SEC Filing | Hovnanian Enterprises, Inc.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ( X )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the twelve months ended OCTOBER 31, 1999 ( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission file number: 1-8551 Hovnanian Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 22-1851059 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 Highway 35, P.O. Box 500, Red Bank, N.J. 07701 (Address of principal executive offices) 732-747-7800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - -------------------- ------------------------ Class A Common Stock, $.01 par value American Stock Exchange per share Securities registered pursuant to Section 12(g) of the Act - None Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ( X )Yes ( ) No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of the close of business on December 31, 1999, there were outstanding 14,485,551 shares of the Registrant's Class A Common Stock and 7,646,626 shares of its Class B Common Stock. The approximate aggregate market value (based upon the closing price on the American Stock Exchange) of these shares held by non- affiliates of the Registrant as of December 31, 1999 was $55,533,000. (The value of a share of Class A Common Stock is used as the value for a share of Class B Common Stock as there is no established market for Class B Common Stock and it is convertible into Class A Common Stock on a share-for-share basis.) Documents Incorporated by Reference: Part III - Those portions of registrant's definitive proxy statement to be filed pursuant to Regulation l4A in connection with registrant's annual meeting of shareholders to be held on March 16, 2000 which are responsive to Items l0, ll, l2 and l3. HOVNANIAN ENTERPRISES, INC. FORM 10-K TABLE OF CONTENTS Item Page PART I 1 and 2 Business and Properties...................... 4 3 Legal Proceedings............................15 4 Submission of Matters to a Vote of Security Holders...........................15 Executive Officers of the Registrant.........15 PART II 5 Market for the Registrant's Common Equity and Related Stockholder Matters............15 6 Selected Consolidated Financial Data.........16 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................18 8 Financial Statements and Supplementary Data.......................................34 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................34 PART III 10 Directors and Executive Officers of the Registrant.................................35 Executive Officers of the Registrant.........35 11 Executive Compensation.......................36 12 Security Ownership of Certain Beneficial Owners and Management......................36 13 Certain Relationships and Related Transactions...............................36 PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................37 SIGNATURES...................................39 PART I ITEMS 1 AND 2 - BUSINESS AND PROPERTIES BUSINESS OVERVIEW We design, construct and market high quality single-family detached homes and attached condominium apartments and townhouses in planned residential developments in the Northeast (primarily in New Jersey, southern New York state, and eastern Pennsylvania), North Carolina, southeastern Florida, Metro D.C. (northern Virginia and Maryland), southern California, Texas, and Poland. We market our homes to first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. We offer a variety of homestyles at prices ranging from $33,000 to $921,000 with an average sales price in fiscal 1999 of $241,000. We are currently offering homes for sale in 110 communities. Since the incorporation of our predecessor company in 1959, we have delivered in excess of 63,000 homes, including 3,768 homes in fiscal 1999. In addition, we provide financial services (mortgage loans and title insurance) to our homebuilding customers and third parties. We employed approximately 1,356 full-time associates as of October 31, 1999. We were incorporated in New Jersey in 1967 and we reincorporated in Delaware in 1982. BUSINESS STRATEGIES, OPERATING POLICIES AND PROCEDURES Over the past few years, our strategies have included several initiatives to fundamentally transform the traditional practices we use to design, build and sell homes and focus on "building better." We believe that the adoption and implementation of processes and systems successfully used in other manufacturing industries, such as rapid cycle times, vendor consolidation, vendor partnering and just-in-time material procurement, will dramatically improve our business and give us a clear advantage over our competitors. Our concentration in selected markets is a key factor that enables us to achieve powers and economies of scale and differentiate ourselves from most of our competitors. These performance enhancing strategies are designed to achieve operational excellence through the implementation of standardized and streamlined "best practice processes." Strategic Initiatives - To improve our homebuilding gross profit margins, we have introduced a number of strategic initiatives, including: Partners In Excellence, Process Redesign and Training. Partners In Excellence, our total quality management initiative, is intended to focus on improving the way operations are performed. It involves all of our associates through a systematic, team-oriented approach to improvement. It increases our profits by streamlining processes and by reducing costly errors. We were recognized for our efforts by receiving the 1997 Gold National Housing Quality Award from Professional Builder magazine and the NAHB Research Center. Process Redesign is the fundamental rethinking and radical redesign of our processes to achieve dramatic improvements in performance. Our Process Redesign efforts are currently focused on streamlining and standardizing all of our key business processes. In addition, we are working to streamline our processes and implement SAP's enterprise-wide "Enterprise Resource Package" computer software system throughout our organization. Training is designed to provide our associates with the knowledge, attitudes, skill and habits necessary to succeed at their jobs. Our Training Department regularly conducts training classes in sales, construction, administration, and managerial skills. In addition, as Process Redesign develops new processes, the Training Department is responsible for educating our associates on the processes, procedures and operations. Land Acquisition, Planning and Development - Before entering into a contract to acquire land, we complete extensive comparative studies and analyses which assist us in evaluating the economic feasibility of such land acquisition. We generally follow a policy of acquiring options to purchase land for future community developments. We attempt to acquire land with a minimum cash investment and negotiate takedown options thereby limiting the financial exposure to the amounts invested in property and predevelopment costs. This policy significantly reduces the risk and generally allows us to obtain necessary development approvals before acquisition of the land, thereby enhancing the value of the options and the land eventually acquired. Our option and purchase agreements are typically subject to numerous conditions, including, but not limited to, our ability to obtain necessary governmental approvals for the proposed community. Generally, the deposit on the agreement will be returned to us if all approvals are not obtained, although predevelopment costs may not be recoverable. By paying an additional, nonrefundable deposit, we have the right to extend a significant number of our options for varying periods of time. In all instances, we have the right to cancel any of our land option agreements by forfeiture of our deposit on the agreement. In such instances, we generally are not able to recover any predevelopment costs. Our development activities include site planning and engineering, obtaining environmental and other regulatory approvals and constructing roads, sewer, water and drainage facilities, and for our residential developments, recreational facilities and other amenities. These activities are performed by our staff, together with independent architects, consultants and contractors. Our staff also carries out long-term planning of communities. Design - Our residential communities are generally located in suburban areas near major highways. The communities are designed as neighborhoods that fit existing land characteristics. We strive to create diversity within the overall planned community by offering a mix of homes with differing architecture, textures and colors. Wherever possible, recreational amenities such as a swimming pool, tennis courts, a club house and tot lots are included. Construction - We design and supervise the development and building of our communities. Our homes are constructed according to standardized prototypes which are designed and engineered to provide innovative product design while attempting to minimize costs of construction. We employ subcontractors for the installation of site improvements and construction of homes. Agreements with subcontractors are generally short term and provide for a fixed price for labor and materials. We rigorously control costs through the use of a computerized monitoring system. Because of the risks involved in speculative building, our general policy is to construct an attached condominium or townhouse building only after signing contracts for the sale of at least 50% of the homes in that building. Single family detached homes in market areas other than California and Texas are usually constructed after the signing of a contract and mortgage approval has been obtained. Materials and Subcontractors - We attempt to maintain efficient operations by utilizing standardized materials available from a variety of sources. In addition, we contract with subcontractors representing all building trades in connection with the construction of our homes. In recent years, we have experienced no significant construction delays due to shortages of materials or labor. We cannot predict, however, the extent to which shortages in necessary materials or labor may occur in the future. Marketing and Sales - Our residential communities are sold principally through on-site sales offices. In order to respond to our customers' needs and trends in housing design, we rely upon our internal market research group to analyze information gathered from, among other sources, buyer profiles, exit interviews at model sites, focus groups and demographic data bases. We make use of newspaper, radio, magazine, our website, billboard, video and direct mail advertising, special promotional events, illustrated brochures, full-sized and scale model homes in our comprehensive marketing program. In addition, we have recently opened home design galleries in our Northeast region and in California, which we expect will increase option sales and profitability in these markets. We plan to open similar galleries in each of our markets. Customer Service and Quality Control - Our associates responsible for customer service participate in pre-closing quality control inspections as well as responding to post-closing customer needs. Prior to closing, each home is inspected and any necessary completion work is undertaken by us. In some of our markets, we are enrolled in a standard limited warranty program which, in general, provides a homebuyer with a one-year warranty for the home's materials and workmanship, a two-year warranty for the home's heating, cooling, ventilating, electrical and plumbing systems and a ten-year warranty for major structural defects. All of the warranties contain standard exceptions, including, but not limited to, damage caused by the customer. Customer Financing - We sell our homes to customers who generally finance their purchases through mortgages. During the year ended October 31, 1999, over 57% of our non-cash customers obtained mortgages originated by our wholly-owned mortgage banking subsidiary, with a substantial portion of our remaining customers obtaining mortgages from various independent lending institutions. Mortgages originated by our wholly-owned mortgage banking subsidiary are sold in the secondary market. RESIDENTIAL DEVELOPMENT ACTIVITIES Our residential development activities include evaluating and purchasing properties, master planning, obtaining governmental approvals and constructing, marketing and selling homes. A residential development generally includes a number of residential buildings containing from two to twenty-four individual homes per building and/or single family detached homes, together with amenities such as recreational buildings, swimming pools, tennis courts and open areas. We attempt to reduce the effect of certain risks inherent in the housing industry through the following policies and procedures: - Through our presence in multiple geographic markets, our goal is to reduce the effects that housing industry cycles, seasonality and local conditions in any one area may have on our business. In addition, we plan to achieve a significant market presence in each of our markets in order to obtain powers and economies of scale. - We acquire land for future development principally through the use of land options which need not be exercised before the completion of the regulatory approval process. We structure these options in most cases with flexible takedown schedules rather than with an obligation to takedown the entire parcel upon approval. Additionally, we purchase improved lots in certain markets by acquiring a small number of improved lots with an option on additional lots. This allows us to minimize the economic costs and risks of carrying a large land inventory, while maintaining our ability to commence new developments during favorable market periods. - In an attempt to reduce our land acquisition costs, we monitor housing industry cycles and seek to acquire land options near the cyclical trough of specific geographic housing cycles. - We generally begin construction on an attached condominium or townhouse building only after entering into contracts for the sale of at least 50% of the homes in that building. Single family detached homes in market areas other than California and Texas are generally started after a contract is signed and mortgage approvals obtained. This limits the build-up of inventory of unsold homes and the costs of maintaining and carrying that inventory. - We offer a broad product array to provide housing to a wide range of customers. Our customers consist of first-time buyers, first- and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. - We offer a wide range of customer options to satisfy individual customer tastes. We have constructed decoration centers in our larger communities where the customer can better see customization possibilities for their new home. We recently opened larger regional home design galleries in New Jersey and California. It is our expectation to open regional design galleries in each of our major markets. Current base prices for our homes in contract backlog at October 31, 1999 (exclusive of upgrades and options) range from $114,000 to $921,000 in its Northeast Region, from $105,000 to $467,000 in North Carolina, from $176,000 to $318,000 in Florida, from $145,000 to $370,000 in Metro D.C., from $129,000 to $385,000 in California, from $99,000 to $570,000 in Texas and from $33,000 to $166,000 in Poland. Closings generally occur and are typically reflected in revenues from two to nine months after sales contracts are signed. Information on homes delivered by market area is set forth below: Year Ended --------------------------------- October October October 31, 1999 31, 1998 31, 1997 --------- -------- -------- (Housing Revenue in Thousands) Northeast Region(1): Housing Revenues........ $560,586 $595,873 $445,817 Homes Delivered......... 2,063 2,530 2,128 Average Price........... $271,733 $235,522 $209,500 North Carolina: Housing Revenues........ $145,153 $127,592 $125,242 Homes Delivered......... $ 756 687 695 Average Price........... $192,001 $185,723 $180,204 Florida: Housing Revenues........ $ 36,566 $ 44,168 $ 74,146 Homes Delivered......... 159 241 418 Average Price........... $229,974 $183,269 $177,382 Metro D.C.: Housing Revenues........ $ 45,493 $ 38,904 $ 14,398 Homes Delivered......... 198 152 70 Average Price........... $229,762 $255,947 $205,685 California: Housing Revenues........ $105,941 $ 82,546 $ 69,252 Homes Delivered......... 514 457 365 Average Price........... $206,110 $180,625 $189,731 Texas: Housing Revenues........ $ 13,184 -- -- Homes Delivered......... 66 -- -- Average Price........... $199,757 -- -- Poland: Housing Revenues........ $ 1,630 $ 6,561 $ 2,952 Homes Delivered......... 12 71 41 Average Price........... $135,833 $ 92,408 $ 72,000 Combined Total: Housing Revenues........ $908,553 $895,644 $731,807 Homes Delivered......... 3,768 4,138 3,717 Average Price........... $241,123 $216,443 $196,881 (1) Fiscal 1999 includes $31,961,000 housing revenues and 88 homes from a New Jersey homebuilder acquired on August 7, 1999. The value of our net sales contracts decreased 1.2% to $796,453,000 for the year ended October 31, 1999 from $806,247,000 for the year ended October 31, 1998. This decrease was the net result of an 8.8% decrease in the number of homes contracted to 3,535 in 1999 from 3,877 in 1998, which was partially offset by an 8.3% increase in the average home base sales prices. By market, on a dollar basis, the Northeast Region decreased 14.0% due to fewer communities open for sale. This decrease was partially offset by a 7.9% increase in North Carolina, a 32.8% increase in Metro D.C. and a 54.5% increase in California. The increase in Metro D.C. was the result of a full year of sales from a small developer acquired on May l, 1998. The increase in California was due to an increase in the number of active selling communities. Changes in other markets were not significant. The following table summarizes our active communities under development as of October 31, 1999: (1) (2) Contracted Remaining Commun- Approved Homes Not Home Sites ities Lots Delivered Delivered Available ------- -------- --------- --------- ---------- Northeast Region...... 27 9,224 3,279 1,075 4,870 North Carolina........ 30 3,718 1,317 202 2,199 Florida............... 2 900 781 37 82 Metro D.C............. 9 998 453 141 404 California............ 8 2,175 339 127 1,709 Texas................. 33 2,833 730 252 1,851 Poland................ 1 115 - 10 105 ------- -------- --------- --------- ---------- Total 110 19,963 6,899 1,844 11,220 ======= ======== ========= ========= ========== (1) Includes 96 lots under option. (2) Of the total home sites available, 599 were under construction or completed (including 76 models and sales offices), 7,057 were under option, and 216 were financed through purchase money mortgages. In addition, as of October 31, 1999, in substantially completed or suspended developments, we had 105 homes under construction or completed including 73 homes which are under contract. We also had 66 lots without construction (4 under contract) in these substantially completed or suspended developments. The following table summarizes our total started or completed unsold homes as of October 31, 1999: Unsold Homes Models Total ------ ------ ----- Northeast Region.................. 114 31 145 North Carolina.................... 129 -- 129 Florida........................... 5 -- 5 Metro D.C......................... 13 9 22 California........................ 53 10 63 Texas............................. 225 28 253 Poland............................ 14 -- 14 ------ ------ ----- Total 553 78 631 ====== ====== ===== BACKLOG At October 31, 1999 and October 31, 1998, we had a backlog of signed contracts for 1,921 homes and 1,681 homes, respectively, with sales values aggregating $460,660,000 and $381,816,000, respectively. Substantially all of our backlog at October 31, 1999 is expected to be completed and closed within the next nine months. At December 31, 1999 and 1998, our backlog of signed contracts was 1,779 homes and 1,584 homes, respectively, with sales values aggregating $429,668,000 and $359,213,000, respectively. Sales of our homes typically are made pursuant to a standard sales contract. This contract requires a nominal customer deposit at the time of signing with the remainder of a 5% to 10% down payment due 30 to 60 days after signing and provides the customer with a statutorily mandated right of rescission for a period ranging up to 15 days after execution. The contract may include a financing contingency, which permits the customer to cancel his obligation in the event mortgage financing at prevailing interest rates (including financing arranged or provided by us) is unobtainable within the period specified in the contract. This contingency period typically is four to eight weeks following the date of execution. RESIDENTIAL LAND INVENTORY It is our objective to control a supply of land, primarily through options, consistent with anticipated homebuilding requirements in its housing markets. Controlled land as of October 31, 1999, exclusive of communities under development described under "Business and Properties -- Residential Development Activities," is summarized in the following table: Number of Proposed Total Land Proposed Developable Option Book Communities Lots Price Value(1)(2) ----------- ----------- ----------- ----------- (In Thousands) Northeast Region: Under Option........ 