity if they occur. If an entity is deemed to
be a VIE, pursuant to FIN 46, an enterprise that absorbs a majority of
the expected losses of the VIE is considered the primary beneficiary and
must consolidate the VIE. FIN 46 is effective immediately for VIE's
created after January 31, 2003. For VIE's created before January 31,
2003, FIN 46 must be applied at the beginning of the first interim or
annual reporting period beginning after June 15, 2003.
Based on the provisions of FIN 46, we have concluded that whenever
we option land or lots from an entity and pay a non-refundable deposit, a
VIE is created under condition (ii) (b) and (c) of the previous
paragraph. We have been deemed to have provided subordinated financial
support, which refers to variable interests that will absorb some or all
of an entity's expected theoretical losses if they occur. For each VIE
created we will compute expected losses and residual returns based on the
probability of future cash flows as outlined in FIN 46. If we are deemed
to be the primary beneficiary of the VIE we will consolidate it on our
balance sheet. The fair value of the VIE's inventory will be reported as
"Consolidated Inventory Not Owned - Variable Interest Entities".
Management believes FIN 46 was not clearly thought out for
application in the homebuilding industry for land and lot options. Under
FIN 46, we can have an option and put down a small deposit as a
percentage of the purchase price and still have to consolidate the
entity. Our exposure to loss as a result of our involvement with the VIE
is only the deposit, not it's total assets consolidated on the balance
sheet. In certain cases we will have to place inventory on our balance
sheet the VIE has optioned to other developers. In addition, if the VIE
has creditors, it's debt will be placed on our balance sheet even though
the creditors have no recourse against our Company. Based on these
observations we believe consolidating VIE's based on land and lot option
deposits does not reflect the economic realities or risks of owning and
developing land.
At July 31, 2003, we consolidated nine VIE's created from February
1, 2003 to July 31, 2003 as a result of our option to purchase land or
lots from the selling entities. We paid cash or issued letters of credit
deposits to these three VIE's totaling $11.7 million. Our option
deposits represent our maximum exposure to loss. The fair value of the
property owned by the VIE's was $93.2 million of which $6.2 million was
not optioned to our Company. We were able to ascertain that one VIE had
third party debt amounting to $1.4 million. Since we could not get the
remainder of the selling entities to provide us with any financial
information, the fair value of the optioned property less our cash
deposits and liabilities from inventory not owned, which totaled $80.1
million, was reported on the balance sheet as Minority interest.
Creditors of these VIE's have no recourse against our company.
We will continue to secure land and lots using options. Including
the deposits with the nine VIE's above, at July 31, 2003 we have total
cash and letters of credit deposits amounting to approximately $180.2
million to purchase land and lots with a total purchase price of $2.4
billion. Not all our deposits are with VIE's. The maximum exposure to
loss is limited to the deposits although some deposits are refundable at
our request or refundable if certain conditions are not met. We are in
the process of evaluating all option purchase agreements in effect as of
January 31, 2003. Options with VIE's where we are the primary
beneficiary will be consolidated by our fiscal year end October 31, 2003.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 37.3% and 36.8% for the three months ended July 31, 2003
and 2002, respectively, and 37.4% and 37.6% for the nine months ended
July 31, 2003 and 2002, respectively. Deferred federal and state income
tax assets primarily represent the deferred tax benefits arising from
temporary differences between book and tax income which will be
recognized in future years as an offset against future taxable income.
If for some reason the combination of future years income (or loss)
combined with the reversal of the timing differences results in a loss,
such losses can be carried back to prior years to recover the deferred
tax assets. As a result, management is confident such deferred tax
assets are recoverable regardless of future income.
Inflation
Inflation has a long-term effect on us because increasing costs of
land, materials, and labor result in increasing sale prices of our homes.
In general, these price increases have been commensurate with the general
rate of inflation in our housing markets and have not had a significant
adverse effect on the sale of our homes. A significant risk faced by the
housing industry generally is that rising house costs, including land and
interest costs, will substantially outpace increases in the income of
potential purchasers. In recent years, in the price ranges in which our
homes sell, we have not found this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we generally
negotiate fixed price contracts with our subcontractors and material
suppliers for the construction of our homes. These prices usually are
applicable for a specified number of residential buildings or for a time
period of between four to twelve months. Construction costs for
residential buildings represent approximately 57% of our homebuilding
cost of sales.
Mergers and Acquisitions
On January 10, 2002, we acquired a California homebuilder for a
total purchase price of $196.5 million, of which $151.6 million was paid
in cash and 2,208,738 shares of our Class A Common Stock were issued. At
the date of acquisition we also paid off approximately $88.0 million of
their third party debt. During the second quarter ended April 30, 2003
we exercised the right to retire at no cost 750,000 Class A Common Stock
shares that were held by the selling principal under the terms of the
acquisition. On November 1, 2002 and December 31, 2002 we acquired two
Houston homebuilding companies for an approximate aggregate purchase
price of $100.0 million. On April 9, 2003 we acquired a build-on-your-
own lot homebuilder in Ohio, and on August 8, 2003 we acquired a
homebuilder in Phoenix, Arizona.
Safe Harbor Statement
All statements in this Form 10-Q that are not historical facts
should be considered as "Forward-Looking Statements" within the meaning
of the Private Securities Litigation Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward looking statements. Although we
believe that our plans, intentions and expectations reflected in, or
suggested by such forward-looking statements are reasonable, we can give
no assurance that such plans, intentions, or expectations will be
achieved. Such risks, uncertainties and other factors include, but are
not limited to:
. Changes in general and local economic and business conditions
. Weather conditions
. Changes in market conditions
. Changes in home prices and sales activity in the California, New
Jersey, Texas, North Carolina, Virginia, and Maryland markets
. Government regulation, including regulations concerning
development of land, the homebuilding process, and the
environment
. Fluctuations in interest rates and the availability of mortgage
financing
. Shortages in and price fluctuations of raw materials and labor
. The availability and cost of suitable land and improved lots
. Levels of competition
. Availability of financing to the Company
. Utility shortages and outages or rate fluctuations
. Geopolitical risks, terrorist acts and other acts of war
These risks, uncertainties, and other factors are described in
detail in Item 1 and 2 Business and Properties in our Form 10-K for the
year ended October 31, 2002.
Quantitative and Qualitative Disclosures About Market Risk.
The primary market risk facing us is interest rate risk on our long
term debt. In connection with our mortgage operations, mortgage loans
held for sale and the associated mortgage warehouse line of credit are
subject to interest rate risk; however, such obligations reprice
frequently and are short-term in duration. In addition, we hedge the
interest rate risk on mortgage loans by obtaining forward commitments
from private investors. Accordingly the risk from mortgage loans is not
material. We do not hedge interest rate risk other than on mortgage
loans using financial instruments. We are also subject to foreign
currency risk but this risk is not material. The following table sets
forth as of July 31, 2003, our long term debt obligations, principal cash
flows by scheduled maturity, weighted average interest rates and
estimated fair market value ("FMV").
As of July 31, 2003
-------------------------------------------------------------
Expected Maturity Rate
----------------------
FMV @
2003 2004 2005 2006 2007 2008 Thereafter Total 7/31/03
------- ------- ------ ------ -------- -------- ---------- -------- --------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate...... $ 29,241 $ 75 $ 81 $ 88 $140,346 $ 104 $ 550,200 $720,135 $755,935
Average interest
rate.......... 6.75% 8.38% 8.38% 8.38% 10.50% 8.38% 8.48% 8.80% --
Variable rate... -- -- -- -- $115,000 -- -- $115,000 $115,000
Average interest
rate.......... -- -- -- -- (2) -- -- -- --
(1) Does not include bonds collateralized by mortgages receivable.
(2) LIBOR plus 2.5%
Item 4. CONTROLS AND PROCEDURES
The company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
company's reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the company's management,
including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosures.
Any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives. The company's management, with the participation of the
company's chief executive officer and chief financial officer, has
evaluated the effectiveness of the design and operation of the company's
disclosure controls and procedures as of July 31, 2003. Based upon that
evaluation and subject to the foregoing, the company's chief executive
officer and chief financial officer concluded that the design and
operation of the company's disclosure controls and procedures provided
reasonable assurance that the disclosure controls and procedures are
effective to accomplish their objectives.
In addition, there was no change in the company's internal control
over financial reporting that occurred during the quarter ended July 31,
2003 that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Certificate of Incorporation of the Registrant.
Exhibit 3(c) Restated Bylaws of the Registrant. (3)
Exhibit 10(a) Third Amended and Restated Credit
Agreement dated June 19, 2003. (2)
Exhibit 10(b) First Amendment to First Restated
K. Hovnanian Mortgage, Inc. Revolving Credit
Agreement dated July 31, 2003.
Exhibit 31(a) Rule 13a-14(a)/15d-14(a) Certification
of Chief Executive Officer.
Exhibit 31(b) Rule 13a-14(a)/15d-14(a) Certification
of Chief Financial Officer.
Exhibit 32(a) Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Exhibit 32(b) Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Annual
Report on Form 10-K for the year ended
February 28, 1994 of the Registrant.
(3) Incorporated by reference to Exhibits to Registration
Statement (No. 333-106761) on Form S-3 of the
Registrant.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during
the quarter for which this report is filed. The
following report on Form 8-K has been furnished
during the quarter for which this report is filed:
On May 23, 2003, the Company furnished a report
on Form 8-K, Item 9 (pursuant to Item 12 in accordance
with SEC Release 33-8216; 34-47583; IC-25983; March 27,
2003), relating to the Company's press release dated
May 28, 2003 relating to its preliminary financial
results for the second quarter ended April 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
l934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: September 12, 2003 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: September 12, 2003 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
Exhibit 31(a)
CERTIFICATIONS
I, Ara K. Hovnanian, President & Chief Executive Officer of Hovnanian
Enterprises, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the cast of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September 12, 2003
/S/ARA K. HOVNNAIAN
Ara K. Hovnanian
President and Chief Executive Officer
Exhibit 31(b)
CERTIFICATIONS
I, J. Larry Sorsby, Executive Vice President & Chief Financial Officer of
Hovnanian Enterprises, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September 12, 2003
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer
Exhibit 32(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc.
(the "Company") on Form 10-Q for the period ended July 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Ara K. Hovnanian, President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: September 12, 2003
/S/ARA K. HOVNANIAN
Ara K. Hovnanian
President and Chief Executive Officer
Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc.
(the "Company") on Form 10-Q for the period ended July 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, J. Larry Sorsby, Executive Vice President and Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: September 12, 2003
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
HOVNANIAN ENTERPRISES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is Hovnanian Enterprises, Inc.
2. The Certificate of Incorporation of the Corporation is
hereby amended by (a) deleting paragraph FOURTH thereof in its entirety
and substituting in lieu thereof the following new paragraph FOURTH:
FOURTH: The total number of shares of all classes of stock
which the Corporation shall have authority to issue is 100,100,000,
of which 87,000,000 shares shall be Class A Common Stock having a
par value of one cent ($0.01) per share, 13,000,000 shares shall be
Class B Common Stock having a par value of one cent ($0.01) per
share and 100,000 shares shall be Preferred Stock having a par
value of one cent ($0.01) per share.
At the close of business on the effective date of this
amendment (the "Effective Date"), and without any further action on
the part of the Corporation or its stockholders, each whole share
of the Corporation's Common Stock, $0.01 par value (the "Old Common
Stock"), then issued (including shares held in the treasury of the
Corporation) shall automatically be reclassified, changed and
converted into one-half (1/2) fully paid and nonassessable share of
Class A Common Stock and one-half (1/2) fully paid and
nonassessable share of Class B Common Stock (a "New Stock Unit").
No fractional shares of Class A Common Stock or Class B Common
Stock will be issued or established. Instead, holders of
certificates evidencing an odd number of shares of Old Common Stock
will have the right to receive (i) a number of New Stock Units
equal to the number of shares of Old Common Stock will have the
right to receive (i) a number of New Stock Units equal to the
number of shares of Old Common Stock minus one and (ii) cash in
respect of a single New Stock Unit in an amount equal to the
greater of (a) the average closing price of a share of Old Common
Stock on the American Stock Exchange for the fifteen trading days
immediately preceding the Effective Date and (b) the closing price
of a share of Old Common Stock on the American Stock Exchange on
the trading day immediately preceding the Effective Date. As soon
as practicable after the Effective Date, the Corporation's transfer
agent shall mail to each record holder of Class A Common Stock and
Class B Common Stock a letter of transmittal. New certificates
representing shares of Class A Common Stock and Class B Common
Stock and, if applicable, checks in lieu of fractional shares will
be issued to the record holders of Class A Common Stock and Class B
Common Stock upon delivery of a properly executed letter of
transmittal accompanied by certificates representing shares of Old
Common Stock.
(a) Common Stock. The Powers, preferences, limitations and
relative rights of the Class A Common Stock and Class B Common
Stock shall be as follows:
(1) Voting Rights and Powers.
Except as otherwise specifically provided in this Certificate
of Incorporation or as otherwise required by law, with respect to
all matters upon which stockholders are entitled to vote or to
which stockholders are entitled to give consent, the holders of the
outstanding shares of Class A Common Stock and the holders of the
outstanding shares of Class B Common Stock shall vote together
without regard to class, and every holder of the outstanding shares
of Class A Common Stock shall be entitled to cast thereon one (1)
vote in person or by proxy for each share of Class A Common Stock
held in his name, and every holder of the outstanding shares of
Class B Common Stock shall be entitled to cast thereon ten (10)
votes in person or by proxy for each share of Class B Common Stock
held in his name; provided, however, that each share of Class B
Common Stock held of record by a person who, to the extent of the
Corporation's knowledge, is a broker or dealer in securities, a
clearing house, a bank, trust company, savings and loan association
or other financial institution, or who is a voting trustee or a
nominee of any of the foregoing, or who otherwise holds shares of
record as a nominee of the beneficial owner of such shares (all
such shares being referred to herein as being held in nominee name)
shall be entitled to only one vote per share held; and provided,
further, however, that the holder of any such share held in nominee
name shall be entitled, notwithstanding the limitation of the
foregoing proviso, to the number of votes to which such holder
otherwise would be entitled at any meeting of stockholders of the
Corporation, to the extent such holder shall establish to the
satisfaction of the Corporation that such share of Class B Common
Stock has been held continuously since the date of issuance for the
benefit or account of the same named beneficial owner of such
shares (as defined in Paragraph (4)(E) hereof) or any Permitted
Transferee thereof (as defined in Paragraph (4)(A) hereof). A
beneficial owner of shares of Class B Common Stock whose shares are
held in nominee name and who wishes to cast the number of votes
provided by the first sentence of this paragraph shall comply with
the following procedure to effect a determination by the
Corporation of his entitlement to such number of votes: if such
record holder is a broker or dealer in securities, a clearing
house, a bank, trust company, savings and loan association or other
financial institution, or a voting trustee or a nominee of any of
the foregoing, such record holder shall file with the transfer
agent for the Class B Common Stock a certificate on a form which
will be mailed to such holder by such transfer agent on request,
certifying, as to the shares identified by such holder, the
information specified in the second proviso of this Paragraph (1);
if such record holder is a nominee of a beneficial owner not
included in the categories mentioned in the preceding clause, such
record holder shall file with the transfer agent for the Class B
Common Stock an affidavit to the same effect as the certificate
specified in the preceding clause. Any certificate or affidavit
filed for purposes of this Paragraph (1) only if received by the
transfer agent not less than 3 nor more than 20 business days prior
to the date of the meeting at which the holder desires to exercise
such voting rights or the last day by which such holder may give
consent in writing to stockholder action in lieu of a meeting. If
such certificate or affidavit is not timely filed or shall not
establish to the satisfaction of the Corporation the facts stated
therein, then such shares of Class B Common Stock shall be entitled
to one vote per share. The Corporation shall use its best efforts,
if the Corporation believes such a certificate or affidavit does
not establish to the Corporation's satisfaction the facts stated
therein, to mail to the person filing such certificate or affidavit
a notice to such effect within seven business days after the
receipt by the transfer agent of any such certificate or affidavit.
Any determination of which shares of Class B Common Stock shall be
entitled to more than one vote per share shall be made by the Board
of Directors or any duly appointed committee of the Board of
Directors. The Board of Directors is expressly authorized to adopt
and apply such rules, procedures and policies, by the adoption of
By-law provisions or otherwise, as it may deem appropriate or
convenient to carry out, clarify and apply the provisions of this
Paragraph (1) relating to the determination of which shares of
Class B Common Stock shall be entitled to more than one vote per
share. Any determination made pursuant to such rules, procedures
or policies shall be final.
(2) Dividends; Distributions Upon Dissolution.
(A) Subject to the rights of the holders of any outstanding
Preferred Stock, and subject to any other provisions of the
Certificate of Incorporation, holders of Class A Common Stock and
Class B Common Stock shall be entitled to receive such dividends
and other distributions (including stock splits or divisions of
stock) in cash, stock or property of the Corporation as may be
declared thereon by the Board of Directors from time to time out of
assets or funds of the Corporation legally available therefor,
provided that in the case of special cash dividends or
distributions or dividends or distributions payable in Preferred
Stock, holders of Class A Common Stock and Class B Common Stock
shall be entitled to share ratably as a single class, and provided,
further, that in the case of regular cash dividends, no such
dividend shall be declared or paid on one class of Common Stock
unless a cash dividend is simultaneously declared and paid on the
other class of Common Stock, and any such dividend will be paid on
the Class A Common Stock in an amount per share of Class A Common
Stock equal to 110% of the amount of such dividend paid on each
share of Class B Common Stock (rounded down, if necessary, to the
nearest one-hundredth of a cent), and provided, further, that in
the case of dividends or other distributions payable in stock of
the Corporation other than Preferred Stock, including distributions
pursuant to stock splits or divisions of stock of the Corporation
other than Preferred Stock, which occur after the Effective Date,
only shares of Class A Common Stock shall be distributed with
respect to Class A Common Stock and only shares of Class B Common
Stock in an amount per share equal to the amount per share paid
with respect to the Class A Common Stock shall be distributed with
respect to Class B Common Stock, and provided, further, that
neither class of Common Stock may be combined or reclassified
(including any reclassification in connection with a consolidation
or merger in which the Corporation is the continuing corporation)
unless the other class of Common Stock is likewise combined or
reclassified, and that, in the case of any such combination or
reclassification of Class A Common Stock, the shares of Class B
Common Stock shall also be combined or reclassified so that the
number of issued shares of Class B Common Stock immediately
following such shall bear the same relationship to the number of
issued shares immediately prior to such combination or
reclassification as the number of issued shares of Class A Common
Stock immediately following such combination or reclassification
bears to the number of issued shares of Class A Common Stock
immediately prior to such combination or reclassification.
(B) In the event the Corporation shall be liquidated (either
partially or completely), dissolved or wound up, whether
voluntarily or involuntarily, the holders of the Class A Common
Stock and the Class B Common Stock shall be entitled to share
ratably as a single class in the net assets of the Corporation
available to the holders of Common Stock; that is, an equal amount
of net assets shall be distributed in respect of each share of
Class A Common Stock and Class B Common Stock.
(3) Conversion of Class B Common Stock into Class A Common
Stock.
(A) Each share of Class B Common Stock may at any time or
from time to time, at the option of the holder thereof, be
converted into one (1) fully paid and nonassessable share of Class
A Common Stock. Such conversion right shall be exercised by the
surrender to the Corporation, or a duly appointed and acting
transfer or exchange agent, of the certificate representing such
share of Class B Common Stock to be converted at any time during
normal business hours at the principal executive offices of the
Corporation (to the attention of the Secretary of the Corporation),
or if an agent for the transfer or exchange of shares of Class B
Common Stock is then duly appointed and acting (said agent being
referred to in this Article FOURTH as the "Class B Transfer Agent")
then at the designated office of the Class B Transfer Agent,
accompanied by a written notice of the election by the holder
thereof to convert and (if so required by the Corporation or the
Class B Transfer Agent) by such other instruments of transfer as
the Corporation or the Class B Transfer Agent may deem appropriate,
in each case duly executed by such holder or his duly authorized
attorney and accompanied by payment of the amount of any Transfer
Tax required pursuant to Paragraph (3) (D) below.
(B) As promptly as practicable after the surrender for
conversion of a certificate representing share of Class B Common
Stock in the manner provided in Paragraph (3)(A) above, including
the payment in cash of any Transfer Tax required by the provisions
of Paragraph (3)(D) below, the Corporation shall deliver or cause
to be delivered at the principal executive office of the
Corporation or the designated office of the Class B Transfer Agent
to the holder so surrendering such certificate for conversion, or
upon the written order of the holder of such certificate, a
certificate or certificates representing the number of full shares
of Class A Common Stock issuable upon such conversion, issued in
such name or names as such holder may direct. If the notice of
conversion delivered by a holder of shares of Class B Common Stock
specifies that less than all of such shares are to be converted
into shares of Class A Common Stock, the Corporation shall deliver
or cause to be delivered, in accordance with the provisions of the
preceding sentence, a new certificate or certificates evidencing
the remaining shares of Class B Common Stock, issued in such name
or names as such holder may direct. Any conversion of shares of
Class B Common Stock into shares of Class A Common Stock shall be
deemed to have been made immediately prior to the close of business
on the date of the surrender for conversion of the certificate
representing shares of Class B Common Stock, accompanied by the
requisite notice of conversion, other instruments of transfer and
payment of Transfer Taxes, and all rights of the holder of such
shares of Class B Common Stock, as such holder, shall cease at such
time and the person or persons in whose name or names the
certificate or certificates representing the shares of Class A
Common Stock are to be issued shall be treated for all purposes at
such time as having become the record holder or holders of the
shares of Class A Common Stock into which such shares of Class B
Common Stock are converted; provided, however, that in the event
any such surrender of shares of Class B Common Stock for conversion
is made on any date when the stock transfer records of the
Corporation shall be closed, the person or persons in whose name or
names the certificate or certificates representing shares of Class
A Common Stock are to be issued upon such conversion will become
the record holder or holders of the shares of Class A Common Stock
for all purposes immediately prior to the close of business on the
next succeeding day on which such stock transfer records are open.
(C) The Corporation will at all times reserve and keep
available, solely for the purpose of issuance upon conversion of
shares of Class B Common Stock, such number of shares of Class A
Common Stock as shall be issuable upon the conversion of all such
outstanding shares; provided, however, that nothing contained
herein shall be construed to preclude the Corporation from
satisfying its obligations in respect of the conversion of shares
of Class B Common Stock by delivery of purchased shares of Class A
Common Stock which are held in the treasury of the Corporation. If
any shares of Class A Common Stock required to be reserved for
purposes of conversion hereunder require registration with or
approval of any governmental authority under any federal or state
law before such shares of Class A Common stock may be issued upon
conversion, the Corporation shall use its best efforts to cause
such shares to be duly registered or approved for issuance as
expeditiously as practicable. The Corporation will endeavor to
list the shares of Class A Common Stock required to be delivered
upon conversion prior to such delivery upon each national
securities exchange, if any, upon which the shares of Class A
Common Stock are listed at the time of such delivery. All shares
of Class A Common Stock which shall be issued upon conversion of
the Class B Common Stock will, upon issuance, be fully paid and
nonassessable and not subject to any preemptive rights.
(D) The issuance of certificates for shares of Class A
Common Stock upon conversion of shares of Class B Common Stock, and
the issuance of certificates for remaining shares of Class B Common
Stock upon conversion of less than all of the shares represented by
any certificate, shall be made without charge to the stockholder
for any stock transfer tax or stamp tax or other similar tax
("Transfer Tax") in respect of the conversion of shares of Class B
Common Stock into Class A Common Stock or the issuance or exchange
of stock certificates in respect thereof; provided, however, that,
if any certificate for shares of Class A Common Stock is to be
issued in a name other than that of the record holder of the share
or shares of Class B Common Stock converted, the person or persons
requesting the issuance thereof shall pay to the Corporation the
amount of any Transfer Tax which may be payable in respect of any
such transfer, exchange or issuance or shall establish to the
satisfaction of the Corporation that such tax has been paid or is
not payable.
(E) All issued shares of Class B Common Stock shall be
deemed, without further action on the part of any person, to be
immediately and automatically converted into shares of Class A
Common Stock, on the terms provided by Paragraph (3)(A) through
(3)(D) above, and stock certificates formerly representing shares
of Class B Common Stock shall thereupon and thereafter be deemed to
represent a like number of shares of Class A Common Stock until
surrendered for certificates explicitly representing shares of
Class A Common Stock in each of the instances set forth below:
(i) All of the shares of Class B Common Stock shall
be automatically so converted into shares of Class A Common
Stock if and when on any record date for determining the
stockholders entitled to participate in any dividend or
distribution on the Common Stock of the Corporation, or any
annual or special meeting of stockholders or action of common
stockholders by written consent, the number of issued and
outstanding shares of Class B Common Stock is less than five
percent (5%) of the aggregate number of shares of Class A
Common Stock and Class B Common Stock then outstanding.
(ii) All of the shares of Class B Common Stock shall
be automatically so converted into shares of Class A Common
Stock, as of a record date set by the Board of Directors for
such purpose, in the event that the Board of Directors, by
resolution adopted by the affirmative vote of a majority of
the members thereof, shall determine that there has been a
material adverse change in the liquidity of the market for,
or the marketability of, the then outstanding shares of Class
A Common Stock due to a delisting of the Class A Common Stock
from a national securities exchange or the cessation of the
quotation of bids for the Class A Common Stock in any
quotation system operated by an association of securities
dealers, or due to requirements of federal or state law
applicable to trading in the Class A Common Stock,
attributable to the existence of the Class A Common Stock and
Class B Common Stock.
In the event that all issued shares of Class B Common Stock
shall be converted into shares of Class A Common Stock in
accordance with this Paragraph (3)(E), the Class B Common Stock
shall automatically be cancelled and shall no longer be authorized
for issuance.
(F) Except as provided in Paragraph (3) (E) above, shares of
Class B Common Stock that are converted into shares of Class A
Common Stock shall be restored to the status of authorized but
unissued shares of Class B Common Stock and may again be issued by
the Corporation as permitted in accordance with the terms of the
Certificate of Incorporation.
(4) Restrictions on Transfer of the Class B Common Stock.
(A) The record owner of shares of Class B Common Stock
(hereinafter referred to as a "Class B Stockholder") may transfer
the shares of Class B Common Stock of such Class B Stockholder,
whether by sale, assignment, gift or otherwise, only to a Permitted
Transferee of such Class B Stockholder and no Class B Stockholder
may otherwise transfer any interest in any shares of Class B Common
Stock and the Corporation shall not register any other attempted
transfer of ownership of shares of Class B Common Stock. For
purposes of the Certificate of Incorporation:
(i) A "Permitted Transferee" shall be, if the Class B
Stockholder is an individual, (A) the estate or any legatee,
heir or distributee upon death of the Class B Stockholder;
(B) the spouse or former spouse of the class B Stockholder;
(C) any parent or grandparent and any lineal descendant
(including any adopted child) of any parent or grandparent of
the Class B Stockholder or of such Class B Stockholder's
spouse; (D) any guardian or custodian (including a custodian
for purposes of the Uniform Gift to Minors Act or Uniform
Transfers to Minors Act) for, or any executor, administrator,
conservator or other legal representative of, the Class B
Stockholder or any Permitted Transferee thereof; (E) the
trustee of a trust (including a voting trust), and any
savings or retirement account, such as an individual
retirement account for purposes of federal income tax laws,
whether or not involving a trust, principally for the benefit
of such Class B Stockholder and/or any Permitted Transferee
thereof, including any trust in respect of which such Class B
Stockholder or any Permitted Transferee thereof has any
general or special testamentary power of appointment or
general or special non-testamentary power of appointment
limited to any Permitted Transferee or Permitted Transferees
thereof; (F) any organization contributions to which are
deductible for federal income, estate or gift tax purposes
(hereinafter referred to as a "Charitable Organization")
established by such Class B Stockholder and/or any Permitted
Transferee or Permitted Transferees thereof; (G) any
corporation, partnership or other business entity if
substantially all the beneficial ownership thereof is held by
the Class B Stockholder and/or any Permitted Transferee or
Permitted Transferees thereof; provided, however, that if the
Class B Stockholder who made such transfer, and all Permitted
Transferees thereof, cease, for whatever reason, to hold
substantially all of the beneficial ownership of such
corporation, partnership or other business entity, then any
and all shares of Class B Common Stock owned by such
corporation, partnership or other business entity shall be
deemed to be converted automatically, without further action
by or on behalf of any person, into shares of Class A Common
Stock as provided by Paragraphs (3) (A) through (3) (D) above
and such corporation, partnership or other business entity
shall no longer be a Class B Stockholder, and (H) the
corporation.
(ii) A "Permitted Transferee" shall be, if the Class B
Stockholder is a corporation, partnership or other business
entity, (A) any employee benefit plan, or trust thereunder or
therefor, sponsored by the class B Stockholder; (B) the
trustee of a trust (including any voting or liquidating
trust) principally for the benefit of such Class B
Stockholder and/or any Permitted Transferee or Permitted
Transferees thereof; (C) any Charitable Organization
established by such Class B Stockholder and/or any Permitted
Transferee or Permitted Transferees thereof; (D) any
corporation, partnership or other business entity which,
directly or indirectly, is in control of, is controlled by or
is under common control with such Class B Stockholder and/or
any Permitted Transferee or Permitted Transferees thereof;
(E) the stockholders of the corporation, partners of the
partnership or other owners of equity interests in any other
business entity who receives such shares, by way of dividend
or distribution (upon dissolution, liquidation or otherwise),
provided that such transfer will not result in beneficial
ownership of such shares by persons who did not have
substantially all of the beneficial ownership of such
corporation, partnership or business entity prior to the time
such corporation, partnership or business entity that
acquired beneficial ownership of such shares of Class B
Common Stock (other than by any such person who is a
Permitted Transferee of a stockholder, partner or other owner
of equity interests in the business entity who continued to
have such beneficial ownership of the corporation,
partnership or other business entity), and such shares of
Class B Common Stock are distributed to such persons
substantially pro rata to their interests in such
corporation, partnership or other business entity; (F) any
successor thereto by operation of law pursuant to a merger,
consolidation or similar transaction; and (G) the
Corporation.
(iii) A "Permitted Transferee" shall be, if the Class
B Stockholder is any person who holds shares of Class B
Common Stock for the beneficial ownership of another
(including any broker or dealer in securities, any clearing
house, any bank, trust company, savings and loan association
or other financial institution, any other nominee, any
trustee, any savings plan or account or related trust, such
as an individual retirement account principally for the
benefit of any individual or any employee benefit plan, or
trust thereunder or therefor, of any corporation, partnership
or other business entity, including any employee stock
ownership, investment, option, bonus, purchase or incentive
plan of the Corporation), (A) the person or persons for whose
benefit the Class B Stockholder holds such shares of Class B
Common Stock (the "beneficiary"), (B) any person who would be
a Permitted Transferee of the beneficiary if the beneficiary
were a Class B Stockholder or (C) if the Class B Stockholder
is an employee benefit plan, or trust thereunder or therefor,
any person who is a participant in such plan, provided such
transfer is made in accordance with such plan.
Notwithstanding anything to the contrary set forth herein,
any holder of Class B Common Stock may pledge his shares of Class B
Common Stock to a pledgee pursuant to a bona fide pledge of such
shares as collateral security for indebtedness due to the pledgee,
provided that such shares may not be transferred to or registered
in the name of the pledgee unless such pledgee is a Permitted
Transferee. In the event of foreclosure or other similar action by
the pledgee, such pledged shares of Class B Common Stock shall be
deemed to be converted automatically, without any act or deed on
the part of the Corporation or any other person, into shares of
Class A Common Stock as provided in Paragraphs (3)(A) through
(3)(D) above, unless within five business days after such
foreclosure or similar event such pledged shares are returned to
the pledgor or transferred to a Permitted Transferee of the
pledgor.
Notwithstanding anything to the contrary set forth herein,
the foregoing provisions of this Paragraph (4) (A) shall not be
deemed to restrict or prevent any transfer of shares of Class B
Common Stock by operation of law upon incompetence, death,
dissolution or bankruptcy of any Class B Stockholder or any
provision of law providing for, or judicial order of, forfeiture,
seizure or impoundment.
(B) Any transfer of any interest in shares of Class B Common
Stock made in violation of Paragraph (4) (A) shall result, without
further action on the part of any person, in the automatic
conversion of such shares of Class B Common Stock into shares of
Class A Common Stock, in accordance with the provisions of Section
3 above.
(C) The Corporation and the Class B Transfer Agent may, as a
condition to the transfer or the registration of any transfer of
shares of Class B Common Stock permitted by Paragraph (4) (A)
above, require the furnishing of such affidavits or other proof as
they deem necessary to establish that the transferee is a Permitted
Transferee. Should any such transferor wish to contest any decision
by the Corporation as to whether such transferee is a Permitted
Transferee, the final determination shall be made by the Board of
Directors of the Corporation, in its sole and absolute discretion.
(D) The Corporation shall note on the certificates for
shares of Class B Common Stock the restrictions on transfer and
registration of transfer imposed by the provisions of this Section
4.
(E) For purposes of Article FOURTH, the term "beneficial
ownership" in respect of shares of Class B Common Stock shall mean
possession of the power and authority, either singly or jointly
with another, to vote or dispose of or to direct the voting or
disposition of such shares, other than in a fiduciary capacity, and
the term "beneficial owner" in respect of shares of Class B Common
Stock shall mean the person or persons who possess such power and
authority. "Beneficial ownership" for purposes of clause (i)(G)
Paragraph (4) (A) above shall mean the power to control a
corporation, partnership or other business entity and to receive
the economic benefits of its enterprise. Unless otherwise approved
by the Board of Directors, a Class B Stockholder and the Permitted
Transferees thereof shall be deemed to have "substantially all" of
the beneficial ownership of a corporation, partnership or other
business entity for purposes of clause (i)(G) of Paragraph (4) (A)
only if they have beneficial ownership of at least 90% of each
class of ownership interest therein. The Board of Directors is
expressly authorized to adopt and apply such rules, procedures and
policies, by the adoption of By-law provisions or otherwise, as it
may deem appropriate or convenient to carry out, clarify and apply
the provisions of Paragraph (4) (A) through (4) (C) above and this
Paragraph (4) (E) relating to the determination of who is the
beneficial owner of any shares of Class B Common Stock and what
constitutes beneficial ownership of "substantially all" of a trust,
corporation, partnership or other business entity.
(5) Merger; Consolidation.
In the event of a merger or consolidation to which the
Corporation is a party (whether or not the Corporation is the
surviving corporation), each share of Class A Common Stock and
Class B Common Stock shall receive the same per share consideration
pursuant to such merger or consolidation. Nothing contained in this
Paragraph (5) shall limit or restrict any conversion of shares of
Class B Common Stock into shares of Class A Common Stock permitted
by Section 4 above.
(6) Other Rights.
Except as otherwise required by the General Corporation Law
of the State of Delaware or as otherwise provided in the
Certificate of Incorporation, each share of Class A Common Stock
and each share of Class B Common Stock shall have identical powers,
preferences and rights.
(b) Preferred Stock. The Board of Directors of the
Corporation is hereby authorized to issue, from time to time,
shares of Preferred Stock in series and to fix the number of shares
in each series and the designations, powers, preferences and
relative, participating, optional or other special rights thereof
and the qualifications, limitations, or restrictions thereon,
including, without limitation, any of the following: (i) provisions
relating to voting rights of each share in such series, including
multiple or fractional votes per share; (ii) provisions relating to
the call or redemption thereof, including, without limitation, the
times and prices for such calls or redemptions and provisions
relating to sinking funds therefor and the retirement thereof, if
any; (iii) provisions relating to the right to receive dividends,
including, without limitation, participation in dividends with
shares of any other class or series of capital stock of the
Corporation and/or preferential dividends, the rate of such
dividends, whether such dividends shall be cumulative or
noncumulative and the conditions on which such dividends shall be
accrued and paid, and any preferential rights thereto or rights in
relation to dividends payable on any other classes or series of
stock of the Corporation; (iv) the rights thereof upon the
dissolution of, or upon any distribution of the assets of, the
Corporation; and (v) provisions relating to the conversion thereof
into, or the exchange thereof for, shares of any class or any other
series of the same class of stock of the Corporation or exchange
for any other security of the corporation or any other company.
and (b) deleting paragraph SEVENTH thereof in its entirety
and substituting in lieu thereof the following new paragraph SEVENTH:
SEVENTH: Election of Directors need not be by written ballot
unless the By-laws of the Corporation so provide. At any time when
any shares of Class B Common Stock are outstanding, thirty-three
and one-third percent (33-1/3%) of the Directors of the
Corporation, as fixed from time to time in accordance with the By-
laws of the Corporation, shall be independent Directors. In the
event that thirty-three and one-third percent (33-1/3%) of the
number of Directors is not a whole number, the number of Directors
who shall be independent Directors shall be rounded up to the
nearest whole number. For purposes of this Article SEVENTH, the
term "independent Director" means a Director who is neither (i) an
officer of the Corporation or of any entity which, directly or
indirectly, is in control of, is controlled by or is under common
control with the Corporation nor (ii) a record or beneficial owner
(as determined in accordance with Paragraph (a) (4) (E) of Article
FOURTH hereof) of five percent (5%) or more of the aggregate number
of outstanding shares of the Corporation's Class A Common Stock and
Class B Common Stock.
3. The amendment of the Certificate of Incorporation of the
Corporation herein certified was duly adopted, pursuant to the provisions
of Section 242 of the General Corporation Law of the State of Delaware,
by the Board of Directors of the Corporation on June 19, 1992.
4. The amendment of the Certificate of Incorporation of the
Corporation herein certified was duly adopted, pursuant to the provisions
of Section 242 of the General Corporation Law of the State of Delaware,
by the Stockholders of the Corporation on September 11, 1992.
Signed on September 11, 1992
/S/PETER S. REINHART
Title: Peter S. Reinhart
Senior Vice President
& General Counsel
Attest:
/S/TIMOTHY P. MASON
Timothy P. Mason
Secretary
FIRST AMENDMENT TO
FIRST RESTATED REVOLVING CREDIT AGREEMENT
This FIRST AMENDMENT TO FIRST RESTATED REVOLVING CREDIT AGREEMENT
(this "Amendment") is dated as of July 31, 2003 and is among K. HOVNANIAN
MORTGAGE, INC., a New Jersey corporation, and K. HOVNANIAN AMERICAN
MORTGAGE, L.L.C., a New Jersey limited liability company (collectively, the
"Borrowers"), GUARANTY BANK, BANK OF AMERICA, N.A., BANK ONE, NA, COMERICA
BANK, NATIONAL CITY BANK OF KENTUCKY, a national banking association , and
U.S. BANK NATIONAL ASSOCIATION (together with any successors and assigns
thereof, hereinafter referred to individually as a "Lender" and
collectively as the "Existing Lenders"), COLONIAL BANK and WASHINGTON
MUTUAL BANK, FA (together with any successors and assigns thereof,
hereinafter referred to individually as a "Supplemental Lender" and
collectively as the "Supplemental Lenders") and GUARANTY BANK, a federal
savings bank, as Agent for the Lenders under the Credit Agreement (the
"Agent").
RECITALS
The Borrowers, the Agent and the Existing Lenders are parties to a
certain First Restated Revolving Credit Agreement dated as of March 7, 2003
(the "Credit Agreement"), pursuant to which the Existing Lenders have
agreed to provide a revolving credit facility to Borrowers on the terms and
conditions set forth in the Credit Agreement. Any capitalized term not
expressly defined herein shall have the meaning ascribed to such term in
the Credit Agreement.
The parties hereto desire to modify the Commitments and certain other
provisions of the Credit Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. The following definitions in Article I of the
Credit Agreement are hereby amended in their entirety to read as follows:
"`Aggregate Commitment' means, as of any date, the aggregate of
the Lenders' then current Commitments under this Agreement, as
reduced or increased from time to time, but in no event shall the
Aggregate Commitment exceed $200,000,000 without the approval of the
Borrowers, the Agent and all of the Lenders."
"`Swingline Amount' means $7,000,000."
"`Termination Date' means July 29, 2004 or any earlier date on
which the Aggregate Commitment is reduced to zero or otherwise
terminated pursuant to the terms hereof."
2. Maximum Loans Available to either Borrower. Section 2.1.1 of
the Credit Agreement is hereby amended by deleting the word "and" at the
end of subsection (2) thereof, deleting the period and adding the word
"and" at the end of subsection (3) thereof, and adding thereafter the
following new subsection (4) to read as follows:
"(4) the aggregate principal balance then outstanding of all
Loans made to either Borrower shall not exceed $198,999,999."
3. Borrowing Base Sublimits by Category. Section 2.1.2 of the
Credit Agreement is hereby amended in its entirety to read as follows:
"2.1.2 Borrowing Base Sublimits by Category. The maximum
amount that can be credited toward the Borrowing Base from certain
categories of Eligible Collateral shall be limited so that the Borrowing
Base value determined under:
(1) clause (ii) of the definition thereof (Eligible Non-
Conforming Mortgage Loans) shall not exceed fifteen percent (15%)
of the Aggregate Commitment;
(2) clause (iii) of the definition thereof (Eligible
Jumbo Mortgage Loans) shall not exceed thirty percent (30%) of the
Aggregate Commitment; and
(3) clause (iv) of the definition thereof (Eligible
Oversize Jumbo Mortgage Loans) shall not exceed five percent (5%)
of the Aggregate Commitment."
4. Application of Proceeds. Section 8.8 of the Credit Agreement
is hereby amended by deleting clause FIFTH thereof and adding the following
new clauses FIFTH and SIXTH in place thereof:
"FIFTH, to the extent proceeds remain after application under
the preceding subparagraphs, to the payment of the Rate Management
Obligations secured by the Security Agreement, until such amounts are
paid in full; and
SIXTH, to the payment to the Borrowers, or to their successors
or assigns, or as a court of competent jurisdiction may direct, of
any surplus then remaining from such proceeds."
5. Commitment Increases. Section 12.4 of the Credit Agreement is
hereby amended in its entirety to read as follows:
"12.4 Commitment Increases.
12.4.1 Increases to Aggregate Commitment. The
Borrowers shall have the right to increase the Aggregate
Commitment by obtaining additional Commitments, either from one
or more of the Lenders or another lending institution provided
that (A) the Agent has approved the identity of any such new
Lender, such approval not to be unreasonably withheld, (B) any
such new Lender assumes all of the rights and obligations of a
"Lender" hereunder, and (C) the procedure described in Section
12.4.2 has been complied with, provided further that the Aggregate
Commitment shall not at any time exceed $200,000,000 without the
approval of the Agent and all of the Lenders.
12.4.2 Procedure for Increases and Addition of New
Lenders. This Agreement permits certain increases in a Lender's
Commitment and the admission of new Lenders providing new
Commitments, none of which require any consents or approvals from
the other Lenders. Any amendment hereto for such an increase or
addition shall be in the form attached hereto as Exhibit "K" and
shall only require the written signatures of the Agent, the
Borrowers and the Lender(s) being added or increasing their
Commitment, subject only to the approval of all Lenders if any
such increase would cause the Aggregate Commitment to exceed
$200,000,000. In addition, within a reasonable time after the
effective date of any increase, the Agent shall, and is hereby
authorized and directed to, revise Schedule "2" reflecting such
increase and shall distribute such revised Schedule to each of the
Lenders and the Borrowers, whereupon such revised Schedule shall
replace the old Schedule and become part of this Agreement. On
the Business Day following any such increase, all outstanding Fed
Funds Advances and Alternate Base Rate Advances shall be
reallocated among the Lenders (including any newly added Lenders)
in accordance with the Lenders' respective revised Primary
Commitment Percentages. Eurodollar Advances shall not be
reallocated among the Lenders prior to the expiration of the
applicable Interest Period in effect at the time of any such
increase."
6. Modifications to Commitments. Each of the Existing Lenders and
the Supplemental Lenders, hereby agrees that from and after the date hereof
it shall have a Commitment in the amount set forth opposite its name in
Column (A) of Schedule 2 attached hereto, resulting in a new Aggregate
Commitment of $200,000,000 as of the date hereof, and each of the
Supplemental Lenders hereby assumes all of the rights and obligations of a
Lender under the Credit Agreement. The Borrower shall execute and deliver
to each of the Supplemental Lenders as of the date hereof, a new Note in
the form attached to the Credit Agreement as Exhibit A to evidence the new
Commitment of such Supplemental Lender.
7. Corrections to Cross References.
(a) The reference in Section 2.15 to "Section 2.14" is hereby
amended to refer to "Section 2.12".
(b) The references in Section 7.2 to "Section 2.11.2" and
"Section 2.11.4" are hereby amended to refer to "Section 2.9.2" and
"Section 2.9.4, respectively.
8. Schedules. The Credit Agreement is hereby amended by
substituting Schedule 2, Commitments and Commitment Percentages, and
Schedule 3, List of Approved Investors, to this Amendment for Schedule 2
and Schedule 3, respectively, to the Credit Agreement.
9. Effective Date. This Amendment shall become effective as of
the date first above written when and only when Agent shall have received,
at Agent's office,
(a) a duly executed counterpart of this Amendment,
(b) Notes to the Supplemental Lenders described in Section 6
above,
(c) a duly executed Consent and Agreement in the form
attached hereto,
(d) a duly executed certificate of the secretary of each
Borrower in form acceptable to Agent, and
(e) an opinion of counsel to Borrowers and Parent in form
acceptable to Agent.
10. Miscellaneous.
(a) All references to the Credit Agreement in the Loan
Documents shall be deemed to refer to the Credit
Agreement as amended by this Amendment.
(b) Borrowers hereby represent and warrant to the Lenders
that on the date of execution hereof, both prior to and
after giving effect to this Amendment, (i) the
representations and warranties of Borrower contained in
the Loan Documents are accurate and complete in all
respects, and (ii) no Default or Unmatured Default has
occurred and is continuing.
(c) In all other respects, the Credit Agreement and the other
Loan Documents are and remain unmodified and in full
force and effect and are hereby ratified and confirmed.
This Amendment may be executed in any number of
counterparts, all of which taken together shall
constitute one agreement, and any of the parties hereto
may execute this Amendment by signing any such
counterpart.
(d) Borrowers agree to reimburse the Agent for all reasonable
out-of-pocket expenses (including legal fees and
expenses) incurred in connection with the preparation,
negotiation and consummation of this Amendment.
(e) This Amendment may be executed in counterparts which,
taken together, shall constitute a single document. This
Amendment may be duly executed by facsimile or other
electronic transmission
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
K. HOVNANIAN MORTGAGE, INC.
By:
Name:
Title:
K. HOVNANIAN AMERICAN
MORTGAGE, L.L.C.
By:
Name:
Title:
THE STATE OF NEW JERSEY )
)
COUNTY OF MONMOUTH )
This instrument was acknowledged before me on , 2003, by
Kevin C. Hake, Vice President-Finance and Treasurer of K. Hovnanian
Mortgage, Inc., a New Jersey corporation, on behalf of said corporation.
Notary Public, State of New Jersey
(printed name)
My Commission Expires:
THE STATE OF NEW JERSEY )
)
COUNTY OF MONMOUTH )
This instrument was acknowledged before me on , 2003 by
Kevin C. Hake, Vice President-Finance and Treasurer of K. Hovnanian
American Mortgage, L.L.C., a New Jersey limited liability company, on
behalf of said company.
Notary Public, State of New Jersey
(printed name)
My Commission Expires:
GUARANTY BANK, individually and
as Agent
By:
Name:
Title:
BANK OF AMERICA, N.A.
By:
Name:
Title:
BANK ONE, NA
By:
Name:
Title:
COLONIAL BANK
By:
Name:
Title:
COMERICA BANK
By:
Name:
Title:
NATIONAL CITY BANK OF KENTUCKY
By:
Name:
Title:
U.S. BANK NATIONAL ASSOCIATION
By:
Name:
Title:
WASHINGTON MUTUAL BANK, FA
By:
Name:
Title:
CONSENT AND AGREEMENT
Hovnanian Enterprises, Inc. hereby consents to the provisions of this
Amendment as of the date thereof and the transactions contemplated herein,
and hereby ratifies and confirms the Keep-Well Agreement dated as of June
7, 2002 made by it for the benefit of Lender and the Subordination
Agreement dated as of June 7, 2002 made by it for the benefit of Lender,
and agrees that its obligations and covenants thereunder are unimpaired
hereby and shall remain in full force and effect.
HOVNANIAN ENTERPRISES, INC.
By:
Name:
Title:
SCHEDULE 2
COMMITMENTS AND COMMITMENT PERCENTAGES
LENDER
(A)
COMMITMENT (B)
COMMITMENT
PERCENTAGE
(A Aggregate
Commitment) (C)
SWINGLINE
AMOUNT
Guaranty Bank $35,000,000 17.500000% $7,000,000
Bank of America
$30,000,000 15.000000%
Washington Mutual
$29,000,000 14.500000%
Bank One
$25,000,000 12.500000%
US Bank
$25,000,000 12.500000%
Colonial Bank
$24,000,000 12.000000%
Comerica
$17,000,000 8.500000%
National City Bank
$15,000,000 7.500000%
SCHEDULE "3"
LIST OF APPROVED INVESTORS
CHASE MANHATTAN MORTGAGE CORPORATION
COUNTRYWIDE HOME LOAN, INC.
FLAGSTAR BANCORP
FEDERAL HOME LOAN MORTGAGE CORPORATION
FEDERAL NATIONAL MORTGAGE ASSOCIATION
FIRST HORIZON BANCORP
FIRST NATIONWIDE MORTGAGE
GREENPOINT MORTGAGE CORPORATION
GUARANTY RESIDENTIAL LENDING
IMPAC FUNDING CORPORATION
INDYMAC BANK
NATIONAL CITY BANK
OHIO SAVINGS BANK
RESIDENTIAL FUNDING CORPORATION
VALLEY NATIONAL BANK
WASHINGTON MUTUAL
WELLS FARGO
CHASE MANHATTAN FUNDINg
COUNTRYWIDE HOME LOAN, INC.
IMPAC FUNDING CORPORATION
RBNG, INC.
RESIDENTIAL FUNDING CORPORATION
US BANK CORPORATE TRUST SERVICES
033544 000195 DALLAS 1612922_5.DOC 2 FIRST AMENDMENT TO FIRST RESTATED
REVOLVING CREDIT AGREEMENT [K. Hovnanian
033544 000195 DALLAS 1612922_5.DOC
FIRST AMENDMENT TO FIRST RESTATED
REVOLVING CREDIT AGREEMENT [K. Hovnanian
FIRST AMENDMENT TO FIRST RESTATED
REVOLVING CREDIT AGREEMENT [K. Hovnanian]
033544 000195 DALLAS 1612922_5.DOC
FIRST AMENDMENT TO FIRST RESTATED
REVOLVING CREDIT AGREEMENT [K. Hovnanian]
Exhibit 31(a)
CERTIFICATIONS
I, Ara K. Hovnanian, President & Chief Executive Officer of Hovnanian
Enterprises, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
cast of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: September 12, 2003
/S/ARA K. HOVNNAIAN
Ara K. Hovnanian
President and Chief Executive Officer
Exhibit 31(b)
CERTIFICATION
I, J. Larry Sorsby, Executive Vice President & Chief Financial Officer of
Hovnanian Enterprises, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: September 12, 2003
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer
Exhibit 31(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the
"Company") on Form 10-Q for the period ended July 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Ara K.
Hovnanian, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 12, 2003
/S/ARA K. HOVNANIAN
Ara K. Hovnanian
President and Chief Executive Officer
Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the
"Company") on Form 10-Q for the period ended July 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Larry Sorsby, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 12, 2003
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer