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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended JANUARY 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Same
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 20,087,921 Class A Common
Shares and 7,586,396 Class B Common Shares were outstanding as of March 9,
2001.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at January 31,
2001 (unaudited) and October 31, 2000 3
Consolidated Statements of Income for the three
months ended January 31, 2001 and 2000
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the three months ended January 31, 2001
(unaudited) 6
Consolidated Statements of Cash Flows for
the three months ended January 31, 2001
and 2000 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Item 4. Submission of Matters to a Vote of Security
Holders 23
PART II. Other Information
Item 6(a). Exhibit 10 - Registration Rights Agreement and
Employment Agreement (Geaton A. DeCesaris, Jr.)
Item 6(b). Exhibit 10 - Restated By Laws of Hovnanian
Enterprises, Inc.
Item 6(c). Reports on Form 8K filed during the quarter for
which this report is filed 23
Signatures 24
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(unaudited)
January 31, October 31,
ASSETS 2001 2000
----------- -----------
Homebuilding:
Cash and cash equivalents....................... $ 33,408 $ 40,131
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.................................. 672,310 525,116
Land and land options held for future
development or sale......................... 92,802 89,867
----------- -----------
Total Inventories........................... 765,112 614,983
----------- -----------
Receivables, deposits, and notes................ 54,927 36,190
----------- -----------
Property, plant, and equipment - net............ 35,414 35,594
----------- -----------
Senior Residential rental properties - net...... 10,179 10,276
----------- -----------
Prepaid expenses and other assets............... 88,884 64,897
----------- -----------
Total Homebuilding.......................... 987,924 802,071
----------- -----------
Financial Services:
Cash and cash equivalents....................... 2,684 3,122
Mortgage loans held for sale.................... 42,857 61,860
Other assets.................................... 1,617 2,145
----------- -----------
Total Financial Services.................... 47,158 67,127
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 4,000 4,145
Other assets.................................... 192 198
----------- -----------
Total Collateralized Mortgage Financing..... 4,192 4,343
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 1,291
----------- -----------
Total Assets...................................... $1,040,565 $873,541
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(unaudited)
January 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
----------- -----------
Homebuilding:
Nonrecourse land mortgages........................ $ 16,402 $ 18,166
Accounts payable and other liabilities............ 95,836 82,205
Customers' deposits............................... 35,930 31,475
Nonrecourse mortgages secured by operating
properties...................................... 3,529 3,554
----------- -----------
Total Homebuilding............................ 151,697 135,400
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 1,591 2,078
Mortgage warehouse line of credit................. 38,041 56,486
----------- -----------
Total Financial Services...................... 39,632 58,564
----------- ----------
Collateralized Mortgage Financing:
Bonds collateralized by mortgages receivable...... 2,878 3,007
----------- -----------
Total Collateralized Mortgage Financing....... 2,878 3,007
----------- -----------
Notes Payable:
Revolving credit agreement........................ 119,775
Senior notes...................................... 296,518 296,430
Subordinated notes................................ 100,000 100,000
Accrued interest.................................. 11,074 12,709
----------- -----------
Total Notes Payable........................... 527,367 409,139
----------- -----------
Income Taxes Payable................................ 4,072
----------- -----------
Total Liabilities............................. 721,574 610,182
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 23,820,893 shares
(including 3,736,921 shares in January 2001
and October 2000 held in Treasury)............. 237 173
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 7,932,219 shares
(including 345,874 shares held in Treasury)..... 79 79
Paid in Capital................................... 94,930 46,086
Retained Earnings................................. 253,343 246,420
Deferred Compensation............................. (266)
Treasury Stock - at cost.......................... (29,332) (29,399)
----------- -----------
Total Stockholders' Equity.................... 318,991 263,359
----------- -----------
Total Liabilities and Stockholders' Equity.......... $1,040,565 $873,541
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(unaudited)
Three Months Ended
January 31,
-------------------
2001 2000
--------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $283,405 $250,118
Land sales and other revenues...... 5,086 2,065
--------- ---------
Total Homebuilding............... 288,491 252,183
Financial Services................... 5,440 4,851
Collateralized Mortgage Financing.... 98 115
--------- ---------
Total Revenues................... 294,029 257,149
--------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 226,576 205,503
Selling, general and administrative 28,225 24,928
Inventory impairment loss.......... 174
--------- ---------
Total Homebuilding............... 254,975 230,431
Financial Services................... 3,697 5,305
Collateralized Mortgage Financing.... 83 98
Corporate General and Administration. 9,878 6,874
Interest............................. 9,505 7,868
Other Operations..................... 1,851 1,797
Restructuring Charges................ 2,480
--------- ---------
Total Expenses................... 282,469 252,373
--------- ---------
Income Before Income Taxes............. 11,560 4,776
--------- ---------
State and Federal Income Taxes:
State................................ 399 155
Federal.............................. 4,238 1,169
--------- ---------
Total Taxes........................ 4,637 1,324
--------- ---------
Net Income............................. $ 6,923 $ 3,452
========= =========
Per Share Data:
Basic:
Income per common share.............. $ 0.31 $ 0.15
Weighted average number of common
shares outstanding................. 22,286 22,327
Assuming dilution:
Income per common share.............. $ 0.30 $ 0.15
Weighted average number of common
shares outstanding................. 22,732 22,413
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 Deferred Treasury
Outstanding Amount Outstanding Amount Capital Earnings Comp Stock Total
----------- ------ ----------- ------ ------- -------- -------- -------- --------
Balance, October 31, 2000. 13,572,448 $173 7,633,029 $79 $46,086 $246,420 $ $(29,399) $263,359
Acquisitions............. 6,352,900 64 48,161 48,225
Sale of common stock
under employee stock
option plan............ 65,000 367 367
Stock bonus plan......... 46,940 316 316
Conversion of Class B to
Class A Common Stock.... 46,684 (46,684)
Deferred compensation..... (266) (266)
Treasury stock purchases
adjustment............. 67 67
Net Income................ 6,923 6,923
----------- ------ ----------- ------ ------- -------- -------- -------- --------
Balance, January 31, 2001 20,083,972 $237 7,586,345 $79 $94,930 $253,343 $ (266) $(29,332) $318,991
(unaudited) =========== ====== =========== ====== ======= ======== ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Three Months Ended
January 31,
---------------------
2001 2000
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 6,923 $ 3,452
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation.................................... 1,965 1,591
Amortization of goodwill........................ 669
(Gain) on sale and retirement of property
and assets.................................... (40) (209)
Deferred income taxes........................... 145 (281)
Impairment losses............................... 174
Decrease (increase) in assets:
Mortgage notes receivable..................... 19,205 11,116
Receivables, prepaids and other assets........ (22,211) (13,091)
Inventories................................... (9,514) (34,275)
Increase (decrease) in liabilities:
State and Federal income taxes................ (544) (2,778)
Customers' deposits........................... 932 5,395
Interest and other accrued liabilities........ (7,587) (5,833)
Post development completion costs............. 1,964 993
Accounts payable.............................. (6,642) (1,907)
---------- ----------
Net cash used in operating activities....... (14,561) (35,827)
---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 7 318
Purchase of property, equipment and other
fixed assets...................................... (1,073) (8,997)
Acquisition of homebuilding companies............... (36,936) (119)
Investment in and advances to unconsolidated
affiliates........................................ (12) (1)
---------- ----------
Net cash used in investing activities....... (38,014) (8,799)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 480,328 336,378
Principal payments on mortgages and notes........... (435,664) (298,263)
Purchase of treasury stock.......................... 67 (1,176)
Proceeds from sale of stock......................... 683
---------- ----------
Net cash provided by financing
activities................................ 45,414 36,939
---------- ----------
Net (Decrease) In Cash and Cash Equivalents........... (7,161) (7,687)
Cash and Cash Equivalents and Balance, Beginning
Of Period........................................... 43,253 19,365
---------- ----------
Cash and Cash Equivalent and Balance, End Of Period... $ 36,092 $ 11,678
========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The consolidated financial statements, except for the October 31,
2000 consolidated balance sheet, have been prepared without audit. In the
opinion of management, all adjustments for interim periods presented have been
made, which include only normal recurring accruals and deferrals necessary for
a fair presentation of consolidated financial position, results of operations,
and changes in cash flows. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates and these differences could have a significant impact on the
financial statements. Results for the interim periods are not necessarily
indicative of the results which might be expected for a full year.
2. Interest costs incurred, expensed and capitalized were:
Three Months Ended
January 31,
-------------------
2001 2000
-------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period......... $ 25,694 $ 21,966
Plus Acquired Entity Interest. 3,604
Plus Interest Incurred(1)(3).. 11,572 8,023
Less Interest Expensed(3)..... 9,505 7,868
-------- --------
Interest Capitalized at
End of Period(2)(3)......... $ 31,365 $ 22,121
======== ========
(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 homes are delivered and
when land is not under active development.
3. Homebuilding accumulated depreciation at January 31, 2001 and
October 31, 2000 amounted to $24,868,000 and $22,164,000, respectively.
Senior residential rental property accumulated depreciation at January 31,
2001 and October 31, 2000 amounted to $2,393,000 and $2,294,000, respectively.
4. In accordance with "Financial Accounting Standards No. 121 ("FAS
121") "Accounting for the Impairment of Long Lived Assets and for Long Lived
Assets to Be Disposed of", we record impairment losses on inventories related
to communities under development when events and circumstances indicate that
they may be impaired and the undiscounted cash flows estimated to be generated
by those assets are less than their related carrying amounts. In addition,
from time to time, we will write off certain residential land options
including approval, engineering and capitalized interest costs for land
management decided not to purchase. We wrote off such costs in the amount of
$63,000 in New Jersey and $111,000 in Metro D. C. during the three months
ended January 31, 2001. Residential inventory FAS 121 impairment losses and
option write offs are reported in the Consolidated Statements of Income as
"Homebuilding-Inventory Impairment Loss."
5. 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. As of January 31, 2001 and October 31, 2000,
respectively, we are obligated under various performance letters of credit
amounting to $5,452,000 and $4,284,000.
6. Our credit facility was amended as of February 22, 2000. Pursuant
to the Amendment, our credit line increased to $375,000,000 and was extended
through July 2003. Interest is payable monthly and at various rates of either
the prime rate plus .25% or Libor plus 1.70%.
7. On January 23, 2001 we merged with Washington Homes, Inc. for a
total purchase price of $87.4 million, of which $38.5 million was paid in cash
and 6,352,900 shares of our Class A Common Stock were issued. At the date of
acquisition we loaned Washington Homes, Inc. approximately $57,000,000 to pay
off their third party debt.
The merger with Washington Homes, Inc. was accounted for as a purchase
with the results of operations of the merged entity included in our
consolidated financial statements as of the date of the merger. The purchase
price was allocated based on estimated fair value at the date of the merger.
Such allocation is preliminary and is pending management's assessment of the
deferred tax assets and liabilities acquired. An intangible asset equal to
the excess purchase price over the fair value of the net assets of $12,794,000
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 financial data for the three months
ended January 31, 2001 and 2000 has been prepared as if the merger with
Washington Homes, Inc. on January 23, 2001 had occurred on November 1, 1999.
Unaudited pro forma financial data is presented for information purposes only
and may not be indicative of the actual amounts of the Company had the events
occurred on the dates listed above, nor does it purport to represent future
periods (in thousands).
Three Months Ended January 31,
------------------------------
2001 2000
----------- -----------
Revenues.................................... $363,767 $350,452
Expenses.................................... 351,704 342,774
Income Taxes................................ 4,095 2,568
----------- -----------
Net Income.................................. $ 7,968 $ 5,110
=========== ===========
Diluted Net Income Per Common Share......... $ 0.28 $ 0.18
=========== ===========
8. Restructuring Charges - Restructuring charges are estimated expenses
associated with the merger of our operations with those of Washington Homes,
Inc. as a result of the merger on January 23, 2001. Under our merger plan,
administration offices in Maryland, Virginia, and North Carolina will be
either closed, relocated, or combined. The merger of administration offices
is expected to be completed by July 31, 2001. Expenses were accrued for
salaries, severance and outplacement costs for the involuntary termination of
associates, costs to close and/or relocate existing administrative offices,
and lost rent and leasehold improvements. We estimate that approximately 58
associates will be terminated. We have accrued approximately $1.7 million to
cover termination and related costs. Associates being terminated are
primarily administrative. In addition, we accrued approximately $0.8 million
to cover closing and/or relocating various administrative offices in these
three states. At January 31, 2001 no costs have been charged against the
above accrued liabilities.
9. 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 and October 2, 2000.
The Subsidiary Issuer acts as a finance and management entity that as of
January 31, 2001 had issued and outstanding approximately $100,000,000
subordinated notes, $300,000,000 senior notes, and a revolving credit
agreement with an outstanding balance of $119,775,000. The subordinated
notes, senior notes, and the revolving credit agreement are fully and
unconditionally guaranteed by the Parent.