40 7,104 $174,615 $ 22,632 Owned............... 3 265 9,411 -------- ----------- ----------- Total............ 43 7,369 32,043 -------- ----------- ----------- North Carolina: Under Option........ 3 605 $ 9,884 4 Owned............... 2 208 3,303 -------- ----------- ----------- Total............ 5 813 3,307 -------- ----------- ----------- Florida: Owned............... 3 1,033 1,264 -------- ----------- ----------- Metro D.C.: Under Option........ 9 1,634 $ 45,994 1,305 Owned............... 2 1,041 2,740 ------- ----------- ----------- Total............ 11 2,675 4,045 ------- ----------- ----------- California: Under Option........ 5 634 $123,026 8,195 ------- ----------- ----------- Texas: Under Option........ 11 469 $ 19,209 -- ------- ----------- ----------- Poland: Owned............... 1 580 3,071 ------- ----------- ----------- Totals: Under Option........ 68 10,446 32,136 Owned............... 11 3,127 19,789 -------- ----------- ----------- Combined Total........ 79 13,573 $ 51,925 ======== =========== =========== (1) Properties under option also includes costs incurred on properties not under option but which are under investigation. For properties under option, we paid, as of October 31, 1999, option fees and deposits aggregating approximately $16,164,000. As of October 31, 1999, we spent an additional $15,972,000 in non- refundable predevelopment costs on such properties. (2) The book value of $51,925,000 is identified on the balance sheet as "Inventories - land, land options, and cost of projects in planning." In its Northeast Region, our objective is to control a supply of land sufficient to meet anticipated building requirements for at least three to five years. In North Carolina and Metro D.C., a portion of the land we acquired was from land developers on a lot takedown basis. In Texas we primarily acquire improved lots from land developers. Under a typical agreement with the lot developer, we purchase a minimal number of lots. The balance of the lots to be purchased are covered under an option agreement or a non-recourse purchase agreement. Due to the dwindling supply of improved lots in North Carolina and Virginia, we are currently optioning parcels of unimproved land for development. In California, we focused our development efforts in the southern portion of the state. Where possible, we plan to option developed or partially developed lots with no more than fifty to seventy-five lots to be taken down during any twelve month period. With a dwindling supply of developed lots in California, we are currently optioning parcels of unimproved land for development. CUSTOMER FINANCING At our communities, on-site personnel facilitate sales by offering to arrange financing for prospective customers through K. Hovnanian Mortgage, Inc. ("KHM"). Management believes that the ability to offer financing to customers on competitive terms as a part of the sales process is an important factor in completing sales. KHM's business consists of providing our customers as well as unrelated third parties with competitive financing and coordinating and expediting the loan origination transaction through the steps of loan application, loan approval and closing. KHM has its headquarters in Red Bank, New Jersey. It originates loans in New Jersey, New York, Pennsylvania, North Carolina, Florida, California, South Carolina and Illinois. KHM, like other mortgage bankers, customarily sells nearly all of the loans that it originates. Additionally, KHM sells virtually all of the loan servicing rights to loans it originates. Loans are sold either individually or in pools to GNMA, FNMA, or FHLMC or against forward commitments to institutional investors, including banks and savings and loan associations. KHM plans to grow its mortgage banking operations. Initially, KHM focused on originating loans from customers who purchase homes from our affiliates. KHM's objective is to increase the capture rate of non-cash homebuyers from the 57% rate achieved in fiscal 1999 to 70% over the next several years. KHM has now expanded to offer its mortgage products and services to unrelated third parties. During the year ended October 31, 1999, third party loans amounted to 48% of total mortgage closings. RENTAL PROPERTY DEVELOPMENT ACTIVITIES AND LAND INVENTORY We had previously diversified our business, on a limited scale, through the development, acquisition and ownership of commercial properties, primarily in central New Jersey, and, to a lesser extent, in Florida, but exited this business (see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations"). COMPETITION Our residential business is highly competitive. We compete with numerous real estate developers in each of the geographic areas in which we operate. Our competition range from small local builders to larger regional and national builders and developers, some of which have greater sales and financial resources than us. Resale of housing and the availability of rental housing provide additional competition. We compete primarily on the basis of reputation, price, location, design, quality, service and amenities. REGULATION AND ENVIRONMENTAL MATTERS General. We are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular locality. In addition, we are subject to registration and filing requirements in connection with the construction, advertisement and sale of our communities in certain states and localities in which we operate even if all necessary government approvals have been obtained. We may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums that could be implemented in the future in the states in which we operate. Generally, such moratoriums relate to insufficient water or sewerage facilities or inadequate road capacity. Environmental. We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment ("environmental laws"). The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and prohibit or severely restrict development in certain environmentally sensitive regions or areas. The Florida Growth Management Act of 1985 became fully effective in Palm Beach County on February 1, 1990. The act requires that infrastructure, including roads, sewer and water lines must be in existence concurrently with the construction of the development. If such infrastructure is not concurrently available, then the community cannot be developed. This will have an effect on limiting the amount of land available for development and may delay approvals of some developments. Fair Housing Act. In July 1985, New Jersey adopted the Fair Housing Act which established an administrative agency to adopt criteria by which municipalities will determine and provide for their fair share of low and moderate income housing. This agency adopted such criteria in May 1986. Its implementation thus far has caused some delay in approvals for some of our New Jersey communities and may result in a reduction in the number of homes planned for some properties. Both prior to the enactment of the Fair Housing Act and in its implementation thus far, municipal approvals in some of the New Jersey municipalities in which we own land or land options required us to set aside up to 22% of the approved homes for sale at prices affordable to persons of low and moderate income. In order to comply with such requirements, we must sell these homes at a loss. We attempt to reduce some of these losses through increased density, certain cost saving construction measures and reduced land prices from the sellers of property. Such losses are absorbed by the market priced homes in the same developments. State Planning Act. Pursuant to the 1985 State Planning Act, the New Jersey State Planning Commission has adopted a State Development and Redevelopment Plan ("State Plan"). The State Plan, if fully implemented, would designate large portions of the state as unavailable for development or as available for development only at low densities, and other portions of the state for more intense development. State government agencies would be required to make permitting decisions in accordance with the State Plan, if it is fully implemented. The state government agencies have not yet adopted policies and regulations to fully implement the State Plan. The Governor has issued an Executive Order to all state agencies requiring compliance with the State Plan. It is unclear what effect this Executive Order may have on our ability to develop our land. The California Environmental Quality Act (CEQA) requires that every community comply with the CEQA. Compliance with CEQA may result in delay in obtaining the necessary approvals for commencement of the community, a reduction in the density permitted in the community, additional costs in developing the community, or denial of the permits necessary to construct the community. Conclusion. Despite our past ability to obtain necessary permits and approvals for our communities, it can be anticipated that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and substantial expenditures for pollution and water quality control, which could have a material adverse effect on us. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretation and application. Company Offices. We own our corporate headquarters, a four-story, 24,000 square feet office building located in Red Bank, New Jersey, a 17,450 square feet office building located in Winston-Salem, North Carolina, and 19,992 square feet in a Middletown, New Jersey condominium office building. We lease office space consisting of 101,691 square feet in various New Jersey locations, 7,460 square feet in Woodbridge, Virginia, 10,271 square feet in various North Carolina locations, 10,271 square feet in West Palm Beach, Florida, 17,566 square feet in southern California, and 13,478 square feet in various Texas locations. ITEM 3 - LEGAL PROCEEDINGS We are involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on us. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the year ended October 31, 1999 no matters were submitted to a vote of security holders. EXECUTIVE OFFICERS OF THE REGISTRANT Information on executive officers of the registrant is incorporated herein from Part III, Item 10. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The number of shares and all data presented on a per share basis in this Form 10-K have been adjusted to give effect to all stock splits. Our Class A Common Stock is traded on the American Stock Exchange and was held by 728 shareholders of record at December 31, 1999. There is no established public trading market for our Class B Common Stock, which was held by 629 shareholders of record at December 31, 1999. In order to trade Class B Common Stock, the shares must be converted into Class A Common Stock on a one-for-one basis. The high and low sales prices for our Class A Common Stock were as follows for each fiscal quarter during the years ended October 31, 1999, 1998, and 1997: Class A Common Stock ------------------------------------------------ Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1997 -------------- -------------- -------------- Quarter High Low High Low High Low - ------- ------ ------ ------ ------ ------ ------ First........ $ 9.25 $ 7.75 $ 9.25 $ 6.50 $7.63 $5.63 Second....... $ 8.94 $ 6.81 $11.50 $ 8.56 $7.00 $6.25 Third........ $ 9.50 $ 7.88 $11.19 $ 8.50 $7.13 $5.69 Fourth....... $ 8.88 $ 6.00 $ 9.88 $ 6.00 $8.13 $6.75 On August 7, 1999 and October 1, 1999 we acquired two homebuilding companies. As part of the purchase price 1,845,359 shares of unregistered Class A Common Stock were issued to the sellers. 483,302 of these shares are being held in escrow (and thus not reported as issued and outstanding at October 31, 1999). There were no underwriters associated with these transactions. These shares were issued in private transactions in reliance upon Section 4(2) of the Securities Act of 1933. Certain debt instruments to which we are a party contain restrictions on the payment of cash dividends. As a result of the most restrictive of these provisions, approximately $35,415,000 was free of such restrictions at October 31, 1999. We have never paid dividends nor do we currently intend to pay dividends. ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data and should be read in conjunction with the financial statements included elsewhere in this Form 10- K. Per common share data and weighted average number of common shares outstanding reflect all stock splits. Year Ended ------------------------------------------------ Summary Consolidated October October October October October Income Statement Data 31, 1999 31, 1998 31, 1997 31, 1996 31, 1995 - ------------------------------- -------- -------- -------- -------- -------- (In Thousands Except Per Share Data) Revenues....................... $948,287 $941,947 $784,136 $807,464 $777,745 Expenses....................... 897,670 900,655 796,260 782,458 756,091 -------- -------- -------- -------- -------- Income(loss) before income taxes and extraordinary loss. 50,617 41,292 (12,124) 25,006 21,654 State and Federal income taxes. 19,674 15,141 (5,154) 7,719 7,526 Extraordinary loss............. (868) (748) -- -- -- -------- -------- -------- -------- -------- Net income (loss).............. $ 30,075 $ 25,403 $ (6,970) $ 17,287 $ 14,128 ======== ======== ======== ======== ======== Per Share Data: Basic:: Income (loss) before extraordinary loss......... $ 1.45 $ 1.20 $ (0.31) $ 0.75 $ 0.61 Extraordinary loss........... (.04) (0.03) -- -- -- -------- -------- -------- -------- -------- Net income (loss)............ $ 1.41 $ 1.17 $ (0.31) $ 0.75 $ 0.61 ======== ======== ======== ======== ======== Weighted average number of common shares outstanding.. 21,404 21,781 22,409 23,037 23,032 Assuming Dilution: Income (loss) before extraordinary loss......... $ 1.43 $ 1.19 $ (0.31) $ 0.75 $ 0.61 Extraordinary loss........... (.04) (0.03) -------- -------- -------- -------- -------- Net income (loss)............ $ 1.39 $ 1.16 $ (0.31) $ 0.75 $ 0.61 ======== ======== ======== ======== ======== Weighted average number of common shares outstanding.. 21,612 22,016 22,506 23,120 23,079 Summary Consolidated October October October October October Balance Sheet Data 31, 1999 31, 1998 31, 1997 31, 1996 31, 1995 - ------------------------------- -------- -------- -------- -------- -------- Total assets................... $712,816 $589,102 $637,082 $614,111 $645,378 Mortgages and notes payable.... $110,228 $150,282 $184,519 $145,336 $183,044 Bonds collateralized by mortgages receivable......... $ 3,699 $ 5,652 $ 7,855 $ 9,231 $ 17,880 Senior notes, participating senior subordinated debentures and subordinated notes........................ $250,000 $145,449 $190,000 $200,000 $200,000 Stockholders' equity........... $236,426 $201,392 $178,762 $193,622 $176,335 RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS For purposes of computing the ratios of earnings to fixed charges and earnings to combined fixed charges and preferred dividends, earnings consist of earnings (loss) from continuing operations before income taxes, minority interest, extraordinary items and cumulative effect of accounting changes, plus fixed charges (interest charges and preferred share dividend requirements of subsidiaries, adjusted to a pretax basis), less interest capitalized, less preferred share dividend requirements of subsidiaries adjusted to a pretax basis and less undistributed earnings of affiliates whose debt is not guaranteed by us. The following table sets forth the ratios of earnings to fixed charges and earnings to combined fixed charges and preferred dividends for the periods indicated: Years Ended October 31, -------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- ---------- Ratio of earnings to fixed charges............ 3.0 2.6 (a) 1.6 1.4 Ratio of earnings to combined fixed charges and preferred stock dividends................. 3.0 2.6 (a) 1.6 1.4 (a) No ratio is presented for the year ended October 31, 1997 as the earnings for such period were insufficient to cover fixed charges by $9,197,000. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Our cash uses during the twelve months ended October 31, 1999 were for operating expenses, seasonal increases in housing inventories, construction, income taxes, interest, the repurchase of common stock, the redemption of subordinated indebtedness, and the acquisition of two homebuilding companies. We provided for our cash requirements from housing and land sales, the issuance of $150,000,000 Senior Notes, the revolving credit facility, the sale of commercial facilities, financial service income, and other revenues. We believe that these sources of cash are sufficient to finance our working capital requirements and other needs. Our net income historically does not approximate cash flow from operating activities. The difference between net income and cash flow from operating activities is primarily caused by changes in inventory levels, mortgage loans and liabilities, and depreciation and impairment losses. When we are expanding our operations, which was the case in fiscal 1999, inventory levels increase causing cash flow from operating activities to decrease. Liabilities also increase as inventory levels increase. The increase in liabilities partially offsets the negative effect on cash flow from operations caused by the increase in inventory levels. As mortgage loans increase, cash flow from operations decreases. Conversely, as such loans decrease, cash flow from operations increases. Depreciation and impairment losses always increase cash flow from operating activities since they are non-cash charges to operations. We expect to be in an expansion mode in fiscal 2000. As a result, we expect cash flow from operations to be less than net income in fiscal 2000. In December 1998 the Board of Directors increased the stock repurchase program to purchase up to 3 million shares of Class A Common Stock. This authorization expires on December 31, 2000. As of October 31, 1999, 2,364,400 shares were repurchased under this program of which 772,900 were repurchased during the year ended October 31, 1999. Our bank borrowings are made pursuant to a revolving credit agreement (the "Agreement") which provides a revolving credit line and letter of credit line of up to $275,000,000 through July 2002. Interest is payable monthly and at various rates of either the prime rate or Libor plus 1.45%. We believe that we will be able either to extend the Agreement beyond July 2002 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. As of October 31, 1999, borrowings under the Agreement were $70,125,000. The subordinated indebtedness issued by us and outstanding as of October 31, 1999 was $100,000,000 9 3/4% Subordinated Notes due June 2005. On May 4, 1999, we issued $150,000,000 9 1/8% Senior Notes due in April 2009. On June 7, 1999, we redeemed the remaining $45,449,000 principal amount 11 1/4% Subordinated Notes due April 2002. The early retirement of these notes resulted in an extraordinary loss of $868,000 net of income taxes of $468,000. The remaining proceeds were used to reduce the outstanding balance on our "Revolving Credit Facility" to zero at that time and for general corporate purposes. Our mortgage banking subsidiary borrows under a $100,000,000 bank warehousing arrangement which expires in June 2000. Other finance subsidiaries formerly borrowed from a multi-builder owned financial corporation and a builder owned financial corporation to finance mortgage backed securities but in fiscal 1988 decided to cease further borrowing from multi-builder and builder owned financial corporations. These non-recourse borrowings have been generally secured by mortgage loans originated by one of our subsidiaries. As of October 31, 1999, the aggregate outstanding principal amount of such borrowings was $33,733,000. The book value of our inventories, rental condominiums, and commercial properties completed and under development amounted to the following: October 31, October 31, 1999 1998 ------------ ------------ Residential real estate inventory....... $527,121,000 $375,733,000 Senior residential rental property...... 10,650,000 10,794,000 ------------ ------------ Total residential real estate....... 537,771,000 386,527,000 Commercial properties................... 109,000 17,832,000 ------------ ------------ Combined Total...................... $537,880,000 $404,359,000 ============ ============ Total residential real estate increased $151,244,000 from October 31, 1998 to October 31, 1999 as a result of an inventory increase of $151,388,000 less depreciation of senior residential rental property. The increase in residential real estate inventory was primarily due to the acquisition of two homebuilding companies during the quarter ended October 31, 1999 and increases in California where we expect to significantly grow our business in fiscal 2000. These increases were offset by a decrease in our Northeast Region where delivery of homes is expected to decrease in fiscal 2000. Residential homes under construction or completed and included in residential real estate inventory at October 31, 1999 are expected to be closed during the next twelve months. Most residential real estate, completed or under development, is financed through our line of credit, senior notes and subordinated indebtedness. We usually option property for development prior to acquisition. By optioning property, we are only subject to the loss of a small option fee and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is kept to a minimum. The following table summarizes housing lots included in our total residential real estate: Total Contracted Remaining Home Not Lots Lots Delivered Available -------- ---------- --------- October 31, 1999: Owned.......................... 9,730 1,825 7,905 Optioned....................... 17,078 96 16,982 -------- ---------- --------- Total........................ 26,808 1,921 24,887 ======== ========== ========= October 31, 1998: Owned.......................... 8,054 1,673 6,381 Optioned....................... 13,668 8 13,660 -------- ---------- --------- Total........................ 21,722 1,681 20,041 ======== ========== ========= The following table summarizes our started or completed unsold homes in active, substantially completed and suspended communities: October 31, October 31, 1999 1998 -------------------------- ------------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ------ ------ ------ ------ Northeast Region(1). 114 31 145 180 16 196 North Carolina...... 129 -- 129 93 -- 93 Florida............. 5 -- 5 24 6 30 Metro D.C........... 13 9 22 23 11 34 California.......... 53 10 63 78 21 99 Texas............... 225 28 253 -- -- -- Poland.............. 14 -- 14 11 -- 11 ------ ------ ------ ------ ------ ------ Total 553 78 631 409 54 463 ====== ====== ====== ====== ====== ====== (1) Includes 6 unsold homes and 2 model homes from a New Jersey homebuilder acquired on August 7, 1999. Prior to the second quarter of fiscal 1997, our commercial properties represented long-term investments in commercial and retail facilities completed or under development. At the end of the second quarter of fiscal 1997, we announced we were planning an orderly exit from the business of owning investment properties. During fiscal 1997 and 1998, we sold all our commercial facilities and a 50% owned partnership sold its retail center. During fiscal 1999 we sold three land parcels. See "Results of Operations - Investment Properties." Collateral Mortgage Financing - collateral for bonds payable consists of collateralized mortgages receivable which are pledged against non-recourse collateralized mortgage obligations. Financial Services - mortgage loans held for sale consist of residential mortgages receivable of which $32,844,000 and $71,002,000 at October 31, 1999 and October 31, 1998, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. The balance of mortgage loans held for sale are being held as an investment. 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 Our operations consist primarily of residential housing development and sales in our Northeast Region (comprised primarily of New Jersey, southern New York state, and eastern Pennsylvania), in southeastern Florida, North Carolina, Metro D. C. (northern Virginia), southern California, Texas and Poland. Our Texas operations are the result of the acquisition of a Texas homebuilder on October 1, 1999. In addition, we had developed and operated commercial properties as long-term investments in New Jersey, and, to a lesser extent, Florida, but have exited this business (see "Investment Properties" below). During the years ended October 31, 1999, 1998, and 1997, our Northeast Region, California Division and North Carolina Division housing operations consistently produced operating profits. In fiscal 1999, our Metro D.C. Division and Texas acquisition also produced profits. In 1999 and 1998, financial services operations were profitable. In addition, in 1998 and 1997 we earned profits from the liquidation of commercial properties. These profits have been reduced by net losses from our other housing divisions, corporate overhead, the writedown of certain residential inventories and commercial properties to their estimated fair value and the write-off of optioned properties and related approval, engineering and capitalized interest costs. See "Notes to Consolidated Financial Statements - Note 11". Prior to fiscal 1998, our first two quarters produced the least amount of deliveries for the year and the fourth quarter produced the most deliveries for the year, sometimes in excess of 40% of total homes delivered. In fiscal 1998 management made a concerted effort to change this trend using new management tools to focus on delivery evenness and through a new quarterly bonus incentive plan. The percentage distribution of deliveries for the last three years is as follows: Quarter Ended ---------------------------------------------------------- January 31 April 30 July 31 October 31 Total ---------- ---------- ---------- ---------- ---------- 1999........... 22% 22% 25% 31% 100% 1998........... 24% 23% 26% 27% 100% 1997........... 16% 19% 25% 40% 100% During the year ended October 31, 1999 a higher percentage was delivered in the fourth quarter due to the acquisition of two homebuilding companies. In fiscal 2000 we expect a higher percentage of deliveries later in the fiscal year resulting from the projected flow of deliveries from recent homebuilding company acquisitions and the timing of community grand openings in our Northeast Region and California Division. Total Revenues Compared to the same prior period, revenues increased (decreased) as follows: Year Ended ----------------------------- October October October 31, 1999 31, 1998 31, 1997 --------- --------- --------- (Dollars in Thousands) Homebuilding: Sale of homes......................$ 12,909 $163,837 $(32,875) Land sales and other revenues...... 1,998 (11,572) 8,371 Financial services................... 1,141 8,363 (481) Investment properties................ (9,544) (2,646) 2,838 Collateralized mortgage financing.... (164) (171) (1,181) --------- --------- --------- Total change....................$ 6,340 $157,811 $(23,328) ========= ========= ========= Percent change.................... 0.7% 20.1% (2.9%) ========= ========= ========= Homebuilding Compared to the same prior period, housing revenues increased $12.9 million or 1.4% for the year ended October 31, 1999, after increasing $163.8 million or 22.4% for the year ended October 31, 1998, and decreasing $32.9 million or 4.3% for the year ended October 31, 1997. Housing revenues are recorded at the time each home is delivered and title and possession have been transferred to the buyer. Information on homes delivered by market area is set forth below: Year Ended --------------------------------- October October October 31, 1999 31, 1998 31, 1997 --------- --------- --------- (Dollars in Thousands) Northeast Region (1): Housing Revenues............$560,586 $595,873 $445,817 Homes Delivered............. 2,063 2,530 2,128 North Carolina: Housing Revenues............$145,153 $127,592 $125,242 Homes Delivered............. 756 687 695 Florida: Housing Revenues............$ 36,566 $ 44,168 $ 74,146 Homes Delivered............. 159 241 418 Metro D.C.: Housing Revenues............$ 45,493 $ 38,904 $ 14,398 Homes Delivered............. 198 152 70 California: Housing Revenues............$ 105,941 $ 82,546 $ 69,252 Homes Delivered............. 514 457 365 Texas: Housing Revenues............$ 13,184 -- -- Homes Delivered............. 66 -- -- Poland: Housing Revenues............$ 1,630 $ 6,561 $ 2,952 Homes Delivered............. 12 71 41 Totals: Housing Revenues............$ 908,553 $895,644 $731,807 Homes Delivered............. 3,768 4,138 3,717 (1) Fiscal 1999 includes $31,961,000 housing revenues and 88 homes from a New Jersey homebuilder acquired on August 7, 1999. The overall increase in housing revenues was the net result of increases in average sales prices offset by decreased deliveries. The increase in average sales prices during the year ended October 31, 1999 is primarily due to the increases in all markets except Metro D. C. The increased average sales prices in the Northeast Region and North Carolina were primarily attributed to the rise in base home prices and the sale of more decorator and structural options. In Florida, average sales prices increased as a result of fewer communities, all of which are higher priced single family developments. In Metro D.C., average sales prices decreased because of a change in product mix to smaller single family homes. In California, sales prices increased due to a change in product mix to larger, more expensive homes. The decrease in homes delivered was primarily due to significant decreases in the Northeast Region and Florida while the other divisions increased deliveries slightly. The decrease in the Northeast Region was attributable to fewer communities open for sale. We expect the Northeast Region to stay at roughly the 2,000 home level in fiscal 2000 and then increase in fiscal 2001 due to an increase of active selling communities. In Florida, due to operating losses we decided to cut back operations in fiscal 1997 and have only one active community delivering homes in fiscal 2000. All other divisions increased home deliveries in 1999 due to the increase in the number of active selling communities. In fiscal 2000 we expect a significant home delivery increase in California. In addition, consolidated home deliveries will increase in fiscal 2000 due to a full year of operations in Texas. Unaudited quarterly housing revenues and net sales contracts using base sales prices by market area for the years ending October 31, 1999, 1998, and 1997 are set forth below: Quarter Ended ------------------------------------------ October July April January 31, 1999 31, 1999 30, 1999 31, 1999 --------- --------- --------- --------- (In Thousands) Housing Revenues: Northeast Region (1)....... $164,899 $142,503 $126,501 $126,683 North Carolina............. 47,251 38,269 30,553 29,080 Florida.................... 9,012 9,690 9,531 8,333 Metro D.C.................. 15,541 11,400 6,005 12,547 California................. 37,290 24,792 26,548 17,311 Texas...................... 13,184 -- -- -- Poland..................... 282 417 -- 931 --------- --------- --------- --------- Total.................. $287,459 $227,071 $199,138 $194,885 ========= ========= ========= ========= Sales Contracts (Net of Cancellations): Northeast Region (1)....... $135,514 $111,083 $114,924 $ 90,163 North Carolina............. 25,757 33,078 50,673 31,111 Florida.................... 2,532 4,471 9,050 11,530 Metro D.C.................. 12,246 14,338 16,201 11,077 California................. 36,197 37,788 24,135 17,817 Texas...................... 5,416 -- -- -- Poland..................... 698 172 -- 482 --------- --------- --------- --------- Total.................. $218,360 $200,930 $214,983 $162,180 ========= ========= ========= ========= (1) Includes $31,961,000 housing revenues and $12,922,000 sales contracts in the quarter ended October 31, 1999 from a New Jersey homebuilder acquired on August 7, 1999. Quarter Ended ------------------------------------------ October July April January 31, 1998 31, 1998 30, 1998 31, 1998 --------- --------- --------- --------- (In Thousands) Housing Revenues: Northeast Region........... $157,882 $162,847 $136,133 $139,011 North Carolina............. 38,997 34,655 28,264 25,676 Florida.................... 11,291 8,111 15,254 9,512 Metro D.C.................. 16,687 11,256 4,843 6,118 California................. 22,980 18,832 17,613 23,121 Poland..................... 2,283 2,199 1,460 619 --------- --------- --------- --------- Total.................. $250,120 $237,900 $203,567 $204,057 ========= ========= ========= ========= Sales Contracts (Net of Cancellations): Northeast Region........... $114,144 $124,144 $188,082 $ 98,814 North Carolina............. 37,085 33,302 35,990 23,903 Florida.................... 5,385 9,503 8,631 7,802 Metro D.C.................. 11,834 15,265 9,583 3,866 California................. 21,325 25,402 9,535 18,769 Poland..................... 1,758 516 332 1,277 --------- --------- --------- --------- Total.................. $191,531 $208,132 $252,153 $154,431 ========= ========= ========= ========= Quarter Ended ------------------------------------------ October July April January 31, 1997 31, 1997 30, 1997 31, 1997 --------- --------- --------- --------- (In Thousands) Housing Revenues: Northeast Region........... $193,513 $118,186 $ 70,678 $ 63,440 North Carolina............. 41,566 35,293 26,341 22,042 Florida.................... 28,951 14,325 17,042 13,828 Metro D.C.................. 5,214 2,759 3,018 3,407 California................. 23,317 15,113 18,489 12,333 Poland..................... 1,212 1,008 667 65 --------- --------- --------- --------- Total.................. $293,773 $186,684 $136,235 $115,115 ========= ========= ========= ========= Sales Contracts (Net of Cancellations): Northeast Region........... $134,280 $124,860 $118,840 $ 92,544 North Carolina............. 29,409 30,339 35,988 31,506 Florida.................... 11,134 15,296 21,399 9,708 Metro D. C................. 5,618 3,761 5,279 2,478 California................. 24,255 22,785 22,383 16,268 Poland..................... 2,109 436 468 1,607 --------- --------- --------- --------- Total.................. $206,805 $197,477 $204,357 $154,111 ========= ========= ========= ========= Our contract backlog using base sales prices by market area is set forth below: October October October 31, 1999 31, 1998 31, 1997 --------- --------- --------- (Dollars in Thousands) Northeast Region (1): Total Contract Backlog........$286,149 $270,753 $266,889 Number of Homes............... 1,125 1,132 1,287 North Carolina: Total Contract Backlog........$ 44,534 $ 48,713 $ 45,879 Number of Homes............... 207 235 232 Florida: Total Contract Backlog........$ 8,705 $ 14,800 $ 25,315 Number of Homes............... 37 73 150 Metro D.C.: Total Contract Backlog........$ 34,484 $ 26,083 $ 7,621 Number of Homes............... 149 115 27 California: Total Contract Backlog........$ 34,313 $ 20,721 $ 25,636 Number of Homes............... 129 119 137 Texas: Total Contract Backlog........$ 51,610 -- -- Number of Homes............... 261 -- -- Poland: Total Contract Backlog........$ 865 $ 746 $ 2,974 Number of Homes............... 13 7 39 Totals: Total Contract Backlog........$460,660 $381,816 $374,314 Number of Homes............... 1,921 1,681 1,872 Fiscal 1999 includes $38,832,000 total contract backlog and 123 number of homes from a New Jersey homebuilder acquired on August 7, 1999. We have written down or written off certain residential inventories $2.1, $4.0 million, and $14.0 million during the years ended October 31, 1999, 1998, and 1997, respectively, to their estimated fair value. See "Notes to Consolidated Financial Statements - Note 11" for additional explanation. These writedowns and writeoffs were incurred primarily because of lower property values, a change in the marketing strategy to liquidate a particular property, or the decision not to exercise an option. During the year ended October 31, 1999 we wrote off one residential land option including approval and engineering costs amounting to $0.3 million. We did not exercise this option because the community's proforma profitability did not produce an adequate return on investment commensurate with the risk. In addition, we wrote down one land parcel in Florida, one residential community in New York and two residential communities in North Carolina. The Florida land parcel was written down based on recent purchase offers. The communities were written down based on our decision to discontinue selling homes and offer the remaining lots for sale. The result of the above decisions was a reduction in inventory carrying amounts to fair value, resulting in a $1.8 million impairment loss in accordance with FAS 121. During the year ended October 31, 1998, we wrote down one Florida residential community and one New Jersey parcel of land for sale. In the Florida residential community, higher discounts were being offered to speed up sales. At the New Jersey land site, lots were being contracted at prices lower than anticipated. The result of the above decisions was a reduction in inventory carrying amounts to fair value, resulting in a $1.9 million impairment loss in accordance with FAS 121. We also wrote off three New Jersey residential land options including approval, engineering and capitalized interest costs amounting to $2.1 million. We did not exercise these options because of changes in local market conditions and difficulties in obtaining government approvals. During the year ended October 31, 1997, we wrote down certain residential communities, and wrote off certain residential land options including approval, engineering and capitalized interest costs. In Florida, our return on investment was unsatisfactory. As a result, we established a goal to reduce our investment in Florida by $25.0 million. To do so on an accelerated basis, we reduced prices and offered pricing concessions in all Florida residential communities. We also decided to sell all inactive properties in Florida. In the Northeast Region, we changed the product type to be constructed on a parcel of land we own. In an active community in the Northeast Region, we incurred unforeseen development costs. Also in the Northeast, we decided to sell an optioned property instead of developing it. The result of the above decisions was a reduction in fair values below carrying amounts and, in accordance with FAS 121, we recorded an impairment loss on the related inventories. At October 31, 1997, residential inventories were reduced $9.3 million to reduce such inventories to estimated fair value. The Northeast Region also wrote off costs associated with three optioned properties and related approval, engineering and capitalized interest costs amounting to $4.7 million. In two cases, we decided not to exercise the option due to environmental problems. The third option was not exercised because the community's proforma profitability did not produce an adequate return on investment commensurate with the risk. Cost of sales includes expenses for housing and land and lot sales. A breakout of such expenses for housing sales and housing gross margin is set forth below: Year Ended --------------------------------- October October October 31, 1999 31, 1998 31, 1997 --------- --------- --------- (Dollars In Thousands) Sale of homes.............. $908,553 $895,644 $731,807 Cost of sales.............. 718,259 740,871 617,312 --------- --------- --------- Housing gross margin....... $190,294 $154,773 $114,495 ========= ========= ========= Gross margin percentage.... 20.9% 17.3% 15.6% ========= ========= ========= Cost of sales expenses as a percentage of home sales revenues are presented below: Year Ended --------------------------------- October October October 31, 1999 31, 1998 31, 1997 --------- --------- --------- Sale of homes.............. 100.0% 100.0% 100.0% --------- --------- --------- Cost of sales: Housing, land and development costs....... 71.0 74.8 76.0 Commissions.............. 2.0 1.9 2.0 Financing concessions.... 0.8 0.7 0.9 Overheads................ 5.3 5.3 5.5 --------- --------- --------- Total cost of sales........ 79.1 82.7 84.4 --------- --------- --------- Gross margin percentage.... 20.9% 17.3% 15.6% ========= ========= ========= 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 the communities and of home types delivered, consolidated gross margin will fluctuate up or down. During the year ended October 31, 1999, our gross margin percentage increased 3.6% from the previous year. This can be attributed to higher gross margins being achieved in each of our markets. Higher gross margins are primarily attributed to positive effects from process redesign and quality programs that reduced the housing and land development costs, selective price increases or reduced selling incentives in our stronger markets, and an increased percentage of deliveries from the better performing communities. Another factor affecting the gross margin percentage is in the Northeast Region gross margin percentages are higher compared to our other markets. In 1999, the gross margin was negatively affected by a lower percentage of housing revenues from the Northeast Region amounting to 61.7% in fiscal 1999 compared to 66.5% in fiscal 1998. In fiscal 2000 we expect margins to remain the same or decrease slightly. This is primarily the result of a higher percentage of deliveries coming from outside the Northeast Region where margins are historically lower. During the year ended October 31, 1998, gross margins increased in all our markets compared to the prior year except Florida. The reasons for the increase in 1998 are the same as above for 1999. In addition, deliveries increased in the Northeast Region to 66.5% compared to the prior year of 60.9%. Selling and general administrative expenses as a percentage of homebuilding revenues increased to 8.8% for the year ended October 31, 1999 from 7.5% for the year ended October 31, 1998 which had decreased from 8.2% for the year ended October 31, 1997. The dollar amount of selling and general expenses has increased the last two years to $81.4 million for the year ended October 31, 1999 from $67.5 million for the year ended October 31, 1998 which increased from $62.5 million for the previous year. The overall percentage and dollar increases in such expenses in 1999 are attributable to increases in all our markets but primarily due to fewer deliveries in our Northeast Region and due to Northeast Region and California administration cost increases. The percentage decrease during the year ended October 31, 1998 was due to increased deliveries. The dollar increase in 1998 was due to increased administration and marketing costs. Land Sales and Other Revenues Land sales and other revenues consist primarily of land and lot sales, interest income, contract deposit forfeitures, cash discounts, national contract rebates, and corporate owned life insurance benefits. A breakout of land and lot sales is set forth below: Year Ended ---------------------------- October October October 31, 1999 31, 1998 31, 1997 -------- -------- -------- (In Thousands) Land and lot sales................... $12,077 $ 8,636 $22,855 Cost of sales........................ 11,766 8,070 17,005 -------- -------- -------- Land and lot sales gross margin...... $ 311 $ 566 $ 5,850 ======== ======== ======== 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 consists primarily of originating mortgages from our homebuyers, as well as from third parties, selling such mortgages in the secondary market, and title insurance activities. During the year ended October 31, 1999 and 1998 financial services provided a $1.0 and $2.1 million pretax profit, respectively, up from break even in 1997. In the market areas served by our wholly-owned mortgage banking subsidiaries, approximately 57%, 58%, and 51% of our non-cash homebuyers obtained mortgages originated by these subsidiaries during the years ended October 31, 1999, 1998, and 1997, respectively. Our mortgage banking goals are to improve profitability by increasing the capture rate of our homebuyers and expanding our business to include originations from unrelated third parties. During the years ended October 31, 1999 and 1998, third party loans amounted to 48% and 40%, respectively, of total mortgage closings. Most servicing rights on new mortgages originated by us will be sold as the loans are closed. Investment Properties Investment Properties consist of rental properties, property management, and gains or losses from sale of such property. See "Capital Resources and Liquidity" for information on our decision to sell our investment properties. We plan to liquidate all properties except for our senior rentals. At October 31, 1999, all properties except one small land parcel had been liquidated. During the year ended October 31, 1999 we sold three land parcels for a total sales price of $20.8 million and recorded a net loss before income taxes of $0.5 million. During the years ended October 31, 1998 and 1997, investment property revenues included a $6.5 million pretax gain and a $4.9 million pretax gain, respectively, from the sale of its commercial facilities and land. Investment properties' expenses do not include interest expense (see "Interest" below). Collateralized Mortgage Financing In the years prior to February 29, 1988 we pledged mortgage loans originated by our mortgage banking subsidiaries against collateralized mortgage obligations ("CMOs"). Subsequently, we discontinued our CMO program. As a result, CMO operations are diminishing as pledged loans are decreasing through principal amortization and loan payoffs, and related bonds are reduced. In recent years, as a result of bonds becoming callable, we have also sold a portion of our CMO pledged mortgages. Corporate General and Administrative Corporate general and administrative expenses includes 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, and administration of insurance, quality, and safety. As a percentage of total revenues, such expenses were 3.0%, 2.2%, and 1.9% for the years ended October 31, 1999, 1998, and 1997, respectively. In 1999, the increase was primarily attributed to increased expenditures for long term improvement initiatives. In 1998, the increase was primarily attributed to increased bonus accruals (there were no bonus accruals based on the Return on Equity incentive program in 1997), increased depreciation from the amortization of capitalized process redesign costs in prior years and increased expenditures for long term improvement initiatives. Our long term improvement initiatives include total quality, process redesign (net of capitalized expenses), and training. Such initiatives resulted in additional expenses for the years ended October 31, 1999, 1998, and 1997 amounting to $7.5 million, $3.8 million, and $2.2 million, respectively. Beginning in fiscal year 2000 we will be required to capitalize certain computer software development costs in accordance with SOP 98-1, "Accounting For the Costs of Computer Software Development For or Obtained For Internal Use." We have not yet determined the impact on net income in connection with the adoption of SOP 98-1. Interest Interest expense includes housing, land and lot, and rental properties interest. Interest expense is broken down as follows: Year Ended ------------------------------- October October October 31, 1999 31, 1998 31, 1997 --------- --------- --------- (In Thousands) Sale of homes.................. $28,093 $ 31,499 $ 29,505 Land and lot sales............. 1,082 652 962 Rental properties.............. 1,168 2,272 5,308 --------- --------- --------- Total.......................... $30,343 $ 34,423 $ 35,775 ========= ========= ========= Housing interest as a percentage of sale of home revenues amounted to 3.1%, 3.5%, and 4.0% for the years ended October 31, 1999, 1998, and 1997, respectively. The decrease in the percentage for the years ended October 31, 1999 and 1998 was primarily due to decreased levels of debt during the year compared to the prior year. This decrease is the result of management's goal to deleverage the Company, and debt reductions from cash generated by the liquidation of investment properties and earnings. Other Operations Other operations consist primarily of miscellaneous residential housing operations, amortization of senior and subordinated note issuance expenses, earnout payments from homebuilding company acquisitions and corporate owned life insurance loan interest. Total Taxes Total taxes as a percentage of income before income taxes amounted to 38.9% and 36.7% for the years ended October 31, 1999 and 1998, respectively. Net tax benefits as a percentage of the loss before income taxes amounted to 42.5% for the year ended October 31, 1997. Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years 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. (See "Notes to Consolidated Financial Statements - Note 10" for an additional explanation of taxes.) Extraordinary Loss On June 7, 1999, we redeemed $45,449,000 of our outstanding 11 1/4% Subordinated Notes due 2002 at an average price of 101.875% of par which resulted in an extraordinary loss of $868,000 net of income taxes of $468,000. Year 2000 Issues We have fully implemented a plan to resolve our information technology ("IT") and non-IT system year 2000 issues. We designated a full-time year 2000 project leader, engaged consultants to review and evaluate our plan, completed the identification of our IT and non-IT noncompliant systems and evaluated subcontractors' and suppliers' state of readiness. Our plan prioritized our efforts on our software systems and computer hardware equipment. We believe we have upgraded, fixed or retired 100% of our critical noncompliant systems. All other IT and non-IT systems are not considered critical to our operations, and if noncapable for year 2000, would only be an inconvenience. The cost of implementing the plan did not have a material impact on earnings in fiscal 1999 and was funded through operations. We are concerned about the readiness of our subcontractors and suppliers. We have communicated with 100% of these third parties. We have been informed that substantially all of the subcontractors and suppliers are year 2000 compliant. Any third parties whose lack of readiness as to year 2000 issues would have an impact on our operations are being replaced. In most cases, we use more than one subcontractor and supplier so finding replacements was not difficult. We believe we have solved all significant year 2000 issues. We do not believe we will have material lost revenues due to the year 2000 issues. Based on the above, we did not develop a worst-case year 2000 scenario. However, we have a year 2000 contingency plan which, if necessary, is ready to implement. Inflation Inflation has a long-term effect on us because increasing costs of land, materials and labor result in increasing sales 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 inflationary risk faced by the housing industry generally is that rising housing costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers. In recent years, in the price ranges in which we sell homes, 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. Item 7(A) - 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 FNMA, FHLMC, GNMA securities and 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 tables set forth as of October 31, 1999 and 1998, our long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value ("FMV"). There have been no significant changes in our market risk from October 31, 1998 to October 31, 1999. As of October 31, 1999 for the Year Ended October 31, -------------------------------------- FMV @ 2000 2001 2002 2003 2004 Thereafter Total 10/31/99 ------ ------ ------ ------ ------ ---------- -------- --------- (Dollars in Thousands) Long Term Debt(1): Fixed Rate.......$4,999 $ 132 $ 138 $2,585 $ 74 $250,613 $258,541 $246,164 Average interest rate........... 8.80% 7.60% 7.63% 7.04% 8.38% 9.37% 9.34% -- Variable Rate....$ 600 $ 927 -- -- -- -- $ 1,527 $ 1,527 Average interest rate........... 6.00% 8.75% -- -- -- -- 7.67% -- As of October 31, 1998 for the Year Ended October 31, -------------------------------------- FMV @ 1999 2000 2001 2002 2003 Thereafter Total 10/31/98 ------ ------ ------ ------ ------ ---------- -------- --------- (Dollars in Thousands) Long Term Debt(1): Fixed Rate.......$ 115 $ 119 $ 132 $50,804 $2,581 $100,685 $154,436 $145,186 Average interest rate........... 7.59% 7.62% 7.60% 10.70% 7.04% 9.74% 10.01% -- Variable Rate....$1,932 $ 600 926 $ -- $ -- $ -- $ 3,458 $ 3,458 Average interest rate........... 9.22% 8.00% 8.64% -- -- -- 8.85% -- (1) Does not include bonds collateralized by mortgages receivable. Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements of Hovnanian Enterprises, Inc. and its consolidated subsidiaries are set forth herein beginning on Page F-1. Item 9 - CHANGES IN OR DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. During the years ended October 31, 1999, 1998, and 1997, there have not been any changes in or disagreements with accountants on accounting and financial disclosure. PART III Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by Item l0, except as set forth below under the heading "Executive Officers of the Registrant", is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation l4A, in connection with the Company's annual meeting of shareholders to be held on March 16, 2000, which will involve the election of directors. Executive Officers of the Registrant Our executive officers are listed below and brief summaries of their business experience and certain other information with respect to them are set forth following the table. Each executive officer holds such office for a one year term. Year Started Name Age Position With Company Kevork S. Hovnanian 76 Chairman of the Board and l967 Director of the Company. Ara K. Hovnanian 42 Chief Executive Officer, President 1979 and Director of the Company. Paul W. Buchanan 49 Senior Vice President-Corporate l981 Controller and Director of the Company. William L. Carpitella 45 Senior Vice President, Organizational Development 1997 Peter S. Reinhart 49 Senior Vice President and General 1978 Counsel and Director of the Company. John D. Roberts 37 Vice President Process Redesign 1998 J. Larry Sorsby 44 Senior Vice President, Treasurer 1988 and Chief Financial Officer and Director of the Company Mr. K. Hovnanian founded the predecessor of the Company in l959 (Hovnanian Brothers, Inc.) and has served as Chairman of the Board of the Company since its incorporation in l967. Mr. K. Hovnanian was also Chief Executive Officer of the Company from 1967 to July 1997. Mr. A. Hovnanian was appointed President in April 1988, after serving as Executive Vice President from March 1983. He has also served as Chief Executive Officer since July 1997. Mr. A. Hovnanian was elected a Director of the Company in December l98l. Mr. A. Hovnanian is the son of Mr. K. Hovnanian. Mr. Buchanan has been Senior Vice President-Corporate Controller since May l990. Mr. Buchanan was elected a Director of the Company in March l982. Mr. Carpitella joined the Company in September 1997 as Senior Vice President, Organizational Development. Prior to joining the Company Mr. Carpitella was Vice President, Human Resources for a division of Pulte Home Corp. from April 1995 to August 1997. From February 1992 Mr. Carpitella was Vice President Human Resources for Geo. J. Ball Co. Mr. Reinhart has been Senior Vice President and General Counsel since April 1985. Mr. Reinhart was elected a Director of the Company in December l98l. Mr. Roberts joined the Company in January 1998 as Vice President Process Redesign. Prior to joining the Company Mr. Roberts worked for Deloitte & Touche Consulting Group ("D & T") from August 1993. At D & T Mr. Roberts was Senior Consultant until August 1994, then Manager until August 1995 and then Senior Manager until he joined the Company. Mr. Sorsby was appointed Senior Vice President, Treasurer and Chief Financial Officer of the Company in February, 1996 after serving as Senior Vice President-Finance/Treasurer of the Company since March 1991. Item 11 - EXECUTIVE COMPENSATION The information called for by Item ll is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation l4A, in connection with our annual meeting of shareholders to be held on March 16, 2000, which will involve the election of directors. Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item l2 is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation l4A, in connection with our annual meeting of shareholders to be held on March 16, 2000, which will involve the election of directors. Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Item l3 is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation l4A, in connection with our annual meeting of shareholders to be held on March 16, 2000, which will involve the election of directors. PART IV Item 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page Financial Statements: Index to Consolidated Financial Statements....................... F-1 Report of Independent Auditors................................... F-2 Consolidated Balance Sheets at October 31, 1999 and 1998......... F-3 Consolidated Statements of Operations for the years ended October 31, 1999, 1998, and 1997.............................. F-5 Consolidated Statements of Stockholders' Equity for the years ended October 31, 1999, 1998, and 1997........................ F-6 Consolidated Statements of Cash Flows for the years ended October 31, 1999, 1998, and 1997.............................. F-7 Notes to Consolidated Financial Statements....................... F-8 No schedules are applicable to us or have been omitted because the required information is included in the financial statements or notes thereto. Exhibits: 3(a) Certificate of Incorporation of the Registrant.(1) 3(b) Certificate of Amendment of Certificate of Incorporation of the Registrant.(6) 3(c) Bylaws of the Registrant.(6) 4(a) Specimen Class A Common Stock Certificate.(6) 4(b) Specimen Class B Common Stock Certificate.(6) 4(c) Indenture dated as of May 28, 1993, relating to 9 3/4% Subordinated Notes between Registrant and First Fidelity Bank, National Association, New Jersey, as Trustee, including form of 9 3/4% Subordinated Note due 2005.(4) 4(d) Indenture dated as of May 4, 1999, relating to 9 1/8% Senior Notes between the Registrant and First Fidelity Bank, including form of 9 1/8% Senior Notes due May 1, 2009.(7) 10(a) Amended and Restated Credit Agreement dated July 29, 1998 among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., certain Subsidiaries Thereof, PNC Bank, National Association, First Union National Bank, NationsBank, National Association, First National Bank of Boston, Bank of America National Trust and Savings Association, The First National Bank of Chicago, Comerica Bank, Credit Lyonnais New York Branch and Guaranty Federal F.S.B. 10(b) Amendment to the Amended and Restated Credit Agreement (Exhibit 10(a)) dated July 13, 1999 10(c) Description of Management Bonus Arrangements.(6) 10(d) Description of Savings and Investment Retirement Plan.(1) 10(e) Stock Incentive Plan (9). 10(f) Management Agreement dated August 12, 1983 for the management of properties by K. Hovnanian Investment Properties, Inc.(1) 10(g) Agreement dated July 8, 1981 between Hovnanian Properties of Atlantic County, Inc. and Kevork S. Hovnanian.(2) 10(h) Management Agreement dated December 15, 1985, for the management of properties by K. Hovnanian Investment Properties, Inc.(3) 10(i) Description of Deferred Compensation Plan.(5) 12 Ratio of Earnings to Fixed Charges 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors 27 Financial Data Schedules (1) Incorporated by reference to Exhibits to Registration Statement (No. 2-85198) on Form S-1 of the Registrant. (2) Incorporated by reference to Exhibits to Registration Statement (No. 33-46064) on Form S-3 of the Registrant. (3) Incorporated by reference to Exhibits to Annual Report on Form 10 -K for the year ended February 28, 1986 of the Registrant. (4) Incorporated by reference to Exhibits to Registration Statement (No. 33-61778) on Form S-3 of the Registrant. (5) Incorporated by reference to Exhibits to Annual Report on Form 10- K for the year ended February 28, 1990 of the Registrant. (6) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended February 28, 1994 of the Registrant. (7) Incorporated by reference to Exhibits to Registration Statement (No. 333-75939) on Form S-3 of the Registrant. (8) Incorporated by reference to Exhibits to Quarterly Report on Form 10Q for the quarter ended July 31, 1999 of the Registrant. (9) Incorporated by the Proxy Statement of the Registrant Filed on Schedule 14A dated January 15, 1999. Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended October 31, 1999. SIGNATURES Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Hovnanian Enterprises, Inc. By: /S/KEVORK S. HOVNANIAN Kevork S. Hovnanian Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of l934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated /S/KEVORK S. HOVNANIAN Chairman of The Board 1/13/00 Kevork S. Hovnanian and Director /S/ARA K. HOVNANIAN Chief Executive Officer, 1/13/00 Ara K. Hovnanian President and Director /S/PAUL W. BUCHANAN Senior Vice President 1/13/00 Paul W. Buchanan Corporate Controller and Director /S/PETERS. REINHART Senior Vice President and 1/13/00 Peter S. Reinhart General Counsel and Director /S/J. LARRY SORSBY Senior Vice President, 1/13/00 J. Larry Sorsby Treasurer, Chief Financial Officer and Director /S/WILLIAM L. CARPITELLA Senior Vice President, 1/13/00 William L. Carpitella Organizational Development HOVNANIAN ENTERPRISES, INC. Index to Consolidated Financial Statements Page Financial Statements: Independent Auditors' Report................................... F-2 Consolidated Balance Sheets as of October 31, 1999 and 1998.... F-3 Consolidated Statements of Operations for the Years Ended October 31, 1999, 1998, and 1997............................... F-5 Consolidated Statements of Stockholders' Equity for the Years Ended October 31, 1999, 1998, and 1997......................... F-6 Consolidated Statements of Cash Flows for the Years Ended October 31, 1999, 1998, and 1997............................... F-7 Notes to Consolidated Financial Statements..................... F-8 No schedules have been prepared because the required information of such schedules is not present, is not present in amounts sufficient to require submission of the schedule or because the required information is included in the financial statements and notes thereto. REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Hovnanian Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Hovnanian Enterprises, Inc. and subsidiaries as of October 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1999. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hovnanian Enterprises, Inc. and subsidiaries at October 31, 1999 and 1998 and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles. /S/Ernst & Young LLP New York, New York December 16, 1999 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) October 31, October 31, ASSETS 1999 1998 ------------ ------------ Homebuilding: Cash and cash equivalents(Note 5).............. $ 17,163 $ 13,306 ------------ ------------ Inventories - At the lower of cost or fair value (Notes 7 and 11): Sold and unsold homes and lots under development................................ 475,196 332,225 Land and land options held for future development or sale........................ 51,925 43,508 ------------ ------------ Total Inventories.......................... 527,121 375,733 ------------ ------------ Receivables, deposits, and notes (Note 12)..... 30,675 29,490 ------------ ------------ Property, plant, and equipment - net (Note 4).. 26,500 16,831 ------------ ------------ Prepaid expenses and other assets (Note 15).... 55,308 32,650 ------------ ------------ Total Homebuilding......................... 656,767 468,010 ------------ ------------ Financial Services: Cash........................................... 2,202 1,486 Mortgage loans held for sale (Note 6).......... 33,158 71,611 Other assets................................... 1,563 3,717 ------------ ------------ Total Financial Services................... 36,923 76,814 ------------ ------------ Investment Properties: Held for sale: Land and improvements (Notes 4 and 11)....... 109 17,832 Other assets................................. 556 295 Held for investment: Cash......................................... 762 Rental property - net (Note 4)............... 10,650 10,794 Other assets................................. 889 868 ------------ ------------ Total Investment Properties................ 12,204 30,551 ------------ ------------ Collateralized Mortgage Financing: Collateral for bonds payable (Note 6).......... 5,006 5,970 Other assets................................... 238 426 ------------ ------------ Total Collateralized Mortgage Financing.... 5,244 6,396 ------------ ------------ Income Taxes Receivable - Including deferred tax benefits (Note 10)............................. 1,723 7,331 ------------ ------------ Total Assets..................................... $712,861 $589,102 ============ ============ See notes to consolidated financial statements. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) October 31, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ------------ ------------ Homebuilding: Nonrecourse land mortgages (Note 7)............... $ 6,407 $ 11,846 Accounts payable and other liabilities............ 73,057 53,765 Customers' deposits (Note 5)...................... 25,647 23,857 Nonrecourse mortgages secured by operating properties (Note 7)............................. 3,662 3,770 ------------ ------------ Total Homebuilding............................ 108,773 93,238 ------------ ------------ Financial Services: Accounts payable and other liabilities............ 1,218 2,422 Mortgage warehouse line of credit (Notes 6 and 7). 30,034 66,666 ------------ ------------ Total Financial Services...................... 31,252 69,088 ------------ ------------ Investment Properties: Accounts payable and other liabilities............ 932 1,373 ------------ ------------ Total Investment Properties................... 932 1,373 ------------ ------------ Collateralized Mortgage Financing: Accounts payable and other liabilities............ 6 Bonds collateralized by mortgages receivable (Note 6)............................. 3,699 5,652 ------------ ------------ Total Collateralized Mortgage Financing....... 3,699 5,658 ------------ ------------ Notes Payable: Revolving credit agreement (Note 7)............... 70,125 68,000 Senior notes (Note 8)............................. 150,000 Subordinated notes (Note 8)....................... 100,000 145,449 Accrued interest.................................. 11,654 4,904 ------------ ------------ Total Notes Payable........................... 331,779 218,353 ------------ ------------ Total Liabilities............................. 476,435 387,710 ------------ ------------ Commitments and Contingent Liabilities (Notes 5 and 14) Stockholders' Equity (Notes 13 and 14): Preferred Stock,$.01 par value-authorized 100,000 shares; none issued Common Stock,Class A,$.01 par value-authorized 87,000,000 shares; issued 17,218,442 shares in 1999 and 15,803,297 shares in 1998 (including 2,710,274 shares in 1999 and 1,937,374 shares in 1998 held in Treasury).................................... 172 157 Common Stock,Class B,$.01 par value (convertible to Class A at time of sale) -authorized 13,000,000 shares; issued 7,997,083 shares in 1999 and 8,040,171 shares in 1998 (both years include 345,874 shares held in Treasury)....................................... 79 80 Paid in Capital................................... 45,856 34,561 Retained Earnings (Note 8)........................ 213,257 183,182 Treasury Stock - at cost.......................... (22,938) (16,588) ------------ ------------ Total Stockholders' Equity.................... 236,426 201,392 ------------ ------------ Total Liabilities and Stockholders' Equity.......... $712,861 $589,102 ============ ============ See notes to consolidated financial statements. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Data) Year Ended ------------------------------- October October October 31, 1999 31, 1998 31, 1997 --------- --------- --------- Revenues: Homebuilding: Sale of homes............................. $908,553 $895,644 $731,807 Land sales and other revenues (Note 12)... 17,409 15,411 26,983 --------- --------- --------- Total Homebuilding...................... 925,962 911,055 758,790 Financial Services.......................... 20,239 19,098 10,735 Investment Properties (Note 12)............. 1,567 11,111 13,757 Collateralized Mortgage Financing........... 519 683 854 --------- --------- --------- Total Revenues.......................... 948,287 941,947 784,136 --------- --------- --------- Expenses: Homebuilding: Cost of sales............................. 730,025 748,941 634,317 Selling, general and administrative....... 81,396 67,519 62,475 Inventory impairment loss (Note 11)....... 2,091 3,994 14,019 --------- --------- --------- Total Homebuilding...................... 813,512 820,454 710,811 --------- --------- --------- Financial Services.......................... 19,195 17,010 10,780 --------- --------- --------- Investment Properties: Operations................................ 1,772 3,395 5,909 Provision for impairment loss (Note 11)... 1,038 14,446 --------- --------- --------- Total Investment Properties............. 1,772 4,433 20,355 --------- --------- --------- Collateralized Mortgage Financing........... 504 672 878 --------- --------- --------- Corporate General and Administrative(Note 3) 28,652 21,048 15,088 --------- --------- --------- Interest.................................... 30,343 34,423 35,775 --------- --------- --------- Other operations............................ 3,692 2,615 2,573 --------- --------- --------- Total Expenses.......................... 897,670 900,655 796,260 --------- --------- --------- Income(Loss)Before Income Taxes and Extraordinary Loss.......................... 50,617 41,292 (12,124) --------- --------- --------- State and Federal Income Taxes: State (Note 10)............................. 5,093 3,572 1,796 Federal (Note 10)........................... 14,581 11,569 (6,950) --------- --------- --------- Total Taxes............................... 19,674 15,141 (5,154) --------- --------- --------- Extraordinary Loss From Extinguishment of Debt, Net of Income Taxes (Note 8).......... (868) (748) --------- --------- --------- Net Income (Loss)............................. $ 30,075 $ 25,403 $ (6,970) ========= ========= ========= Per Share Data: Basic: Income (Loss)Per Common Share Before Extraordinary Loss...................... $ 1.45 $ 1.20 $ (0.31) Extraordinary Loss........................ (.04) (.03) --------- --------- --------- Income (Loss)............................. $ 1.41 $ 1.17 $ (0.31) ========= ========= ========= Assuming Dilution: Income (Loss)Per Common Share Before Extraordinary Loss...................... $ 1.43 $ 1.19 $ (0.31) Extraordinary Loss........................ (.04) (.03) --------- --------- --------- Income (Loss)............................. $ 1.39 $ 1.16 $ (0.31) ========= ========= ========= See notes to consolidated financial statements. 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 Treasury Outstanding Amount Outstanding Amount Capital Earnings Stock Total ----------- ------ ----------- ------ ------- -------- -------- --------- Balance, October 31, 1996... 15,135,348 $ 155 7,901,705 $ 82 $33,935 $164,749 $(5,299) $ 193,622 Conversion of Class B to Class A common stock...... 146,893 1 (146,893) (1) Treasury stock purchases.... (1,184,400) (7,890) (7,890) Net Loss.................... (6,970) (6,970) ----------- ------ ----------- ------ ------- -------- --------- --------- Balance, October 31, 1997... 14,097,841 156 7,754,812 81 33,935 157,779 (13,189) 178,762 Sale of Common Stock Under Employee Stock Option Plan...................... 114,667 626 626 Conversion of Class B to Class A common stock...... 60,515 1 (60,515) (1) Treasury stock purchases.... (407,100) (3,399) (3,399) Net Income.................. 25,403 25,403 ----------- ------ ----------- ------ ------- -------- --------- --------- Balance, October 31, 1998... 13,865,923 157 7,694,297 80 34,561 183,182 (16,588) 201,392 Sale of common stock under Employee Stock Option Plan 10,000 1 58 59 Acquisitions (Note 15)...... 1,362,057 13 11,237 11,250 Conversion of Class B to Class A common stock...... 43,088 1 (43,088) (1) Treasury stock purchases.... (772,900) (6,350) (6,350) Net Income ................. 30,075 30,075 ----------- ------ ----------- ------ ------- -------- --------- --------- Balance, October 31, 1999... 14,508,168 $ 172 7,651,209 $ 79 $45,856 $213,257 $(22,938) $ 236,426 =========== ====== =========== ====== ======= ======== ========= ========= See notes to consolidated financial statements. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Year Ended ---------------------------------- October October October 31, 1999 31, 1998 31, 1997 ---------- ---------- ---------- Cash Flows From Operating Activities: Net Income (Loss)............................... $ 30,075 $ 25,403 $ (6,970) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation................................ 6,314 4,293 5,032 Loss (gain)on sale and retirement of property and assets....................... 283 (6,189) (4,760) Extraordinary loss from extinguishment of Debt net of income taxes.................. 868 748 Deferred income taxes....................... 3,056 1,987 (4,568) Impairment losses........................... 2,091 5,032 28,465 Decrease (increase) in assets: Mortgage notes receivable................. 46,012 (17,343) 4,332 Receivables, prepaids and other assets.... (9,475) 6,410 (6,830) Inventories............................... (53,592) 30,666 (48,105) Increase (decrease) in liabilities: State and Federal income taxes............ 3,020 3,651 (7,325) Customers' deposits....................... (1,269) 1,490 10,007 Interest and other accrued liabilities.... 9,203 2,235 3,726 Post development completion costs......... 3,293 4,438 (8,746) Accounts payable.......................... (4,400) 2,233 5,034 Net cash provided by (used in) ---------- ---------- ---------- operating activities.................... 35,479 65,054 (30,708) ---------- ---------- ---------- Cash Flows From Investing Activities: Net proceeds from sale of property and assets... 19,094 30,436 14,997 Purchase of property............................ (13,381) (3,135) (3,156) Acquisition of homebuilding companies........... (12,249) Investment in and advances to unconsolidated affiliates.................................... 249 243 195 Investment in income producing properties....... (843) (3,844) (11,099) Net cash provided by (used in) ---------- ---------- ---------- investing activities.................... (7,130) 23,700 937 ---------- ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes............... 850,320 632,531 1,139,780 Proceeds from senior debt....................... 150,000 Principal payments on mortgages and notes..... (972,265) (668,987) (1,101,969) Principal payments on subordinated debt......... (46,302) (45,284) (10,000) Purchase of treasury stock...................... (6,350) (3,399) (7,890) Proceeds from sale of stock..................... 59 626 Net cash provided by (used in) ---------- ---------- ---------- financing activities.................... (24,538) (84,513) 19,921 ---------- ---------- ---------- Net Increase (Decrease) In Cash................... 3,811 4,241 (9,850) Cash and Cash Equivalent Balance, Beginning Of Year......................................... 15,554 11,313 21,163 ---------- ---------- ---------- Cash and Cash Equivalent Balance, End Of Year..... $ 19,365 $ 15,554 $ 11,313 ========== ========== ========== Supplemental Disclosures Of Cash Flow: Cash paid during the year for: Interest (net of amount capitalized).......... $ 23,731 $ 35,315 $ 35,869 ========== ========== ========== Income Taxes.................................. $ 16,257 $ 12,303 $ 6,809 ========== ========== ========== Non-cash Investing and Finance Activities: Debt assumed on sale of property and assets..... $ 13,530 ========== Stock issued for acquisitions..................... $ 11,250 ========== See notes to consolidated financial statements HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 1999, 1998, AND 1997. BASIS OF PRESENTATION AND SEGMENT INFORMATION Basis of Presentation - The accompanying consolidated financial statements include our accounts and all wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions. Segment Information - Statement of Financial Accounting Standards No. 131 ("FAS 131") "Disclosures About Segments of an Enterprise and Related Information" established new standards for segment reporting based on the way management organizes segments within a company for making operating decisions and assessing performance. Our financial reporting segments consist of homebuilding, financial services, collateralized mortgage financing, and corporate. Our homebuilding operations comprise the most substantial part of our business, with approximately 97% of consolidated revenues in years ended October 31, 1999, 1998, and 1997 contributed by the homebuilding operations. We are a Delaware corporation, currently building and selling homes in more than 110 new home communities in New Jersey, Pennsylvania, New York, Florida, North Carolina, Virginia, California, Texas and Poland. We offer a wide variety of homes that are designed to appeal to first time buyers, first and second time move up buyers, luxury buyers, active adult buyers and empty nesters. Our financial services operations provide mortgage banking and title services to the homebuilding operations' customers and third parties. We do not retain or service the mortgages that we originate but rather, sell the mortgages and related servicing rights to investors. Corporate primarily includes the operations of our corporate office whose primary purpose is to provide information services, human resources, management reporting, training, cash management, internal audit, risk management, and administration of process redesign, quality and safety. Assets, liabilities, revenues and expenses of our reportable segments are separately included in the consolidated balance sheets and consolidated statements of operations. 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Business Combinations - When we make an acquisition of another company, we use the purchase method of accounting in accordance with Accounting Principal Board Opinion 16 ("APB 16") "Business Combinations". Under APB 16 we record as our cost the acquired assets less liabilities assumed. Any difference between the cost of an acquired company and the sum of the fair values of tangible and identified intangible assets less liabilities is recorded as goodwill. The reported income of an acquired company includes the operations of the acquired company after acquisition, based on the acquisition costs. Income Recognition - Income from sales is recorded when title is conveyed to the buyer, subject to the buyer's financial commitment being sufficient to provide economic substance to the transaction. Cash and Cash Equivalents - Cash and cash equivalents include cash deposited in checking accounts, overnight repurchase agreements, certificates of deposit, Treasury bills and government money market funds with original maturities of 90 days or less when purchased. Fair Value of Financial Instruments - The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Our financial instruments consist of cash equivalents, mortgages and notes receivable, mortgages and notes payable, and the senior and subordinated notes payable. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded values. Inventories - For inventories of communities under development, a loss is recorded when events and circumstances indicate impairment and the undiscounted future cash flows generated are less than the related carrying amounts. The impairment loss is based on expected revenue, cost to complete including interest, and selling costs. Inventories and long-lived assets held for sale are recorded at the lower of cost or fair value less selling costs. Fair value is defined in Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land, land development, and common facility costs in a community are amortized equally based upon the number of homes to be constructed in each housing community. Interest costs related to properties in progress are capitalized during the construction period and expensed along with the associated cost of sales as the related inventories are sold (see Note 7). The cost of land options is capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations when we determine we will not exercise the option. Property - Historically, our rental operations arose primarily from rental of commercial properties. All commercial rental property has been liquidated as of October 31, 1998. At October 31, 1999 we own two senior residential rental properties. Intangible Assets - Any intangible assets acquired by us are amortized on a straight line basis over its useful life. Goodwill resulting from company acquisitions during the year ended October 31, 1999 is being amortized over 10 years and reported in the consolidated statements of income as "Other Operations". During the years ended October 31, 1999, 1998, and 1997, goodwill amortization amounted to $261,000, $134,000, and $134,000, respectively. The carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the estimated undiscounted cash flows of the company acquired over the remaining amortization period, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows. In addition, we assess long-lived assets for impairment under FAS 121. Under those rules, goodwill associated with assets acquired in a purchase business combination is included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. 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. Advertising Costs - Advertising costs are treated as period costs and expensed as incurred. During the years ended October 31, 1999, 1998, and 1997, advertising costs expensed amounted to $11,995,000, $10,531,000, and $12,559,000, respectively. Deferred Income Tax - Deferred income taxes or income tax benefits are provided for temporary differences between amounts recorded for financial reporting and for income tax purposes. Common Stock - Each share of Class A Common Stock entitles its holder to one vote per share and each share of Class B Common Stock entitles its holder to ten votes per share. The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B Common Stock. If a shareholder desires to sell shares of Class B Common Stock, such stock must be converted into shares of Class A Common Stock. On December 10, 1998, our Board of Directors approved an increase in the stock repurchase plan to purchase up to 3 million shares. The 3 million shares equals 13.0% of our total and outstanding shares as of December 16, 1996 when the initial repurchase plan was approved by the Board. As of October 31, 1999, 2,364,400 shares have been repurchased under this program. Depreciation - The straight-line method is used for both financial and tax reporting purposes for all assets. Prepaid Expenses - Prepaid expenses which relate to specific housing communities (model setup, architectural fees, homeowner warranty, etc.) are amortized to costs of sales as the applicable inventories are sold. All other prepaid expenses are amortized over a specific time period or as used and charged to overhead expense. Stock Options - Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" establishes a fair value-based method of accounting for stock-based compensation plans, including stock options. Registrants may elect to continue accounting for stock option plans under Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," but are required to provide proforma net income and earnings per share information "as if" the new fair value approach had been adopted. We intend to continue accounting for our stock option plan under APB 25. Under APB 25, no compensation expense was recognized because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant (see Note 13). Per Share Calculations - Statement of Financial Accounting Standards No. 128 ("FAS 128") "Earnings Per Share" requires the presentation of basic earnings per share and diluted earnings per share, and is effective for annual periods ending after December 15, 1997. We adopted FAS 128 in the year ended October 31, 1998. Basic earnings per common share is computed using the weighted average number of shares outstanding and is the same calculation as reported in prior years. Basic weighted average shares outstanding at October 31, 1999, 1998, and 1997 amounted to 21,404,473 shares, 21,781,105 shares, and 22,409,063 shares, respectively. Diluted earnings per common share has been presented for prior years and is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock of 208,000, 235,000, and 97,000 for the years ended October 31, 1999, 1998, and 1997, respectively. Accounting Pronouncements Not Yet Adopted - In March 1998, the AICPA issued SOP-98-1, Accounting For the Costs of Computer Software Developed For or Obtained For Internal Use. We plan to adopt the SOP on November 1, 1999. The SOP will require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. We currently expense such costs as incurred. We have not yet determined the impact on net income or earnings per share in connection with the adoption of SOP 98-1. Reclassifications - Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform to the 1999 presentation. 3. CORPORATE INITIATIVES We have embarked on long term improvement initiatives of total quality, process redesign, and training. Included in Corporate General and Administrative is $7,502,000, $3,756,000, and $2,216,000 for the years ended October 31, 1999, 1998, and 1997, respectively, related to such initiatives. 4. PROPERTY Homebuilding property, plant, and equipment consists of land, land improvements, buildings, building improvements, furniture and equipment used to conduct day to day business. Homebuilding accumulated depreciation related to these assets at October 31, 1999 and October 31, 1998 amounted to $19,550,000 and $15,088,000, respectively. We owned and held for sale three parcels of commercial land at October 31, 1998. During the three months ended January 31, 1999 we sold the three land parcels for a total sales price of $20.8 million and recorded a loss before income taxes of $0.5 million. At October 31, 1999 all commercial facilities and land (except for one small parcel) have been liquidated. We are retaining two senior citizen residential rental communities. Accumulated depreciation on rental property at October 31, 1999 and October 31, 1998 amounted to $2,211,000 and $1,826,000, respectively. 5. ESCROW CASH We hold escrow cash amounting to $5,578,000 and $4,775,000 at October 31, 1999 and October 31, 1998, respectively, which primarily represents customers' deposits which are restricted from use by us. We are able to release escrow cash by pledging letters of credit. At October 31, 1999 and October 31, 1998, $10,000,000 and $14,000,000 was released from escrow and letters of credit were pledged, respectively. Escrow cash accounts are substantially invested in short-term certificates of deposit or time deposits. 6. MORTGAGES AND NOTES RECEIVABLE Our wholly-owned mortgage banking subsidiary originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary mortgage market, servicing released, or prior to February 28, 1987 pledged against, collateralized mortgage obligations ("CMOs"). At October 31, 1999 and October 31, 1998, respectively, $32,844,000 and $71,002,000 of such mortgages were pledged against our mortgage warehouse line (see "Notes to Consolidated Financial Statements - Note 7"). We may incur risk with respect to mortgages that are delinquent and not pledged against CMOs, but only to the extent the losses are not covered by mortgage insurance or resale value of the home. Historically, we have incurred minimal credit losses. The mortgage loans held for sale are carried at the lower of cost or market value, determined on an aggregate basis. There was no valuation adjustment at October 31, 1999. 7. MORTGAGES AND NOTES PAYABLE Substantially all of the nonrecourse land mortgages are short-term borrowings. Nonrecourse mortgages secured by operating properties are installment obligations having annual principal maturities in the following years ending October 31, of approximately $119,000 in 2000, $132,000 in 2001, $138,000 in 2002, $2,585,000 in 2003, $74,000 in 2004 and $613,000 after 2004. The interest rates on these obligations range from 7.000% to 8.375%. We have an unsecured Revolving Credit Agreement ("Agreement") with a group of banks which provides up to $275,000,000 through July 2002. Interest is payable monthly and at various rates of either the prime rate or LIBOR plus 1.45%. In addition, we pay a fee equal to .325% per annum on the weighted average unused portion of the line. Interest costs incurred, expensed and capitalized were: Year Ended ---------------------------- October October October 31, 1999 31, 1998 31, 1997 -------- -------- -------- (Dollars in Thousands) Interest incurred (1): Residential(3)................. $23,426 $26,675 $29,469 Commercial(4).................. 1,168 2,272 5,308 ------- ------- ------- Total incurred................. $24,594 $28,947 $34,777 ======= ======= ======= Interest expensed: Residential(3)................. $29,175 $32,151 $30,467 Commercial(4).................. 1,168 2,272 5,308 ------- ------- ------- Total expensed................. $30,343 $34,423 $35,775 ======= ======= ======= Interest capitalized at beginning of year.............. $25,545 $35,950 $39,152 Plus acquired entity interest.... 3,397 Plus interest incurred........... 24,594 28,947 34,777 Less interest expensed........... 30,343 34,423 35,775 Less impairment write-off........ 460 1,220 Less sale of assets.............. 1,227 4,469 984 ------- ------- ------- Interest capitalized at end of year.................... $21,966 $25,545 $35,950 ======= ======= ======= Interest capitalized at end of year: Residential(3)................. $21,516 $23,868 $29,804 Commercial(2).................. 450 1,677 6,146 ------- ------- ------- Total interest capitalized................... $21,966 $25,545 $35,950 ======= ======= ======= 1) Data does not include interest incurred by our mortgage and finance subsidiaries. (2) Data does not include a reduction for depreciation. (3) Represents acquisition interest for construction, land and development costs which is charged to interest expense when land is not under active development and when homes are delivered. (4) Represents interest allocated to or incurred on long term debt for investment properties and charged to interest expense. Average interest rates and average balances outstanding for short-term debt are as follows: October October October 31, 1999 31, 1998 31, 1997 -------- -------- -------- (Dollars In Thousands) Average outstanding borrowings................. $ 55,495 $ 98,090 $133,760 Average interest rate during period..................... 9.2% 8.4% 8.2% Average interest rate at end of period(1)............... 7.2% 6.9% 7.8% Maximum outstanding at any month end.................. $117,085 $125,325 $184,550 (1) Average interest rate at the end of the period excludes any charges on unused loan balances. In addition, we have a secured mortgage loan warehouse agreement with a group of banks which provides up to $100,000,000 through June 27, 2000. Interest is payable monthly and at various rates. The interest rate at October 31, 1999 was 6.4%. 8. SENIOR AND SUBORDINATED NOTES On April 29, 1992, we issued $100,000,000 principal amount of 11 1/4% Subordinated Notes due April 15, 2002. In October 1998, we redeemed $44,551,000 principal amount at an average price of 101.6% of par. The funds were provided by the revolving credit agreement and resulted in an extraordinary loss of $748,000 net of an income tax benefit of $403,000. In June 1999, we redeemed the remaining $45,449,000 principal amount at an average price of 101.875% of par. The funds for this redemption were provided by the issuance of Senior Notes and resulted in an extraordinary loss of $868,000 net of an income tax benefit of $468,000. On June 7, 1993, we issued $100,000,000 principal amount of 9 3/4% Subordinated Notes due June 1, 2005. Interest is payable semi-annually. The notes are redeemable in whole or in part at our option, initially at 104.875% of their principal amount on or after June 1, 1999 and reducing to 100% of their principal amount on or after June 1, 2002. On May 4, 1999, we issued $150,000,000 principal amount of 9 1/8% Senior Notes due May 1, 2009. Interest is payable semi-annually. The notes are redeemable in whole or in part at our option, initially at 104.563% of their principal amount on or after May 1, 2004 and reducing to 100% of their principal amount on or after May 1, 2007. The indentures relating to the Senior and Subordinated Notes and the Revolving Credit Agreement contain restrictions on the payment of cash dividends. At October 31, 1999, $35,415,000 of retained earnings were free of such restrictions. The fair value of both the Senior Notes and Subordinated Notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. The fair value of the Senior Notes and Subordinated Notes is estimated at $143,250,000 and $94,500,000, respectively, as of October 31, 1999. 9. RETIREMENT PLAN In December 1982, we established a defined contribution savings and investment retirement plan. Under such plan there are no prior service costs. All associates are eligible to participate in the retirement plan and employer contributions are based on a percentage of associate contributions. Plan costs charged to operations amount to $1,976,000, $1,523,000, and $1,520,000 for the years ended October 31, 1999, 1998, and 1997, respectively. 10. INCOME TAXES Income Taxes payable (receivable) including deferred benefits, consists of the following: October October 31, 1999 31, 1998 --------- --------- (In Thousands) State income taxes: Current.......................... $ 437 $ 2,897 Deferred......................... (758) (1,495) Federal income taxes: Current.......................... 4,311 36 Deferred......................... (5,713) (8,769) --------- --------- Total.......................... $ (1,723) $ (7,331) ========= ========= The provision for income taxes is composed of the following charges (benefits): Year Ended ----------------------------------- October October October 31, 1999 31, 1998 31, 1997 --------- --------- --------- (In Thousands) Current income tax expense: Federal(1)....................... $ 13,253 $ 9,177 $ (2,381) State(2)......................... 4,954 3,484 2,051 --------- --------- --------- 18,207 12,661 (330) --------- --------- --------- Deferred income tax expense: Federal.......................... 860 1,989 (4,569) State............................ 139 88 (255) --------- --------- --------- 999 2,077 (4,824) --------- --------- --------- Total.......................... $ 19,206 $ 14,738 $ (5,154) ========= ========= ========= (1) The current federal income tax expense includes a tax benefit of $468,000 and $403,000 in the years ended October 31, 1999 and 1998, respectively, relating tothe loss on the redemption of Subordinated Notes that was reported as an extraordinary item in the "Statement of Operations." (2) The current state income tax expense is net of the use of state loss carryforwards amounting to $5,860,000, $8,495,000, and $13,439,000 for the years ended October 31, 1999, 1998, and 1997. The deferred tax liabilities or assets have been recognized in the consolidated balance sheets due to temporary differences as follows: October October 31, 1999 31, 1998 -------- --------- (In Thousands) Deferred tax assets: Deferred income...................... $ 40 $ 40 Maintenance guarantee reserves....... 711 701 Provision to reduce inventory to net realizable value............... -- 136 Inventory impairment loss............ 2,545 6,077 Uniform capitalization of overhead... 3,365 2,967 Post development completion costs.... 4,238 1,379 State net operating loss carryforwards...................... 29,440 27,205 Other................................ 1,378 843 -------- --------- Total.............................. 41,717 39,348 Valuation allowance(2)............... (29,440) (27,205) -------- --------- Deferred tax assets.................. 12,277 12,143 -------- --------- Deferred tax liabilities: Deferred interest.................... 31 31 Installment sales.................... 137 137 Accelerated depreciation............. 2,916 1,711 Acquisition goodwill................. 2,722 -- -------- --------- Total............................... 5,806 1,879 -------- --------- Net deferred tax assets................ $ 6,471 $ 10,264 ======== ========= (3) The net change in the valuation allowance of $2,235,000 results from an increase in the separate company state net operating losses that may not be fully utilized. The effective tax rates varied from the expected rate. The sources of these differences were as follows: Year Ended ------------------------------ October October October 31, 1999 31, 1998 31, 1997 -------- -------- -------- Computed "expected" tax rate...... 35.0 % 35.0 % (35.0)% State income taxes, net of Federal income tax benefit.............. 6.5 % 6.0 % 11.6 % Company owned life insurance...... (.1)% (1.6)% (6.2)% Low income housing tax credit..... (2.8)% (3.4)% (11.2)% Other............................. .4 % .7 % (1.9)% -------- -------- -------- Effective tax rate................ 39.0 % 36.7 % (42.7)% ======== ======== ======== We have state net operating loss carryforwards for financial reporting and tax purposes of $359,000,000 due to expire between the years October 31, 2000 and October 31, 2014. 11. REDUCTION OF INVENTORY TO FAIR VALUE In accordance with FAS 121, we record impairment losses on inventories related to communities under development when events and circumstances indicate that they may be impaired and the undiscounted cashflows estimated to be generated by those assets are less than their related carrying amounts. As of October 31, 1998 and 1997, inventory with a carrying amount of $3,077,000 and $33,143,000, respectively, was written down by $353,000 and $9,258,000, respectively, to its fair value. This was based on our evaluation of the expected revenue, cost to complete including interest and selling cost. The writedown during the year ended October 31, 1998 was attributed to one community in Florida where homes are being discounted to accelerate sales. The writedowns during the year ended October 31, 1997 were attributable to numerous communities in Florida after we decided to reduce our investment in that state and two communities in New Jersey resulting from a product type change and unforeseen development costs. Also in accordance with FAS 121, we record impairment losses on inventories and long-lived assets held for sale when the related carrying amount exceeds the fair value less the selling cost. As of October 31, 1999, 1998 and 1997, inventory and commercial properties with a carrying amount of $4,539,000, $4,629,000 and $32,008,000, respectively, was written down by $1,801,000, $2,588,000 and $12,690,000, respectively, to its fair value. The writedowns during the year ended October 31, 1999 were attributed to one land parcel in Florida and two residential communities in North Carolina. The Florida land parcel was written down based on recent purchase offers. The communities were written down based on our decision to discontinue selling homes and offer the remaining lots for sale. The writedowns during the year ended October 31, 1998 were attributed to one parcel of land being sold as lots and a commercial retail center parcel of land which incurred higher land development costs, both in New Jersey. The writedowns during the year ended October 31, 1997 were attributable to four residential parcels of land in Florida, one residential parcel of land in New Jersey, one multi-use commercial parcel of land in New Jersey and two Florida commercial facilities with expansion land attached to one facility. During the year ended October 31, 1998, when these commercial facilities were liquidated, we recovered the carrying value. During the years ended October 31, 1999, 1998 and 1997, we recovered the carrying value or recognized nominal losses on the land held for sale which was subsequently liquidated. The total aggregate impairment losses, which are presented in the consolidated statements of operations, on the inventory held for development and the land or commercial facilities held for sale were $1,801,000, $2,941,000, and $21,948,000 for the years ended October 31, 1999, 1998 and 1997, respectively. On the statement of operations the lines entitled "Homebuilding - Inventory impairment loss" and "Investment Properties - Provision for impairment loss" also include writeoffs of options including approval, engineering and capitalized interest costs. During the year ended October 31, 1999 the writeoffs amounted to $290,000 and zero, respectively. During the year ended October 31, 1998, the writeoffs amounted to $2,091,000 and zero, respectively. During the year ended October 31, 1997, the writeoffs amounted to $4,761,000 and $1,756,000, respectively. During 1999 we did not exercise an option because the community's proforma profitability did not produce an adequate return on investment commensurate with the risk. During 1998, we did not exercise three residential options because of changes in local market conditions and difficulties in obtaining government approvals. During 1997, we decided not to exercise three residential options due to environmental problems or the property's proforma did not produce an adequate return on investment commensurate with the risk and one commercial property option because an anchor tenant with an acceptable credit rating could not be found. 12. TRANSACTIONS WITH RELATED PARTIES Our Board of Directors has adopted a general policy providing that it will not make loans to our officers or directors or their relatives at an interest rate less than the interest rate at the date of the loan on six month U.S. Treasury Bills, that the aggregate of such loans will not exceed $3,000,000 at any one time, and that such loans will be made only with the approval of the members of our Board of Directors who have no interest in the transaction. At October 31, 1999 and 1998 included in receivables, deposits and notes are related party receivables from officers and directors amounted to $2,718,000 and $2,117,000, respectively. Interest income from these loans for October 31, 1999, 1998, and 1997 amounted to $108,000, $97,000, and $100,000, respectively. We provide property management services to various limited partnerships including one partnership in which Mr. A. Hovnanian, our Chief Executive Officer, President and a Director, is a general partner, and members of his family and certain officers and directors are limited partners. During the years ended October 31, 1999, 1998, and 1997 we received $80,000, $67,000, and $76,000, respectively, in fees for such management services. At October 31, 1999 and 1998, no amounts were due us by these partnerships. 13. STOCK PLANS We have a stock option plan for certain officers and key employees. Options are granted by a Committee appointed by the Board of Directors. The exercise price of all stock options must be at least equal to the fair market value of the underlying shares on the date of the grant. Options granted prior to May 14, 1998 vest in three equal installments on the first, second and third anniversaries of the date of the grant. Options granted on or after May 14, 1998 vest in four equal installments on the third, fourth, fifth and sixth anniversaries of the date of the grant. All options expire ten years after the date of the grant. In addition, during the years ended October 31, 1999 and 1997 each of the three outside directors of the Company were granted options to purchase 5,000 shares at the same price and terms as those granted to officers and key employees. Stock option transactions are summarized as follows: Weighted Weighted Weighted Average Average Average Fair Fair Fair Value (1) Value (1) Value (1) And And And October Exercise October Exercise October Exercise 31, 1999 Price 31, 1998 Price 31, 1997 Price --------- -------- --------- -------- --------- -------- Options outstanding at beginning of period. 1,415,000 $8.13 1,336,500 $7.83 1,156,000 $8.04 Granted............ 171,000 $7.87 291,500 $9.09 190,500 $6.47 Exercised.......... 10,000 $5.81 114,667 $5.45 Forfeited.......... 98,333 $9.98 10,000 $5.81 --------- --------- --------- Options outstanding at end of period....... 1,576,000 $8.29 1,415,000 $8.13 1,336,500 $7.83 ========= ========= ========= Options exercisable at end of period....... 1,106,666 1,013,166 1,069,333 Price range of options $5.13- $5.13- $5.13- outstanding......... $11.50 $11.50 $11.50 Weighted-average remaining contractual life................ 5.0 yrs. 5.4 yrs. 5.4 yrs. (1) Fair value of options at grant date approximate exercise price. Pro forma information regarding net income and earnings per share is required under the fair value method of Financial Accounting Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation" and is to be calculated as if we had accounted for our stock options under the fair value method of FAS 123. The fair value for these options is established at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997: risk- free interest rate of 6.4%, 4.5% and 5.8%, respectively; divided yield of zero; volatility factor of the expected market price of our common stock of 0.41, 0.46 and 0.47, respectively; and a weighted-average expected life of the option of 7.7, 7.5 and 7.0 years, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and are not likely to be representative of the effects on reported net income for future years, if applicable. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information follows (in thousands except for earnings per share information): Year Ended ----------------------------------- October October October 31, 1999 31, 1998 31, 1997 ---------- ---------- ----------- Pro forma net income (loss)............. $ 29,851 $ 25,107 $ (7,131) ========== ========== =========== Pro forma basic earnings (loss) per share............................. $ 1.39 $ 1.15 $ (0.32) ========== ========== =========== Pro forma diluted earnings (loss) per share............................. $ 1.38 $ 1.14 $ (0.32) ========== ========== =========== For the year ended October 31, 1999, we modified our bonus plan for certain associates. A portion of their bonus will be paid by issuing a deferred right to receive our Class A Common Stock. The number of shares will be calculated by dividing the portion of the bonus subject to the deferred right award by our stock price on the date the bonus is earned. 25% of the deferred right award will vest, and shares will be issued, one year after the year end and then 25% a year for the next three years. For the year ended October 31, 1999, approximately 200,000 deferred rights were awarded in lieu of $1,534,000 of bonus payments. 14. COMMITMENTS AND CONTINGENT LIABILITIES We are involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on us. We were involved in an action resulting from the non-performance by a land owner (the "Defendant") to sell real property to us. We entered into a Settlement Agreement and Mutual Release ("SAMR") relating to this action. Pursuant to the terms of the SAMR, the Defendant stipulated to a judgement in our favor in the amount of $3,535,349, which would result in a gain amounting to approximately $2,500,000. The Defendant also granted us an option to acquire the real property which was the subject of the action at a specified price in satisfaction of the judgement. In the event we do not exercise the option, we may enforce the judgement against such real property and certain other assets of the Defendant subsequent to June 30, 2000. We have not reflected this settlement in our financial statements as of October 31, 1999. As of October 31, 1999 and 1998, respectively, we are obligated under various performance letters of credit amounting to $4,091,000 and $6,934,000. (See Note 5) 15. ACQUISITIONS On August 7, 1999 we acquired the Matzel and Mumford Organization, Inc. ("M & M"), a New Jersey homebuilder and its related entities. On October 1, 1999 we acquired the Goodman Family of Builders, L.P. ("Goodman"), a Texas homebuilder and its related entities. The combined initial purchase price for both acquisitions was approximately $21,200,000 in cash and 1,845,359 shares of our Class A Common Stock at a weighted average share price of $7.18, of which 483,302 shares are being held in escrow (and thus not reported as issued and outstanding at October 31, 1999) for pre-acquisition contingencies. At the dates of the acquisition we loaned the acquired entities approximately $85,000,000 to pay off their third party debt. The Goodman Purchase Agreement provides for an additional contingent payment equal to 75% of the Goodman pretax profit, as deferred, from October 1, 1999 to December 31, 1999; this contingent payment is not included in the purchase price above but will be recorded, if any, to goodwill when the future earnings requirement has been met. In addition, both the M & M and Goodman acquisitions provide for other payments to be made generally dependent upon the achievement of certain future operating and return objectives. Both acquisitions were accounted for as a purchase with the results of operations of the acquired entities included in our consolidated financial statements as of the dates of acquisitions. The purchase prices were allocated based on estimated fair values at the dates of the acquisitions. An intangible asset equal to the excess purchase prices over the fair values of net assets acquired of $16,422,000 is recorded in prepaid expenses and other assets on the consolidated balance sheet; this amount is being amortized on a straight-line basis over a period of ten years. The following unaudited pro forma information presents a summary of our consolidated results of operations as if the acquisitions had occurred as of November 1, 1998 and 1997 with pro forma adjustments to give effect to amortization of goodwill, additional compensation, interest expense on acquisition debt and certain other adjustments, together with related income tax effects: Year Ended October 31, 1999 1998 ---------- ---------- (In Thousands Except Per Share) Total Revenues............................ $1,142,690 $1,180,964 Income Before Extraordinary Item.......... $ 37,020 $ 29,612 Net Income Before Adjusting Inventories to Fair Value at the Date of Acquisition... $ 36,152 $ 28,864 Basic Earnings Per Share.................. $1.60 $1.25 Diluted Earnings Per Share................ $1.59 $1.23 These proforma results have been prepared for comparative purposes only and include certain adjustments including additional amortization expense as a result of goodwill, additional compensation and increased interest expense on acquisition debt. Cost of sales does not include inventory fair value adjustments at November 1, 1998 and 1997 which would reduce earnings per share. They do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect on November 1, 1997 and 1998 or of future results of operations of the consolidated entities. 16. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION Summarized quarterly financial information for the years ended October 31, 1999 and 1998 is as follows: Three Months Ended ----------------------------------------- October July April January 31, 1999 31, 1999 30, 1999 31, 1999 -------- -------- -------- --------- (In Thousands Except Per Share Data) Revenues........................... $298,828 $236,671 $209,309 $203,479 Expenses........................... $284,928 $222,601 $196,840 $193,301 Income before income taxes and extraordinary loss............... $ 13,900 $ 14,070 $ 12,469 $ 10,178 State and Federal income tax....... $ 5,015 $ 5,592 $ 5,017 $ 4,050 Extraordinary loss from extinguish- ment of debt, net of income taxes $ (868) Net income......................... $ 8,885 $ 7,610 $ 7,452 $ 6,128 Per Share Data: Basic: Income per common share before extraordinary loss............. $ 0.41 $ 0.40 $ 0.35 $ 0.28 Extraordinary loss............... $ (.04) Net Income....................... $ 0.41 $ 0.36 $ 0.35 $ 0.28 Weighted average number of common shares outstanding...... 21,726 20,979 21,266 21,512 Assuming Dilution: Income per common share before extraordinary loss...... $ 0.41 $ 0.40 $ 0.35 $ 0.28 Extraordinary loss............... $ (.04) Net Income....................... $ 0.41 $ 0.36 $ 0.35 $ 0.28 Weighted average number of common shares outstanding...... 21,902 21,206 21,488 21,725 Three Months Ended ----------------------------------------- October July April January 31, 1998 31, 1998 30, 1998 31, 1998 -------- -------- -------- --------- (In Thousands Except Per Share Data) Revenues........................... $267,542 $248,125 $212,320 $213,960 Expenses........................... $255,268 $235,735 $204,710 $204,942 Income before income taxes and extraordinary loss............... $ 12,274 $ 12,390 $ 7,610 $ 9,018 State and Federal income tax....... $ 4,762 $ 4,677 $ 2,597 $ 3,105 Extraordinary loss from extinguish- ment of debt, net of income taxes $ (748) Net income......................... $ 6,764 $ 7,713 $ 5,013 $ 5,913 Per Share Data: Basic: Income per common share before extraordinary loss............. $ 0.35 $ 0.35 $ 0.23 $ 0.27 Extraordinary loss............... $ (.03) Net Income....................... $ 0.32 $ 0.35 $ 0.23 $ 0.27 Weighted average number of common shares outstanding...... 21,661 21,785 21,848 21,834 Assuming Dilution: Income per common share before extraordinary loss...... $ 0.34 $ 0.35 $ 0.23 $ 0.27 Extraordinary loss............... $ (.03) Net Income....................... $ 0.31 $ 0.35 $ 0.23 $ 0.27 Weighted average number of common shares outstanding...... 21,896 22,018 22,042 21,985 17. FINANCIAL INFORMATION OF SUBSIDIARY ISSUER AND SUBSIDIARY GUARANTORS 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") was the issuer of certain Senior Notes on May 4, 1999. The Subsidiary Issuer acts as a finance and management entity that as of October 31, 1999 had issued and outstanding $100,000,000 subordinated notes, $150,000,000 senior notes and a revolving credit agreement with an outstanding balance of $70,125,000. The subordinated notes, senior notes and the revolving credit agreement are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name and a subsidiary engaged in homebuilding activity in Poland (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the senior notes and revolving credit agreement of the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying consolidated condensed financial statements based on our understanding of the Securities and Exchange Commission's interpretation and application of Rule 3-10 of the Securities and Exchange Commission's Regulations S-X and Staff Accounting Bulletin 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information presents the results of operations, financial position and cash flows of (i) the Parent (ii) the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv) the Non-guarantor Subsidiaries of the Parent and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 1999 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- ASSETS Homebuilding: Cash and cash equivalents........$ 47 $ (5,395) $ 22,405 $ 106 $ $ 17,163 Inventories...................... 523,192 3,929 527,121 Receivables, deposits, and notes. 6 7,979 22,690 30,675 Property, plant, and equipment... 17,417 9,046 37 26,500 Prepaid expenses and other assets 14,734 40,537 37 55,308 -------- ---------- ---------- ------------ ---------- ---------- Total Homebuilding............. 53 34,735 617,870 4,109 656,767 -------- ---------- ---------- ------------ ---------- ---------- Financial Services................. (4,807) 41,730 36,923 -------- ---------- ---------- ------------ ---------- ---------- Investment Properties: Held for sale.................... 665 665 Held for investment.............. 11,539 11,539 -------- ---------- ---------- ------------ ---------- ---------- Total Investment Properties.... 12,204 12,204 -------- ---------- ---------- ------------ ---------- ---------- Collateralized Mortgage Financing.. 5,244 5,244 -------- ---------- ---------- ------------- --------- ---------- Income Taxes Receivables........... (4,303) (374) 8,562 (2,162) 1,723 -------- ---------- ---------- ------------ ---------- ---------- Investments in and amounts due to and from consolidated subsidiaries..................... 240,676 304,811 (305,942) 2,252 (241,797) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$236,426 $ 339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861 ======== ========== ========== ============ ========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities....................$ $ 7,060 $ 65,930 $ 67 $ $ 73,057 Customers' deposits.............. 25,351 296 25,647 Nonrecourse mortgages............ 10,069 10,069 -------- ---------- ---------- ------------ ---------- ---------- Total Homebuilding............. 7,060 101,350 363 108,773 -------- ---------- ---------- ------------ ---------- ---------- Financial Services................. 495 30,757 31,252 Investment Properties.............. 932 932 Collateralized Mortgage Financing.. 3,699 3,699 Notes Payable...................... 331,491 288 331,779 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities.............. 338,551 103,065 34,819 476,435 -------- ---------- ---------- ------------ ---------- ---------- STOCKHOLDERS' EQUITY............... 236,426 621 224,822 16,354 (241,797) 236,426 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$236,426 $ 339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861 ======== ========== ========== ============ ========== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 1998 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- ASSETS Homebuilding: Cash and cash equivalents........$ 14 $ (9,660) $ 21,732 $ 1,220 $ $ 13,306 Inventories...................... 373,364 2,369 375,733 Receivables, deposits, and notes. 2,618 26,872 29,490 Property, plant, and equipment... 10,180 6,627 24 16,831 Prepaid expenses and other assets 187 9,931 22,530 2 32,650 -------- --------- ---------- ------------ ---------- ---------- Total Homebuilding............. 201 13,069 451,125 3,615 468,010 -------- --------- ---------- ------------ ---------- ---------- Financial Services................. 1,461 75,353 76,814 -------- --------- ---------- ------------ ---------- ---------- Investment Properties: Held for sale.................... 18,127 18,127 Held for investment.............. 12,424 12,424 -------- --------- ---------- ------------ ---------- ---------- Total Investment Properties.... 30,551 30,551 -------- --------- ---------- ------------ ---------- ---------- Collateralized Mortgage Financing.. 6,396 6,396 Income Taxes Receivables-Including deferred tax benefits............ 41 382 8,419 (1,511) 7,331 -------- --------- ---------- ------------ ---------- ---------- Investments in and amounts due to and from consolidated subsidiaries..................... 201,150 210,648 (236,457) 7,941 (183,282) -------- --------- ---------- ------------ ---------- ---------- Total Assets.......................$201,392 $224,099 $ 255,099 $ 91,794 $(183,282) $ 589,102 ======== ========= ========== ============ ========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities....................$ $ 5,908 $ 47,636 $ 221 $ $ 53,765 Customers' deposits.............. 23,367 490 23,857 Nonrecourse mortgages............ 15,616 15,616 -------- --------- ---------- ------------ ---------- ---------- Total Homebuilding............. 5,908 86,619 711 93,238 -------- --------- ---------- ------------ ---------- ---------- Financial Services................. 677 68,411 69,088 Investment Properties.............. 1,373 1,373 Collateralized Mortgage Financing.. 5,658 5,658 Notes Payable...................... 218,182 171 218,353 -------- --------- ---------- ------------ ---------- ---------- Total Liabilities.............. 224,090 88,840 74,780 387,710 -------- --------- ---------- ------------ ---------- ---------- STOCKHOLDERS' EQUITY............... 201,392 9 166,259 17,014 (183,282) 201,392 -------- --------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$201,392 $224,099 $ 255,099 $ 91,794 $(183,282) $ 589,102 ======== ========= ========== ============ ========== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS TWELVE MONTHS ENDED OCTOBER 31, 1999 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ (159) $ 1,120 $ 922,639 $ 22,767 $ (20,405) $ 925,962 Financial Services............... 3,561 16,678 20,239 Investment Properties............ 2,757 (1,190) 1,567 Collateralized Mortgage Financing 519 519 Intercompany Charges............. 91,695 72 (91,767) Equity In Pretax Income of Consolidated Subsidiaries...... 50,776 (50,776) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 50,617 92,815 929,029 39,964 (164,138) 948,287 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 832,314 1,918 (20,720) 813,512 Financial Services............... 2,757 16,866 (428) 19,195 Investment Properties............ 2,732 (960) 1,772 Collateralized Mortgage Financing 504 504 Corporate General and Administration................. 27,415 1,468 (231) 28,652 Interest......................... 60,922 30,381 316 (61,276) 30,343 Other Operations................. 1,774 1,904 14 3,692 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 90,111 871,556 19,618 (83,615) 897,670 ------- ---------- ---------- ------------ ---------- ---------- Income (Loss) Before Income Taxes.. 50,617 2,704 57,473 20,346 (80,523) 50,617 State and Federal Income Taxes..... 19,674 917 21,453 7,771 (30,141) 19,674 Extraordinary Loss................. (868) (868) 868 (868) ------- ---------- ---------- ------------ ---------- ---------- Net Income (Loss)..................$30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075 ======= ========== ========== ============ ========== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS TWELVE MONTHS ENDED OCTOBER 31, 1998 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 1,441 $ 902,952 $ 26,210 $ (19,548) $ 911,055 Financial Services............... 3,817 15,281 19,098 Investment Properties............ 12,180 (1,069) 11,111 Collateralized Mortgage Financing 683 683 Intercompany Charges............. 84,166 3,844 (88,010) Equity In Pretax Income of Consolidated Subsidiaries...... 41,292 (41,292) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 41,292 85,607 922,793 42,174 (149,919) 941,947 ------- ---------- ---------- ------------ --------- ---------- Expenses: Homebuilding..................... 833,470 6,219 (19,235) 820,454 Financial Services............... 3,049 14,165 (204) 17,010 Investment Properties............ 5,179 (746) 4,433 Collateralized Mortgage Financing 672 672 Corporate General and Administration................. 20,388 897 (237) 21,048 Interest......................... 61,972 34,184 515 (62,248) 34,423 Other Operations................. 1,680 921 14 2,615 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 84,040 877,700 21,585 (82,670) 900,655 ------- ---------- ---------- ------------ ---------- ---------- Income (Loss) Before Income Taxes.. 41,292 1,567 45,093 20,589 (67,249) 41,292 State and Federal Income Taxes..... 15,141 (64) 16,315 7,975 (24,226) 15,141 Extraordinary Loss................. (748) (748) 748 (748) ------- ---------- ---------- ------------ ---------- ---------- Net Income (Loss)..................$25,403 $ 883 $ 28,778 $ 12,614 $ (42,275) $ 25,403 ======= ========== ========== ============ ========== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS TWELVE MONTHS ENDED OCTOBER 31, 1997 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 895 $ 754,972 $ 14,053 $ (11,130) $ 758,790 Financial Services............... 3,090 7,645 10,735 Investment Properties............ 14,822 (1,065) 13,757 Collateralized Mortgage Financing 854 854 Intercompany Charges............. 77,737 7,346 (85,083) Equity In Pretax Income of Consolidated Subsidiaries......(12,124) 12,124 ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ (12,124) 78,632 780,230 22,552 (85,154) 748,136 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 717,637 3,331 (10,157) 710,811 Financial Services............... 3,063 8,101 (384) 10,780 Investment Properties............ 21,031 (676) 20,355 Collateralized Mortgage Financing 878 878 Corporate General and Administration................. 14,671 737 (320) 15,088 Interest......................... 58,870 36,555 157 (59,807) 35,775 Other Operations................. 1,951 608 14 2,573 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 75,492 779,631 12,481 (71,344) 796,260 ------- ---------- ---------- ------------ ---------- ---------- Income (Loss) Before Income Taxes..(12,124) 3,140 599 10,071 (13,810) (12,124) State and Federal Income Taxes..... (5,154) 367 (830) 4,028 (3,565) (5,154) ------- ---------- ---------- ------------ ---------- ---------- Net Income (Loss)..................$(6,970) $ 2,773 $ 1,429 $ 6,043 $ (10,245) $ (6,970) ======= ========== ========== ====================== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS TWELVE MONTHS ENDED OCTOBER 31, 1999 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income (loss)..................$ 30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities... 15,774 311 (123,977) 63,782 49,514 5,404 -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 45,849 1,230 (87,957) 76,357 35,479 Net Cash Provided by (Used In) Investing Activities............... (9,478) 1,868 480 (7,130) Net Cash Provided By(Used In) Financing Activities............... (6,291) 106,676 (40,326) (84,597) (24,538) Intercompany Investing and Financing Activities - Net................... (39,526) (94,163) 128,000 5,689 -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash...... 32 4,265 1,585 (2,071) 3,811 Cash and Cash Equivalent Balance, Beginning of Period................ 14 (9,660) 23,023 2,177 15,554 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalent Balance, End of Period......................$ 46 $ (5,395) $ 24,608 $ 106 $ 19,365 ======== ========= ========== ============ ========== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS TWELVE MONTHS ENDED OCTOBER 31, 1998 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income (loss)..................$ 25,403 $ 883 $ 28,778 $ 12,614 $ (42,275) $ 25,403 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities... (22,675) 1,708 33,340 (14,997) 42,275 39,651 -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 2,728 2,591 62,118 (2,383) 65,054 Net Cash Provided by (Used In) Investing Activities............... (1,789) 26,090 (601) 23,700 Net Cash Provided By(Used In) Financing Activities............... (2,773) (71,551) (26,687) 16,498 (84,513) Intercompany Investing and Financing Activities - Net................... 49 66,574 (52,355) (14,268) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash...... 4 (4,175) 9,166 (754) 4,241 Cash and Cash Equivalent Balance, Beginning of Period................ 10 (5,485) 13,857 2,931 11,313 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalent Balance, End of Period......................$ 14 $ (9,660) $ 23,023 $ 2,177 $ $ 15,554 ======== ========= ========== ============ ========== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS TWELVE MONTHS ENDED OCTOBER 31, 1997 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income (loss)..................$ (6,970) $ 2,773 $ 1,429 $ 6,043 $ (10,245) $ (6,970) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities... 30,787 (121,105) 56,498 (163) 10,245 (23,738) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 23,817 (118,332) 57,927 5,880 (30,708) Net Cash Provided by (Used In) Investing Activities............... (2,327) 3,327 (63) 937 Net Cash Provided By(Used In) Financing Activities............... (7,890) 55,000 (14,965) (12,224) 19,921 Intercompany Investing and Financing Activities - Net................... (15,926) 61,423 (50,708) 5,211 -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash...... 1 (4,236) (4,419) (1,196) (9,850) Cash and Cash Equivalent Balance, Beginning of Period................ 9 (1,249) 18,276 4,127 21,163 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalent Balance, End of Period......................$ 10 $ (5,485) $ 13,857 $ 2,931 $ $ 11,313 ======== ========= ========== ============ ========== ==========

5 1000 12-MOS OCT-31-1999 OCT-31-1999 19,365 0 30,675 0 527,121 639,365 26,500 19,550 712,861 219,074 257,361 251 0 0 236,426 712,861 920,630 948,287 730,025 867,347 0 0 30,343 50,617 19,674 30,075 0 (868) 0 30,075 1.41 1.39

EXHIBIT 21 SUBSIDIARY LISTING K. Hovnanian Equities, Inc. EXC, Inc. K. Hovnanian Companies of North Carolina, Inc. KHL, Inc. Hovnanian Texas, Inc. Hovnanian Georgia, Inc. Hovnanian Financial Services III, Inc. K. Hovnanian Mortgage USA, Inc. Hovnanian Financial Services IV, Inc. K. Hovnanian Developments of New Jersey, Inc. KHE Finance, Inc. K. Hov International, Inc. Hovnanian Financial Services II, Inc. New Fortis Investment Hovnanian Financial Services I, Inc. K. Hovnanian Enterprises, Inc. Hovnanian Pennsylvania, Inc. Recreational Development Co., Inc. K. Hovnanian Marine, Inc. K. Hovnanian Aviation, Inc. K. Hovnanian Companies of North Jersey, Inc. K. Hovnanian at Montville, Inc. K. Hovnanian at Wayne, Inc. K. Hovnanian at Mahwah IV, Inc K. Hovnanian at Morris II, Inc. K. Hovnanian at Mahwah II, Inc. K. Hovnanian at Mahwah III, Inc. K. Hovnanian @ Northern Westchester, Inc. K. Hovnanian at Hanover, Inc. K. Hovnanian at Montville II, Inc. K. Hovnanian @ Newark Urban Renewal Corp.I, Inc. K. Hovnanian @ Newark I, Inc. K. Hovnanian @ Newark Urban Renewal Corp.II, Inc. Jersey City Danforth CSO K. Hovnanian @ Newark Urban Renewal Corp.III, Inc. K. Hovnanian @ Newark Urban Renewal Corp. IV, Inc. K. Hovnanian @ Newark Urban Renewal Corp. V, Inc. K. Hovnanian at Jersey City I, Inc. K. Hovnanian at Jersey City II, Inc.(Phase 2A) K. Hovnanian at Jersey City III, Inc. K. Hovnanian at Mahwah VI, Inc. K. Hovnanian at Jersey City II, Inc.(Phase 2B) K. Hovnanian at Mahwah VII, Inc. K. Hovnanian at Montclair, N.J., Inc. K. Hovnanian at Horizon Heights, Inc. K. Hovnanian at Reservoir Ridge, Inc. K. Hovnanian at Mahwah V, Inc. K. Hovnanian at Mahwah VIII, Inc. K. Hovnanian of North Jersey, Inc. (Hudson River) Montego Bay I Acquisition Corp., Inc. Montego Bay Associates Limited I, LP (MBAI) Montego Bay II Acquisition Corp., Inc. Montego Bay Associates Limited II, LP (MBAII) 0515 Co., Inc. K. Hovnanian at North Brunswick IV, Inc. K. Hovnanian Properties of North Brunswick IV, Inc. Arrow Properties, Inc. KHIPE, Inc. Pine Brook Company, Inc. K. Hovnanian Properties of North Brunswick II, Inc. K. Hovnanian Properties of Galloway, Inc. K. Hovnanian @ Cedar Grove I, Inc. K. Hovnanian @ Cedar Grove II, Inc. K. Hovnanian Properties of Piscataway, Inc. K. Hovnanian Properties of North Brunswick I, Inc. Molly Pitcher Renovations, Inc. K. Hovnanian Properties of East Brunswick II,Inc. K. Hovnanian Investment Properties of N.J., Inc. K. Hovnanian Investment Properties, Inc. Hovnanian Properties of Atlantic County, Inc. K. Hovnanian Properties of Newark Urban Renewal Corporation, Inc. K. Hovnanian Properties of Hamilton, Inc. K. Hovnanian Properites of Franklin, Inc. K. Hovnanian Properties of North Brunswick III, Inc. K. Hovnanian Properties of Franklin II, Inc. K. Hovnanian at Jacksonville, Inc. K. Hovnanian Properties of North Brunswick V, Inc. K. Hovnanian Properties of Wall, Inc. K.Hovnanian at Pompano Beach, Inc. Hovnanian Properties of Lake Worth, Inc. Landarama, Inc. K. Hovnanian Companies Northeast, Inc. Parthenon Group Minerva Group K. Hovnanian Companies of Central Jersey, Inc. K. Hovnanian Real Estate Investment, Inc. K. Hovnanian at Princeton, Inc. K. Hovnanian at South Brunswick III, Inc. K. Hovnanian at South Brunswick IV, Inc. K. Hovnanian at Plainsboro I, Inc. K. Hovnanian at Plainsboro II, Inc. K. Hovnanian at Klockner Farms, Inc. K. Hovnanian at South Brunswick II, Inc. K. Hovnanian at Hopewell III, Inc. K. Hovnanian at Hopewell I, Inc. K. Hovnanian at South Brunswick, Inc. K. Hovnanian at East Windsor I, Inc. K. Hovnanian at North Brunswick II, Inc. K. Hovnanian at North Brunswick III, Inc. K. Hovnanian at Hopewell II, Inc. K. Hovnanian at Somerset VIII, Inc. K. Hovnanian at Lawrence Square, Inc. Dryer Associates, Inc. K. Hovnanian at East Brunswick V, Inc. K. Hovnanian at Bernards II, Inc. K. Hovnanian at Bridgewater III, Inc. K. Hovnanian at Plainsboro III, Inc. K. Hovnanian at Somerset V, Inc. K. Hovnanian at Somerset VI, Inc. Eastern Title Agency, Inc. K. Hovnanian Mortgage, Inc. Governors Abstract Eastern National Title Insurance Agency, Inc. Founders Title Agency, Inc. K. Hovnanian Companies North Central Jersey, Inc. K. Hovnanian at Bedminster, Inc. K. Hovnanian at Bridgewater IV, Inc. K. Hovnanian at Branchburg III, Inc. K. Hovnanian at Spring Ridge, Inc. K. Hovnanian at Bridgewater V, Inc. K. Hovnanian at Readington, Inc. K. Hovnanian at Branchburg II, Inc. K. Hovnanian at Bridgewater II, Inc. K. Hovnanian at Branchburg I, Inc. K. Hovnanian Companies Jersey Shore, Inc. K. Hovnanian at Wall Township, Inc. K. Hovnanian at Galloway VIII, Inc. K. Hovnanian at Dover Township, Inc. K. Hovnanian at Galloway VII, Inc. K. Hovnanian at Tinton Falls II, Inc. K. Hovnanian at Ocean Township, Inc. K. Hovnanian at Wall Township II, Inc. K. Hovnanian at Wall Township III, Inc. K. Hovnanian at Holmdel Township, Inc. K. Hovnanian at Wall Township IV, Inc. K. Hovnanian at Wall Township V, Inc. K. Hovnanian at Atlantic City, Inc. K. Hovnanian at Ocean Township II, Inc. K. Hovnanian at Ocean Township, Inc. K. Hovnanian at Marlboro Township, Inc. K. Hovnanian at Howell Township, Inc. K. Hovnanian at Howell Township II, Inc. K. Hovnanian at Woodbury Oaks, Inc. K. Hovnanian at Freehold Township, Inc. K. Hovnanian at Lakewood, Inc. K. Hovnanian Companies of the Delaware Valley, Inc. K. Hovnanian Co. of Delaware Valley, Inc. Brokerage Company K. Hovnanian at Lower Saucon, Inc K. Hovnanian at Perkiomen I, Inc. K. Hovnanian at Montgomery I, Inc. K. Hovnanian at Upper Merion, Inc. K. Hovnanian at Perkiomen II, Inc. K. Hovnanian Companies of South Jersey, Inc. K. Hovnanian at Valleybrook, Inc. Kings Grant Evesham Corp. K. Hovnanian at Burlington, Inc. K. Hovnanian at Medford I, Inc. K. Hovnanian at The Reserve @ Medford, Inc K. Hovnanian at Kings Grant I, Inc. K. Hovnanian at Valleybrook II, Inc. K. Hovnanian Real Estate of Florida, Inc. Hovnanian Developments of Florida, Inc. K. Hovnanian Companies of Florida, Inc. Hovnanian of Palm Beach II, Inc. Hovnanian of Palm Beach III, Inc. Hovnanian of Palm Beach IV, Inc. Hovnanian of Palm Beach V, Inc. Hovnanian of Palm Beach VI, Inc. Hovnanian of Palm Beach VII, Inc. Hovnanian of Palm Beach VIII, Inc. Hovnanian of Palm Beach IX, Inc. Hovnanian at Tarpon Lakes I, Inc. Hovnanian at Tarpon Lakes II, Inc. Hovnanian at Tarpon Lakes III, Inc. K. Hovnanian at Pasco I, Inc. K. Hovnanian at Ft. Myers I, Inc. K. Hovnanian at Palm Beach XI, Inc. K. Hovnanian at Jensen Beach, Inc. Hovnanian of Palm Beach X, Inc. K. Hovnanian at Martin Downs I, Inc. K. Hovnanian at Jacksonville I, Inc. K. Hovnanian at Ft. Myers II, Inc. K. Hovnanian at Lawrence Grove, Inc. K. Hovnanian at Jacksonville II, Inc. K. Hovnanian of Palm Beach XIII, Inc. Hovnanian of Palm Beach, Inc. K. Hovnanian at Half Moon Bay, Inc. K. Hovnanian at Woodridge Estates, Inc. Pike Utilities, Inc. Tropical Service Builders, Inc. K. Hovnanian at Embassy Lakes, Inc. K. Hovnanian at Delray Beach II, Inc. K. Hovnanian at Orlando I, Inc. K. Hovnanian at Orlando II, Inc. K. Hovnanian at Orlando III, Inc. K. Hovnanian at Martin Downs II, Inc. K. Hovnanian at Orlando IV, Inc. K. Hovnanian Properties of Orlando, Inc. K. Hovnanian at Delray Beach I, Inc. K. Hovnanian at Pasco II, Inc. K. Hovnanian at Port St. Lucie I, Inc. K. Hovnanian at Delray Beach, Inc. Eastern National Title Insurance Agency, Inc. K. Hovnanian Mortgage of Florida, Inc. South Florida Residential Title Agency, Inc. Eastern National Title Insurance Agency I, Inc. Western Financial Services, Inc. r. e. Scott Mortgage co. of Florida, Inc. New K. Hovnanian Developments of Florida, Inc. New K. Hovnanian Companies of Florida, Inc. K. Hovnanian at Fairway Views, Inc. K. Hovanian at Lake Charleston, Inc. K. Hovnanian at Carolina Country Club I, Inc. K. Hovnanian at Chapel Trail, Inc. K. Hovnanian at Winston Trails, Inc. K. Hovnanian at Lakes of Boca Raton, Inc. K. Hovnanian at Lake Charleston II, Inc. K. Hovnanian at Lake Charleston III, Inc. K. Hovnanian at Carolina Country Club II, Inc. K. Hovnanian at Winston Trails, Inc. K. Hovnanian at Pembroke Isles, Ins. K. Hovnanian at Carolina Country Club III, Inc. K. Hovnanian at Coconut Creek, Inc. K. Hovnanian at Polo Trace, Inc. K. Hovnanian Companies of New York, Inc. K. Hovnanian at Westchester, Inc. K. Hovnanian at Peekskill, Inc. K. Hovnanian at Washingtonville, Inc. K. Hovnanian at Mahopac, Inc. K. Hovnanian at Carmel, Inc. K. Hovnanian Developments of New York, Inc. Cedar Hill Water Corporation Cedar Hill Sewer Corporation R.C.K. Community Management Co., Inc. K. Hovnanian Companies of Massachusetts, Inc. K. Hovnanian at Merrimack, Inc. K. Hovnanian at Merrimack II, Inc. K. Hovnanian at Taunton, Inc. New England Community Management Co., Inc. K. Hovnanian Cos. of Metro Washington, Inc. K. Hovnanian at Ashburn Village, Inc. K. Hovnanian at Woodmont,, Inc. K. Hovnanian at Sully Station, Inc. K. Hovnanian at Bull Run, Inc. K. Hovnanian at Montclair, Inc. K. Hovnanian at River Oaks, Inc. K. Hovnanian at Holly Crest, Inc. K. Hovnanian at Woodmont, Inc. K. Hovnanian at Montclair, Inc.(Montclair Condos) K. Hovnanian at Fair Lakes, Inc. K. Hovnanian at Ashburn Village, Inc. K. Hovnanian at Park Ridge, Inc. K. Hovnanian at Belmont, Inc. K. Hovnanian at Fair Lakes Glen, Inc. K. Hovnanian Developments of Metro Washington, Inc. K. Hovnanian at River Oaks, Inc. K. Hovnanian at Montclair, Inc. (Montclair Laing) K. Hovnanian Companies of California, Inc. K. Hovnanian at Clarkstown, Inc. K. Hovnanian at West Orange, Inc. K. Hovnanian at Wayne III, Inc. K. Hovnanian at Wayne IV, Inc. K. Hovnanian at Wayne V, Inc. K. Hovnanian at Hackettstown, Inc. K. Hovnanian at Spring Mountain, Inc. K. Hovnaian at East Windsor II, Inc. K. Hovnanian Treasure Coast, Inc. K. Hovnanian at La Terraza, Inc. K. Hovnanian at Highland Vineyards, Inc. K. Hovnanian Companies of Southern California II, Inc. K. Hovnanian at Vail Ranch, Inc. K. Hovnanian at Carmel Del Mar, Inc. K. Hovnanian at Calabria, Inc. K. Hovnanian Developments of California, Inc. K. Hovnanian at Ballantrae, Inc. Ballantrae Home Sales, Inc. K. Hovnanian at Hunter Estates, Inc. K. Hovnanian Developments of Maryland, Inc. K. Hovnanian Companies of Maryland, Inc. K. Hovnanian at Seneca Crossing, Inc. K. Hovnanian at Exeter Hills, Inc. K. Hovnanian Southeast Florida, Inc. K. Hovnanian Florida Region, Inc. K. Hovnanian at East Brunswick VI, Inc. K. Hovnanian at Berlin, Inc. K. Hovnanian at Bedminster II, Inc. K. Hovnanian at Marlboro Township II, Inc. K. Hovnanian at Inverrary I, Inc. K. Hovnanian at Mahwah IX, Inc. K. Hovnanian at Hopewell IV, Inc. K. Hovnanian at Northlake, Inc. K. Hovnanian at Castile, Inc. K. Hovnanian at Tierrasanta, Inc. K. Hovnnaian at Bridgewater VI, Inc. K. Hovnanian at Preston, Inc. K. Hovnanian at Bernards III, Inc. K. Hovnanian at Wayne VI, Inc. K. Hovnanian at Rancho Cristianitos, Inc. K. Hovnanian at La Trovata, Inc. K. Hovnanian at Watchung Reserve, Inc. K. Hovnanian at Windsong East Brunswick, Inc. K. Hovnanian at South Brunswick V, Inc. K. Hovnanian at Wall Township III, Inc. K. Hovnanian at Tannery Hill, Inc. K. Hovnanian at Upper Freehold Township I, Inc. K. Hovnanian at Jefferson, Inc. K. Hovnanian at Hershey's Mill, Inc. K. Hovnanian at Bernards VI, Inc. K. Hovnanian at Port Imperial North, Inc. K. Hovnanian at Hopewell V, Inc. K. Hovnanian at Hopewell VI, Inc. K. Hovnanian at Manalapan II, Inc. K. Hovnanian at Union Township, Inc. K. Hovnanian at Wayne VII, Inc. K. Hovnanian at Scotch Plains II, Inc. K. Hovnanian at Thornbury, Inc. K. Hovnanian at Cameron Chase, Inc. K. Hovnanian at Marlboro Township IV, Inc. K. Hovnanian at Port Imperial Urban Renewal, Inc. K. Hovnanian at East Whiteland, Inc. K. Hovnanian at Stonegate, Inc. K. Hovnanian Companies of Southern California, Inc. K. Hovnanian at Crestline, Inc. K. Hovnanian at Sycamore, Inc. K. Hovnanian at Saratoga, Inc. K. Hovnanian at Sone Canyon, Inc. K. Hovnanian at Chaparral, Inc. K. Hovnanian at Ocean Walk, Inc. K. Hovnanian at Maplewood, Inc. K. Hovnanian at Tuxedo, Inc. K. Hovnanian at Bridgeport, Inc. K. Hovnanian at Stonegate, Inc. (California) K. Hovnanian at Lower Saucon II, Inc. K. Hovnanian at Barrington, Inc. K. Hovnanian at The Glen, Inc. K. Hovnanian at Hampton Oaks, Inc. K. Hovnanian at Summerwood, Inc. K. Hovnanian at Chester I, LLC K. Hovnanian at West Windsor, LLC K. Hovnanian at Barnards V, LLC K. Hovnanian's Four Seasons of the Palm Beaches, Inc. K. Hovnanian at Chester I, LLC K. Hovnanian at West Windsor, LLC K. Hovnanian at Bernards V, LLC K. Hovnanian at Menifee, LLC K. Hovnaian at Roland Heights, LLC K. Hovnanian at Winchester, LLc K. Hovnanian at Carmel Village, LLC K. Hovnanian's Four Seasons, LLC K. Hovnanian at North Brunswick VI, LLC K. Hovnanian at Lawrence V, LLC K. Hovnanian at Jackson, LLC K. Hovnanian at Blue Heron Pines, LLC K. Hovnanian at Middletown, LLC K. Hovnanian at Berkeley, LLC K. Hovnanian at Guttenberg, LLC K. Hovnanian at Prince William, LLC K. Hovnanian at Lake Terrapin, LLC K. Hovnanian at King Farm, LLc K. Hovnanian at South Bank, LLC K. Hovnanian at Clifton, LLC K. Hovnanian at Jersey City IV, LLC K. Hovnanian at Lafayetts Estates, LLC K. Hovnanian at Upper Freehold II, LLC K. Hovnanian at Kincaid, LLC K. Hovnanian at Linwood, LLC K. Hovnanian at South Amboy, LLC K. Hovnanian at Upper Freehold Township III, LLC K. Hovnanian at Brenbrooke, LLC K. Hovnanian at Blooms Crossing, LLC K. Hovnanian at Spring Hill Road, LLC K. Hovnanian at St. Margarets, LLC K. Hovnanian at Paramus, LLC K. Hovnanian Developments of Texas, Inc. The Matzel & Mumford Organization, Inc. Matzel & Mumford of Delaware, Inc. K. Hovnanian at Kent Island, LLC K. Hovnanian at Northfield, LLC

CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-51991) of Hovnanian Enterprises, Inc. and in the related Prospectus of our report dated December 16, 1999, with respect to the consolidated financial statements of Hovnanian Enterprises, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended October 31, 1999. /s/ Ernst & Young LLP New York, New York January 13, 2000

EXHIBIT 12 HOVNANIAN ENTERPRISES, INC. Statement setting forth computation showing the ratio of earnings to fixed charges, including wholly owned mortgage banking and finance subsidiaries. (Dollars in Thousands) Year Ended October 31, October 31, October 31, October 31, October 31, 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- Net income (loss)....... $ 30,075 $ 25,403 $ (6,970) $ 17,287 $ 14,128 Add: Federal and State Income Taxes........ 19,674 15,141 (5,154) 7,719 7,526 Extraordinary Loss.... 868 748 Interest Expensed Res & Comm.......... 31,570 39,352 37,704 32,157 30,744 Interest Expensed Mortgage & Finance Subsidiaries........ 3,240 3,099 1,778 2,354 2,836 Amortization of Bond Prepaid Expenses.... 549 625 636 671 671 ------------ ----------- --------- ----------- ----------- Total Earnings.... $ 85,976 $ 84,368 $ 27,994 $ 60,188 $ 55,905 ============ =========== ========= =========== =========== Fixed Charges: Interest Incurred Res & Comm.............. 24,594 28,947 34,777 35,551 37,828 Interest Incurred Mortgage & Finance Subsidiaries........ 3,240 3,099 1,778 2,354 2,836 Amortization of Bond Prepaid Expenses.... 549 625 636 671 671 ------------ ----------- --------- ----------- ----------- Total Fixed Charges......... $ 28,383 $ 32,671 $ 37,191 $ 38,576 $ 41,335 ============ =========== ========= =========== =========== Ratio................... 3.0 2.6 (a) 1.6 1.4 (a) Earnings for the year ended October 31, 1997 were insufficient to cover fixed charges for such period by $9,197,000.