Each of the wholly owned subsidiaries of the Parent (collectively the
"Guarantor Subsidiaries"), with the exception of four subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, a mortgage
lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian"
trade name, and a subsidiary engaged in homebuilding activity in Poland
(collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and
unconditionally, on a joint and several basis, the obligation to pay principal
and interest under the senior notes and the revolving credit agreement of the
Subsidiary Issuer.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying consolidated
condensed financial statements. Management does not believe that separate
financial statements of the Guarantor Subsidiaries are material to investors.
Therefore, separate financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information present the
results of operations, financial position, and cash flows of (i) the Parent,
(ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries of the Parent,
(iv) the Non-guarantor Subsidiaries of the Parent, and (v) the eliminations to
arrive at the information for Hovnanian Enterprises, Inc. on a consolidated
basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
JANUARY 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding.......................$ 9 $ 54,400 $ 924,715 $ 8,800 $ $ 987,924
Financial Services and CMO......... 888 50,462 51,350
Income Taxes (Payables)Receivables. (3,951) (4,257) 11,559 (2,060) 1,291
Investments in and amounts due to
and from consolidated
subsidiaries..................... 322,933 484,274 (748,000) 3,434 (62,641)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$318,991 $ 534,417 $ 189,162 $ 60,636 $ (62,641) $1,040,565
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................$ $ 6,902 $ 144,003 $ 792 $ $ 151,697
Financial Services and CMO......... 355 42,155 42,510
Notes Payable...................... 527,308 59 527,367
Stockholders' Equity............... 318,991 207 44,745 17,689 (62,641) 318,991
-------- ----------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$318,991 $ 534,417 $ 189,162 $ 60,636 $ (62,641) $1,040,565
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ (63) $ 76,648 $ 717,484 $ 8,002 $ $ 802,071
Financial Services and CMO......... 994 70,476 71,470
Income Taxes (Payables)Receivables. (4,585) (5,873) 12,567 (2,109)
Investments in and amounts due to
and from consolidated
subsidiaries..................... 268,007 353,115 (473,872) 577 (147,827)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 11,533 $ 122,807 $ 1,060 $ $ 135,400
Financial Services and CMO......... 457 61,114 61,571
Notes Payable...................... 409,041 98 409,139
Income Taxes Payable............... 4,072 4,072
Stockholders' Equity............... 263,359 3,316 129,739 14,772 (147,827) 263,359
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 65 $ 287,122 $ 7,516 $ (6,212) $ 288,491
Financial Services and CMO....... 2,018 3,520 5,538
Intercompany Charges............. 30,410 (1,954) (28,456)
Equity In Pretax Income of
Consolidated Subsidiaries...... 11,560 (11,560)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 11,560 30,475 287,186 11,036 (46,228) 294,029
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 29,913 283,926 1,254 (36,404) 278,689
Financial Services and CMO....... 1,288 2,589 (97) 3,780
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 29,913 285,214 3,843 (36,501) 282,469
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 11,560 562 1,972 7,193 (9,727) 11,560
State and Federal Income Taxes..... 4,637 352 70 2,814 (3,236) 4,637
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$ 6,923 $ 210 $ 1,902 $ 4,379 $ (6,491) $ 6,923
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 154 $ 251,406 $ 2,092 $ (1,469) $ 252,183
Financial Services and CMO....... 1,750 3,216 4,966
Intercompany Charges............. 23,046 2,448 (25,494)
Equity In Pretax Income of
Consolidated Subsidiaries...... 4,776 (4,776)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................. 4,776 23,200 255,604 5,308 (31,739) 257,149
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 23,058 241,375 454 (17,917) 246,970
Financial Services and CMO....... 1,374 4,188 (159) 5,403
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 23,058 242,749 4,642 (18,076) 252,373
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 4,776 142 12,855 666 (13,663) 4,776
State and Federal Income Taxes..... 1,324 35 4,166 230 (4,431) 1,324
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$ 3,452 $ 107 $ 8,689 $ 436 $ (9,232) $ 3,452
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 6,923 $ 210 $ 1,902 $ 4,379 $ (6,491) $ 6,923
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 93,226 35,300 (173,139) 16,639 6,491 (21,483)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 100,149 35,510 (171,237) 21,018 (14,560)
Net Cash Provided by (Used In)
Investing Activities............... (45,218) (17,819) 25,023 (38,014)
Net Cash Provided By(Used In)
Financing Activities............... 67 119,863 (55,942) (18,574) 45,414
Intercompany Investing and Financing
Activities - Net..................... (54,926) (161,569) 219,352 (2,857)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 72 (24,015) 17,196 (413) (7,160)
Cash and Cash Equivalents Balance,
Beginning of Period................ (63) 17,629 22,506 3,181 43,253
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 9 $ (6,386) $ 39,702 $ 2,768 $ $ 36,093
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 3,452 $ 107 $ 8,689 $ 436 $ (9,232) $ 3,452
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 16,257 170 (80,276) 15,338 9,232 (39,279)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 19,709 277 (71,587) 15,774 (35,827)
Net Cash Provided by (Used In)
Investing Activities............... (8,327) (470) (2) (8,799)
Net Cash Provided By(Used In)
Financing Activities............... (1,176) 48,350 2,552 (12,787) 36,939
Intercompany Investing and Financing
Activities - Net..................... (18,487) (34,743) 33,067 (2,883)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 46 5,557 (13,392) 102 (7,687)
Cash and Cash Equivalents Balance,
Beginning of Period................ 46 (5,395) 24,608 106 19,365
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 92 $ 162 $ 11,216 $ 208 $ $ 11,678
======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the three months ended January 31, 2001 were for
operating expenses, seasonal increases in housing inventories, construction,
income taxes, interest, and the merger with Washington Homes, Inc. We
provided for our cash requirements from housing and land sales, the revolving
credit facility, financial service revenues, and other revenues. We believe
that these sources of cash are sufficient to finance our working capital
requirements and other needs.
In March 2000 the Board of Directors increased the stock repurchase
program to purchase up to 4 million shares of Class A Common Stock. This
authorization expired on December 31, 2000 and is in the process of being
revised. As of January 31, 2001, 3,391,047 shares were repurchased under this
program.
Our homebuilding bank borrowings are made pursuant to a revolving credit
agreement (the "Agreement") that provides a revolving credit line of up to
$375,000,000 (the "Revolving Credit Facility") through July 2003. Interest is
payable monthly and at various rates of either the prime rate plus .25% or
Libor plus 1.70%. We believe that we will be able either to extend the
Agreement beyond July 2003 or negotiate a replacement facility, but there can
be no assurance of such extension or replacement facility. We are currently
in compliance and intend to maintain compliance with the covenants under the
Agreement. As of January 31, 2001, borrowings under the Agreement were
$119,775,000.
The subordinated indebtedness issued by us and outstanding as of January
31, 2001 was $100,000,000 9 3/4% Subordinated Notes due June 2005. The senior
indebtedness issued by us and outstanding as of January 31, 2001 was
$150,000,000 10 1/2% Senior Notes due October 2007 and $150,000,000 9 1/8%
Senior Notes due May 2009.
Our mortgage banking subsidiary borrows under a bank warehousing
arrangement. Other finance subsidiaries formerly borrowed from a multi-
builder owned financial corporation and a builder owned financial corporation
to finance mortgage backed securities, but in fiscal 1988 decided to cease
further borrowing from multi-builder and builder owned financial corporations.
These non-recourse borrowings have been generally secured by mortgage loans
originated by one of our subsidiaries. As of January 31, 2001, the aggregate
principal amount of all such borrowings was $38,041,000.
Total inventory increased $150,129,000 during the three months ended
January 31, 2001. The increase in inventory was primarily due to the merger
with Washington Homes, Inc. In addition inventory levels increased in most of
our housing markets. Substantially all homes under construction or completed
and included in inventory at January 31, 2001 are expected to be closed during
the next twelve months. Most inventory completed or under development is
financed through our line of credit, and senior and subordinated indebtedness.
The following table summarizes housing lots included in our total residential
real estate:
Active Contracted Active Proposed Grand Total
Active Selling Not Lots Developable Lots
Communities Lots Delivered Available Lots Available
----------- ------- ---------- --------- ----------- -----------
January 31, 2001:
Northeast Region.. 28 4,598 1,201 3,397 10,569 13,966
North Carolina.... 65 5,117 570 4,547 2,351 6,898
Metro D.C......... 37 3,306 788 2,518 4,965 7,483
California........ 13 1,909 227 1,682 576 2,258
Texas............. 40 1,543 280 1,263 684 1,947
Mid South......... 21 1,631 106 1,525 160 1,685
Other............. 1 138 58 80 2,374 2,454
----------- ------- ---------- ---------- ---------- -----------
205 18,242 3,230 15,012 21,679 36,691
=========== ======= ========== ========== ========== ===========
Owned.......... 8,244 2,742 5,502 4,177 9,679
Optioned....... 9,998 488 9,510 17,502 27,012
------- ---------- ---------- ---------- -----------
Total........ 18,242 3,230 15,012 21,679 36,691
======= ========== ========== ========== ===========
Active Contracted Active Proposed Grand Total
Active Selling Not Lots Developable Lots
Communities Lots Delivered Available Lots Available
----------- ------- ---------- --------- ----------- -----------
October 31, 2000:
Northeast Region.. 28 4,941 1,149 3,792 11,016 14,808
North Carolina.... 29 2,331 215 2,116 400 2,516
Metro D.C......... 6 708 215 493 4,875 5,368
California........ 12 2,015 151 1,864 576 2,440
Texas............. 44 1,628 282 1,346 752 2,098
Other............. 1 186 84 102 2,374 2,476
----------- ------- ---------- ---------- ---------- -----------
120 11,809 2,096 9,713 19,993 29,706
=========== ======= ========== ========== ========== ===========
Owned.......... 6,236 1,963 4,273 3,776 8,049
Optioned....... 5,573 133 5,440 16,217 21,657
------- ---------- ---------- ---------- -----------
Total........ 11,809 2,096 9,713 19,993 29,706
======= ========== ========== ========== ===========
The following table summarizes our started or completed unsold homes and
models:
January 31, October 31,
2001 2000
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 119 59 178 133 48 181
North Carolina...... 216 54 270 102 31 133
Metro D.C........... 87 37 124 6 7 13
California.......... 98 22 120 136 32 168
Texas............... 238 9 247 238 8 246
Mid South........... 73 23 96 -- -- --
Other.............. 40 -- 40 58 -- 58
------ ------ ----- ------ ------ -----
Total 871 204 1,075 673 126 799
====== ====== ===== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of residential
mortgages receivable of which $42,546,000 and $61,549,000 at January 31, 2001
and October 31, 2000, respectively, are being temporarily warehoused and
awaiting sale in the secondary mortgage market. The balance of such mortgages
is being held as an investment by us. We may incur risk with respect to
mortgages that are delinquent, but only to the extent the losses are not
covered by mortgage insurance or resale value of the house. Historically, we
have incurred minimal credit losses. Collateral Mortgage Financing -
Collateral for bonds payable consist of collateralized mortgages receivable
which are pledged against non-recourse collateralized mortgage obligations.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2001 COMPARED TO
THE THREE MONTHS ENDED JANUARY 31, 2000
Our operations consist primarily of residential housing development and
sales in our Northeast Region (comprising of New Jersey, southern New York
state and eastern Pennsylvania), North Carolina, Metro D.C. (northern Virginia
and Maryland), southern California, Texas, the Mid-south (Tennessee, Alabama,
and Mississippi), and Poland. Our Mid-south operations are the result of the
merger with Washington Homes, Inc. In addition, we provide financial services
to our homebuilding customers.
Important indicators of the future results are recently signed contracts
and home contract backlog for future deliveries. Our sales contracts and
homes in contract backlog (using base sales prices) by market area are set
forth below:
Sales Contracts for the
Three Months Ended Contract Backlog
January 31, as of January 31,
----------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $125,433 $109,040 $327,437 $284,240
Homes............... 479 422 1,201 1,086
North Carolina:
Dollars............. $ 41,651 $ 26,892 $102,786 $ 44,081
Homes............... 233 144 570 213
Metro D.C.:
Dollars............. $ 32,009 $ 13,449 $193,098 $ 32,144
Homes............... 130 52 786 136
California:
Dollars............. $ 65,547 $ 23,839 $ 82,106 $ 33,217
Homes............... 182 93 227 128
Texas:
Dollars............. $ 37,177 $ 39,830 $ 62,754 $ 42,951
Homes............... 175 202 280 204
Mid South:
Dollars............. $ 3,806 -- $ 17,037 --
Homes............... 29 -- 106 --
Other:
Dollars............. $ 857 $ 4,193 $ 10,011 $ 9,276
Homes............... 22 50 60 76
Totals:
Dollars............. $306,480 $217,243 $795,229 $445,909
Homes............... 1,250 963 3,230 1,843
During February 2001 we signed an additional 949 contracts compared to 359 in
the same month last year. The February 2001 contracts along with our contract
backlog at January 31, 2001 and deliveries for the three months ended January
31, 2001 amount to approximately 75% of our planned deliveries for fiscal
2001.
Total Revenues:
Revenues for the three months ended January 31, 2001 increased $36.9
million or 14.3%, compared to the same period last year. This was the result
of a $33.3 million increase in revenues from the sale of homes, a $3.0 million
increase in land sales and other homebuilding revenues, and a $0.6 million
increase in financial service revenues.
Homebuilding:
Revenues from the sale of homes increased $33.3 million or 13.3% during
the three months ended January 31, 2001, compared to the same period last
year. Revenues from sales of homes are recorded at the time each home is
delivered and title and possession have been transferred to the buyer.
Information on homes delivered by market area is set forth below:
Three Months Ended
January 31,
-------------------
2001 2000
--------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $123,626 $127,252
Homes Delivered...... 427 461
North Carolina:
Housing Revenues..... $ 31,798 $ 27,370
Homes Delivered...... 180 138
Metro D.C.:
Housing Revenues..... $ 36,691 $ 15,845
Homes Delivered...... 162 65
California:
Housing Revenues..... $ 44,314 $ 25,636
Homes Delivered...... 106 94
Texas:
Housing Revenues..... $ 37,810 $ 49,215
Homes Delivered...... 177 259
Mid South:
Housing Revenues..... $ 3,077 --
Homes Delivered...... 22 --
Other:
Housing Revenues..... $ 6,089 $ 4,800
Homes Delivered...... 48 24
Totals:
Housing Revenues..... $283,405 $250,118
Homes Delivered...... 1,122 1,041
The increase in the number of homes delivered and related revenues was
due to an increase of three communities in the Metro D. C. market, an increase
in the average home price in California, and the merger with Washington Homes,
Inc. These increases were partially offset by decreases in the Northeast
Region and Texas. The decrease in the Northeast Region was due to the timing
of scheduled deliveries. The decrease in deliveries in Texas was due to the
change in their fiscal year end when we acquired them October 31, 1999. Texas
historically reported strong deliveries in their fourth quarter, which were
represented in our first quarter ended January 31, 2000.
Cost of sales includes expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended
January 31,
-------------------
2001 2000
-------- --------
(Dollars in Thousands)
Sale of Homes................ $283,405 $250,118
Cost of Sales................ 223,675 204,710
-------- --------
Housing Gross Margin......... $ 59,730 $ 45,408
======== ========
Gross Margin Percentage...... 21.1% 18.2%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended
January 31,
-------------------
2001 2000
-------- --------
Sale of Homes................ 100.0% 100.0%
-------- --------
Cost of Sales:
Housing, land &
development costs.... 70.8% 73.4%
Commissions............ 2.2% 2.3%
Financing concessions.. 0.9% 0.9%
Overheads.............. 5.0% 5.2%
-------- --------
Total Cost of Sales.......... 78.9% 81.8%
-------- --------
Gross Margin................. 21.1% 18.2%
======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the mix of both
communities and of home types delivered, consolidated quarterly gross margin
will fluctuate up or down and may not be representative of the consolidated
gross margin for the year. In addition, gross margin percentages are higher
in the Northeast Region compared to our other markets. For the three months
ended January 31, 2001 our gross margin percentage increased 2.9% compared to
the same period last year. This can be attributed to improved profitability
in the Northeast Region and increased sales prices in California.
Selling, general, and administrative expenses as a percentage of total
homebuilding revenues, decreased to 9.8% for the three months ended January
31, 2001 from 9.9% for the prior year three months. Such expenses increased
$3.3 million during the three months ended January 31, 2001 compared to the
same period last year. The dollar increase in selling, general and
administrative is primarily due to increased advertising and selling costs in
California due to the addition of five new communities, increases in
administrative costs in our Northeast Region, and the addition of Washington
Homes, Inc.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot sales.
A breakout of land and lot sales is set forth below:
Three Months Ended
January 31,
------------------
2001 2000
-------- --------
Land and Lot Sales................ $ 3,166 $ 934
Cost of Sales..................... 2,901 793
-------- --------
Land and Lot Sales Gross Margin... 265 141
Interest Expense.................. 233 191
-------- --------
Land and Lot Sales Profit (Loss)
Before Tax...................... $ 32 $ (50)
======== ========
Land and lot sales are incidental to our residential housing operations
and are expected to continue in the future but may significantly fluctuate up
or down.
Financial Services
Financial services consist primarily of originating mortgages from our
homebuyers, selling such mortgages in the secondary market, and title
insurance activities. For the three months ended January 31, 2001 financial
services provided a $1.7 million profit before taxes compared to a loss of
$0.5 million in 2000. This increase is primarily due to a change in
management, reduced costs, and increased mortgage loan amounts. In addition
to our wholly-owned mortgage facility, customers obtained mortgages from our
mortgage joint ventures in our Texas and Washington Homes divisions.
Collateralized Mortgage Financing
In the years prior to February 29, 1988 we pledged mortgage loans
originated by our mortgage banking subsidiaries against our collateralized
mortgage obligations ("CMO's"). 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 include the operations at
our headquarters in Red Bank, New Jersey. Such expenses include our executive
offices, information services, human resources, corporate accounting,
training, treasury, process redesign, internal audit, and administration of
insurance, quality, and safety. As a percentage of total revenues such
expenses increased to 3.4% for the three months ended January 31, 2001 from
2.7% for the prior year three months. Corporate general and administrative
expenses increased $3.0 million during the three months ended January 31, 2001
compared to the same period last year. Increases in corporate general and
administrative expenses are primarily attributed to less process redesign
costs associated with SAP capitalized during the three months ended January
31, 2001 compared to the same period last year, our new enterprise wide fully
integrated software package, increased depreciation resulting from capitalized
process redesign costs in prior years, and increased bonus accruals based upon
increased return on equity. Process redesign costs are capitalized in
accordance with SOP 98-1 "Accounting For the Cost of Computer Software
Development For or Obtained for Internal Use".
Interest
Interest expense includes housing, and land and lot interest. Interest
expense is broken down as follows:
Three Months Ended
January 31,
------------------
2001 2000
-------- --------
Sale of Homes.............. $ 9,272 $ 7,677
Land and Lot Sales......... 233 191
-------- --------
Total...................... $ 9,505 $ 7,868
======== ========
Housing interest as a percentage of sale of homes revenues slightly
increased to 3.3% for the three months ended January 31, 2001 compared to 3.1%
for the three months ended January 31, 2000.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations expenses, investment property operations, amortization of senior
and subordinated note issuance expenses, earnout payments from homebuilding
company acquisitions, amortization of goodwill, and corporate owned life
insurance loan interest.
Restructuring Charges
Restructuring charges are estimated expenses associated with the
integration of our operations with those of Washington Homes, Inc. These
expenses are salaries, severance and outplacement costs for the termination of
associates, and costs to close and relocate existing administrative offices,
and lost rent and leasehold improvements.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 40.1% and 27.7% for the three months ended January 31, 2001 and
2000, respectively. The increase in this percentage from 2000 to 2001 is
primarily attributed to an increased effective federal income tax rate. The
increased effective rate is due primarily to higher amounts of expenses in
2001 not deductible for federal taxes and a reduced effect of our senior
rental tax credits. Although the credits are the same in 2001 and 2000, they
reduce our effective tax rate less when pretax profits are higher. Deferred
federal and state income tax assets primarily represent the deferred tax
benefits arising from temporary differences between book and tax income which
will be recognized in future years as an offset against future taxable income.
If for some reason the combination of future years income (or loss) combined
with the reversal of the timing differences results in a loss, such losses can
be carried back to prior years to recover the deferred tax assets. As a
result, management is confident such deferred tax assets are recoverable
regardless of future income.
Inflation
Inflation has a long-term effect on us because increasing costs of land,
materials, and labor result in increasing sale prices of our homes. In
general, these price increases have been commensurate with the general rate of
inflation in our housing markets and have not had a significant adverse effect
on the sale of our homes. A significant risk faced by the housing industry
generally is that rising house costs, including land and interest costs, will
substantially outpace increases in the income of potential purchasers. In
recent years, in the price ranges in which our homes sell, we have not found
this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we generally
negotiate fixed price contracts with our subcontractors and material suppliers
for the construction of our homes. These prices usually are applicable for a
specified number of residential buildings or for a time period of between four
to twelve months. Construction costs for residential buildings represent
approximately 57% of our homebuilding cost of sales.
Merger With Washington Homes, Inc.
On January 23, 2001 we merged with Washington Homes, Inc. for a total
purchase price of $87.4 million, of which $37.9 was paid in cash and 6,352,900
shares of our Class A common stock were issued. The addition of Washington
Homes operations for slightly more than three full quarters is expected to
increase revenues more than 40% in fiscal 2001 from fiscal 2000.
Safe Harbor Statement
Certain statements contained in this Form 10-Q that are not historical
facts should be considered as "Forward-Looking Statements" within the meaning
of the Private Securities Litigation Act of 1995. Such statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results to differ materially. Such risks, uncertainties and other factors
include, but are not limited to:
. Changes in general economic and market conditions
. Changes in interest rates and the availability of mortgage financing
. Changes in costs and availability of material, supplies and labor
. General competitive conditions
. The availability of capital
. The ability to successfully effect acquisitions
These risks, uncertainties, and other factors are described in detail in
Item 1 and 2 Business and Properties in our Form 10-K for the year ended
October 31, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual stockholders meeting on March 8, 2001 at 10:30 a.m.
in the Board Room of the American Stock Exchange, 13th floor, 86 Trinity
Place, New York, New York. The following matters were voted at the meeting:
. Election of all Directors to hold office until the next Annual
Meeting of Stockholders. The elected Directors were:
.. Kevork S. Hovnanian
.. Ara K. Hovnanian
.. Paul W. Buchanan
.. Geaton A. DeCesaris, Jr.
.. Arthur Greenbaum
.. Desmond P. McDonald
.. Peter S. Reinhart
.. John J. Robbins
.. J. Larry Sorsby
.. Stephen D. Weinroth
. Ratification of selection of Ernst & Young, LLP as certified
independent accountants for fiscal year ending October 31, 2001.
.. Votes For Class A 11,871,112 Class B 72,836,990
.. Votes Against Class A 13,652 Class B 617,160
.. Abstain Class A 6,247 Class B 7,730
Item 6c. Reports on Form 8-K.
(i) 8-K filed on December 15, 2000 which was to file the press
release dated December 14, 2000 relating to fourth quarter
numbers.
(ii) 8-K filed on February 7, 2001 which was to announce completion
of the Washington Homes, Inc. merger on January 23, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: March 16, 2001 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: March 16, 2001 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (hereinafter called this
"Agreement"), dated as of August 28, 2000, between Hovnanian Enterprises,
Inc., a Delaware corporation (the "Company"), and each of the stockholders of
WHI (as hereinafter defined) set forth on the signature pages hereto (each an
"Investor").
RECITALS
WHEREAS, the Investors are the beneficial owners of shares of
common stock, par value $.01 per share ("WHI Common Stock"), of Washington
Homes, Inc., a Maryland corporation ("WHI");
WHEREAS, the Company, WHI Holding Co., Inc., a Delaware
corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and
WHI have entered into an Agreement and Plan of Merger of even date herewith
(the "Merger Agreement"), pursuant to which WHI will be merged (the "Merger")
with and into Merger Sub;
WHEREAS, as a result of the Merger, certain of the shares of WHI
Common Stock beneficially owned by the Investors will be converted at the
effective time of the Merger (the "Effective Time") into the right to
receive, and thereafter the Investors shall become the beneficial owners of,
shares of Class A Common Stock, par value $.01 per share ("Class A Common
Stock"), of the Company;
WHEREAS, in connection with the Merger, the Company and certain
of the Investors are contemporaneously entering into Voting Agreements of
even date herewith, pursuant to which each such Investor, as one of a limited
number of related shareholders of WHI, has agreed, among other things,
subject to certain terms and conditions, to vote his, her or its shares of
WHI Common Stock for approval and adoption of the Merger Agreement; and
WHEREAS, the parties hereto desire to enter into this Agreement,
which sets forth certain registration rights applicable to the Registrable
Securities (as hereinafter defined) held from time to time by the Investor.
NOW, THEREFORE, to implement the foregoing and in consideration
of the premises and of the mutual agreements contained herein, the parties
hereto agree as follows:
1. Definitions.
Whenever the following terms are used in this Agreement, they
shall have the meaning specified below:
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Holder" shall mean each Investor and any holder of Registrable
Securities who agrees in writing to be bound by the provisions of this
Agreement.
"Person" shall mean any individual, partnership, firm,
corporation, limited liability company, association, trust,
unincorporated organization or other entity.
"Registrable Securities" shall mean any Class A Common Stock
issued or issuable to a Holder and any Class A Common Stock which may
be issued or distributed in respect of such Class A Common Stock by way
of stock dividend or stock split or other distribution,
recapitalization or reclassification. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable
Securities when (i) a registration statement with respect to the sale
of such securities shall have become effective under the Securities Act
and such securities shall have been disposed of in accordance with such
registration statement, (ii) they shall have been distributed to the
public pursuant to Rule 144 or 144A (or any successor provisions) under
the Securities Act, (iii) they shall have been otherwise transferred,
new certificates for them not bearing a legend restricting further
transfer shall have been delivered by the Company and subsequent
disposition of them shall not require registration or qualification of
them under the Securities Act or any state securities or blue sky law
then in force, or (iv) they shall have ceased to be outstanding.
"Registration Expenses" shall mean expenses incident to
performance of or compliance with this Agreement, including, without
limitation, (i) all SEC and stock exchange or National Association of
Securities Dealers, Inc. registration and filing fees, (ii) all fees
and expenses of complying with securities or blue sky laws (including
fees and disbursements of counsel for the underwriters in connection
with blue sky qualifications of the Registrable Securities), (iii) all
printing, messenger and delivery expenses, (iv) all fees and expenses
incurred in connection with the listing of the Registrable Securities
on any securities exchange pursuant to clause (viii) of Section 4,
(v)the fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of any special
audits and/or "cold comfort" letters required by or incident to such
performance and compliance, (vi) the reasonable fees and disbursements
of one counsel to all Investors participating in the registration, and
(vii) any fees and disbursements of underwriters customarily paid by
the issuers or sellers of securities, including liability insurance if
the Company so desires or if the underwriters so require, and the
reasonable fees and expenses of any special experts retained in
connection with the requested registration, but excluding underwriting
discounts and commissions and transfer taxes, if any.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"SEC" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act or
the Exchange Act.
"Seller" shall mean a Holder whose Registrable Securities are
included in a registration statement pursuant to any provision of this
Agreement.
2. Incidental Registrations.
(a) Right to Include Registrable Securities. If the Company at
any time after the Effective Time proposes to register its Class A Common
Stock under the Securities Act (other than a registration of shares in
connection with a sale for its own account, or a registration on Form S-4 or
S-8, or any successor or other forms promulgated for similar purposes, or a
registration statement in connection with an offering to employees of the
Company and its subsidiaries or a registration of shares of Class A Common
Stock pursuant to the terms of any Supplemental Agreement (as hereinafter
defined) other than any such registration resulting from any right of a party
to such Supplemental Agreement to have the Company effect registration under
Section 7(a) of this Agreement), pursuant to a registration statement on
which it is permissible to register Registrable Securities for sale to the
public under the Securities Act, it will each such time give prompt written
notice to each Investor of its intention to do so and of the Investor's
rights under this Section 2. Upon the written request of any Investor made
within 15 days after the receipt of any such notice (which request shall
specify the Registrable Securities intended to be disposed of by the
Investor), the Company will use its reasonable best efforts to effect the
registration under the Securities Act of all Registrable Securities which the
Company has been so requested to register by the Investor; provided, that (i)
if, at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration statement
filed in connection with such registration, the Company shall determine for
any reason not to proceed with the proposed registration of the securities
identified in such notice to be sold, the Company may, at its election, give
written notice of such determination to the Investor and, thereupon, shall be
relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith), and (ii) if such registration
involves an underwritten offering, the Investor must sell his, her or its
Registrable Securities to the underwriters selected by the Company on the
same terms and conditions as apply to the Company, with such differences,
including any with respect to indemnification and liability insurance, as may
be customary or appropriate in secondary offerings. If a registration
requested pursuant to this Section 2(a) involves an underwritten public
offering, an Investor may elect, in writing prior to the effective date of
the registration statement filed in connection with such registration, not to
register such securities in connection with such registration.
(b) Expenses. The Company will pay Registration Expenses in
connection with each registration of Registrable Securities requested
pursuant to this Section 2 to the same extent that the Company is obligated
to pay the registration expenses of any other holders of Class A Common Stock
or any holders of Class B Common Stock, par value $.01 per share ("Class B
Common Stock" and, collectively with the Class A Common Stock, "Common
Stock"), of the Company under the registration rights agreement or agreements
having the most favorable terms to holders with respect to payment of such
expenses.
(c) Priority in Incidental Registrations. If a registration
pursuant to this Section 2 involves an underwritten offering and the managing
underwriter in good faith advises the Company in writing that, in its
opinion, the total amount of securities requested to be included in such
registration (including the Registrable Securities which Investors have
requested to be included in such registration pursuant to Section 2(a)
hereof) exceeds the amount which can be sold in such offering without having
an adverse effect on such offering as contemplated by the Company (including
the price at which the Company proposes to sell such securities), then the
Company will include in such registration (i) first, 100% of the securities
proposed to be sold in the notice delivered to the Investors pursuant to
Section 2(a) hereof and (ii) second, to the extent of the number of
securities requested to be included in such registration exceed the number of
securities that, in the opinion of such managing underwriter, can be sold
without having the adverse effect referred to above, the amount of
Registrable Securities that Investors have requested to be included in such
registration (and, in the case of more than one Holder having the rights of
the Investors under this Section 2 and requesting pursuant to Section 2(a)
hereof to have Registrable Securities included in such registration, such
amount to be allocated pro rata among all requesting Holders on the basis of
the relative number of shares of Registrable Securities then held by each
such Holder, provided that any Registrable Securities thereby allocated to
any such Holder that exceed such Holder's request will be reallocated among
the remaining requesting Holders in like manner).
3. Registration on Request.
(a) Request by Investors. After the Effective Time, upon the
written request of an Investor or group of Investors that, as of the date of
such request, hold Registrable Securities equal to at least 50% of the
aggregate of all Registrable Securities then held by all Investors requesting
that the Company effect the registration under the Securities Act of all or
part of such Investor's or Investors' Registrable Securities and specifying
the amount and intended method of disposition thereof, the Company will (i)
promptly upon receipt thereof, give written notice of such request to all
other Holders and (ii) as expeditiously as possible, use its reasonable best
efforts to effect the registration under the Securities Act of the
Registrable Securities which the Company has been so requested to register by
such Investor or Investors and any other Holders so as to permit the
disposition (in accordance with the intended method thereof as aforesaid) of
the Registrable Securities so to be registered. Notwithstanding the
foregoing, upon delivery to the requesting Investor or Investors of written
notice and a brief statement of the reason for the Company's action, the
Company shall be entitled to postpone filing of the registration statement
otherwise properly requested to be filed pursuant to this Section 3 for a
period not to exceed 60 days if, in the reasonable judgment of the Board of
Directors of the Company, such registration would materially interfere with
or materially adversely affect any then existing negotiations for financing
or any other arrangement, agreement or plan then pending or being negotiated
in good faith, provided that the duration of such postponement does not
exceed the number of days required to avoid such material interference or
material adverse effect. Notwithstanding anything to the contrary in this
Agreement, the Company need only effect a total of two registrations
requested under this Section 3 for all of the Investors as a whole, and
following such two registrations no Investor shall have any rights under this
Section 3.
(b) Registration Statement Form. Registration under this
Section 3 shall be on such appropriate registration form prescribed by the
SEC under the Securities Act (i) as shall be selected by the Company and as
shall be reasonably acceptable to the Investor and (ii) as shall permit the
disposition of the Registrable Securities pursuant to the intended method of
disposition thereof specified in accordance with Section 3(a) hereof. The
Company agrees to include in such registration statement filed pursuant to
this Section 3 all information that the participating Investors, upon advice
of counsel, shall reasonably request. The Company may, if permitted by law,
effect any registration requested under this Section 3 by the filing of a
registration statement on Form S-3 (or any successor or similar short form
registration statement). If the managing underwriter shall advise the
Company in writing that, in its opinion, the use of a form of registration
statement other than Form S-3 is of material importance to the success of
such proposed offering, then such registration shall be effected on such
other form.
(c) Expenses. The Company will pay Registration Expenses in
connection with each registration of Registrable Securities requested
pursuant to this Section 3 to the same extent that the Company is obligated
to pay the registration expenses of any other holders of Class A Common Stock
or any holders of Class B Common Stock under the registration rights
agreement or agreements having the most favorable terms to holders with
respect to payment of such expenses.
(d) Effective Registration Statement. A registration requested
pursuant to this Section 3 will not be deemed to have been effected unless it
has become effective; provided, that if, within 180 days after it has become
effective, the offering of Registrable Securities pursuant to such
registration is interfered with by any stop order, injunction or other order
or requirement of the SEC or other governmental agency or court, such
registration will be deemed not to have been effected.
(e) Selection of Underwriters. If a requested registration
pursuant to this Section 3 involves an underwritten offering, the requesting
Investor or Investors shall have the right to select the investment banker or
bankers and managers to administer the offering; provided, however, that such
investment banker or bankers and managers shall be reasonably satisfactory to
the Company.
(f) Priority in Requested Registrations. If a requested
registration pursuant to this Section 3 involves an underwritten offering and
the managing underwriter in good faith advises the Company in writing that,
in its opinion, the number of securities requested to be included in such
registration (including any Registrable Securities which any other Holder has
requested to be included in such registration pursuant to Section 3(a)
hereof) exceeds the amount which can be sold in such offering without having
an adverse effect on such offering as contemplated by the requesting Investor
or Investors (including the price at which the Investor or Investors propose
to sell such securities), then the Company will include in such registration
(i) first, 100% of the securities the requesting Investor or Investors
propose to sell and (ii) second, to the extent of the number of securities
requested to be included in such registration exceed the number of securities
that, in the opinion of such managing underwriter, can be sold without having
the adverse effect referred to above, the amount of Registrable Securities
that the other Holders have requested to be included in such registration,
such amount to be allocated pro rata among all requesting Holders on the
basis of the relative number of shares of Registrable Securities then held by
each such Holder, provided that any Registrable Securities thereby allocated
to any such Holder that exceed such Holder's request will be reallocated
among the remaining requesting Holders in like manner). In the event that
the number of Registrable Securities requested to be included in such
registration (consisting of the sum of the number of Registrable Securities
that the Investor or Investors have requested to be included in such
registration pursuant to Section 3(a) hereof and the number of Registrable
Securities which any other Holder has requested to be included in such
registration pursuant to Section 3(a)) is less than the amount of Registrable
Securities that, in the opinion of the managing underwriter, can be sold
without having the adverse effect referred to above, the Company may include
in such registration the securities the Company proposes to sell up to the
number of securities that, in the opinion of such managing underwriter, can
be so sold.
(g) Offerings Without Registration. Notwithstanding anything
to the contrary in this Section 3, if counsel for the Company shall determine
that registration under the Securities Act is not required for the amount
and/or intended method of disposition of the Registrable Securities specified
in the Investor's or Investors' request for registration pursuant to Section
3(a) hereof, the Company shall not be required to effect such requested
registration. In any such instance involving a proposed underwritten
offering of such Registrable Securities, however, the Company shall use its
reasonable best efforts to assist the Investor or Investor in consummating
the transaction or transactions contemplated in such request, including,
without limitation, the preparation of appropriate offering or sale
documents, and shall pay Registration Expenses in connection with such
offering to the same extent as the Company would be obligated to pay
Registration Expenses pursuant to Section 3(c) hereof.
4. Registration Procedures. If and whenever the Company is
required to use its reasonable best efforts to effect or cause the
registration of any Registrable Securities under the Securities Act as
provided in this Agreement, the Company will, as expeditiously as possible:
(i) prepare and, in any event within 120 days after the
end of the period within which a request for registration may be given
to the Company, file with the SEC a registration statement with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become effective; provided, however, that the
Company may discontinue any registration of its securities which is
being effected pursuant to Section 2 hereof at any time prior to the
effective date of the registration statement relating thereto;
(ii) prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective for a period not in excess of 180 days (or such
period as may be permitted under the Securities Act) and to comply with
the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the
Seller or Sellers thereof set forth in such registration statement;
provided, that before filing a registration statement or prospectus, or
any amendments or supplements thereto, the Company will furnish to
counsel for the Investor or Investors copies of all documents proposed
to be filed, which documents will be subject to the review of such
counsel and no such registration statement or prospectus, or any
amendment or supplement thereto, shall be filed to which such counsel
shall have reasonably objected on the grounds that such registration
statement or prospectus, or amendment or supplement (with respect to
disclosures or omissions in the case of a registration under Section 3
hereof relating to the Holders of Registrable Securities), does not
comply in all material respects with the requirements of the Securities
Act or the rules or regulations thereunder and shall have specified the
basis for such objection in reasonable detail;
(iii) furnish to each Seller of such Registrable
Securities such number of copies of such registration statement and of
each amendment and supplement thereto (in each case including all
exhibits), such number of copies of the prospectus included in such
registration statement (including each preliminary prospectus and
summary prospectus), in conformity with the requirements of the
Securities Act, and such other documents as such Seller may reasonably
request in order to facilitate the disposition of the Registrable
Securities by such Seller;
(iv) use its reasonable best efforts to register or
qualify such Registrable Securities covered by such registration
statement under such other securities or blue sky laws of such
jurisdictions as each Seller shall reasonably request, and do any and
all other acts and things which may be reasonably necessary or
advisable to enable such Seller to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such Seller,
except that the Company shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any
jurisdiction where, but for the requirements of this clause (iv), it
would not be obligated to be so qualified, to subject itself to
taxation in any such jurisdiction, or to consent to general service of
process in any such jurisdiction;
(v) use its reasonable best efforts to cause such
Registrable Securities covered by such registration statement to be
registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the Seller or Sellers thereof
to consummate the disposition of such Registrable Securities;
(vi) notify each Seller of any such Registrable
Securities covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act within the appropriate period mentioned in clause (ii)
of this Section 4, of the Company's becoming aware that the prospectus
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing,
and at the request of any such Seller, prepare and furnish to such
Seller a reasonable number of copies of an amended or supplemental
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances
then existing;
(vii) otherwise use its reasonable best efforts to
comply with all applicable rules and regulations of the SEC, and make
available to its security holders, as soon as reasonably practicable
(but not more than 18 months) after the effective date of the
registration statement, an earnings statement which shall satisfy the
provisions of Section 11(a) of the Securities Act and the rules and
regulations promulgated thereunder;
(viii) use its reasonable best efforts to list such
Registrable Securities on any securities exchange on which the Class A
Common Stock is then listed, if such Registrable Securities are not
already so listed and if such listing is then permitted under the rules
of such exchange, and to provide a transfer agent and registrar for
such Registrable Securities covered by such registration statement not
later than the effective date of such registration statement;
(ix) enter into such customary agreements (including
an underwriting agreement in customary form) and take such other
actions as requesting Investor or Investors, the Seller or Sellers of a
majority of the Registrable Securities being sold by other Holders or
the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities;
(x) obtain a "cold comfort" letter or letters from the
Company's independent public accountants in customary form and covering
matters of the type customarily covered by "cold comfort" letters as
the Investor or the Seller or Sellers of a majority of the Registrable
Securities being sold by other Holders (provided that such Registrable
Securities constitute at least 25% of the securities covered by such
registration statement) shall reasonably request; and
(xi) make available for inspection by any Seller of
such Registrable Securities covered by such registration statement, by
any underwriter participating in any disposition to be effected
pursuant to such registration statement and by any attorney, accountant
or other agent retained by any such Seller or any such underwriter, all
pertinent financial and other records, pertinent corporate documents
and properties of the Company, and cause all of the Company's officers,
directors and employees to supply all information reasonably requested
by any such Seller, underwriter, attorney, accountant or agent in
connection with such registration statement.
The Company may require each Seller to furnish the Company with
such information regarding such Seller and pertinent to the disclosure
requirements relating to the registration and the distribution of such
securities as the Company may from time to time reasonably request in
writing.
Each Seller agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in clause (vi) of
this Section 4, such Seller will forthwith discontinue disposition of
Registrable Securities pursuant to the registration statement covering such
Registrable Securities until such Seller's receipt of the copies of the
supplemented or amended prospectus contemplated by clause (vi) of this
Section 4, and, if so directed by the Company, such Seller will deliver to
the Company (at the Company's expense) all copies, other than permanent file
copies then in such Seller's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the period mentioned in clause
(ii) of this Section 4 shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
clause (vi) of this Section 4 and including the date when each Seller shall
have received the copies of the supplemented or amended prospectus
contemplated by clause (vi) of this Section 4.
5. Indemnification.
(a) Indemnification by the Company. In the event of any
registration of any securities of the Company under the Securities Act
pursuant to Section 2 or 3, the Company will, and it hereby does, indemnify
and hold harmless, to the extent permitted by law, the Seller of any
Registrable Securities covered by such registration statement, each affiliate
of such Seller and their respective directors and officers or general and
limited partners (and the directors, officers, affiliates and controlling
Persons thereof), each other Person who participates as an underwriter in the
offering or sale of such securities and each other Person, if any, who
controls such Seller or any such underwriter within the meaning of the
Securities Act (collectively, the "Indemnified Parties"), against any and all
losses, claims, damages or liabilities, joint or several, and expenses to
which such Seller, any such director or officer or general or limited partner
or affiliate or any such underwriter or controlling Person may become subject
under the Securities Act, common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof,
whether or not such Indemnified Party is a party thereto) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary, final
or summary prospectus contained therein, or any amendment or supplement
thereto, or (ii) any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing, and
the Company will reimburse such Indemnified Party for any legal or any other
expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided,
that the Company shall not be liable to any Indemnified Party in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement or amendment or supplement thereto or in
any such preliminary, final or summary prospectus in reliance upon and in
conformity with written information with respect to such Seller furnished to
the Company by such Seller for use in the preparation thereof; and provided,
further, that the Company will not be liable to any Person who participates
as an underwriter in the offering or sale of Registrable Securities or any
other Person, if any, who controls such underwriter within the meaning of the
Securities Act, under the indemnity agreement in this Section 5(a) with
respect to any preliminary prospectus or the final prospectus or the final
prospectus as amended or supplemented, as the case may be, to the extent that
any such loss, claim, damage or liability of such underwriter or controlling
Person results from the fact that such underwriter sold Registrable
Securities to a Person to whom there was not sent or given, at or prior to
the written confirmation of such sale, a copy of the final prospectus
(including any documents incorporated by reference therein) or of the final
prospectus as then amended or supplemented (including any documents
incorporated by reference therein), whichever is most recent, if the Company
has previously furnished copies thereof to such underwriter. Such indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of such Seller or any Indemnified Party and shall survive the
transfer of such securities by such Seller.
(b) Indemnification by the Seller. The Company may require, as
a condition to including any Registrable Securities in any registration
statement filed in accordance with Section 4 herein, that the Company shall
have received an undertaking reasonably satisfactory to it from the
prospective Seller of such Registrable Securities or any underwriter to
indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 5(a) hereof) the Company and all other prospective Sellers
or any underwriter, as the case may be, with respect to any statement or
alleged statement in or omission or alleged omission from such registration
statement, any preliminary, final or summary prospectus contained therein, or
any amendment or supplement, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
written information with respect to such Seller or underwriter furnished to
the Company by such Seller or underwriter for use in the preparation of such
registration statement, preliminary, final or summary prospectus or amendment
or supplement, or a document incorporated by reference into any of the
foregoing. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Company or any of the
prospective Sellers, or any of their respective affiliates, directors,
officers or controlling Persons and shall survive the transfer of such
securities by such Seller.
(c) Notices of Claims, Etc. Promptly after receipt by an
Indemnified Party hereunder of written notice of the commencement of any
action or proceeding with respect to which a claim for indemnification may be
made pursuant to this Section 5, such Indemnified Party will, if a claim in
respect thereof is to be made against an indemnifying party, give written
notice to the latter of the commencement of such action; provided, that the
failure of the Indemnified Party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 5, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any
such action is brought against an Indemnified Party, unless in such
Indemnified Party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnifying party will be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified
to the extent that it may wish, with counsel reasonably satisfactory to such
Indemnified Party, and after notice from the indemnifying party to such
Indemnified Party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such Indemnified Party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. No
indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include, as an unconditional term thereof, the
giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation, without the prior
written consent of the Indemnified Party.
(d) Other Indemnification. Indemnification similar to that
specified in the preceding subdivisions of this Section 5 (with appropriate
modifications) shall be given by the Company and each Seller with respect to
any required registration or other qualification of securities under any
federal or state law or regulation or governmental authority other than the
Securities Act.
(e) Non-Exclusivity. The obligations of the parties under this
Section 5 shall be in addition to any liability which any party may otherwise
have to any other party.
6. Rule 144. The Company covenants that it will file the
reports required to be filed by it under the Securities Act and the Exchange
Act and the rules and regulations adopted by the SEC thereunder (or, if the
Company is not required to file such reports, it will, upon the request of
the Investor, make publicly available such information), and it will take
such further action as the Investor may reasonably request, all to the extent
required from time to time to enable Investors to sell shares of Registrable
Securities without registration under the Securities Act within the
limitation of the exemptions provided by (i) Rule 144 under the Securities
Act, as such Rule may be amended from time to time, or (ii) any similar rule
or regulation hereafter adopted by the SEC. Upon the request of any
Investor, the Company will deliver to the Investor a written statement as to
whether he, she or it has complied with such requirements. Notwithstanding
anything contained in this Section 6, the Company may deregister under
Section 12 of the Exchange Act if it then is permitted to do so pursuant to
the Exchange Act and the rules and regulations thereunder.
7. Miscellaneous.
(a) Holdback Agreement. If any such registration shall be in
connection with an underwritten public offering, the Holders agree not to
effect any public sale or distribution, including any sale pursuant to Rule
144 under the Securities Act, of any equity securities of the Company, or of
any security convertible into or exchangeable or exercisable for any equity
security of the Company (in each case, other than as part of such
underwritten public offering), within 7 days before or 180 days (or such
lesser period as the managing underwriters may permit) after the effective
date of such registration if, and to the extent, the Company or any managing
underwriter of any such offering determines such action is necessary or
desirable in order to effect such offering, and the Company hereby also so
agrees and agrees to cause each other holder of any equity security, or of
any security convertible into or exchangeable or exercisable for any equity
security, of the Company purchased from the Company (at any time other than
in a public offering) to so agree.
(b) Amendments and Waivers. This Agreement may be amended and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company shall have
obtained the written consent to such amendment, action or omission to act, of
each Investor who is then a party hereto. Each Holder of any Registrable
Securities at the time or thereafter outstanding shall be bound by any
consent authorized by this Section 7(c), whether or not such Registrable
Securities shall have been marked to indicate such consent.
(c) Successors, Assigns and Transferees. This Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and assigns. In addition, and whether or not any
express assignment shall have been made, the provisions of this Agreement
which are for the benefit of the parties hereto other than the Company shall
also be for the benefit of and enforceable by any subsequent Holder of any
Registrable Securities, subject to the provisions contained herein.
(d) Notices. All notices and other communications provided for
hereunder shall be in writing and shall be sent by first class mail, telex,
facsimile or hand delivery:
(i) if to the Company, to:
Hovnanian Enterprises, Inc.
10 Highway 35, P.O. Box 500
Red Bank, New Jersey 07701
Attention:
With a copy to:
Hovnanian Enterprises, Inc.
10 Highway 35, P.O. Box 500
Red Bank, New Jersey 07701
Attention:
(ii) if to any Investor, to him, her or it at the address
set forth below his or her signature or otherwise designated by such
Investor:
(iii) if to any other Holder, to the address of such other
holder as shown in the books and records of the Company, or to such
other address as any of the above shall have designated in writing to
all of the other above.
All such notices and communications shall be deemed to have been given or
made (1) when delivered by hand, (2) five business days after being deposited
in the mail, postage prepaid, (3) when telexed, answer-back received or (4)
when sent by facsimile, receipt acknowledged.
(e) Descriptive Headings. The headings in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning of terms contained herein.
(f) Severability. In the event that any one or more of the
provisions, paragraphs, words, clauses, phrases or sentences contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision, paragraph, word, clause,
phrase or sentence in every other respect and of the remaining provisions,
paragraphs, words, clauses, phrases or sentences hereof shall not be in any
way impaired, it being intended that all rights, powers and privileges of the
parties hereto shall be enforceable to the fullest extent permitted by law.
(g) Counterparts. This Agreement may be executed in two or
more counterparts, and by different parties on separate counterparts, each of
which shall be deemed an original, but all such counterparts shall together
constitute one and the same instrument, and it shall not be necessary in
making proof of this Agreement to produce or account for more than one such
counterpart.
(h) Effectiveness; Termination. This Agreement shall not
become effective until the Effective Time. This Agreement shall terminate,
and shall cease to be of any further force or effect, with respect to any
Investor or any other Holder at such time as such person beneficially owns
shares of Class A Common Stock representing less than 1% of the issued and
outstanding shares of Common Stock of the Company.
(i) Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed therein. The parties to
this Agreement hereby agree to submit to the jurisdiction of the courts of
the State of New Jersey in any action or proceeding arising out of or
relating to this Agreement.
(j) Specific Performance. The parties hereto acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, it is agreed that
they shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court of competent jurisdiction in the United States
or any state thereof, in addition to any other remedy to which they may be
entitled at law or equity.
IN WITNESS WHEREOF, each of the undersigned has executed this
Agreement or caused this Agreement to be executed on its behalf as of the
date first written above.
HOVNANIAN ENTERPRISES, INC.
By: /S/ J. LARRY SORSBY
Name: J. Larry Sorsby
Title: Senior Vice-President and CFO
Investors:
/s/ Geaton A. DeCesaris, Sr /s/ Paul C. Sukalo
Geaton A. DeCesaris, Sr.* Paul C. Sukalo*
/s/ Elizabeth H. DeCesaris /s/ Iad M. Sukalo
Elizabeth H. DeCesaris* Ida M. Sukalo*
/s/ Marco A. DeCesaris /s/ Thomas Pellerito
Marco A. DeCesaris* Thomas Pellerito*
/s/ Joseph A. DeCesaris /s/ Josephine A. DeCesaris
Joseph A. DeCesaris* Josephine A. DeCesaris*
/s/ Donna M. DeCesaris /s/ Geaton A. DeCeasaris, Jr.
Donna M. DeCesaris* Geaton A. DeCesaris, Jr.
/s/ A. Hugo DeCesaris /s/ Julie P. DeCesaris
A. Hugo DeCesaris* Julie P. DeCesaris*
* Pursuant to a Power of Attorney attached hereto.
THE DeCESARIS FAMILY WASHINGTON THE MARCO A. DeCESARIS
HOMES STOCK GRAT TRUST FAMILY TRUST
By: /s/ Geaton A. DeCesaris, Sr., Trustee By: /s/ Maria R. Vaccaro, Trustee
Geaton A. DeCesaris, Sr., Trustee* Maria R. Vaccaro, Trustee*
By: /s/ Robert D. Courtland, Trustee
THE JOSEPH A. AND DONNA M. Robert D. Courtland, Trustee*
DECESARIS FAMILY TRUST
By: /s/ Maria R. Vaccaro, Trustee THE GEATON A. AND
Maria R. Vaccaro, Trustee* ELIZABETH H. DeCESARIS
FAMILY TRUST
By: /s/ Robert D. Courtland, Trustee
Robert D. Courtland, Trustee* By: /s/ Maria R. Vaccaro, Trustee
Maria R. Vaccaro, Trustee*
THE GEATON A. AND JOSEPHINE A. By: /s/ Robert D. Courtland,
Trustee
DeCESARIS FAMILY TRUST Robert D. Courtland, Trustee*
By: /s/ Maria R. Vaccaro, Trustee
Maria R. Vaccaro, Trustee* THE A. HUGO AND JULIE P.
DeCESARIS FAMILY TRUST
By: /s/ Robert D. Courtland, Trustee
Robert D. Courtland, Trustee* By: /s/ Maria R. Vaccaro, Trustee
Maria R. Vaccaro, Trustee*
By: /s/ Robert D. Courtland,
Trustee
Robert D. Courtland, Trustee*
* Pursuant to a Power of Attorney attached hereto.
15
EMPLOYMENT AGREEMENT
(Geaton A. DeCesaris, Jr.)
EMPLOYMENT AGREEMENT (the "Agreement") dated January 23, 2001 by
and between K. Hovnanian Enterprises, Inc. (the "Company") and Geaton A.
DeCesaris, Jr. (the "Executive").
WHEREAS, Executive entered into that certain Employment Agreement
with WHI (as hereinafter defined) dated July 1, 2000 (the "WHI Employment
Agreement"). As an inducement to the Executive to enter into this Agreement,
the Executive has agreed to the cancellation of the WHI Employment Agreement
in consideration for a payment of a signing bonus to the Executive in an
amount equal to the Executive's base salary and the total annual bonus in
respect of WHI's fiscal year ended July 31, 2000 (which includes the current
amount paid and the amount deferred) earned by the Executive for WHI's fiscal
year ended July 31, 2000;
WHEREAS, the Company desires to employ Executive and to enter
into an agreement embodying the terms of such employment; and
WHEREAS, Executive desires to accept such employment and enter
into such an agreement.
NOW, THEREFOR, in consideration of the promises and mutual
covenants herein and for other good and valuable consideration, the parties
agree as follows:
1. Term of Employment. Subject to the provisions of Section 7 of
this Agreement and the consummation of the transactions contemplated in the
Agreement and Plan of Merger among Hovnanian Enterprises, Inc. ("Hovnanian"),
WHI Holding Co., Inc. and Washington Homes, Inc. ("WHI") dated as of August
27, 2000 (such agreement, the "Merger Agreement" and the date of such
consummation, the "Effective Time"), Executive shall be employed by the
Company for a period commencing on the Effective Time and ending on October
31, 2003 (the "Employment Term") on the terms and subject to the conditions
set forth in this Agreement.
2. Position.
a. During the Employment Term, Executive shall serve as the
Company's Chief Operating Officer and President of Homebuilding Operations.
In such position, Executive shall have direct responsibility for the
oversight of the President of the Southeast Region of the Company and of the
combined assets of the former WHI, which has been merged with and into the
Company, and the assets of the Southeast Region of Hovnanian (of which the
Company is a wholly- owned subsidiary), as well as such other duties and
authority as shall be determined from time to time by the Board of Directors
(the "Board") and the Chief Executive Officer of Hovnanian. The Executive
will also serve as a member of the Board of Directors of Hovnanian and a
member of the Strategic Planning Committee of Hovnanian and will be
responsible for the development and recommendation to the Chief Executive
Officer and Board of Directors of Hovnanian of ideas and strategies for
improvement of homebuilding operations and profitability. Furthermore, the
Executive will be responsible, along with other executives of Hovnanian and
the Company, for implementation of decisions affecting homebuilding
operations and the profitability of Hovnanian and its subsidiaries.
Executive shall operate principally out of Landover, Maryland and such other
locations in the Washington, D.C. area as may be requested from time to time.
Executive agrees to travel to such other places as may be required from time
to time to perform Executive's duties under this Agreement.
b. During the Employment Term, Executive will devote
Executive's full business time and best efforts to the performance of
Executive's duties hereunder and will not engage in any other business,
profession or occupation for compensation or otherwise which would conflict
or interfere with the rendition of such services either directly or
indirectly, without the prior written consent of the Board; provided that
nothing herein shall preclude Executive, from accepting appointment to or
continue to serve on any board of directors or trustees of any business
corporation or any charitable organization; provided in each case, and in the
aggregate, that such activities do not conflict or interfere with the
performance of Executive's duties hereunder or conflict with Section 8.
c. In addition to the foregoing, during the Employment
Term, so long as Executive continues to hold at least 500,000 shares of
common stock of Hovnanian (the "Shares"), Executive shall also serve as a
member of the board of directors of Hovnanian (the "Hovnanian Board"). Upon
termination of Executive's employment pursuant to this Agreement for any
reason other than for Cause, death or Disability (as hereinafter defined),
Executive shall continue to serve as a member of the Hovnanian Board for a
period of two years following the date of termination, so long as he
continues to hold at least 500,000 Shares; provided, however, that in the
event that Executive breaches the covenant not to compete set forth in
Section 8(a) of this Agreement, Executive shall immediately cease to be a
member of the Hovnanian Board.
3. Base Salary. During the Employment Term, the Company shall
pay Executive a base salary at the annual rate of $500,000, payable in
regular installments in accordance with the Company's usual payment
practices. Executive's base salary shall be adjusted annually, at the same
time as other executives of the Company's base salary is adjusted, by a
percentage equal to the percentage increase, if any, in the Consumer Price
Index for all Urban Consumers (the "CPI") for the Washington, D.C.
Metropolitan Area (or any successor CPI), published by the Bureau of Labor
Statistics of the United States for the year that immediately precedes the
calendar year in which the applicable anniversary occurs. The amount of
Executive's base salary, as adjusted from time to time hereunder, shall be
referred to herein as Executive's "Base Salary".
4. Annual Bonus; Stock Options.
a. Annual Bonus. With respect to each full fiscal year
during the Employment Term, Executive shall be eligible to earn an annual
bonus award (an "Annual Bonus") in accordance with the terms and conditions
of the K. Hovnanian Annual Incentive Plan for Executive (attached hereto as
Exhibit A), subject to the terms and conditions of Section 5 and Exhibit C
attached hereto.
b. Stock Options. The Executive shall be entitled to
options to acquire shares of the Class A common stock, par value $0.01 per
share, of Hovnanian in accordance with the terms and conditions set forth in
Exhibit B attached hereto. In addition to the foregoing, and notwithstanding
that the WHI Employment Agreement shall, as of the Effective Time, be of no
further force and effect, the Company acknowledges that Hovnanian has assumed
and shall continue to honor Executive's rights set forth in the grant to the
Executive of a Nonstatutory Stock Option for the shares of common stock,
$0.01 par value per share, of WHI) and the provisions set forth in Section
2(b) of such WHI Employment Agreement. Executive hereby agrees that any
additional option grants shall be made pursuant to the Option Plan and shall
include a vesting schedule consistent with such option grants made pursuant
to the Option Plan. Executive further hereby acknowledges that the current
option-vesting schedule under the Option Plan provides that options vest 25%
annually commencing on the third anniversary of the date of grant and on each
anniversary thereafter.
5. Employee Benefits. During the Employment Term, Executive
shall be entitled to participate in the Company's employee benefit plans
(other than bonus, incentive or severance plans), including group medical,
dental, disability and life insurance plans, retirement plans, and
supplemental and excess retirement plans, as in effect from time to time
(collectively "Employee Benefits"), on the same basis as those benefits are
generally made available to other senior executives of the Company, except
the Company shall specifically provide Executive with the benefits set forth
in Exhibit C hereof; provided, that Executive shall be entitled to four (4)
weeks paid vacation per year. For purposes of determining eligibility to
participate and vesting only, where length of service is relevant under any
Employee Benefit plan, Executive shall receive service credit for Executive's
service with Washington Homes, Inc. to the same extent such service credit
was granted under Washington Homes, Inc. employee benefits plans. The
Company hereby acknowledges that in the case of Executive, such service
credit is equal to 27 years (as of the date hereof). In addition to the
foregoing, in the event that the Employment Term expires and Executive's
employment with the Company terminates thereafter, Executive shall be
entitled to participate in such employee benefit plans as may be offered to
other executives of the Company upon their termination of employment.
6. Business Expenses. During the Employment Term, reasonable
business expenses incurred by Executive in the performance of Executive's
duties hereunder shall be reimbursed by the Company in accordance with
Company policies, except the Company shall specifically reimburse Executive
for the expenses set forth in Exhibit C hereof pursuant to the policy in
effect at WHI prior to the Effective Time, which policy is also set forth in
Exhibit C hereof.
7. Termination. The Employment Term and Executive's employment
hereunder may be terminated by either party at any time and for any reason;
provided that Executive will be required to give the Company at least 30 days
advance written notice of any resignation of Executive's employment.
Notwithstanding any other provision of this Agreement, the provisions of this
Section 7 shall exclusively govern Executive's rights upon termination of
employment with the Company and its affiliates.
a. By the Company For Cause or By Executive Resignation
Without Good Reason.
(i) The Employment Term and Executive's employment
hereunder may be terminated by the Company for Cause (as defined below) and
shall terminate automatically upon Executive's resignation without Good
Reason (as defined in Section 7(c)); provided that Executive will be required
to give the Company at least 30 days advance written notice of a resignation
without Good Reason.
(ii) For purposes of this Agreement, "Cause" shall mean
(A) dishonesty in the performance of Executive's duties hereunder, (B) an act
or acts on Executive's part constituting (x) a felony under the laws of the
United States or any state thereof or (y) a misdemeanor involving moral
turpitude, (C) Executive's willful malfeasance or willful misconduct, whether
by action or failure to act, (including, without limitation, Executive's
continued absenteeism or failure to carry out a direct, legal order given to
Executive by his supervisor) in connection with Executive's duties hereunder
for a period of 20 days following written notice by the Company to Executive
of the details of such malfeasance or misconduct or (D) Executive's breach of
the provisions of Sections 8 or 9 of this Agreement.
(iii) If Executive's employment is terminated by the
Company for Cause, or if Executive resigns without Good Reason after giving
the Company 30 days advance written notice of such resignation, Executive
shall be entitled to receive:
(A) the Base Salary through the date of termination;
(B) any Annual Bonus which may be earned but not yet paid
as of the date of termination for any previously completed fiscal
year;
(C) reimbursement for any unreimbursed business expenses
properly incurred by Executive in accordance with Company policy
prior to the date of Executive's termination; and
(D) such Employee Benefits, if any, as to which Executive
may be entitled under the employee benefit plans of the Company
(the amounts described in clauses (A) through (D) hereof being
referred to as the "Accrued Rights").
Following such termination of Executive's employment by the
Company for Cause or resignation by Executive without Good Reason, except as
set forth in this Section 7(a)(iii), Executive shall have no further rights
to any compensation or any other benefits under this Agreement.
b. Disability or Death.
(i) The Employment Term and Executive's employment
hereunder shall terminate upon Executive's death and may be terminated by the
Company if Executive becomes physically or mentally incapacitated and is
therefore unable for a period of six (6) consecutive months or for an
aggregate of nine (9) months in any twenty-four (24) consecutive month period
to perform Executive's duties (such incapacity is hereunder referred to as
"Disability"). Any question as to the existence of the Disability of
Executive as to which Executive and the Company cannot agree shall be
determined in writing by a qualified independent physician mutually
acceptable to Executive and the Company. If Executive and the Company cannot
agree as to a qualified independent physician, each shall appoint such a
physician and those two physicians shall select a third who shall make such
determination in writing. The determination of Disability made in writing to
the Company and Executive shall be final and conclusive for all purposes of
the Agreement.
(ii) Upon termination of Executive's employment hereunder
for either Disability or death, Executive or Executive's estate (as the case
may be) shall be entitled to receive:
(A) the Accrued Rights; and
(B) a pro rata portion of any Annual Bonus that Executive
would have been entitled to receive pursuant to Section 4 hereof
in such year based upon the percentage of the fiscal year that
shall have elapsed through the date of Executive's termination of
employment, payable when such Annual Bonus would have otherwise
been payable had Executive's employment not terminated,
Following Executive's termination of employment due to death or
Disability, except as set forth in this Section 7(b)(ii), Executive shall
have no further rights to any compensation or any other benefits under this
Agreement.
c. By the Company Without Cause or Resignation by Executive
for Good Reason.
(i) The Employment Term and Executive's employment
hereunder may be terminated by the Company without Cause or by Executive's
resignation for Good Reason.
(ii) For purposes of this Agreement, "Good Reason" shall
mean (A) the failure of the Company to pay or cause to be paid Executive's
Base Salary or Annual Bonus, when due hereunder or (B) any substantial and
sustained diminution in Executive's authority or responsibilities from those
described in Section 2 hereof; provided that either of the events described
in clauses (A) and (B) of this Section 7(c)(ii) shall constitute Good Reason
only if the Company fails to cure such event within 30 days after receipt
from Executive of written notice of the event which constitutes Good Reason;
provided, further, that "Good Reason" shall cease to exist for an event on
the 30th day following the later of its occurrence or Executive's knowledge
thereof, unless Executive has given the Company written notice thereof prior
to such date.
(iii) If Executive's employment is terminated by the
Company without Cause (other than by reason of death or Disability) or if
Executive resigns for Good Reason, Executive shall be entitled to receive:
(A) the Accrued Rights; and
(B) a pro rata portion of any Annual Bonus that Executive
would have been entitled to receive pursuant to Section 4 hereof
in such year based upon the percentage of the fiscal year that
shall have elapsed through the date of Executive's termination of
employment, payable when such Annual Bonus would have otherwise
been payable had Executive's employment not terminated; and
(C) an amount equal to two times the sum of (i) the Base
Salary, plus (ii) the average of the last two fiscal years'
Annual Bonus earned by Executive, payable within thirty (30) days
following the date of termination.
Following Executive's termination of employment by the Company
without Cause (other than by reason of Executive's death or Disability) or by
Executive's resignation for Good Reason, except as set forth in this Section
7(c)(iii), Executive shall have no further rights to any compensation or any
other benefits under this Agreement.
d. Continued Employment Beyond the Expiration of the
Employment Term. Unless the parties otherwise agree in writing, continuation
of Executive's employment with the Company beyond the expiration of the
Employment Term shall be deemed an employment at-will and shall not be deemed
to extend any of the provisions of this Agreement and Executive's employment
may thereafter be terminated at will by either Executive or the Company;
provided that the provisions of Sections 7(c)(iii), 8, 9 and 10 of this
Agreement shall survive any termination of this Agreement or Executive's
termination of employment hereunder.
e. Notice of Termination. Any purported termination of
employment by the Company or by Executive (other than due to Executive's
death) shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 11(g) hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall
set forth in reasonable detail the facts and circumstances claimed to provide
a basis for termination of employment under the provision so indicated.
f. Resignation. Upon termination of Executive's employment
for any reason, Executive agrees to resign, as of the date of such
termination and to the extent applicable, from the Company as an officer of
the Company and any of the Company's affiliates.
8. Non-Competition.
a. Executive acknowledges and recognizes the highly
competitive nature of the businesses of the Company and its affiliates and
accordingly agrees as follows:
(1) During the Employment Term and, for a period of (x) six
months following the date the Company terminates Executive's employment
for Cause or (y) one year following the date Executive ceases to be
employed by the Company for any other reason (other than as a result of
the natural expiration of the Employment Term), Executive will not,
whether on Executive's own behalf or on behalf of or in conjunction
with any person, company, business entity or other organization
whatsoever, directly or indirectly:
(i) engage in any business that competes with the
business of the Company or its affiliates (including,
without limitation, businesses which the Company or
its affiliates have specific plans to conduct in the
future and as to which Executive is aware of such
planning) (a "Competitive Business");
(ii) enter the employ of, or render any services to, any
person or entity (or any division of any person or
entity) who or which engages in a Competitive
Business including, without limitation, any person or
entity who or which derives more than 5% of its
annual revenues from any Competitive Business (or
which is part of a controlled group of corporations
which derives more than 5% of its annual revenues
from any Competitive Business);
(iii) acquire a financial interest in, or otherwise become
actively involved with, any Competitive Business,
directly or indirectly, as an individual, partner,
shareholder, officer, director, principal, agent,
trustee or consultant; or
(iv) interfere with, or attempt to interfere with,
business relationships (whether formed before, on or
after the date of this Agreement) between the Company
or any of its affiliates and customers, clients,
suppliers, partners, members or investors of the
Company or its affiliates.
(2) Notwithstanding anything to the contrary in this Agreement,
Executive may, directly or indirectly own, solely as an investment,
securities of any person engaged in the business of the Company or its
affiliates which are publicly traded on a national or regional stock
exchange or on the over-the-counter market if Executive (i) is not a
controlling person of, or a member of a group which controls, such
person and (ii) does not, directly or indirectly, own 5% or more of any
class of securities of such person.
(3) During the Employment Term and, for a period of eighteen
months following the date Executive ceases to be employed by the
Company (the "Restricted Period"), Executive will not, whether on
Executive's own behalf or on behalf of or in conjunction with any
person, company, business entity or other organization whatsoever,
directly or indirectly:
(i) solicit or encourage any employee of the Company or
its affiliates to leave the employment of the Company
or its affiliates;
(ii) solicit the employment or services of any employee
who left the employment of the Company or its
affiliates coincident with, or within three months
prior to or after the termination of, Executive's
employment with the Company;
(iii) hire any such employee (other than any employee who
is related to Executive by blood or by marriage) who
was employed by the Company or its affiliates as of
the date of Executive's termination of employment
with the Company or who left the employment of the
Company or its affiliates coincident with, or within
one year prior to or after, the termination of
Executive's employment with the Company; or
(iv) Compete for any real property that the Company had
investigated, conducted due diligence on, conducted
research into, performed a feasibility analysis on,
entered into an option to purchase, entertained
entering into a letter of intent or an option to
purchase, or otherwise expressed an interest in
purchasing at any time within one year prior to the
termination of Executive's employment with the
Company.
(4) During the Restricted Period, Executive will not, directly
or indirectly, solicit or encourage to cease to work with the Company
or its affiliates any consultant then under contract with the Company
or its affiliates.
(5) Notwithstanding anything to the contrary contained in this
Agreement, the provisions of sub clause (1) of this Section 8(a) shall
be restricted to those states within the southeast region of the United
States in which the Company operates and all other areas in which the
Executive has performed significant services for the Company.
b. It is expressly understood and agreed that although
Executive and the Company consider the restrictions contained in this Section
8 to be reasonable, if a final judicial determination is made by a court of
competent jurisdiction that the time or territory or any other restriction
contained in this Agreement is an unenforceable restriction against
Executive, the provisions of this Agreement shall not be rendered void but
shall be deemed amended to apply as to such maximum time and territory and to
such maximum extent as such court may judicially determine or indicate to be
enforceable. Alternatively, if any court of competent jurisdiction finds
that any restriction contained in this Agreement is unenforceable, and such
restriction cannot be amended so as to make it enforceable, such finding
shall not affect the enforceability of any of the other restrictions
contained herein.
9. Confidentiality. Executive will not at any time (whether
during or after Executive's employment with the Company) disclose or use for
Executive's own benefit or purposes or the benefit or purposes of any other
person, firm, partnership, joint venture, association, corporation or other
business organization, entity or enterprise other than the Company and any of
its subsidiaries or affiliates, any trade secrets, information, data, or
other confidential information relating to customers, development programs,
costs, marketing, trading, investment, sales activities, promotion, credit
and financial data, manufacturing processes, financing methods, plans, or the
business and affairs of the Company generally, or of any subsidiary or
affiliate of the Company; provided that the foregoing shall not apply to
information which is not unique to the Company or which is generally known to
the industry or the public other than as a result of Executive's breach of
this covenant. Except as required by law, Executive will not disclose to
anyone, other than his immediate family and legal or financial advisors, the
existence or contents of this Agreement. Executive agrees that upon
termination of Executive's employment with the Company for any reason, he
will return to the Company immediately all memoranda, books, papers, plans,
information, letters and other data, and all copies thereof or therefrom, in
any way relating to the business of the Company and its affiliates, except
that he may retain personal notes, notebooks and diaries that do not contain
confidential information of the type described in the preceding sentence.
Executive further agrees that he will not retain or use for Executive's
account at any time any trade names, trademark or other proprietary business
designation used or owned in connection with the business of the Company or
its affiliates.
10. Specific Performance. Executive acknowledges and agrees
that the Company's remedies at law for a breach or threatened breach of any
of the provisions of Section 8 or Section 9 would be inadequate and, in
recognition of this fact, Executive agrees that, in the event of such a
breach or threatened breach, in addition to any remedies at law, the Company,
without posting any bond, shall be entitled to cease making any payments or
providing any benefit otherwise required by this Agreement and obtain
equitable relief in the form of specific performance, temporary restraining
order, temporary or permanent injunction or any other equitable remedy which
may then be available.
11. Miscellaneous.
a. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland, without
regard to conflicts of laws principles thereof.
b. Entire Agreement/Amendments. This Agreement contains
the entire understanding of the parties with respect to the employment of
Executive by the Company. There are no restrictions, agreements, promises,
warranties, covenants or undertakings between the parties with respect to the
subject matter herein other than those expressly set forth herein. This
Agreement may not be altered, modified, or amended except by written
instrument signed by the parties hereto.
c. No Waiver. The failure of a party to insist upon strict
adherence to any term of this Agreement on any occasion shall not be
considered a waiver of such party's rights or deprive such party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Agreement.
d. Severability. In the event that any one or more of the
provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not be affected thereby.
e. Assignment. This Agreement shall not be assignable by
Executive. This Agreement may be assigned by the Company to a person or
entity, which is an affiliate or a successor in interest to substantially all
of the business operations of the Company. Upon such assignment, the rights
and obligations of the Company hereunder shall become the rights and
obligations of such affiliate or successor person or entity.
f. Successors; Binding Agreement. This Agreement shall
inure to the benefit of and be binding upon personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devises and legatees.
g. Notice. For the purpose of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered by hand or
overnight courier or three days after it has been mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below Agreement, or to such other address as
either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only
upon receipt.
If to the Company:
K. Hovnanian Enterprises, Inc.
10 Highway 35
P.O. Box 500
Red Bank, New Jersey 07701
Attention: Ara K. Hovnanian, President
With a copy to:
Peter S. Reinhart,
Senior Vice President and General Counsel
If to Executive:
Geaton A. DeCesaris, Jr.
5806 Sonny Drive
Lothian, Maryland 20711
h. Executive Representation. Executive hereby represents
to the Company that the execution and delivery of this Agreement by Executive
and the Company and the performance by Executive of Executive's duties
hereunder shall not constitute a breach of, or otherwise contravene, the
terms of any employment agreement or other agreement or policy to which
Executive is a party or otherwise bound.
i. Prior Agreements This Agreement supercedes all prior
agreements and understandings (including verbal agreements) between Executive
and the Company and/or its affiliates regarding the terms and conditions of
Executive's employment with the Company and/or its affiliates (collectively,
the "Prior Agreements").
j. Cooperation. Executive shall provide his reasonable
cooperation in connection with any action or proceeding (or any appeal from
any action or proceeding), which relates to events occurring during
Executive's employment hereunder. This provision shall survive any
termination of this Agreement.
k. Withholding Taxes. The Company may withhold from any
amounts payable under this Agreement such federal, state and local taxes as
may be required to be withheld pursuant to any applicable law or regulation.
l. Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
K. HOVNANIAN ENTERPRISES, INC. GEATON A. DECESARIS, JR.
/s/ J. Larry Sorsby /s/Geaton A. DeCesaris, Jr.
By: J. Larry Sorsby
Title: Executive Vice President
EXHIBIT A
K. Hovnanian Annual Incentive Plan
For
Geaton A. DeCesaris, Jr.
Executive's Annual Bonus for the fiscal years ended October 31, 2001,
October 31, 2002 and October 31, 2003 will be based upon the highest amount
derived by using the computational methodology described in paragraph (1) or
(2), plus (3) below.
(1) An increasing dollar amount based on the Return on Inventory ("ROI")
calculated based solely on WHI Holding Co. and its subsidiaries' operations
for the fiscal years ended October 31, 2001 and October 31, 2002, and based
on the consolidated ROI of WHI Holding Co. and its subsidiaries and
Hovnanian's Southeast Region operations for the fiscal year ended October 31,
2003. The Annual Bonus amount will be interpolated between the ROI
percentages set forth below:
ROI 10% 15% 20%
Bonus $500,000 $1,000,000 $1,500,000
or
(2) An increasing dollar amount based on the Return on Equity ("ROE") of
Hovnanian. The Annual Bonus amount will be interpolated between ROE
percentages set forth below:
ROE 10% 15% 20%
Bonus $300,000 $750,000 $1,250,000
and
(3) An Annual Bonus equal to 3% of the profits before taxes from the
Hovnanian Southeast Region for Hovnanian's fiscal years ended October 31,
2001 and October 31, 2002.
With respect to any Annual Bonus payable in accordance with
paragraph (1), (2) or (3) above, as the case may be, 70% of the amount of
such Annual Bonus will be paid in cash and 30% will be paid in the Class A
common stock, $0.01 par value per share, of Hovnanian (the "Common Stock.").
The Common Stock component of the Annual Bonus will be subject to an increase
of 20% in excess of the correlative cash component of the Annual Bonus and,
taking into account the fact that the Executive, for vesting purposes, will
receive credit for his 20 plus prior years of service with WHI and its
predecessor Company, will be fully vested at the time that the Common Stock
component of the Annual Bonus is awarded and computed.
By way of example, if 30% of the Executive's Annual Bonus is
equal to $300,000, the Executive will receive a number of shares of Common
Stock of Hovnanian equal to $360,000 ($300,000 x 1.2) computed based upon the
closing price of the Common Stock on the national securities exchange on
which the Common Stock is then traded on the last day of the bonus period,
which will be October 31 of any given year. Because the Executive will be
fully vested with respect to the Common Stock component of his Annual Bonus,
all of the Common Stock to which he is entitled (subject to a cash payment
for any fractional share) will be delivered to him on the date that the cash
component of the Annual Bonus is paid.
The calculation of the Annual Bonus will not include any adjustments
(including, without limitation, adjustment of inventory, goodwill, and net
investment) related to the utilization by WHI, the Company (as successor to
WHI) or Hovnanian, as the case may be, to reflect the use of the purchase
method of accounting for the WHI/Hovnanian merger under generally accepted
accounting principles. Accounting principles will be applied on a consistent
basis and will not be changed with the intention of adversely affecting the
bonus calculation.
ATTACHMENT 1 TO EXHIBIT A
Definitions Pertaining to Annual Incentive Plan
of K. Hovnanian Enterprises, Inc. for
Geaton A. DeCesaris, Jr.
ROE of Hovnanian:
Consolidated Net Income on Hovnanian's 10K divided by the
quarterly average of the Hovnanian's equity as reported on its
most recent 10Q or 10K, divided by five.
ROI of WHI (or the Company as successor to WHI):
Pre-tax profits of WHI generated from all operations divided by
quarterly average inventory (as defined below) of WHI. Pre-tax
profits are after a 12% interest charge on Hovnanian net
investment (as defined below) in WHI. In calculating pre-tax
profits, the following expenses will be excluded:
Executive's compensation benefits, etc. and the costs associated
with being a public entity. These costs have been estimated to
be at $3,500,000.
That portion of WHI's divisional administrative overhead (not
WHI's regional overheads formerly known as WHI's corporate office
expenses) which is allocated (for purposes of calculating ROI) to
deliveries from Hovnanian communities which have been
consolidated into WHI divisions. In making this calculation,
WHI's divisional administrative overheads will be allocated pro-
rata to such WHI and Hovnanian consolidated deliveries based upon
revenues.
Any severance payments associated with integrating WHI and
Hovnanian.
Average Inventory:
The balance sheet items included in average inventory are work in
process ("WIP"), models, capitalized interest, finished lots,
land under development, goodwill net of amortization, land
deposits and joint ventures. The average is calculated by adding
the beginning of the year inventory and four quarter ends and
then dividing by five. Any Hovnanian properties under option or
owned as of the closing date will remain a Hovnanian Southeast
Region asset for the purpose of the WHI ROI calculation. As a
result, any new property options or acquisitions of property not
under option by Hovnanian prior to the Effective Time will be
considered assets of WHI after the Effective Time for the purpose
of the WHI ROI calculation.
Net Investment:
Net investment is defined as total assets minus total liabilities
excluding any intercompany receivables or payables to Hovnanian
and its affiliates.
EXHIBIT B
Option Grants to Geaton A. DeCesaris, Jr.
under the K. Hovnanian Enterprises, Inc.
Stock Option Plan pursuant to the
Terms Of His Employment Agreement
Mr. DeCesaris will be entitled to the following grants of options
for the Common Stock of Hovnanian Enterprises, Inc. on the terms set forth
below:
Number of
Date of Grant Shares Exercise Price Expiration Date
Vesting
- --------------- ---------------- -------------- --------------- -------
1st Anniversary 50,000 Fair Market* 10 years from
**
from Date of Value on Date of Grant (See
Below)
Employment Date of Grant
Agreement
2nd Anniversary 50,000 Fair Market* 10 years from
**
from Date of Value on Date of Grant
(See Below)
Employment Date of Grant
Agreement
3rd Anniversary 50,000 Fair Market* 10 years from
**
from Date of Value on Date of Grant
(See Below)
Employment Date of Grant
Agreement
4th Anniversary 50,000 Fair Market* 10 years from
**
from Date of Value on Date of Grant
(See Below)
Employment Date of Grant
Agreement
* Fair Market Value on Date of grant shall be deemed to be the closing
price of Hovnanian's Class A Common Stock on whichever national securities
exchange is listed on the Date of Grant.
** Vesting with respect to these grants of options shall be as follows:
25% on each anniversary from the Date of Grant.
EXHIBIT C
Special Employee Benefits
Two automobiles with Jeep/BMW and all related expenses including gasoline,
insurance and repairs.
Business meals and entertainment
First class travel to industry and business related conferences periodically
with wife
First class travel over 1-1/2 hours to H/B operations
Plane charter on an as needed basis with prior approval by CEO
Sporting event tickets, within reason
Airline travel clubs and country club dues
Young Presidents Organization (YPO) Dues and conferences
Payment of $25,000 per calendar year premium for split-dollar life insurance
policy (to be deducted from the annual bonus amount payable in respect of the
fiscal year of the Company in which such required premium payment occurs);
provided, however, in the unlikely event that the amount of annual bonus
payable in respect of such fiscal year is less than the amount paid by the
Company in respect of such premium payment, Executive shall reimburse the
Company for such premium payment.
RESTATED BY-LAWS of HOVNANIAN ENTERPRISES, INC. As of January 23, 2001 ARTICLE I MEETING OF STOCKHOLDERS Section 1. Place of Meeting and Notice. Meetings of the stockholders of the Corporation shall be held at such place either within or without the State of Delaware as the Board of Directors may determine. Section 2. Annual and Special Meetings. Annual meetings of stockholders shall be held, at a date, time and place fixed by the Board of Directors and stated in the notice of meeting, to elect a Board of Directors and to transact such other business as may properly come before the meeting. Special meetings of the stockholders may be called by the President for any purpose and shall be called by the President or Secretary if directed by the Board of Directors or requested in writing by the holders of not less than 25% of the capital stock of the Corporation. Each such stockholder request shall state the purpose of the proposed meeting. Section 3. Notice. Except as otherwise provided by law, at least 10 and not more than 60 days before each meeting of stockholders, written notice of the time, date and place of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder. Section 4. Quorum.. At any meeting of stockholders, the holders of record, present in person or by proxy, of a majority of the votes of the Corporation's issued and outstanding capital stock shall constitute a quorum for the transaction of business, except as. otherwise provided by law. In the absence of a quorum, any officer entitled to preside at or to act as secretary of the meeting shall have power to adjourn the meeting from time to time until a quorum is present. Section 5. Voting, Except as otherwise specifically provided in the Certificate of Incorporation or as otherwise required by law, with respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Class A Common Stock and the holders of the outstanding shares of Class B Common Stock shall vote together without regard to Class and all such matters shall be decided by a majority of votes of the holders voting or consenting with respect to such matters. ARTICLE II DIRECTORS Section 1. Number, Term of Office and Removal. The Directors of the Corporation shall be up to eleven in number. Directors need not be stockholders. The Directors shall be elected at the annual meeting of the stockholders of the Corporation and each Director shall be elected to serve until the next annual meeting of stockholders, or until his successor shall have been elected and qualified. Any Director may be removed, either with or without cause, and his successor elected, at any time by a vote of the stockholders at a special meeting called for such purpose. Any other vacancy occurring in the Board of Directors may be filled for the unexpired term by vote of the remaining Directors although less than a quorum. Section 2. Meetings. Regular meetings of the Board of Directors shall be held at such times and places as may from time to time be fixed by the Board of Directors or as may be specified in a notice of meeting. Special meetings of the Board of Directors may be held at any time upon the call of the President and shall be called by the President or Secretary if directed by the Board of Directors. Telegraphic or written- notice of each special meeting of the Board of Directors shall be sent to each Director not less than two days before such meeting. A meeting of the Board of Directors may be held without notice immediately after the annual meeting of the stockholders. Notice need not be given of regular meetings of the Board of Directors. Section 3. Quorum. One-third of the total number of Directors shall constitute a quorum for the transaction of business. If a quorum is not present at any meeting of the Board of Directors, the Directors present may adjourn the Meeting from time to time, without notice other than announcement at the meeting, until such a quorum is present. Except as otherwise provided by law, the Certificate of Incorporation of the Corporation, these By-Laws or any contract or agreement to which the Corporation is a party, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. Section 4. Committees of Directors. The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more committees, including without limitation an Audit Committee, a Compensation Committee, and an Executive Committee, to have and exercise such power and authority as the Board of Directors shall specify. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another Director to act at the meeting in place of any such absent or disqualified member. ARTICLE III OFFICERS The officers of the Corporation shall consist of a President, a Secretary, a Treasurer and such other additional officers with such titles as the Board of Directors shall determine, all of whom shall be chosen by and shall serve at the pleasure of the Board of Directors. Such officers shall have the usual powers and shall perform all the usual duties incident to their respective offices. All officers shall be subject to the supervision and direction of the Board of Directors. The authority, duties or responsibilities of any officer of the Corporation may be suspended by the President with our without cause. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause. ARTICLE IV INDEMNIFICATION To the fullest extent permitted by the laws of the State of Delaware: (a) The Corporation shall indemnify any current or former Director or officer of the Corporation and his heirs, executors and administrators, and may, at the discretion of the Board of Directors, indemnify any current or former employee or agent of the Corporation and his heirs, executors and administrators, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or by his heirs, executors or administrators in connection with any threatened, pending or completed action, suit or proceeding (brought by or in tire right of the Corporation or otherwise), whether civil, criminal, administrative or investigative, and whether formal or informal, including appeals, to which he was or is a party or is threatened to be made a party by reason of his current or former position with the Corporation or by reason of the fact that he is or was serving, at the request of the Corporation, as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. (b) The Corporation may pay expenses incurred in defending any action, suit, or proceeding described in subsection (a) of this Article in advance of the final disposition of such action, suit or proceeding, including appeals. (c) By action of its Board of Directors, notwithstanding any interest of the directors in the action, the Corporation may purchase and maintain insurance on behalf of any person described in subsection (a) of this Article, in such amounts as the Board of Directors deems appropriate, against any liability asserted against him, whether or not the Corporation would have the power to indemnify him against such Liability under the provisions of this Article or otherwise. (d) The Provisions of this Article shall be applicable to all actions, claims, suits or proceedings made or commenced after the adoption hereof, whether arising from acts or omissions to act occurring before or after its adoption. The provisions of this Article shall be deemed to be a contract between the Corporation and each director, officer, employee or agent who serves in such capacity at any time while this Article and the relevant provisions of the laws of the State of Delaware and other applicable law, if any, are in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts or any action, suit -or proceeding then or theretofore existing, or any action, suit or proceeding thereafter brought or threatened based in whole or in part on any such state of facts. If any provision of this Article shall be found to be invalid or limited in application by reason of any law or regulation, it shall not affect any other application of such provision or the validity of the remaining provisions hereof. The rights of indemnification and advancement of expenses provided in this Article shall neither be exclusive of, nor be deemed in limitation of, any rights to which any such officer, director, employee or agent may otherwise be entitled or permitted by contract, the Certificate of Incorporation, vote of stockholders or directors or otherwise, or as a matter of law, both as to actions in his official capacity and actions in any other capacity while holding such office, it being the policy of the Corporation that indemnification of the specified individuals shall be made to the fullest extent permitted by law. (e) For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee, or agent of the corporation which imposes duties on, or involves service by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. ARTICLE V GENERAL PROVISIONS Section 1. Notices. Whenever any statute, the Certificate of Incorporation or these By-Laws require notice to be given to any Director of stockholder, such notice may be given in writing by mail, addressed to such Director of stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Such notice shall be deemed to have been given when it is deposited in the United States mail. Notice to Directors may also be given by telegram or fax. Section 2. Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors.