UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For quarterly period ended JANUARY 31, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-1851059 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) l0 Highway 35, P.O. Box 500, Red Bank, NJ 07701 (Address of Principal Executive Offices) (Zip Code) 732-747-7800 (Registrant's Telephone Number, Including Area Code) |
Same
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. (See definition
of "accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act).
Large Accelerated Filer [ X ] Accelerated Filer [ ]
Non-Accelerated Filer { }
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 47,043,772 shares of Class A Common Stock and 14,672,000 shares of Class B Common Stock were outstanding as of March 2, 2006.
HOVNANIAN ENTERPRISES, INC.
FORM 10-Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets as of January 31,
2006 (unaudited) and October 31, 2005 3
Condensed Consolidated Statements of Income for the
three months ended January 31, 2006 and
2005 (unaudited) 5
Condensed Consolidated Statement of Stockholders'
Equity for the three months ended
January 31, 2006 (unaudited) 6
Condensed Consolidated Statements of Cash Flows for
the three months ended January 31, 2006
and 2005 (unaudited) 7
Notes to Condensed Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 46
Item 4. Controls and Procedures 47
PART II. Other Information
Item 1. Legal Proceedings 48
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 50
Item 6. Exhibits 51
Signatures 54
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
January 31, October 31,
ASSETS 2006 2005
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents.................... $ 44,521 $ 218,830
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.............................. 2,831,845 2,459,431
----------- -----------
Land and land options held for future
development or sale...................... 663,665 595,806
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options............. 8,550 9,289
Variable interest entities............... 241,988 242,825
Other options............................ 140,375 129,269
----------- -----------
Total Consolidated Inventory Not Owned.. 390,913 381,383
----------- -----------
Total Inventories........................ 3,886,423 3,436,620
----------- -----------
Investments in and advances to unconsolidated
joint ventures............................. 196,276 187,205
----------- -----------
Receivables, deposits, and notes ............ 84,327 125,388
----------- -----------
Property, plant, and equipment - net......... 102,920 96,891
----------- -----------
Prepaid expenses and other assets............ 152,322 125,662
----------- -----------
Goodwill..................................... 32,658 32,658
----------- -----------
Definite life intangibles.................... 211,894 249,506
----------- -----------
Total Homebuilding....................... 4,711,341 4,472,760
----------- -----------
Financial Services:
Cash and cash equivalents.................... 12,424 10,669
Mortgage loans held for sale................. 152,396 211,248
Other assets................................. 3,988 15,375
----------- -----------
Total Financial Services................. 168,808 237,292
----------- -----------
Income Taxes Receivable - Including Deferred
Tax Benefits................................. 28,630 9,903
----------- -----------
Total Assets................................... $ 4,908,779 $ 4,719,955
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
January 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages....................... $ 37,685 $ 48,673
Accounts payable and other liabilities........... 482,503 510,529
Customers' deposits.............................. 249,743 259,930
Nonrecourse mortgages secured by operating
properties..................................... 24,179 24,339
Liabilities from inventory not owned............. 180,819 177,014
----------- -----------
Total Homebuilding........................... 974,929 1,020,485
----------- -----------
Financial Services:
Accounts payable and other liabilities........... 6,345 8,461
Mortgage warehouse line of credit................ 137,749 198,856
----------- -----------
Total Financial Services..................... 144,094 207,317
----------- -----------
Notes Payable:
Revolving credit agreement....................... 226,250
Senior notes..................................... 1,098,990 1,098,739
Senior subordinated notes........................ 400,000 400,000
Accrued interest................................. 13,460 20,808
----------- -----------
Total Notes Payable.......................... 1,738,700 1,519,547
----------- -----------
Total Liabilities.................................. 2,857,723 2,747,349
----------- -----------
Minority interest from inventory not owned......... 175,009 180,170
----------- -----------
Minority interest from consolidated joint ventures. 1,243 1,079
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; issued 5,600 shares at January 31,
2006 and at October 31, 2005 with a
liquidation preference of $140,000.
Common Stock,Class A,$.01 par value-authorized
200,000,000 shares; issued 58,290,396 shares at
January 31, 2006 and 57,976,455 shares at
October 31, 2005 (including 11,145,656 shares
at January 31, 2006 and 10,995,656 shares at
October 31, 2005 held in Treasury).............. 583 580
Common Stock,Class B,$.01 par value (convertible
to Class A at time of sale) authorized
30,000,000 shares; issued 15,365,053 shares at
January 31, 2006 and 15,370,250 shares at
October 31, 2005 (including 691,748 shares at
January 31, 2006 and October 31, 2005 held in
Treasury)....................................... 154 154
Paid in Capital................................... 378,475 371,390
Retained Earnings................................. 1,604,379 1,522,952
Deferred Compensation............................. (17,415) (19,648)
Treasury Stock - at cost.......................... (91,372) (84,071)
----------- -----------
Total Stockholders' Equity.................... 1,874,804 1,791,357
----------- -----------
Total Liabilities and Stockholders' Equity..........$ 4,908,779 $ 4,719,955
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
January 31,
-----------------------
2006 2005
----------- ----------
Revenues:
Homebuilding:
Sale of homes...................... $ 1,246,197 $1,015,969
Land sales and other revenues...... 12,533 24,399
----------- ----------
Total Homebuilding............... 1,258,730 1,040,368
Financial Services................... 19,262 14,193
----------- ----------
Total Revenues................... 1,277,992 1,054,561
----------- ----------
Expenses:
Homebuilding:
Cost of sales, excluding interest.. 934,687 771,256
Cost of sales interest............. 16,569 17,767
----------- ----------
Total Cost of Sales.............. 951,256 789,023
----------- ----------
Selling, general and administrative 135,234 96,588
Inventory impairment loss.......... 3,109 498
----------- ----------
Total Homebuilding............... 1,089,599 886,109
Financial Services................... 13,530 9,920
Corporate General and Administrative. 27,722 15,878
Other Interest....................... 820 155
Other Operations..................... 7,001 1,940
Intangible Amortization.............. 11,669 10,088
----------- ----------
Total Expenses................... 1,150,341 924,090
----------- ----------
Income from unconsolidated joint
ventures........................... 7,575 1,435
----------- ----------
Income Before Income Taxes............. 135,226 131,906
----------- ----------
State and Federal Income Taxes:
State................................ 4,874 5,446
Federal.............................. 46,256 44,978
----------- ----------
Total Taxes........................ 51,130 50,424
----------- ----------
Net Income............................. 84,096 81,482
Less: Preferred Stock Dividends....... 2,669
----------- ----------
Net Income Available to Common
Stockholders......................... $ 81,427 $ 81,482
=========== ==========
Per Share Data:
Basic:
Income per common share.............. $ 1.30 $ 1.31
Weighted average number of common
shares outstanding................. 62,810 62,240
Assuming dilution:
Income per common share.............. $ 1.25 $ 1.25
Weighted average number of common
shares outstanding................ 65,403 65,419
See notes to condensed consolidated financial statements (unaudited).
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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
(Unaudited)
A Common Stock B Common Stock Preferred Stock
------------------ ------------------ ----------------------
Shares Shares Shares
Issued and Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Outstanding Amount Capital Earnings Comp. Stock Total
----------- ------ ----------- ------ ----------- ---------- -------- ---------- -------- --------- ----------
Balance,
October 31, 2005. 46,980,799 $ 580 14,678,502 $ 154 5,600 $ - $371,390 $1,522,952 $(19,648) $(84,071) $1,791,357
Issuance costs..... (90) (90)
Preferred Dividend
Declared ($476.56
per Share)....... (2,669) (2,669)
Stock Options,
amortization and
issuances, net
of tax........... 122,914 1 6,078 6,079
Restricted Stock
grants, issuances
and forfeitures,
Net of tax....... 185,830 2 1,097 947 2,046
Amortization of
Restricted Stock. 1,286 1,286
Conversion of Class B
to Class A
common stock..... 5,197 (5,197)
Treasury Stock
Purchases........ (150,000) (7,301) (7,301)
Net Income......... 84,096 84,096
----------- ------ ----------- ------ ----------- ---------- -------- ---------- -------- --------- ---------
Balance,
January 31, 2006. 47,144,740 $ 583 14,673,305 $ 154 5,600 $ - $378,475 $1,604,379 $(17,415) $(91,372) $1,874,804
=========== ====== =========== ====== =========== ========== ======== ========== ======== ========= ==========
See notes to condensed consolidated financial statements (unaudited).
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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - unaudited)
Three Months Ended
January 31,
------------------------
2006 2005
----------- -----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 84,096 $ 81,482
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation.................................... 3,086 1,620
Intangible amortization......................... 11,669 10,088
Amortization of deferred compensation........... 7,867 2,087
Amortization of bond discounts.................. 251 153
Excess tax benefits from share-based payment.... (3,443) -
Loss on sale and retirement of property
and assets.................................... 74 41
Undistributed income from unconsolidated
joint ventures................................ (5,100) -
Deferred income taxes........................... (30,701) (7,394)
Impairment losses............................... 3,109 498
Decrease (increase) in assets:
Mortgage notes receivable..................... 58,854 52,665
Receivables, prepaids and other assets........ 51,556 (37,745)
Inventories................................... (446,247) (112,248)
(Decrease) increase in liabilities:
State and Federal income taxes................ 11,974 (37,424)
Customers' deposits........................... (10,303) 11,366
Interest and other accrued liabilities........ (24,275) (21,510)
Accounts payable.............................. (19,522) (35,960)
----------- -----------
Net cash (used in) operating activities..... (307,055) (92,281)
----------- -----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 89 35
Purchase of property, equipment and other fixed
assets............................................ (9,147) (13,478)
Net investments of capital in unconsolidated
affiliates........................................ (3,929) (6,156)
----------- -----------
Net cash (used in) investing activities..... (12,987) (19,599)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 18,246 17,380
Net proceeds (payments) related to revolving
credit agreement.................................. 226,250 (115,000)
Net proceeds (payments) related to mortgage
warehouse line of credit.......................... (61,107) (57,170)
Proceeds from senior debt........................... - 200,000
Proceeds from senior subordinated debt.............. - 100,000
Payments of issuance costs.......................... (90) -
Principal payments on mortgages and notes........... (30,828) (19,182)
Excess tax benefits from share-based payment........ 3,443 -
Preferred dividends paid........................... (2,669) -
Purchase of treasury stock.......................... (7,301) -
Proceeds from sale of stock and employee stock plan. 1,544 1,107
----------- -----------
Net cash provided by financing activities.... 147,488 127,135
----------- -----------
Net (Decrease) increase in Cash........................ (172,554) 15,255
Cash and Cash Equivalents Balance, Beginning
of Period........................................... 229,499 78,024
----------- -----------
Cash and Cash Equivalents Balance, End of Period...... $ 56,945 $ 93,279
=========== ===========
Supplemental Disclosures of Cash Flow
Cash paid during the year for:
Interest......................................... $ 26,642 $ 17,711
=========== ===========
Income taxes..................................... $ 38,885 $ 92,210
=========== ===========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... $ 8,075 $ 2,941
Variable interest entities....................... 227,983 150,793
Other options.................................... 137,834 30,072
----------- -----------
Total Inventory Not Owned.......................... $ 373,892 $ 183,806
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of our consolidated financial position, results of operations, and changes in cash flows. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for interim periods are not necessarily indicative of the results which might be expected for a full year. The balance sheet at October 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. Effective November 1, 2005, the Company adopted Statement of Financial Accounting Standards ("SFAS") 123R, "Share-Based Payments", which revises SFAS 123, "Accounting for Stock-Based Compensation". Prior to fiscal year 2006, the Company accounted for stock awards granted to employees under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. As a result, the recognition of stock-based compensation expense was generally limited to the expense attributed to nonvested stock awards, as well as the amortization of certain acquisition-related deferred compensation.
SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after the required effective date, as well as to the unvested portion of awards outstanding as of the required effective date. The Company uses the Black-Scholes model to value its new stock option grants under SFAS 123R, applying the "modified prospective method" for existing grants which requires the Company to value stock options prior to its adoption of SFAS 123R under the fair value method and expense the unvested portion over the remaining vesting period. The fair value for options is established at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for January 31, 2006: risk-free interest rate of 4.15%; dividend yield of zero; volatility factor of the expected market price of our common stock of 0.43; and a weighted average expected life of the option of 5.0 years. SFAS 123R also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation (estimated at 2% for fiscal 2006 and fiscal 2005, respectively,) and requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as both a financing cash inflow and an operating cash outflow upon adoption.
Compensation cost arising from nonvested stock granted to employees and from non-employee stock awards is recognized as expense using the straight-line method over the vesting period. Unearned compensation is included in deferred compensation in stockholders' equity beginning in the first quarter of fiscal 2004. As of January 31, 2006, there was $17.4 million of total unrecognized compensation cost related to nonvested stock.
For the three months ended January 31, 2006, the Company's total stock-based compensation expense was $7.9 million ($4.9 million net of tax). Included in this total stock-based compensation expense was incremental expense for stock options of $3.3 million ($2.1 million net of tax) for the quarter ended January 31, 2006.
The following table illustrates the effect (in thousands, except per share amounts) on net income and earnings per share for the three months ended January 31, 2005 as if the Company's stock-based compensation had been determined based on the fair value at the grant dates for awards made prior to fiscal 2006, under those plans and consistent with SFAS 123R:
Three Months Ended
January 31,
------------------
2005
------------------
Net income as reported.......... $ 81,482
Deduct: total stock-based employee
compensation expense determined
using Black-Scholes fair value
based method for all awards... 1,352
--------
Pro forma net income............ $ 80,130
========
Pro forma basic earnings per share $ 1.29
========
Basic earnings per share as
reported...................... $ 1.31
========
Pro forma diluted earnings per
share......................... $ 1.22
========
Diluted earnings per share as
reported...................... $ 1.25
========
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Pro forma information regarding net income and earnings per share is calculated as if we had accounted for our stock-based compensation under the fair value method of SFAS 123R. The fair value for options is established at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for January 31, 2005: risk-free interest rate of 4.19%; dividend yield of zero; volatility factor of the expected market price of our common stock of 0.43; and a weighted average expected life of the option of 5.2 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, management believes the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.
On November 10, 2005, the FASB issued FASB Staff Position No. SFAS
123(R)-3, "Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards" (FSP 123R-3). The alternative transition
method includes simplified methods to establish the beginning balance of
the additional paid-in capital pool (APIC pool) related to the tax effects
of employee stock-based compensation, and to determine the subsequent
impact on the APIC pool and Consolidated Statements of Cash Flows of the
tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123R. The Company has until November
2006 to make a one-time election to adopt the transition method described
in FSP 123R-3. The Company is currently evaluating FSP 123R-3; however, if
the Company were to make the one-time election, it is not expected to
affect operating income or net income.
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended
January 31,
------------------
2006 2005
-------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period(1)..... $ 48,366 $ 37,465
Plus Interest Incurred(2).... 30,804 21,044
Less Cost of Sales Interest
Expensed(3)................ 16,569 17,767
Less Other Interest Expensed. 820 155
-------- --------
Interest Capitalized at
End of Period.............. $ 61,781 $ 40,587
======== ========
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(1) Beginning balance for 2006 does not include interest incurred of
$2.3 million which is capitalized in property, plant, and equipment.
(2) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(3) Represents interest on borrowings for construction, land and
development costs, which are charged to interest expense when homes
are delivered.
4. Accumulated depreciation at January 31, 2006 and October 31, 2005 amounted to $33.3 million and $30.5 million, respectively, for our homebuilding assets.
5. In accordance with Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment of or Disposal of Long Lived Assets", we record impairment losses on inventories related to communities under development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. In addition, from time to time, we will write off certain residential land options including approval and engineering costs for land we decided not to purchase. We wrote off such costs in the amount of $3.1 million and $0.5 million during the three months ended January 31, 2006 and 2005, respectively. Residential inventory impairment losses and option write-offs are reported in the Condensed Consolidated Statements of Income as "Homebuilding- Inventory impairment loss".
6. We provide a warranty accrual for repair costs over $1,000 to homes, community amenities, and land development infrastructure. We accrue for warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer. In addition, we accrue warranty costs under our $20 million per occurrence general liability insurance deductible for fiscal 2006 (deductible was $5 million per occurrence for homes built in fiscal 2005 and $150,000 per occurrence for homes built between fiscal 2001 and fiscal 2004) as part of selling, general and administrative costs. Warranty accruals are based upon historical experience. Additions and charges incurred in the warranty accrual and general liability accrual for the three months ended January 31, 2006 and 2005 are as follows:
Three Months Ended
January 31,
-------- --------
2006 2005
-------- --------
(Dollars in Thousands)
Balance, beginning of period..... $86,706 $64,922
Additions........................ 7,264 13,337
Charges incurred................. (6,339) (4,143)
-------- --------
Balance, end of period.......... $87,631 $74,116
======== ========
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7. We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations and we are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation, and/or other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas.
In March 2005, we received two requests for information pursuant to Section 308 of the Clean Water Act from Region 3 of the Environmental Protection Agency (the "EPA"). These requests sought information concerning storm water discharge practices in connection with completed, ongoing and planned homebuilding projects by subsidiaries in the states and district that comprise EPA Region 3. We also received a notice of violations for one project in Pennsylvania and requests for sampling plan implementation in two projects in Pennsylvania. The amount requested by the EPA to settle the asserted violations at the one project was not material. We provided the EPA with information in response to its requests. We have since been advised by the Department of Justice ("DOJ") that it will be involved in the review of our storm water discharge practices. We cannot predict the outcome of the review of these practices or estimate the costs that may be involved in resolving the matter. To the extent that the EPA or the DOJ asserts violations of regulatory requirements and requests injunctive relief or penalties, we will defend and attempt to resolve such asserted violations.
In addition, in November 2005, we received two notices from the California Regional Water Quality Control Board alleging violations of certain storm water discharge rules and assessing an administrative civil liability of $0.2 million and $0.3 million. We do not consider these assessments to be material and are considering our response to the notices.
It can be anticipated that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
Our sales and customer financing processes are subject to the jurisdiction of the U. S. Department of Housing and Urban Development ("HUD"). In connection with the Real Estate Settlement Procedures Act, HUD recently inquired about our process of referring business to our affiliated mortgage company and has separately requested documents related to customer financing. We have responded to HUD's inquiries. In connection with these inquiries, the Inspector General of HUD has recommended to the Secretary of HUD that we indemnify HUD for any losses that it may sustain in connection with nine loans that it alleges were improperly underwritten. We cannot predict the outcome of HUD's inquiry or estimate the costs that may be involved in resolving the matter. We do not expect the ultimate cost to be material.
8. As of January 31, 2006 and October 31, 2005, respectively, we are obligated under various performance letters of credit amounting to $391.0 million and $330.8 million.
9. Our amended and restated unsecured Revolving Credit Agreement ("Agreement") with a group of banks provides a revolving credit line of $1.2 billion through July 2009. The facility contains an accordion feature under which the aggregate commitment can be increased to $1.3 billion subject to the availability of additional commitments. Interest is payable monthly at various rates based on a margin ranging from 1.00% to 1.95% per annum, depending on our Consolidated Leverage Ratio, as defined in the Agreement, plus, at the Company's option, either (1) a base rate determined by reference to the higher of (a) PNC Bank, National Association's prime rate and (b) the federal funds rate plus 1/2% or (2) a LIBOR-based rate for a one, two, three, or six month interest period as selected by the Company. In addition, we pay a fee ranging from 0.20% to 0.30% per annum on the unused portion of the revolving credit line depending on our Consolidated Leverage Ratio and the average percentage unused portion of the revolving credit line. We and each of our significant subsidiaries, except for various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a subsidiary formerly engaged in homebuilding activity in Poland, our financial services subsidiaries, joint ventures, and certain other subsidiaries, is a guarantor under the Agreement. As of January 31, 2006 and October 31, 2005, the outstanding balance under the Agreement was $226.3 million and zero, respectively.
Our amended secured mortgage loan warehouse agreement with a group of banks, which is a short-term borrowing facility, provided up to $250 million through April 2006. Interest is payable monthly at the Eurodollar Rate plus 1.25%. The loan is repaid when we sell the underlying mortgage loans to permanent investors. We also have a $100 million commercial paper facility. The facility expires in September 2006 and interest of LIBOR plus .65% is payable monthly. As of January 31, 2006 and October 31, 2005, borrowings under both agreements were $137.7 million and $198.9 million, respectively. On March 7, 2006, we amended our secured mortgage loan warehouse agreement. Pursuant to the new agreement, we may borrow up to $250 million. It expires on October 30, 2006 and interest is payable monthly at the Eurodollar Rate plus 1.0%.
10. On November 30, 2004, we issued $200 million of 6 1/4% Senior Notes due 2015 and $100 million of 6% Senior Subordinated Notes due 2010. The net proceeds of the issuance were used to repay the outstanding balance on our revolving credit facility as of November 30, 2004 and for general corporate purposes.
On August 8, 2005, we issued $300 million 6 1/4% Senior Notes due 2016. The notes were issued at a discount to yield 6.46% and have been reflected net of the unamortized discount in the Condensed Consolidated Balance Sheets. The notes are redeemable in whole or in part at our option at 100% of their principal amount plus the payment of a make-whole amount. The net proceeds of the issuance were used to repay the outstanding balance under our revolving credit facility as of August 8, 2005, and for general corporate purposes, including acquisitions.
At January 31, 2006, we had $1,105.3 million of outstanding senior notes ($1,099.0 million, net of discount), comprised of $140.3 million 10 1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215 million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due 2014, $200 million 6 1/4% Senior Notes due 2015, and $300 million 6 1/4% Senior Notes due 2016. At January 31, 2006, we had $400 million of outstanding senior subordinated notes, comprised of $150 million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior Subordinated Notes due 2013, and $100 million 6% Senior Subordinated Notes due 2010.
As a subsequent event, on February 27, 2006, we issued $300 million of 7 1/2% Senior Notes due 2016. The notes are redeemable in whole or in part at our option at 100% of their principal amount plus the payment of a make-whole amount. The net proceeds of the issuance were used to repay a portion of the outstanding balance under our revolving credit facility as of February 27, 2006.
Under the terms of the indentures governing our debt securities, we have the right to make certain redemptions and depending on market conditions, may do so from time to time.
11. Per Share Calculations - Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to non- vested stock and outstanding options to purchase common stock, of approximately 2.6 million and 3.2 million for the three months ended January 31, 2006 and 2005, respectively.
12. On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000 per share for net proceeds of $135 million. Dividends on the Series A Preferred Stock are not cumulative and are paid at an annual rate of 7.625%. The Series A Preferred Stock is not convertible into the Company's common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares beginning on the fifth anniversary of their issuance. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of Series A Preferred Stock. The depositary shares are listed on the Nasdaq National Market under the symbol "HOVNP". The net proceeds from the offering, reflected in Paid in Capital in the Condensed Consolidated Balance Sheet, were used for the partial repayment of the outstanding balance under our revolving credit facility as of July 12, 2005. On January 17, 2006, we paid $2.7 million of dividends on the Series A Preferred Stock.
13. Variable Interest Entities - In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). A Variable Interest Entity ("VIE") is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE.
Based on the provisions of FIN 46, we have concluded that whenever we option land or lots from an entity and pay a non-refundable deposit, a VIE is created under condition (ii) (b) and (c) of the previous paragraph. We are deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity's expected theoretical losses if they occur. For each VIE created with a significant nonrefundable option fee, we compute expected losses and residual returns based on the probability of future cash flows as outlined in FIN 46. If we are deemed to be the primary beneficiary of the VIE we consolidate it on our balance sheet. The fair value of the VIEs inventory is reported as "Consolidated Inventory Not Owned - Variable interest entities".
Management believes FIN 46 was not clearly thought out for application in the homebuilding industry for land and lot options. Under FIN 46, we can have an option and put down a small deposit as a percentage of the purchase price and still have to consolidate the entity. Our exposure to loss as a result of our involvement with the VIE is only the deposit, not its total assets consolidated on the balance sheet. In certain cases, we will have to place inventory the VIE has optioned to other developers on our balance sheet. In addition, if the VIE has creditors, its debt will be placed on our balance sheet even though the creditors have no recourse against us. Based on these observations we believe consolidating VIEs based on land and lot option deposits does not reflect the economic realities or risks of owning and developing land.
At January 31, 2006, all 31 VIEs we were required to consolidate were the result of our options to purchase land or lots from the selling entities. We paid cash or issued letters of credit deposits to these VIEs totaling $27.4 million. Our option deposits represent our maximum exposure to loss. The fair value of the property owned by these VIEs was $242.0 million. Since we do not own an equity interest in any of the unaffiliated variable interest entities that we must consolidate pursuant to FIN 46, we generally have little or no control or influence over the operations of these entities or their owners. When our requests for financial information are denied by the land sellers, certain assumptions about the assets and liabilities of such entities are required. In most cases, the fair value of the assets of the consolidated entities have been based on the remaining contractual purchase price of the land or lots we are purchasing. In these cases, it is assumed that the entities have no debt obligations and the only asset recorded is the land or lots we have the option to buy with a related offset to minority interest for the assumed third party investment in the variable interest equity. At January 31, 2006, the balance reported in minority interest from inventory not owned was $175.0 million. Creditors of these VIEs have no recourse against the Company.
We will continue to control land and lots using options. Not all our deposits are with VIEs. Including the deposits with the 31 VIEs above, at January 31, 2006, we have total cash and letters of credit deposits amounting to approximately $409.5 million to purchase land lots with a total purchase price of $5.0 billion. The maximum exposure to loss is limited to the deposits although some deposits are refundable at our request or refundable if certain conditions are not met.
14. Investments in Unconsolidated Homebuilding and Land Development Joint Ventures - We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base, and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with third party investors to develop land and construct homes that are sold directly to third party homebuyers. Our land development joint ventures include those entered into with developers and other homebuilders, as well as financial investors, to develop finished lots for sale to the joint venture's members or other third parties. As of January 31, 2006, we have investments in nine homebuilding joint ventures and nine land development joint ventures. The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method.
January 31, 2006
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Assets:
Cash and cash equivalents....... $ 52,191 $ 1,341 $ 53,532
Inventories..................... 701,865 194,888 896,753
Other assets.................... 169,666 3,113 172,779
-------------- ---------------- --------------
Total assets.................... $ 923,722 $ 199,342 $ 1,123,064
============== ================ ==============
Liabilities and Equity:
Accounts payable and
accrued liabilities........... $ 176,327 $ 16,234 $ 192,561
Notes payable................... 359,340 59,405 418,745
Equity of:
Hovnanian Enterprises, Inc.... 82,821 87,467 170,288
Others........................ 305,234 36,236 341,470
-------------- ---------------- --------------
Total Equity.................... 388,055 123,703 511,758
-------------- ---------------- --------------
Total liabilities and equity.... $ 923,722 $ 199,342 $ 1,123,064
============== ================ ==============
Debt to Capitalization Ratio.... 48% 32% 45%
|
October 31, 2005
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Assets:
Cash and cash equivalents....... $ 46,200 $ 5,012 $ 51,212
Inventories..................... 694,408 198,267 892,675
Other assets.................... 166,974 295 167,269
-------------- ---------------- --------------
Total assets.................... $ 907,582 $ 203,574 $ 1,111,156
============== ================ ==============
Liabilities and Equity:
Accounts payable and
accrued liabilities........... $ 228,264 $ 21,523 $ 249,787
Notes payable................... 316,532 59,131 375,663
Equity of:
Hovnanian Enterprises, Inc.... 75,349 86,593 161,942
Others........................ 287,437 36,327 323,764
-------------- ---------------- --------------
Total Equity.................... 362,786 122,920 485,706
-------------- ---------------- --------------
Total liabilities and equity.... $ 907,582 $ 203,574 $ 1,111,156
============== ================ ==============
Debt to Capitalization Ratio.... 47% 32% 44%
|
As of January 31, 2006 and October 31, 2005, we had advances outstanding of approximately $21.2 million and $23.7 million, respectively, to these unconsolidated joint ventures, which were included in the accounts payable and accrued liabilities balances in the table above. On our Hovnanian Enterprises, Inc. Condensed Consolidated Balance Sheet our "Investments in and advances to unconsolidated joint ventures" amounted to $196.3 million and $187.2 million at January 31, 2006 and October 31, 2005, respectively. The minor difference between the Hovnanian equity balance plus advances to unconsolidated joint ventures balance disclosed here compared to the Hovnanian Enterprises, Inc. Condensed Consolidated Balance Sheet is due to a different inside basis versus outside basis in certain joint ventures.
For the Three Months Ended January 31,2006
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Revenues........................ $ 216,048 $ 8,400 $ 224,448
Cost of sales and expenses...... (193,332) (7,648) (200,980)
-------------- ---------------- --------------
Net income...................... $ 22,716 $ 752 $ 23,468
============== ================ ==============
Our share of net earnings....... $ 7,299 $ 276 $ 7,575
============== ================ ==============
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For the Three Months Ended January 31,2005
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Revenues........................ $ 12,168 $ 2,730 $ 14,898
Cost of sales and expenses...... (9,276) (3,165) (12,441)
-------------- ---------------- --------------
Net income (loss)............... $ 2,892 $ (435) $ 2,457
============== ================ ==============
Our share of net earnings (losses)$ 1,633 $ (198) $ 1,435
============== ================ ==============
|
Income from unconsolidated joint ventures is reflected as a separate line in the accompanying Condensed Consolidated Financial Statements and reflects our proportionate share of the income of these unconsolidated homebuilding and land development joint ventures. Our ownership interests in the joint ventures vary but are generally less than or equal to 50 percent. In determining whether or not we must consolidate joint ventures, where we are the manager of the joint venture, we consider the guidance in EITF 04-5 in assessing whether the other partners have specific rights to overcome the presumption of control by us or the manager of the joint venture.
Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing for each venture. Generally, the amount of such financing is limited to no more than 50% of the joint venture's total assets, and such financing is obtained on a non-recourse basis, with guarantees from us limited only to performance and completion guarantees and environmental indemnification. In some instances, the joint venture entity is considered a variable interest entity (VIE) under FIN 46 due to the returns being limited to the equity holders; however, in these instances, we are not the primary beneficiary, therefore we do not consolidate these entities.
15. Recent Accounting Pronouncements - In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections". This statement, which replaces APB Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements", changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective application of changes in accounting principle to prior periods' financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 creates a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate the partnership. EITF 04-5 states that the presumption of general partner control would be overcome only when the limited partners have certain specific rights as outlined in EITF 04-5. EITF 04-5 is effective immediately for all newly formed limited partnerships and for existing limited partnership agreements that are modified. For general partners in all other limited partnerships, EITF 04-5 is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. Implementation of EITF 04-5 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
16. Intangible Assets - The intangible assets recorded on our balance sheet are goodwill, definite life intangibles, tradenames, architectural designs, distribution processes, and contractual agreements with both definite and indefinite lives resulting from our acquisitions. We no longer amortize goodwill or indefinite life intangibles, but instead assess them periodically for impairment. We are amortizing the definite life intangibles over their expected useful life, ranging from three to seven years.
17. On March 1, 2005, we acquired for cash the assets of Cambridge Homes, a privately held Orlando homebuilder and provider of related financial services, headquartered in Altamonte Springs, Florida. Cambridge Homes also provides mortgage financing, as well as title and settlement services to its homebuyers. In connection with the acquisition, based on an appraisal of acquisition intangibles, we have definite life intangible assets equal to the excess of purchase price over the fair value of the net tangible assets of $22 million. We are amortizing the various definite life intangibles over their estimated lives.
On March 2, 2005, we acquired the operations of Town & Country Homes, a privately held homebuilder and land developer headquartered in Lombard, Illinois, which occurred concurrently with our entering into a joint venture agreement with affiliates of Blackstone Real Estate Advisors in New York to own and develop Town & Country's existing residential communities. The joint venture is being accounted for under the equity method. Town & Country Homes' operations beyond the existing owned and optioned communities, as of the acquisition date, are wholly-owned and included in our consolidated financial statements.
On August 3, 2005, we acquired substantially all of the homebuilding assets of Oster Homes, a privately held Ohio homebuilder, headquartered in Lorain, Ohio.
On August 8, 2005, we acquired substantially all of the assets of First Home Builders of Florida, a privately held homebuilder and provider of related financial services headquartered in Cape Coral, Florida.
In connection with the First Home Builders of Florida and Oster Homes acquisitions, we have definite life intangible assets equal to the excess purchase price over the fair value of $121 million in the aggregate. We are awaiting the appraisal from these acquisitions. Until the appraisals are received, we estimated the intangible value for amortization calculations. We expect to have final appraisals by the third quarter ended July 31, 2006. We expect to amortize the definite life intangibles over their estimated lives.
18. Hovnanian Enterprises, Inc., the parent company (the "Parent"), is the issuer of publicly traded common stock and preferred stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the "Subsidiary Issuer"), acts as a finance entity that as of January 31, 2006 had issued and outstanding $400 million of Senior Subordinated Notes, $1,105.3 million face value of Senior Notes, and $226.3 million drawn on a Revolving Credit Agreement. The Senior Subordinated Notes, Senior Notes and the Revolving Credit Agreement are fully and unconditionally guaranteed by the Parent.
In addition to the Parent, each of the wholly owned subsidiaries of the Parent other than the Subsidiary Issuer (collectively, the "Guarantor Subsidiaries"), with the exception of various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, our mortgage lending subsidiaries, a subsidiary formerly engaged in homebuilding activity in Poland, our title insurance subsidiaries, joint ventures, and certain other subsidiaries (collectively, the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation of the Subsidiary Issuer to pay principal and interest under the Senior Notes, Senior Subordinated Notes, and the Revolving Credit Agreement.
In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying condensed consolidating 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 condensed consolidating financial information presents the results of operations, financial position, and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, (iv) the Non-guarantor Subsidiaries, and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
---------- ---------- ------------ ------------ ----------- ----------
ASSETS
Homebuilding..................... $ 1,235 $ 106,918 $ 4,337,002 $ 266,186 $ $4,711,341
Financial Services................. 138 168,670 168,808
Income Taxes (Payable) Receivable.. (30,377) 59,492 (485) 28,630
Investments in and amounts due to
and from consolidated
subsidiaries.................... 1,903,946 1,894,929 (2,054,260) (241,687) (1,502,928)
---------- ---------- ------------ ------------ ----------- ----------
Total Assets..................... $1,874,804 $2,001,847 $ 2,342,372 $ 192,684 $(1,502,928)$4,908,779
========== ========== ============ ============ =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding................... $ $ $ 944,377 $ 30,552 $ $ 974,929
Financial Services............. 34 144,060 144,094
Notes Payable................... 1,737,988 712 1,738,700
Minority Interest................ 175,009 1,243 176,252
Stockholders' Equity............. 1,874,804 263,859 1,222,240 16,829 (1,502,928) 1,874,804
---------- ---------- ------------ ------------ ----------- ----------
Total Liabilities and Stockholders'
Equity......................... $1,874,804 $2,001,847 $ 2,342,372 $ 192,684 $(1,502,928)$4,908,779
========== ========== ============ ============ =========== ==========
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
---------- ---------- ------------ ------------ ---------- -----------
Assets
Homebuilding......................$ 1,192 $ 325,997 $ 3,931,333 $ 214,238 $ $4,472,760
Financial Services................ 200 237,092 237,292
Income Taxes (Payable) Receivable. (22,704) 32,970 (363) 9,903
Investments in and Amounts Due to
And From Consolidated
Subsidiaries.................... 1,812,869 1,413,666 (1,617,271) (189,626)(1,419,638)
---------- ---------- ------------ ------------ ----------- ----------
Total Assets......................$1,791,357 $1,739,663 $ 2,347,232 $ 261,341$(1,419,638) $4,719,955
========== ========== ============ ============ =========== ==========
Liabilities
Homebuilding......................$ $ 20,431 $ 996,428 $ 3,626 $ $1,020,485
Financial Services................. 81 207,236 207,317
Notes Payable...................... 1,498,739 (3,531) 24,339 1,519,547
Minority Interest.................. 180,170 1,079 181,249
Stockholders' Equity...............1,791,357 220,493 1,174,084 25,061 (1,419,638) 1,791,357
---------- ----------- ------------ ------------ ----------- ----------
Total Liabilities and Stockholders'
Equity......................... $1,791,357 $ 1,739,663 $ 2,347,232 $ 261,341$(1,419,638) $4,719,955
========== =========== ============ ============ =========== ==========
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.................... $ $ 153 $1,256,427 $ 2,150 $ $1,258,730
Financial Services............... 2,255 17,007 19,262
Intercompany Charges............. 66,758 66,703 (133,461)
Equity In Pretax Income of
Consolidated Subsidiaries...... 135,226 (135,226)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 135,226 66,911 1,325,385 19,157 (268,687) 1,277,992
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 208 1,165,341 1,455 (30,193) 1,136,811
Financial Services............... 883 12,892 (245) 13,530
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 208 1,166,224 14,347 (30,438) 1,150,341
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated
Joint Ventures................... 7,575 7,575
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 135,226 66,703 166,736 4,810 (238,249) 135,226
State and Federal Income Taxes..... 51,130 23,411 61,864 1,912 (87,187) 51,130
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)................. $ 84,096 $ 43,292 $ 104,872 $ 2,898 $ (151,062)$ 84,096
======== ========== ========== ============ ========== ==========
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 42 $1,039,598 $ 728 $ $1,040,368
Financial Services............... 1,029 13,164 14,193
Intercompany Charges............. 48,397 48,985 (97,382)
Equity In Pretax Income of
Consolidated Subsidiaries...... 131,906 (131,906)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 131,906 48,439 1,089,612 13,892 (229,288) 1,054,561
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (545) 936,455 1,171 (22,911) 914,170
Financial Services............... 730 10,075 (885) 9,920
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (545) 937,185 11,246 (23,796) 924,090
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated Joint
Ventures........................ 1,435 1,435
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 131,906 48,984 153,862 2,646 (205,492) 131,906
State and Federal Income Taxes..... 50,424 17,098 54,923 4,158 (76,179) 50,424
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$ 81,482 $ 31,886 $ 98,939 $ (1,512)$ (129,313)$ 81,482
======== ========== ========== ============ ========== ==========
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 84,096 $ 43,292 $ 104,872 $ 2,898 $ (151,062)$ 84,096
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 2,815 (6,934) (424,587) (113,507) 151,062 (391,151)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 86,911 36,358 (319,715) (110,609) (307,055)
Net Cash (Used In)
Investing Activities............... (7,583) (5,404) (12,987)
Net Cash Provided By (Used In)
Financing Activities.............. 4,166 226,250 (26,149) (56,779) 147,488
Intercompany Investing and Financing
Activities - Net................... (91,077) (481,263) 396,005 176,335
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... (218,655) 42,558 3,543 (172,554)
Balance, Beginning of Period......... 16 298,596 (79,835) 10,722 229,499
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period.....................$ 16 $ 79,941 $ (37,277)$ 14,265 $ $ 56,945
======== ========= ========== ============ ========== ==========
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 81,482 $ 31,886 $ 98,939 $ (1,512)$ (129,313)$ 81,482
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (23,356) (1,330) (321,900) 43,510 129,313 (173,763)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 58,126 30,556 (222,961) 41,998 (92,281)
Net Cash (Used In)
Investing Activities............... (1,600) (17,964) (35) (19,599)
Net Cash Provided By (Used In)
Financing Activities............... (2,087) 185,000 1,427 (57,205) 127,135
Intercompany Investing and Financing
Activities - Net................... (54,439) (148,758) 187,849 15,348
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 66,798 (51,649) 106 15,255
Balance, Beginning of Period......... 15 29,369 35,441 13,199 78,024
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period.....................$ 15 $ 96,167 $ (16,208)$ 13,305 $ $ 93,279
======== ========= ========== ============ ========== ==========
|
19. Subsequent Events -
On February 27, 2006, our wholly-owned subsidiary K. Hovnanian Enterprises, Inc. issued $300 million of 7 1/2% Senior Notes due 2016. The notes are guaranteed by Hovnanian Enterprises, Inc. and each of its other wholly-owned subsidiaries, except for various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, our mortgage lending subsidiaries, a subsidiary formerly engaged in homebuilding activity in Poland, our title insurance subsidiaries, joint ventures, and certain other subsidiaries. The net proceeds of the issuance were used to repay a portion of the outstanding balance under our revolving credit facility as of February 27, 2006.
On March 7, 2006, we amended our secured mortgage loan warehouse agreement. Pursuant to the new agreement, we may borrow up to $250 million. It expires on October 30, 2006 and interest is payable monthly at the Eurodollar Rate plus 1.0%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management believes that the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Business Combinations - When we make an acquisition of another company, we use the purchase method of accounting in accordance with the Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations". Under SFAS No. 141, we record as our cost the estimated fair value of the acquired assets less liabilities assumed. Any difference between the cost of an acquired company and the sum of the fair values of tangible and intangible assets less liabilities is recorded as goodwill. The reported income of an acquired company includes the operations of the acquired company from the date of acquisition.
Income Recognition from Home and Land Sales - Income from home and land sales is recorded when title is conveyed to the buyer, adequate cash payment has been received and there is no continued involvement.
Additionally, in certain markets, we sell lots to customers, transferring title, collecting proceeds, and entering into contracts to build homes on these lots. In these cases, we do not recognize the revenue from the lot sale until we deliver the completed home and have no continued involvement related to that home. The cash received on the lot is recorded as customer deposits until the revenue is recognized.
Income Recognition from Mortgage Loans - Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected.
Interest Income Recognition for Mortgage Loans Receivable and Recognition of Related Deferred Fees and Costs - Interest income is recognized as earned for each mortgage loan during the period from the loan closing date to the sale date when legal control passes to the buyer and the sale price is collected. All fees related to the origination of mortgage loans and direct loan origination costs are deferred and recorded as either (a) an adjustment to the related mortgage loans upon the closing of a loan or (b) recognized as a deferred asset or deferred revenue while the loan is in process. These fees and costs include loan origination fees, loan discount, and salaries and wages. Such deferred fees and costs relating to the closed loans are recognized over the life of the loans as an adjustment of yield or taken into operations upon sale of the loan to a permanent investor.
Inventories - Inventories and long-lived assets held for sale are recorded at the lower of cost or fair value less selling costs. Fair value is defined as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land, land development, and common facility costs are allocated based on buildable acres to product types within each community, except for high-rise and mid-rise buildings, then charged to cost of sales equally based upon the number of homes to be constructed in each product type. For high-rise and mid-rise buildings, land, land development and common facility costs are allocated to homes based on the relative sales value of each home. For inventories of communities under development, a loss is recorded when events and circumstances indicate impairment and the undiscounted future cash flows generated are less than the related carrying amounts. The impairment loss is based on discounted future cash flows generated from expected revenue, less cost to complete including interest, and selling costs.
Insurance Deductible Reserves - For fiscal 2006, our deductible is $20 million per occurrence with an aggregate $20 million for premise liability claims and an aggregate $20 million for construction defect claims under our general liability insurance. Our worker's compensation insurance deductible is $1 million per occurrence in fiscal 2006. Reserves have been established based upon actuarial analysis of estimated losses incurred during fiscal 2006 and fiscal 2005.
Interest - In accordance with SFAS 34 "Capitalization of Interest Cost", interest incurred is first capitalized to properties under development during the land development and home construction period and expensed along with the associated cost of sales as the related inventories are sold. Interest in excess of interest capitalized or interest incurred on borrowings directly related to properties not under development is expensed immediately in "Other Interest".
Land Options - Costs are capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations when we determine we will not exercise the option. In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities", an interpretation of Accounting Research Bulletin No. 51, SFAS No. 49 "Accounting for Product Financing Arrangements" ("SFAS 49"), SFAS No. 98 "Accounting for Leases" ("SFAS 98"), and Emerging Issues Task Force ("EITF") No. 97-10 "The Effects of Lessee Involvement in Asset Construction" ("EITF 97-10"), we record on the Condensed Consolidated Balance Sheet specific performance options, options with variable interest entities, and other options under "Consolidated Inventory Not Owned" with the offset to "Liabilities from inventory not owned", "Minority interest from inventory not owned", and "Minority interest from consolidated joint ventures".
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated homebuilding and land development joint ventures are accounted for under the equity method of accounting. Under the equity method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or homes to third parties. Our ownership interests in our unconsolidated joint ventures range from 20% to 50%. In some instances, the joint venture entity is considered a variable interest entity (VIE) under FIN 46 due to the returns being limited to the equity holders; however, in these instances, we are not the primary beneficiary, therefore we do not consolidate these entities.
Intangible Assets - The intangible assets recorded on our balance sheet are goodwill definite life intangibles, tradenames, architectural designs, distribution processes, and contractual agreements with both definite and indefinite lives resulting from our acquisitions. We no longer amortize goodwill or indefinite life intangibles, but instead assess them periodically for impairment. We are amortizing the definite life intangibles over their expected useful life, ranging from three to eight years.
Post Development Completion and Warranty Costs - In those instances where a development is substantially completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover the cost of such work. In addition, our warranty accrual includes estimated costs for construction work that is unforeseen, but estimable based on past history, at the time of closing. Both of these liabilities are recorded in "Accounts payable and other liabilities" in the Condensed Consolidated Balance Sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development and sales in our Northeast Region (New Jersey, New York State, Pennsylvania, Ohio, Michigan, Illinois and Minnesota), our Southeast Region (Washington D. C., Delaware, Maryland, Virginia, West Virginia, North Carolina, South Carolina, and Florida), our Southwest Region (Texas and Arizona), and our West Region (California). In addition, we provide financial services to our homebuilding customers.
Our cash uses during the three months ended January 31, 2006 were for operating expenses, increases in housing inventories, construction, income taxes, interest, preferred stock dividends and repayments of our revolving credit facility. 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.
On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares of Class A Common Stock. As of January 31, 2006, 2.7 million shares of Class A Common Stock have been purchased under this program.
On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000 per share for net proceeds of $135 million. Dividends on the Series A Preferred Stock are not cumulative and are paid at an annual rate of 7.625%. The Series A Preferred Stock is not convertible into the Company's common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares beginning on the fifth anniversary of their issuance. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of Series A Preferred Stock. The depositary shares are listed on the Nasdaq National Market under the symbol "HOVNP". The net proceeds from the offering, reflected in Paid in Capital in the Condensed Consolidated Balance Sheet, were used for the partial repayment of the outstanding balance under our revolving credit facility as of July 12, 2005. On January 17, 2006, we paid $2.7 million of dividends on the Series A Preferred Stock.
Our homebuilding bank borrowings are made pursuant to an amended and
restated unsecured revolving credit agreement (the "Agreement") effective
June 17, 2005, that provides a revolving credit line and letter of credit
line of $1.2 billion through July 2009. The facility contains an
accordion feature under which the aggregate commitment can be increased to
$1.3 billion subject to the availability of additional commitments.
Interest is payable monthly at various rates based on a margin ranging
from 1.00% to 1.95% per annum, depending on our Consolidated Leverage
Ratio, as defined in the Agreement, plus, at the Company's option, either
(1) a base rate determined by reference to the higher of (a) PNC Bank,
National Association's prime rate and (b) the federal funds rate plus 1/2%
or (2) a LIBOR-based rate for a one, two, three or six month interest
period as selected by the Company. In addition, we pay a fee ranging from
0.20% to 0.30% per annum on the unused portion of the revolving credit
line depending on its Leverage Ratio and the average percentage unused
portion of the revolving credit line. At January 31, 2006, there was
$226.3 million drawn under this Agreement and we had approximately $44.5
million of homebuilding cash. At January 31, 2006, we had issued $391.0
million of letters of credit which reduces cash available under the
Agreement. We believe that we will be able either to extend the Agreement
beyond July 2009 or negotiate a replacement facility, but there can be no
assurance of such extension or replacement facility. We currently are in
compliance and intend to maintain compliance with the covenants under the
Agreement. We and each of our significant subsidiaries, except for
various subsidiaries formerly engaged in the issuance of collateralized
mortgage obligations, a subsidiary formerly engaged in homebuilding
activity in Poland, our financial services subsidiaries, joint ventures,
and certain other subsidiaries, is a guarantor under the Agreement.
At January 31, 2006, we had $1,105.3 million of outstanding senior notes ($1,099.0 million, net of discount), comprised of $140.3 million 10 1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215 million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due 2014, $200 million 6 1/4% Senior Notes due 2015, and $300 million 6 1/4% Senior Notes due 2016. At January 31, 2006, we had $400 million of outstanding senior subordinated notes, comprised of $150 million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior Subordinated Notes due 2013, and $100 million 6% Senior Subordinated Notes due 2010. On February 27, 2006, we issued $300 million of 7 1/2% Senior Notes due 2016. We and each of our wholly owned subsidiaries, except for K. Hovnanian Enterprises, Inc., the issuer of the senior and senior subordinated notes, and various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, our mortgage lending subsidiaries, a subsidiary formerly engaged in homebuilding activity in Poland, our title insurance subsidiaries, joint ventures, and certain other subsidiaries is a guarantor of the senior notes and senior subordinated notes.
Our mortgage banking subsidiary's warehouse agreement was amended on March 7, 2006. Pursuant to the agreement, we may borrow up to $250 million. The agreement expires in October 2006 and interest is payable monthly at the Eurodollar Rate plus 1.0%. We also have a $100 million commercial paper facility. The facility expires in September 2006 and interest of LIBOR plus .65% is payable monthly. As of January 31, 2006, the aggregate principal amount of all borrowings under this agreement was $137.7 million.
Total inventory increased $440.2 million during the three months ended January 31, 2006. This increase excluded the increase in consolidated inventory not owned of $9.5 million consisting of specific performance options, options with variable interest entities, and other options that were added to our balance sheet in accordance with SFAS 49, SFAS 98, and EITF 97-10, and variable interest entities in accordance with FIN 46. See "Notes to Condensed Consolidated Financial Statements" - Note 13 for additional information on FIN 46. Total inventory in our Northeast Region increased $110.4 million, the Southeast Region increased $138.1 million, the Southwest Region increased $41.0 million, and our West Region increased $150.7 million. The increase in inventory was primarily the result of future planned organic growth in our existing markets. Substantially all homes under construction or completed and included in inventory at January 31, 2006 are expected to be closed during the next twelve months. Most inventory completed or under development is partially financed through our revolving credit agreement and senior and senior subordinated indebtedness.
We usually option property for development prior to acquisition. By optioning property, we are only subject to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is reduced.
The following table summarizes the number of buildable homes included in our total residential real estate. The January 31, 2006 and October 31, 2005 numbers exclude real estate owned and options in locations where we have ceased development.
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- --------- ------------ ---------
January 31, 2006:
Northeast Region.. 67 10,720 22,092 32,812
Southeast Region.. 153 22,307 27,954 50,261
Southwest Region.. 99 13,418 8,922 22,340
West Region....... 52 9,409 10,464 19,873
----------- --------- ------------ ---------
Consolidated Total 371 55,854 69,432 125,286
===========
Unconsolidated
Joint Ventures.. 6,601 2,431 9,032
--------- ------------ ---------
Total Including
Unconsolidated
Joint Ventures.. 62,455 71,863 134,318
========= ============ =========
Owned.......... 26,248 7,219 33,467
Optioned....... 24,656 62,213 86,869
--------- ------------ ---------
Controlled Lots... 50,904 69,432 120,336
Construction to
Permanent Financing
Lots........... 4,950 - 4,950
Lots Controlled by
Unconsolidated
Joint ventures. 6,601 2,431 9,032
--------- ------------ ---------
Total Including
Unconsolidated
Joint Ventures. 62,455 71,863 134,318
========= ============ =========
|
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- ----------- ------------ ----------
October 31, 2005:
Northeast Region.. 65 10,797 22,928 33,725
Southeast Region.. 148 21,713 26,113 47,826
Southwest Region.. 102 12,905 7,547 20,452
West Region....... 52 9,285 9,718 19,003
----------- ----------- ----------- -----------
Consolidated Total 367 54,700 66,306 121,006
===========
Unconsolidated
Joint Ventures.. 6,655 3,396 10,051
----------- ----------- -----------
Total Including Unconsolidated
Joint Ventures.. 61,355 69,702 131,057
=========== =========== ===========
Owned.......... 24,731 5,657 30,388
Optioned....... 25,046 60,649 85,695
----------- ----------- -----------
Controlled Lots... 49,777 66,306 116,083
Construction to
Permanent Financing
Lots........... 4,923 - 4,923
Lots Controlled by
Unconsolidated
Joint ventures. 6,655 3,396 10,051
----------- ----------- -----------
Total Including
Unconsolidated
Joint Ventures. 61,355 69,702 131,057
=========== =========== ===========
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The following table summarizes our started or completed unsold homes and models. The increase in total started or completed unsold homes compared to the prior year is primarily due to the increase in mid-rise and high-rise buildings for which we count all units started when vertical construction begins and the growth in the number of active selling communities.
January 31, October 31,
2006 2005
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 546 49 595 469 35 504
Southeast Region.... 412 64 476 417 56 473
Southwest Region.... 1,150 92 1,242 901 70 971
West Region......... 460 133 593 275 157 432
------ ------ ----- ------ ------ -----
Total 2,568 338 2,906 2,062 318 2,380
====== ====== ===== ====== ====== =====
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Investments in and advances to unconsolidated joint ventures increased $9.0 million during the three months ended January 31, 2006. This increase is due to income from joint ventures not distributed and additional investment in joint ventures. As of January 31, 2006, we have investments in nine homebuilding joint ventures and nine land development joint ventures. Other than performance and completion guarantees and environmental indemnifications, no other guarantees associated with unconsolidated joint ventures have been given.
Receivables, deposits, and notes decreased $41.1 million to $84.3 million at January 31, 2006. The decrease was primarily due to a decrease in miscellaneous receivables for a payment received in the first quarter of 2006 from an unconsolidated joint venture. It was also due to the reduction in the receivables from home sales which amounted to $26.8 million and $39.4 million at January 31, 2006 and October 31, 2005, respectively.
Prepaid expenses and other assets are as follows:
January 31, October 31, Dollar
2006 2005 Change
---------- ----------- ---------
Prepaid insurance.................... $ 14,877 $ - $ 14,877
Prepaid project costs................ 66,548 61,773 4,775
Senior residential rental properties. 8,659 8,754 (95)
Other prepaids....................... 29,166 24,547 4,619
Other assets......................... 33,072 30,588 2,484
----------- ----------- ---------
$ 152,322 $ 125,662 $ 26,660
=========== =========== =========
|
Prepaid insurance increased due to a payment of a full year of insurance costs during the first quarter of every year. These costs are amortized on a straight line basis. Prepaid project costs and other prepaids increased due to new communities. Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaids are expensed as homes are delivered. The increase in other assets is attributable to the Executive Deferred Compensation Plan, due to increased profit sharing contributions for Senior Management.
At January 31, 2006, we had $32.7 million of goodwill. This amount resulted from Company acquisitions prior to fiscal 2000.
Definite life intangibles decreased $37.6 million to $211.9 million at January 31, 2006. The decrease was the result of amortization during the three months of $11.7 million, and an adjustment to the First Home Builders of Florida acquisition accounting. As we finalize our valuation of the assets acquired, we established a deferred tax asset as part of the purchase price allocation, which reduced the recorded intangibles, offset by our Cambridge Homes acquisition earnout and contingent payments related to past acquisitions. For any acquisition, professionals are hired to appraise all acquired intangibles. See "- Critical Accounting Policies - Intangible Assets" above for additional information on intangibles. For tax purposes all our intangibles, except those resulting from an acquisition classified as a tax free exchange, are being amortized over 15 years.
Accounts payable and other liabilities are as follows:
January 31, October 31, Dollar
2006 2005 Change
--------- ----------- --------
Accounts payable.......................$ 172,010 $ 191,469 $(19,459)
Reserves............................... 98,258 95,310 2,948
Accrued expenses....................... 41,379 48,647 (7,268)
Accrued compensation................... 64,356 75,655 (11,299)
Other liabilities...................... 106,500 99,448 7,052
--------- ----------- --------
$ 482,503 $ 510,529 $(28,026)
========= =========== ========
|
The decrease in accounts payable was primarily due to decreases in homes under construction in the first quarter of 2006 compared to the fourth quarter of 2005 throughout our markets, which results in less activity and lower payables. Reserves increased for our general liability insurance deductible, owner controlled insurance program and bonding. The decrease in accrued expenses is due to timing of property tax payments and acquisition earnout obligations. The decrease in accrued compensation was primarily due to the payout of our fiscal year 2005 bonuses during the first quarter of 2006. The increase in other liabilities is mainly due to increased contributions to our deferred compensation plan, increased payroll withholding due to timing of insurance claims, and a lot option advance in the Southwest Region.
Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $152.4 million and $211.2 million at January 31, 2006 and October 31, 2005, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. We may incur risk with respect to mortgages that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, we have incurred minimal credit losses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2006 COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 2005
Total Revenues:
Compared to the same prior period, revenues increased as follows:
Three Months Ended
--------------------------------------------
January 31, January 31, Dollar Percentage
2006 2005 Change Change
----------- ----------- -------- ----------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $1,246,197 $1,015,969 $230,228 22.7%
Land sales and other
revenues........... 12,533 24,399 (11,866) (48.6)%
Financial Services..... 19,262 14,193 5,069 35.7%
----------- ----------- -------- ----------
Total Revenues... $1,277,992 $1,054,561 $223,431 21.2%
=========== =========== ======== ==========
|
Homebuilding:
Compared to the same prior period, housing revenues increased $230.2 million or 22.7% during the three months ended January 31, 2006. Housing revenues are recorded when title is conveyed to the buyer, adequate cash payment has been received, and there is no continued involvement. Land sales are incidental to our residential housing operations and are expected to continue in the future but may significantly fluctuate up or down. For further details on land sales and other revenues, see paragraph titled "Land Sales and Other Revenues" later in this document.
Information on homes delivered by market area is set forth below:
Three Months Ended
January 31,
---------------------
2006 2005
---------- ----------
(Dollars in Thousands)
Northeast Region (1):
Dollars............ $ 225,502 $ 238,461
Homes.............. 612 687
Southeast Region (2):
Dollars............ $ 467,656 $ 263,834
Homes.............. 1,527 902
Southwest Region:
Dollars............ $ 183,259 135,911
Homes.............. 872 715
West Region:
Dollars............ $ 369,780 $ 377,763
Homes.............. 834 962
Consolidated Total:
Dollars............ $ 1,246,197 $1,015,969
Homes.............. 3,845 3,266
Unconsolidated Joint
Ventures (3):
Dollars............ $ 214,612 $ 11,585
Homes.............. 585 22
Totals:
Housing Revenues... $ 1,460,809 $1,027,554
Homes Delivered.... 4,430 3,288
|
(1) Northeast Region includes deliveries from our Ohio acquisition of
Oster Homes on August 3, 2005.
(2) Southeast Region includes deliveries from our Florida acquisitions
of Cambridge Homes and First Home Builders of Florida on March 1,
2005 and August 8, 2005, respectively.
(3) Unconsolidated Joint Ventures includes deliveries from our joint
venture with affiliates of Blackstone Real Estate Advisors that
acquired Town & Country Homes existing residential communities on
March 2, 2005.
An important indicator of our 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:
Net Contracts(1) for the
Three Months Ended Contract Backlog
January 31, as of January 31,
------------------------- ------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(Dollars in Thousands)
Northeast Region (2):
Dollars............ $ 224,401 $ 189,605 $ 803,498 $ 720,675
Homes.............. 608 522 2,160 2,091
Southeast Region (3):
Dollars............ $ 501,401 $ 284,882 $2,242,102 $ 792,978
Homes.............. 1,367 849 7,218 2,346
Southwest Region:
Dollars............ $ 170,704 $ 165,048 $ 276,116 $ 197,285
Homes.............. 801 897 1,225 1,106
West Region:
Dollars............ $ 257,151 $ 354,124 $ 686,500 $ 764,697
Homes.............. 574 906 1,493 1,861
Consolidated Total:
Dollars............ $1,153,657 $ 993,659 $ 4,008,216 $2,475,635
Homes.............. 3,350 3,174 12,096 7,404
Unconsolidated Joint
Ventures (4):
Dollars............ $ 108,572 $ 41,347 $ 924,762 $ 239,851
Homes.............. 274 66 2,029 399
Totals:
Dollars............ $1,262,229 $1,035,006 $ 4,932,978 $2,715,486
Homes............... 3,624 3,240 14,125 7,803
|
(1) Net contracts are defined as new contracts during the period for the
purchase of homes, less cancellations of prior contracts.
(2) The number and the dollar amount of net contracts and contract
backlog in the Northeast in the 2006 first quarter include the
effect of the Oster Homes acquisition, which closed in August 2005.
(3) The number and the dollar amount of net contracts and contract
backlog in the Southeast in the 2006 first quarter include the
effects of the Cambridge Homes and First Home Builders of Florida
acquisitions, which closed in March 2005 and August 2005,
respectively.
(4) The number and the dollar amount of net contracts and contract
backlog in Unconsolidated Joint Ventures in the 2006 first quarter
include the effect of the Town & Country Homes acquisition, which
closed in March 2005.
Cost of sales includes expenses for homebuilding and land sales. A breakout of such expenses for homebuilding sales and homebuilding gross margin is set forth below:
Three Months Ended
January 31,
----------------------
2006 2005
---------- ----------
(Dollars in Thousands)
Sale of Homes.............. $1,246,197 $1,015,969
Cost of Sales, excluding
interest................. 926,822 757,086
---------- ----------
Homebuilding Gross Margin,
before interest expense.. 319,375 258,883
Homebuilding Cost of
Sales Interest........... 16,111 17,579
---------- ----------
Homebuilding Gross Margin,
after interest expense... $ 303,264 $ 241,304
========== ==========
Gross Margin Percentage,
before interest expense... 25.6% 25.5%
Gross Margin Percentage,
after interest expense.... 24.3% 23.8%
|
Cost of Sales expenses as a percentage of home sales revenues are presented below:
Three Months Ended
January 31,
-------------------
2006 2005
-------- --------
Sale of Homes................ 100.0% 100.0%
-------- --------
Cost of Sales, excluding
interest:
Homebuilding, land &
development costs.... 65.8% 66.1%
Commissions............ 2.3% 2.1%
Financing concessions.. 0.9% 0.9%
Overheads.............. 5.4% 5.4%
-------- --------
Total Cost of Sales, before
interest expense........... 74.4% 74.5%
-------- --------
Gross Margin Percentage,
before interest expense.... 25.6% 25.5%
Cost of sales interest....... 1.3% 1.7%
-------- --------
Gross Margin Percentage,
after interest expense..... 24.3% 23.8%
======== ========
|
We sell a variety of home types in various local communities, each yielding a different gross margin. As a result, depending on the geographic mix of deliveries and 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. The consolidated gross margin before interest expense for the three months ended January 31, 2006 was 10 basis points higher than the same period in 2005. Our gross margin after interest expense for the three months ended January 31, 2006 was 50 basis points more than the same period last year. These minor fluctuations from period to period in cost of sales interest as a percentage of home revenues are due to the mix of homes sold and the inventory carrying period for those homes.
Homebuilding selling, general, and administrative expenses as a percentage of homebuilding revenues increased to 10.9% for the three months ended January 31, 2006, compared to 9.5% for the three months ended January 31, 2005. Such expenses increased $38.6 million for the three months ended January 31, 2006 compared to the same period last year. The dollar and percentage increases were in line with our growth goals as we increase selling, general and administrative costs associated with the expected increase in the number of active selling communities in all of our regions.
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,
------------------
2006 2005
-------- --------
Land Sales........................ $ 10,555 $23,004
Cost of Sales, Excluding Interest. 7,865 14,171
-------- --------
Land Sales Gross Margin,
Excluding Interest.............. 2,690 8,833
-------- --------
Interest Expense.................. 458 188
-------- --------
Land Sales Gross Margin,
Including Interest.............. $ 2,232 $ 8,645
======== ========
|
Land sales are incidental to our residential homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. For the full fiscal year 2006, we expect pre-tax profit from land sales to be higher than they were in fiscal 2005. However, land sales are often dependent upon receiving approvals and entitlements, the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult.
Financial Services
Financial services consist primarily of originating mortgages from our homebuyers and selling such mortgages in the secondary market, and title insurance activities. For the three months ended January 31, 2006, financial services provided a $5.7 million profit before income taxes, compared to a profit of $4.3 million for the same period in 2005. The increase in pretax profit for the three months ended January 31, 2006 is primarily due to increased mortgage settlements and the addition of mortgage operations as a result of our 2005 acquisitions.
Corporate General and Administrative
Corporate general and administrative expenses represent the operations at our headquarters in Red Bank, New Jersey. Such expenses include our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality, and safety. As a percentage of total revenues, such expenses increased to 2.2% for the three months ended January 31, 2006 from 1.5% for the prior year's three months. Corporate general and administrative expenses increased $11.8 million during the three months ended January 31, 2006, compared to the same period last year. The increase in corporate general and administrative expenses is primarily attributed to increased depreciation expense for new software systems, increased consulting services related to the new software implementation, Sarbanes Oxley compliance costs, increased compensation with more headcount and higher profit based bonuses, as well as the adoption of FAS 123R resulting in the expensing of stock options.
While the sum of homebuilding, selling, general and administrative expenses and corporate general and administrative expenses as a percentage of total revenues for the first quarter is higher than the prior year's first quarter percentage, we expect these expenses as a percentage of revenues for the full fiscal year to be similar to the prior year.
Other Interest
Other interest increased $0.7 million for the three months ended January 31, 2006, compared to three months ended January 31, 2005. This increase is primarily due to an increase in interest incurred and expensed on nonrecourse land mortgages directly related to property not yet under development.
Other Operations
Other operations consist primarily of miscellaneous residential housing operations expenses, senior rental residential property operations, amortization of senior and senior subordinated note issuance expenses, earnout payments from homebuilding company acquisitions, minority interest relating to consolidated joint ventures, and corporate owned life insurance. The increase in other operations to $7.0 million for the three months ended January 31, 2006, compared to $1.9 million for the three months ended January 31, 2005, is primarily due to increased earnout expenses related to several recent acquisitions.
Intangible Amortization
We are amortizing our definite life intangibles over their expected useful life, ranging from three to seven years. Intangible amortization increased $1.6 million for the three months ended January 31, 2006, when compared to the same period last year. This increase was the result of the amortization expense related to the acquisition of Cambridge Homes in March 2005, Oster Homes in August 2005 and First Home Builders of Florida in August 2005, offset by reduced amortization on older acquisitions.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections". This statement, which replaces APB Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements", changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective application of changes in accounting principle to prior periods' financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue No. 04-5 "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 creates a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate the partnership. EITF 04-5 states that the presumption of general partner control would be overcome only when the limited partners have certain specific rights as outlined in EITF 04-5. EITF 04-5 is effective immediately for all newly formed limited partnerships and for existing limited partnership agreements that are modified. For general partners in all other limited partnerships, EITF 04-5 is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. Implementation of EITF 04-5 is not expected to have a material impact on the Company's results of operations or financial position.
Total Taxes
Total taxes as a percentage of income before taxes decreased for the three months ended January 31, 2006 to 37.8% from 38.2% for the three months ended January 31, 2005. This decrease is primarily due to the benefit of the tax deduction on qualified production activities provided by the American Jobs Creation Act of 2004.
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, 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. Recently in the more highly regulated markets that have seen significant home price appreciation, customer affordability has become a concern. Our broad product array insulates us to some extent, but it is something we are monitoring closely.
Inflation has a lesser short-term effect, because we generally negotiate fixed price contracts with many, but not all, of 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 three to twelve months. Construction costs for residential buildings represent approximately 60% of our homebuilding cost of sales.
Mergers and Acquisitions
On March 1, 2005, we acquired for cash the assets of Cambridge Homes, a privately held Orlando homebuilder and provider of related financial services, headquartered in Altamonte Springs, Florida. The acquisition provides us with a presence in the greater Orlando market. Cambridge Homes designs, markets and sells both single family homes and attached townhomes and focuses on first-time, move-up and luxury homebuyers. Cambridge Homes also provides mortgage financing, as well as title and settlement services to its homebuyers.
The Cambridge Homes acquisition was accounted for as a purchase, with the results of its operations included in our consolidated financial statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country Homes, a privately held homebuilder and land developer headquartered in Lombard, Illinois, which occurred concurrently with our entering into a joint venture agreement with affiliates of Blackstone Real Estate Advisors in New York to own and develop Town & Country's existing residential communities. The joint venture is being accounted for under the equity method. Town & Country Homes' operations beyond the existing owned and optioned communities, as of the acquisition date, are wholly owned and included in our consolidated financial statements.
The Town & Country acquisition provides us with a strong initial position in the greater Chicago market, and expands our operations into the Florida markets of West Palm Beach, Boca Raton and Fort Lauderdale and bolsters our current presence in Minneapolis/St. Paul. Town & Country designs, markets and sells a diversified product portfolio in each of its markets, including single family homes and attached townhomes, as well as mid-rise condominiums in Florida. Town & Country serves a broad customer base including first-time, move-up and luxury homebuyers.
On August 3, 2005, we acquired substantially all of the homebuilding assets of Oster Homes, a privately held Ohio homebuilder, headquartered in Lorain, Ohio. The acquisition provides Hovnanian with a complementary presence to its Ohio "build-on-your-own-lot" homebuilding operations. Oster Homes builds in Lorain County in Northeast Ohio, just west of Cleveland. Oster Homes designs, markets and sells single family homes, with a focus on first-time and move-up homebuyers. Additionally, Oster Homes utilizes a design center to market extensive pre-prices, options and upgrades.
On August 8, 2005, we acquired substantially all of the assets of First Home Builders of Florida, a privately held homebuilder and provider of related financial services headquartered in Cape Coral, Florida. First Home Builders is a leading builder in Western Florida and ranked first in the greater Fort Myers-Cape Coral market. First Home Builders of Florida designs, markets and sells single family homes, with a focus on the first- time home buying segment. The company also provides mortgage financing, title and settlement services to its homebuyers.
Both the First Home Builders of Florida and the Oster Homes acquisitions were accounted for as purchases with the results of their operations included in our consolidated financial statements as of the dates of the acquisitions.
All fiscal 2005 acquisitions provide for other payments to be made, generally dependant upon achievement of certain future operating and return objectives.
Transactions with Related Parties
In December 2005, we entered into an agreement to purchase land in New Jersey from an entity that is owned by family relatives of our Chairman of the Board and our Chief Executive Officer at a base price of $25 million. The land will be acquired in four phases over a period of 30 months from the date of acquisition of the first phase. The purchase prices for phases two through four are subject to an increase in the purchase price for the phase of not less than 6% per annum and not more than 8% per annum from the date of the closing of the first phase based on an identified prime rate. As of the end of the first quarter of 2006, no land has been acquired. A deposit in the amount of $500,000, however, has been made by the Company. Neither the Company nor the Chairman of the Board or the Chief Executive Officer has a financial interest in the relatives' company from whom the land will be purchased.
Pursuant to the Board of Director requirements, prior to the agreement being finalized, an independent appraisal of the property being purchased was performed. Upon review of the appraisal by the independent members of the Board of Directors the transaction was approved.
Safe Harbor Statement
All statements in this Form 10-Q that are not historical facts should be considered as "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Although we believe that our plans, intentions and expectations reflected in, or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. Such risks, uncertainties and other factors include, but are not limited to:
. Changes in general and local economic and business conditions;
. Adverse weather conditions and natural disasters;
. Changes in market conditions;
. Changes in home prices and sales activity in the markets where
the Company builds homes;
. Government regulation, including regulations concerning
development of land, the home building, sales and customer
financing processes, and the environment;
. Fluctuations in interest rates and the availability of mortgage
financing;
. Shortages in, and price fluctuations of, raw materials and labor;
. The availability and cost of suitable land and improved lots;
. Levels of competition;
. Availability of financing to the Company;
. Utility shortages and outages or rate fluctuations; and
. Geopolitical risks, terrorist acts and other acts of war.
Certain 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, 2005.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing us is interest rate risk on our long- term debt. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse line of credit are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from private investors. Accordingly, the risk from mortgage loans is not material. We do not hedge interest rate risk other than on mortgage loans using financial instruments. We are also subject to foreign currency risk but this risk is not material. The following table sets forth as of January 31, 2006, our long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value ("FMV").
As of January 31, 2006
-------------------------------------------
Expected Maturity Date
FMV @
2006 2007 2008 2009 2010 Thereafter Total 1/31/06
------ ------- ------- -------- -------- ---------- ---------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.... $37,686 $140,915 $ 711 $ 760 $100,813 $1,286,230 $1,567,115 $1,535,245
Average
interest rate 6.10% 10.48% 6.69% 6.71% 6.01% 6.93% 7.17% -
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(1) Does not include bonds collateralized by mortgages receivable or the warehouse line of credit.
In addition, we have reassessed the market risk for our variable rate debt, which is based upon a margin plus at our option either (1) a base rate determined by reference to the higher of (a) a PNC Bank, National Association's prime rate and (b) the federal funds rate plus 1/2% or (2) a LIBOR-based rate for a one, two, three, or six month interest period as selected by us, and we believe that a one percent increase in this rate would have an approximate $0.3 million increase in interest expense for the three months ended January 31, 2006, assuming an average of $113.1 million of variable rate debt outstanding from November 1, 2005 to January 31, 2006.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of January 31, 2006. Based upon that evaluation and subject to the foregoing, the Company's chief executive officer and chief financial officer concluded that the design and operation of the Company's disclosure controls and procedures are effective to accomplish their objectives.
In addition, there was no change in the Company's internal control over financial reporting that occurred during the quarter ended January 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations and we are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation, and/or other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas.
In March 2005, we received two requests for information pursuant to Section 308 of the Clean Water Act from Region 3 of the Environmental Protection Agency (the "EPA"). These requests sought information concerning storm water discharge practices in connection with completed, ongoing and planned homebuilding projects by subsidiaries in the states and district that comprise EPA Region 3. We also received a notice of violations for one project in Pennsylvania and requests for sampling plan implementation in two projects in Pennsylvania. The amount requested by the EPA to settle the asserted violations at the one project was not material. We provided the EPA with information in response to its requests. We have since been advised by the Department of Justice ("DOJ") that it will be involved in the review of our storm water discharge practices. We cannot predict the outcome of the review of these practices or estimate the costs that may be involved in resolving the matter. To the extent that the EPA or the DOJ asserts violations of regulatory requirements and request injunctive relief or penalties, we will defend and attempt to resolve such asserted violations.
In addition, in November 2005, we received two notices from the California Regional Water Quality Control Board alleging violations of certain storm water discharge rules and assessing an administrative civil liability of $0.2 million and $0.3 million. We do not consider these assessments to be material and are considering our response to the notices.
It can be anticipated that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
Our sales and customer financing processes are subject to the jurisdiction of the U. S. Department of Housing and Urban Development ("HUD"). In connection with the Real Estate Settlement Procedures Act, HUD recently inquired about our process of referring business to our affiliated mortgage company and has separately requested documents related to customer financing. We have responded to HUD's inquiries. In connection with these inquiries, the Inspector General of HUD has recommended to the Secretary of HUD that we indemnify HUD for any losses that it may sustain in connection with nine loans that it alleges were improperly underwritten. We cannot predict the outcome of HUD's inquiry or estimate the costs that may be involved in resolving the matter. We do not expect the ultimate cost to be material.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
This table provides information with respect to purchases of shares of our Class A Common Stock made by or on behalf of Hovnanian Enterprises or any affiliated purchaser during the fiscal first quarter of 2006.
Issuer Purchases of Equity Securities (1)
Total Number
Of Shares Maximum Number of
Purchased as Shares That May
Part of Publicly Yet Be Purchased
Total Number of Average Price Announced Plans Under The Plans
Period Shares Purchased Paid Per Share or Programs or Programs
---------------- ---------------- -------------- ---------------- -----------------
November 1, 2005
Through
November 30, 2005 1,487,668
-------------------------------------------------------------------------------------
December 1, 2005
Through
December 31, 2005 150,000 $48.64 150,000 1,337,668
-------------------------------------------------------------------------------------
January 1, 2006
Through
January 31, 2006 1,337,668
-------------------------------------------------------------------------------------
Total 150,000 $48.64 150,000
================ ============== ================
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(1) In July 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares of Class A Common Stock.
No shares of our Class B Common Stock or of our 7.625% Series A Preferred Stock were purchased by or on behalf of Hovnanian Enterprises or any affiliated purchaser during the fiscal first quarter of 2006.
Item 6. Exhibits
Exhibit 3(a) Certificate of Incorporation of the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of Certificate of Incorporation of the Registrant. (2)
Exhibit 3(c) Certificate of Amendment of Certificate of Incorporation of the Registrant. (3)
Exhibit 3(d) Restated Bylaws of the Registrant. (4)
Exhibit 4(a) Indenture, dated as of November 3, 2003, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and Wachovia Bank, National Association, as Trustee. (5)
Exhibit 4(b) First Supplemental Indenture, dated as of November 3, 2003, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other Guarantors named therein and Wachovia Bank, National Association, as Trustee. (6)
Exhibit 4(c) Second Supplemental Indenture, dated as of March 18, 2004, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other Guarantors named therein and Wachovia Bank, National Association, as Trustee. (7)
Exhibit 4(d) Third Supplemental Indenture, dated as of July 15, 2004, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other Guarantors named therein and Wachovia Bank, National Association, as Trustee. (7)
Exhibit 4(e) Fourth Supplemental Indenture, dated as of April 19, 2005, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other Guarantors named therein and Wachovia Bank, National Association, as Trustee. (7)
Exhibit 4(f) Fifth Supplemental Indenture, dated as of September 6, 2005, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other Guarantors named therein and Wachovia Bank, National Association, as Trustee. (7)
Exhibit 4(g) Sixth Supplemental Indenture, dated as of February 27, 2006, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other Guarantors named therein and Wachovia Bank, National Association, as Trustee, relating to the 7 1/2% Senior Notes due 2016 (including form of 7 1/2% Senior Notes due 2016). (8)
Exhibit 4(h) Certificate of Designations, Powers, Preferences and Rights of the 7.625% Series A Preferred Stock of Hovnanian Enterprises, Inc., dated July 12, 2005.(9)
Exhibit 10(a) Fifth Amended and Restated Credit Agreement dated June 14, 2005. (10)
Exhibit 10(b) Amended and Restated Guaranty and Suretyship Agreement, dated June 14, 2005. (10)
Exhibit 10(c) Death and Disability Agreement between the Registrant and Ara K. Hovnanian.
Exhibit 10(d) Form of Hovnanian Deferred Share Policy for Senior Executives.
Exhibit 10(e) Form of Hovnanian Deferred Share Policy.
Exhibit 10(f) Form of Non-Qualified Stock Option Agreement.
Exhibit 10(g) Form of Incentive Stock Option Agreement.
Exhibit 10(h) Form of Stock Option Agreement for Directors.
Exhibit 10(i) Form of Restricted Share Unit Agreement.
Exhibit 31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Exhibit 31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Exhibit 32(a) Section 1350 Certification of Chief Executive Officer.
Exhibit 32(b) Section 1350 Certification of Chief Financial Officer.
(1) Incorporated by reference to Exhibits to Registration Statement (No. 2-85198) on Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibit 4.2 to Registration Statement (No. 333-106761) on Form S-3 of the Registrant.
(3) Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended January 31, 2004.
(4) Incorporated by reference to Exhibit 3.2 to Registration Statement (No. 1-08551) on Form 8-A of the Registrant.
(5) Incorporated by reference to Exhibits to Registration Statement (No. 333-125738) on Form S-3 of the Registrant.
(6) Incorporated by reference to Exhibits to Current Report of the Registrant on Form 8-K on November 7, 2003.
(7) Incorporated by reference to Exhibits to Registration Statement (No. 333-131982) on Form S-3 of the Registrant.
(8) Incorporated by reference to Exhibits to Current Report of the Registrant on Form 8-K filed on February 27, 2006.
(9) Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant, filed on July 13, 2005.
(10) Incorporated by reference to Exhibits to Registration Statement (No. 333-127806) on Form S-4 of the Registrant.
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 10, 2006 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: March 10, 2006 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
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Exhibit 10c
February 2, 2006
Mr. Ara K. Hovnanian
767 Fifth Avenue, 46th Floor
New York, NY 10153
Dear Ara:
This letter agreement (the "Agreement") sets forth the terms of the agreement between you and Hovnanian Enterprises, Inc. (the "Company") in the event that your employment is terminated due to your "Disability" (as defined under the K. Hovnanian Enterprises, Inc. Long Term Disability Plan, as it may be amended from time to time) or in the event of your death during your employment with the Company (the date of either such termination is hereafter referred to as the "Termination Date").
1. Amounts Payable & Designated Beneficiary. In the event that your employment is terminated due to your Disability or death during your employment with the Company, you (or your designated beneficiary, estate, or legal representative) will be entitled to receive a lump sum of $10 million dollars (the "benefit"). In the event of your death, you have elected your spouse, Rachel Hovnanian, to be beneficiary of the benefit as outlined in this letter agreement. In the event of your "simultaneous" deaths, or in the event that you are not survived by Rachel Hovnanian by at least thirty days, you have elected alternative beneficiaries under this agreement to be Alexander Hovnanian and Serena Hovnanian; for which the benefit will be equally divided.
2. Other Plans. Any payments that may become payable to you hereunder are in addition to all individual death or disability policies, company provided death or disability policies, or employee benefits, if any, to which you may be entitled from time to time under the employee benefit plans, policies or programs of the Company.
3. No Trust Fund. This Agreement will not be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and any of its affiliates and you or any other person. To the extent that you (or your designated beneficiary, legal representative or estate, as applicable) acquire the right to receive payments from the Company or any of its affiliates under this Agreement, such right will be no greater than the right of any unsecured general creditor of the Company.
4. No Right To Employment. Except as expressly provided herein, this Agreement will not interfere in any way with the right of the Company to reduce your compensation or other benefits or terminate your employment, with or without cause. Any rights that you will have in that regard will be as set forth in any applicable employment agreement between you and the Company. This Agreement may be changed only by a written agreement executed by the Company and you.
5. Assignment. You may not assign, transfer, pledge or otherwise dispose of your rights under this Agreement other than to a family limited partnership or trust for estate planning purposes, by your will or under the laws of descent and distribution. If the Company shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this Section 5 will continue to apply to each subsequent employer of you hereunder in the event of any subsequent merger, consolidation or succession of such subsequent employer.
6. Governing Law/Counterparts. The validity, construction, and effect of this Agreement will be determined in accordance with the laws of New York. This Agreement may be signed in counterparts, each of which will be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
7. Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such as Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
8. Entire Agreement. This Agreement sets forth our entire agreement with respect to the subject matter hereof, and supersedes any and all prior agreements between you and the Company, (other than any other employee benefit plans (as provided in Section 2)) whether written or oral, relating to any and all matters covered by and contained or otherwise dealt with in this Agreement. This Agreement has been authorized by the Executive Compensation Committee of the Board of Directors of the Company.
This letter Agreement replaces and supercedes the letter Agreement dated July 28, 2000 between you and the Company.
Please indicate your agreement to the foregoing by executing this Agreement where indicated below.
HOVNANIAN ENTERPRISES, INC.
By: /S/ROBYN T. MINGLE
Robyn T. Mingle
Senior Vice President
Human Resources
Agreed and acknowledged as of
this 2 day of February, 2006
/S/ARA K. HOVNANIAN
ARA K. HOVNANIAN
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Exhibit 10d
HOVNANIAN DEFERRED SHARE POLICY
FOR SENIOR EXECUTIVES
THIS POLICY, dated as of , relates to one or more Deferred Share Awards which may be granted by Hovnanian Enterprises, Inc., a Delaware corporation (the "Company") to (the "Grantee").
The Company may grant the Grantee from time to time during one or more November 1st through October 31st fiscal years incentive profit sharing awards ("Incentives") pursuant to the Company's Incentive Profit Sharing Program applicable to the Grantee. The Grantee will receive in cash such percentage of each Incentive as is specified under the Incentive Profit Sharing Program?. The remainder of each Incentive will be deferred (all such deferred awards made on behalf of the Grantee for service performed in a given fiscal year referred to herein as a "Deferred Share Award"), and, when vested, will be paid in the form of shares of Class A or Class B Common Stock of the Company ("Common Stock").
The number of shares of Class A or Class B Common Stock to be paid under a Deferred Share Award will be determined by dividing the dollar amount of the Deferred Share Award by the lesser of (i) the closing price of a share of Class A or Class B Common Stock, as reported in the Wall Street Journal, on the last day of the fiscal year during which the service giving rise to the Deferred Share Award was performed, or (ii) the average of the closing prices of a share of Class A or Class B Common Stock, as reported in the Wall Street Journal, on the last day of the 5 fiscal quarters ending on the last day of the fiscal year during which the service giving rise to the Deferred Share Award was performed. In addition, the Company will increase the number of shares of Class A or Class B Common Stock under the Deferred Share Award by 20%. Delivery of the shares of Class A or Class B Common Stock will be deferred, and will become vested and payable, as described below.
1. Crediting of Deferred Share Award. The Deferred Share Award, which is granted under and subject to the terms of the 1999 Company Stock Incentive Plan or the Senior Executive Short-Term Incentive Plan (the "Stock Plans"), the terms of which are incorporated herein by reference, shall be credited to a Deferred Share Account maintained on the books of the Company.
2. Vesting of Deferred Share Award.
The following vesting schedule shall apply for so long as the Grantee has not attained age 58 or performed 20 years of service with the Company or any respective subsidiary thereof:
On the second November 1st following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on November 1, 2006 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), the Grantee shall become vested in 25% (rounded up to the nearest whole share) of his or her Deferred Share Award for that fiscal year.
On the third November 1st following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on November 1, 2007 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), the Grantee shall become vested in an additional 25% (rounded up to the nearest whole share) of his or her Deferred Share Award for that fiscal year.
On the fourth November 1st following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on November 1, 2008 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), the Grantee shall become vested in an additional 25% (rounded up to the nearest whole share) of his or her Deferred Share Award for that fiscal year.
On the fifth November 1st following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on November 1, 2009 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), the Grantee shall become vested in 100% of his or her then unvested Deferred Share Award for that fiscal year.
Notwithstanding the preceding vesting schedule, if the Grantee either attains age 58 or completes 20 years of service with the Company, K. Hovnanian Enterprises, Inc. or any respective subsidiary thereof, the Grantee shall become immediately vested in 100% of his or her then unvested Deferred Share Award upon the later of (i) the January 15th following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on January 15, 2006 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), or (ii) the date the Grantee attains age 58 or completes 20 years of service with the Company, K. Hovnanian Enterprises, Inc. or any respective subsidiary thereof.
3. Effects of Termination of Employment on Deferred Share Award. In the event that the Grantee's employment terminates for any reason other than the Grantee's death or Disability (as such term is defined in the Stock Plans), the unvested Deferred Share Award shall be cancelled immediately without payment therefor. In the event that the Grantee's employment terminates due to the Grantee's death or Disability, any unvested portion of the Deferred Share Award shall become fully vested upon such termination.
4. Dividend Equivalents. In the event that any cash dividend is paid
on shares of Class A or Class B Common Stock as of a record date
prior to the day on which the shares are delivered to the Grantee
hereunder, the Company shall credit to the Grantee's Deferred Share
Account an additional number of shares equal to (x) the number of
shares under the Deferred Share Award credited to the Deferred Share
Account as of any applicable record date multiplied by (y) the
dividend per share, divided by (z) the Fair Market Value of a share
of Class A or Class B Common Stock on the applicable dividend
payment date.
5. Distributions.
(a) Distribution of the Deferred Share Account shall be made in the form of Class A or Class B Common Stock as soon as practicable after an applicable vesting date, unless the Grantee is eligible and has elected to defer the distribution pursuant to the terms a nonqualified deferred compensation plan maintained by the Company ("Deferred Compensation Plan"); provided that any such deferred amount, when paid from such Deferred Compensation Plan, shall be paid in the form of shares of Class A or Class B Common Stock. Once any shares are deferred under any Deferred Compensation Plan, the rights and privileges of the Grantee with respect thereto shall be determined solely with reference to such Deferred Compensation Plan and not to this Policy.
(b) The Grantee shall not have any of the rights or privileges of a holder of Class A or Class B Common Stock (including any voting rights) of the Company unless and until such time as shares of Class A or Class B Common Stock are distributed to the Grantee hereunder or, if later, are distributed to the Grantee from the Deferred Compensation Plan.
(c) If the Grantee dies before the Deferred Share Account has been distributed hereunder, payment shall be made to the beneficiary or beneficiaries designated on the beneficiary designation form on file with the Company. In the absence of any such designation, the Deferred Share Account shall be distributed to the Grantee's spouse (or if no spouse is then living, to the Grantee's estate).
6. Adjustments. Subject to the terms of the Stock Plans, in the event that the outstanding shares of the Class A or Class B Common Stock are, from time to time, changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares, or otherwise, the Committee (as defined in the Stock Plans) shall make an appropriate and equitable adjustment in the number of shares under the Deferred Share Award credited to the Deferred Share Account. Any such adjustment made by the Committee shall be final and binding upon the Grantee, the Company and all other interested persons.
7. Miscellaneous.
(a) All capitalized terms used herein shall have the meaning set forth in the Stock Plans, unless the context requires a different meaning.
(b) Except as determined by the Company, no person shall have any right to receive a Deferred Share Award. The eligibility, amount and the grant of the Deferred Share Award are entirely at the discretion of the Company.
(c) The Company reserves the right to amend this Policy in writing unilaterally so long as no such amendment adversely affects any accrued and vested rights of the Grantee with respect to this Policy.
(d) The execution and delivery of this Policy and the granting of one or more Deferred Share Awards hereunder shall not constitute or be evidence of any agreement or understanding, express or implied, on the part of the Company or its affiliates to employ the Grantee for any specific period or in any particular capacity and shall not prevent the Company or its affiliate from terminating the Grantee's employment at any time with or without cause, subject to applicable law.
(e) Any federal, state or local taxes required by the applicable taxing authorities to be withheld by the Company by reason of the Deferred Share Award shall be paid to the Company by the Grantee within the requisite time such taxes are required to be paid or deposited by the Company. The Company reserves the right to retain the value of the Deferred Share Award sufficient to equal the amount of the taxes required to be withheld.
(f) This Policy shall be subject to all applicable laws, rules and regulations, and to such approvals of any governmental agencies as may be required. Unless otherwise required by law (without the application of local conflict of law rules), the interpretation and administration of this Policy shall be governed by the laws of the State of Delaware.
(g) Unless the Committee determines otherwise, neither the Deferred Share Award nor the Deferred Share Account shall be secured by any specific assets of the Company or its subsidiaries, nor shall any assets of the Company or any of its subsidiaries be designated as attributable or allocated to the satisfaction of the Company's obligations under this Policy or the Deferred Compensation Plan with respect to the Deferred Share Award granted hereunder.
(h) The execution and delivery of this Policy and the granting of the Deferred Share Award hereunder shall not give the Grantee or any other person the right to participate or to continue to participate in any Deferred Compensation Plan of the Company. Such rights shall be governed exclusively by the terms of such Plan.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this Policy.
HOVNANIAN ENTERPRISES, INC.
By:
Title:
Date:
Notwithstanding the general rule that the terms of the Company's Incentive Profit Sharing Program applicable to the Grantee determine the percentage of Incentive paid in cash and the percentage of Incentive paid as a Deferred Share Award, if, but for this paragraph, the dollar value of the Deferred Share Award portion of the Grantee's Incentive for a given fiscal year is expected to exceed five hundred thousand dollars ($500,000), the Grantee may elect, pursuant to such rules and procedures established by the Company and no later than fifteen (15) days following the end of the fiscal year, to have the dollar value of the Deferred Share Award portion of his or her Incentive for the fiscal year capped at five hundred thousand dollars ($500,000). If the Grantee so elects, any portion of his or her Incentive in excess of five hundred thousand dollars ($500,000) which would, but for the election, have been payable as part of the Deferred Share Award shall instead be payable in cash.
Exhibit 10e
HOVNANIAN DEFERRED SHARE POLICY
THIS POLICY, dated as of , relates to one or more Deferred Share Awards which may be granted by Hovnanian Enterprises, Inc., a Delaware corporation (the "Company") to (the "Grantee").
The Company may grant the Grantee from time to time during one or more November 1st through October 31st fiscal years incentive profit sharing awards ("Incentives") pursuant to the Company's Incentive Profit Sharing Program applicable to the Grantee. The Grantee will receive in cash such percentage of each Incentive as is specified under the Incentive Profit Sharing Program. The remainder of each Incentive will be deferred (all such deferred awards made on behalf of the Grantee for service performed in a given fiscal year referred to herein as a "Deferred Share Award"), and, when vested, will be paid in the form of shares of Class A Common Stock of the Company ("Common Stock").
The number of shares of Common Stock to be paid under a Deferred Share Award will be determined by dividing the dollar amount of the Deferred Share Award by the lesser of (i) the closing price of a share of Common Stock, as reported in the Wall Street Journal, on the last day of the fiscal year during which the service giving rise to the Deferred Share Award was performed, or (ii) the average of the closing prices of a share of Common Stock, as reported in the Wall Street Journal, on the last day of the 5 fiscal quarters ending on the last day of the fiscal year during which the service giving rise to the Deferred Share Award was performed. In addition, the Company will increase the number of shares of Common Stock under the Deferred Share Award by 20%. Delivery of the shares of Common Stock will be deferred, and will become vested and payable, as described below.
1. Crediting of Deferred Share Award. The Deferred Share Award, which is granted under and subject to the terms of the 1999 Company Stock Incentive Plan (the "Stock Plan"), the terms of which are incorporated herein by reference, shall be credited to a Deferred Share Account maintained on the books of the Company.
2. Vesting of Deferred Share Award.
The following vesting schedule shall apply for so long as the Grantee has not attained age 58 or performed 20 years of service with the Company or any respective subsidiary thereof:
* On the second November 1st following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on November 1, 2006 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), the Grantee shall become vested in 25% (rounded up to the nearest whole share) of his or her Deferred Share Award for that fiscal year.
* On the third November 1st following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on November 1, 2007 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), the Grantee shall become vested in an additional 25% (rounded up to the nearest whole share) of his or her Deferred Share Award for that fiscal year.
* On the fourth November 1st following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on November 1, 2008 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), the Grantee shall become vested in an additional 25% (rounded up to the nearest whole share) of his or her Deferred Share Award for that fiscal year.
* On the fifth November 1st following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on November 1, 2009 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), the Grantee shall become vested in 100% of his or her then unvested Deferred Share Award for that fiscal year.
Notwithstanding the preceding vesting schedule, if the Grantee either attains age 58 or completes 20 years of service with the Company, K. Hovnanian Enterprises, Inc. or any respective subsidiary thereof, the Grantee shall become immediately vested in 100% of his or her then unvested Deferred Share Award upon the later of (i) the January 15th following the fiscal year during which the service giving rise to the Deferred Share Award was performed (e.g., on January 15, 2006 for a Deferred Share Award in respect of service performed during the November 1, 2004 through October 31, 2005 fiscal year), or (ii) the date the Grantee attains age 58 or completes 20 years of service with the Company, K. Hovnanian Enterprises, Inc. or any respective subsidiary thereof.
3. Effects of Termination of Employment on Deferred Share Award. In the event that the Grantee's employment terminates for any reason other than the Grantee's death or Disability (as such term is defined in the Stock Plan), the unvested Deferred Share Award shall be cancelled immediately without payment therefor. In the event that the Grantee's employment terminates due to the Grantee's death or Disability, any unvested portion of the Deferred Share Award shall become fully vested upon such termination.
4. Dividend Equivalents. In the event that any cash dividend is paid on shares of Common Stock as of a record date prior to the day on which the shares are delivered to the Grantee hereunder, the Company shall credit to the Grantee's Deferred Share Account an additional number of shares equal to (x) the number of shares under the Deferred Share Award credited to the Deferred Share Account as of any applicable record date multiplied by (y) the dividend per share, divided by (z) the Fair Market Value of a share of Common Stock on the applicable dividend payment date.
5. Distributions.
(a)Distribution of the Deferred Share Account shall be made in the form of Common Stock as soon as practicable after an applicable vesting date, unless the Grantee is eligible and has elected to defer the distribution pursuant to the terms a nonqualified deferred compensation plan maintained by the Company ("Deferred Compensation Plan"); provided that any such deferred amount, when paid from such Deferred Compensation Plan, shall be paid in the form of shares of Common Stock. Once any shares are deferred under any Deferred Compensation Plan, the rights and privileges of the Grantee with respect thereto shall be determined solely with reference to such Deferred Compensation Plan and not to this Policy.
(b) The Grantee shall not have any of the rights or privileges of a holder of Common Stock (including any voting rights) of the Company unless and until such time as shares of Common Stock are distributed to the Grantee hereunder or, if later, are distributed to the Grantee from the Deferred Compensation Plan.
(c) If the Grantee dies before the Deferred Share Account has been distributed hereunder, payment shall be made to the beneficiary or beneficiaries designated on the beneficiary designation form on file with the Company. In the absence of any such designation, the Deferred Share Account shall be distributed to the Grantee's spouse (or if no spouse is then living, to the Grantee's estate).
6. Adjustments. Subject to the terms of the Stock Plan, in the event that the outstanding shares of the Common Stock are, from time to time, changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares, or otherwise, the Committee (as defined in the Stock Plan) shall make an appropriate and equitable adjustment in the number of shares under the Deferred Share Award credited to the Deferred Share Account. Any such adjustment made by the Committee shall be final and binding upon the Grantee, the Company and all other interested persons.
7. Miscellaneous.
(a) All capitalized terms used herein shall have the meaning set forth in the Stock Plan, unless the context requires a different meaning.
(b) Except as determined by the Company, no person shall have any right to receive a Deferred Share Award. The eligibility, amount and the grant of the Deferred Share Award are entirely at the discretion of the Company.
(c) The Company reserves the right to amend this Policy in writing unilaterally so long as no such amendment adversely affects any accrued and vested rights of the Grantee with respect to this Policy.
(d) The execution and delivery of this Policy and the granting of one or more Deferred Share Awards hereunder shall not constitute or be evidence of any agreement or understanding, express or implied, on the part of the Company or its affiliates to employ the Grantee for any specific period or in any particular capacity and shall not prevent the Company or its affiliate from terminating the Grantee's employment at any time with or without cause, subject to applicable law.
(e) Any federal, state or local taxes required by the applicable taxing authorities to be withheld by the Company by reason of the Deferred Share Award shall be paid to the Company by the Grantee within the requisite time such taxes are required to be paid or deposited by the Company. The Company reserves the right to retain the value of the Deferred Share Award sufficient to equal the amount of the taxes required to be withheld.
(f) This Policy shall be subject to all applicable laws, rules and regulations, and to such approvals of any governmental agencies as may be required. Unless otherwise required by law (without the application of local conflict of law rules), the interpretation and administration of this Policy shall be governed by the laws of the State of Delaware.
(g) Unless the Committee determines otherwise, neither the Deferred Share Award nor the Deferred Share Account shall be secured by any specific assets of the Company or its subsidiaries, nor shall any assets of the Company or any of its subsidiaries be designated as attributable or allocated to the satisfaction of the Company's obligations under this Policy or the Deferred Compensation Plan with respect to the Deferred Share Award granted hereunder.
(h) The execution and delivery of this Policy and the granting of the Deferred Share Award hereunder shall not give the Grantee or any other person the right to participate or to continue to participate in any Deferred Compensation Plan of the Company. Such rights shall be governed exclusively by the terms of such Plan.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this Policy.
HOVNANIAN ENTERPRISES, INC.
By:
Title:
Date:
Exhibit 10f
HOVNANIAN ENTERPRISES, INC.
1999 STOCK INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
Participant: Date of Grant: Number of Class Shares: Grant Price: Vesting Schedule: |
Date: Number of Shares:
Option Termination Date:
1. Grant of the Option. For valuable consideration, receipt
of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware
Corporation (The "Company"), hereby grants the right and option (the
"Option") to purchase, on the terms and conditions hereinafter set forth,
all or any part of an aggregate number of Class A Shares set forth above.
This grant is made subject to the terms and conditions of the 1999 Stock
Incentive Plan of the Company (the "Plan"), which Plan is incorporated
herein by reference and subject to amendments to the Plan. The purchase
price of the Shares subject to the Option (the "Grant Price") shall be the
price per Share set forth above. This Option is not an Incentive Stock
Option within the meaning of Section 422 of the Internal Revenue Code of
1986 (the "Code").
2. Vesting. This Option will vest in accordance with the
schedule set forth above.
3. Exercise of Option.
(a) Period of Exercise.
(i) In General. The Option must be exercised before the
Option Termination Date set forth above (the "Termination Date"). The
Participant may exercise less than the full installment available to him
or her under this Option, but the Participant must exercise this Option in
full shares of the Common Stock of the Company. The Participant is
limited to ten exercises during the term of this Option.
(ii) Termination of Employment Other Than Due to Death or
Disability. If, prior to the Termination Date, the Participant ceases to
be employed by the Company or a subsidiary thereof (otherwise than by
reason of death or disability within the meaning of Section 22(e)(3) of
the Code ("Disability")), the nonvested portion of the Option shall be
canceled and the vested portion of the Option, to the extent not
previously exercised, shall remain exercisable until the earlier of (a)
the Termination Date and (b) the sixtieth (60th) day after the date of
cessation of employment, and thereafter all Options, to the extent not
previously exercised, shall terminate together with all other rights
hereunder. This Option shall be wholly void and of no effect after the
Termination Date.
(iii) Termination of Employment Due to Death. If, prior to the
Termination Date, the Participant ceases to be employed by the Company or
a subsidiary thereof due to the Participant's death, the Option, to the
extent not previously exercised, shall become immediately exercisable and
remain exercisable until the earlier of (i) the Termination Date and (ii)
the first anniversary of the Participant's death, and thereafter all
Options, to the extent not previously exercised, shall terminate together
with all other rights hereunder. During such time, the Option will be
exercisable by the person or persons to whom the Participant's rights
under the Option shall pass by will or by the applicable laws of descent
and distribution.
(iv) Termination of Employment Due to Disability. If prior to
the Termination Date the Participant ceases to be employed by the Company
or a subsidiary thereof by reason of Disability, the Option, to the extent
not previously exercised, shall immediately become exercisable and shall
remain exercisable until the earlier of (i) the Termination Date and (ii)
the first anniversary of the date of cessation of employment due to
Disability, and thereafter all Options, to the extent not previously
exercised, shall terminate together with all other rights hereunder.
(b) Method of Exercise. Subject to the provisions of the
Plan, this Option may be exercised by written notice to the Company
stating the number of shares with respect to which it is being exercised
and accompanied by payment of the Option Price (a) by certified or bank
cashier's check payable to the order of the Company in New York Clearing
House Funds, (b) by surrender or delivery to the Company of shares of its
Common Stock that have been held by the Participant for at least six
months (or such other period of time as may be determined by the Board of
Directors), or (c) in any other form acceptable to the Company together
with payment or arrangement for payment of any federal income or other tax
required to be withheld by the Company. As soon as practical after
receipt of such notice and payment, the Company, shall, without transfer
or issue tax or other incidental expense to the Participant, deliver to
the Participant at the offices of the Company at 10 Highway 35, Red Bank,
New Jersey, or such other place as may be mutually acceptable, or, at the
election of the Company, by first-class insured mail addressed to the
Participant at his or her address shown in the employment records of the
Company or at the location at which he or she is employed by the Company
or a subsidiary, a certificate or certificates for previously unissued
shares or reacquired shares of its Common Stock as the Company may elect.
(c) Delivery.
(i) The Company may postpone the time of delivery of
certificates for shares of its Common Stock for such additional time as
the Company shall deem necessary or desirable to enable it to comply with
the listing requirements of any securities exchange upon which the Common
Stock of the Company may be listed, or the requirements of the Securities
Act of 1933 or the Securities Exchange Act of 1934 or any Rules or
Regulations of the Securities and Exchange Commission promulgates
thereunder or the requirements of applicable state laws relating to
authorization, issuance or sale of securities.
(ii) If the Participant fails to accept delivery of the
shares of Common Stock of the Company upon tender of delivery thereof, his
or her right to exercise this Option with respect to such undelivered
shares may be terminated by the Company.
4. Adjustments Upon Certain Events. Subject to the terms
of the Plan, in the event of any change in the outstanding Shares by
reason of any Share dividend or split, reorganization, recapitalization,
merger, consolidation, amalgamation, spin-off or combination transaction
or exchange of Shares or other similar events (collectively, an
"Adjustment Event"), the Committee may, in its sole discretion, make an
appropriate and equitable adjustment in the number of Shares subject to
this Agreement to reflect such Adjustment Event. Any such adjustment made
by the Committee shall be final and binding upon the Participant, the
Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor
this Agreement shall be construed as giving the Participant the right to
be retained in the employ of, or in any consulting relationship to, the
Company or any Affiliate. Further, the Company or an Affiliate may at any
time dismiss the Participant, free from any liability or any claim under
the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the
Participant acknowledges and accepts that the Board has the power to amend
or terminate the Plan, to the extent permitted thereunder, at any time and
that the opportunity given to the Participant to participate in the Plan
is entirely at the discretion of the Committee and does not obligate the
Company or any of its Affiliates to offer such participation in the future
(whether on the same or different terms). The Participant further
acknowledges and accepts that such Participant's participation in the Plan
is not to be considered part of any normal or expected compensation and
that the termination of the Participant's employment under any
circumstances whatsoever will give the Participant no claim or right of
action against the Company or its Affiliates in respect of any loss of
rights under this Agreement or the Plan that may arise as a result of such
termination of employment.
7. No Rights of a Shareholder. The Participant shall not
have any rights or privileges as a shareholder of the Company until the
Shares in question have been registered in the Company's register of
shareholders.
8. Legend on Certificates. Any Shares issued or
transferred to the Participant pursuant to Section 3 of this Agreement
shall be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the Plan or the rules, regulations,
and other requirements of the Securities and Exchange Commission, any
stock exchange upon which such Shares are listed, and any applicable
Federal or state laws or relevant securities laws of the jurisdiction of
the domicile of the Participant, and the Committee may cause a legend or
legends to be put on any certificates representing such Shares to make
appropriate reference to such restrictions.
9. Transferability. The Option may not be assigned,
alienated, pledged, attached, sold or otherwise transferred or encumbered
by the Participant otherwise than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, an Participant may transfer
this option in whole or in part by gift or domestic relations order to a
family member of the Participant (a "Permitted Transferee") and, following
any such transfer such option or portion thereof shall be exercisable only
by the Permitted Transferee, provided that no such option or portion
thereof is transferred for value, and provided further that, following any
such transfer, neither such option or any portion thereof nor any right
hereunder shall be transferable other than to the Participant or otherwise
than by will or the laws of descent and distribution or be subject to
attachment, execution or other similar process. For purposes of this
paragraph, "family member" includes any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, former spouse, sibling, niece,
nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law or sister-in-law, including adoptive relationships, any
person sharing the Participant's household (other than a tenant or
employee), trust in which these persons have more than fifty percent of
the beneficial interest, a foundation in which these persons (or the
Participant) control the management of assets and any other entity in
which these persons (or the Participant) own more than fifty percent of
the voting interests. Any purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance not permitted by this Section 9
shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to
the Company or any Affiliate and the Company or any Affiliate shall have
the right and is hereby authorized to withhold from any transfer due under
this Agreement or under the Plan or from any compensation or other amount
owing to the Participant, applicable withholding taxes with respect to any
transfer under this Agreement or under the Plan and to take such action as
may be necessary in the opinion of the Company to satisfy all obligations
for the payment of such taxes. Notwithstanding the foregoing, if the
Participant's employment with the Company terminates prior to the transfer
of all of the Shares under this Agreement, the payment of any applicable
withholding taxes with respect to any further transfer of Shares under
this Agreement or the Plan shall be made solely through the sale of Shares
equal to the statutory minimum withholding liability.
11. Choice of Law. THE INTERPRETATION, PERFORMANCE AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
12. Option Subject to Plan. By entering into this
Agreement, the Participant agrees and acknowledges that the Participant
has received and read a copy of the Plan. The Option is subject to the
Plan. In the event of a conflict between any term or provision contained
herein and a term or provision of the Plan, the applicable terms and
provisions of the Plan will govern and prevail.
13. Signature in 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 executed this
Agreement.
HOVNANIAN ENTERPRISES, INC.
By:
PARTICIPANT
By:
Exhibit 10g
HOVNANIAN ENTERPRISES, INC.
1999 STOCK INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
Participant: Date of Grant: Number of Class A Shares: Grant Price Vesting Schedule: Date: Number of Shares |
Option Termination Date:
1. Grant of the Option. For valuable consideration, receipt
of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware
Corporation (The "Company"), hereby grants the right and option (the
"Option") to purchase, on the terms and conditions hereinafter set forth,
all or any part of an aggregate number of Class A Shares set forth above.
This grant is made subject to the terms and conditions of the 1999 Stock
Incentive Plan of the Company (the "Plan"), which Plan is incorporated
herein by reference and subject to amendments to the Plan. The purchase
price of the Shares subject to the Option (the "Grant Price") shall be the
price per Share set forth above. This Option is an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986
(the "Code").
2. Vesting. This Option will vest in accordance with the
schedule set forth above.
3. Exercise of Option.
(a) Period of Exercise.
(i) In General. The Option must be exercised before the
Option Termination Date set forth above (the "Termination Date"). The
Participant may exercise less than the full installment available to him
or her under this Option, but the Participant must exercise this Option in
full shares of the Common Stock of the Company. The Participant is
limited to ten exercises during the term of this Option.
(ii) Termination of Employment Other Than Due to Death or
Disability. If, prior to the Termination Date, the Participant ceases to
be employed by the Company or a subsidiary thereof (otherwise than by
reason of death or disability within the meaning of Section 22(e)(3) of
the Code ("Disability")), the nonvested portion of the Option shall be
canceled and the vested portion of the Option, to the extent not
previously exercised, shall remain exercisable until the earlier of (a)
the Termination Date and (b) the sixtieth (60th) day after the date of
cessation of employment, and thereafter all Options, to the extent not
previously exercised, shall terminate together with all other rights
hereunder. This Option shall be wholly void and of no effect after the
Termination Date.
(iii) Termination of Employment Due to Death. If, prior to the
Termination Date, the Participant ceases to be employed by the Company or
a subsidiary thereof due to the Participant's death, the Option, to the
extent not previously exercised, shall become immediately exercisable and
remain exercisable until the earlier of (i) the Termination Date and (ii)
the first anniversary of the Participant's death, and thereafter all
Options, to the extent not previously exercised, shall terminate together
with all other rights hereunder. During such time, the Option will be
exercisable by the person or persons to whom the Participant's rights
under the Option shall pass by will or by the applicable laws of descent
and distribution.
(iv) Termination of Employment Due to Disability. If prior
to the Termination Date the Participant ceases to be employed by the
Company or a subsidiary thereof by reason of Disability, the Option, to
the extent not previously exercised, shall immediately become exercisable
and shall remain exercisable until the earlier of (i) the Termination Date
and (ii) the first anniversary of the date of cessation of employment due
to Disability, and thereafter all Options, to the extent not previously
exercised, shall terminate together with all other rights hereunder.
(b) Method of Exercise. Subject to the provisions of the
Plan, this Option may be exercised by written notice to the Company
stating the number of shares with respect to which it is being exercised
and accompanied by payment of the Option Price (a) by certified or bank
cashier's check payable to the order of the Company in New York Clearing
House Funds, (b) by surrender or delivery to the Company of shares of its
Common Stock that have been held by the Participant for at least six
months (or such other period of time as may be determined by the Board of
Directors), or (c) in any other form acceptable to the Company together
with payment or arrangement for payment of any federal income or other tax
required to be withheld by the Company. As soon as practical after
receipt of such notice and payment, the Company, shall, without transfer
or issue tax or other incidental expense to the Participant, deliver to
the Participant at the offices of the Company at 10 Highway 35, Red Bank,
New Jersey, or such other place as may be mutually acceptable, or, at the
election of the Company, by first-class insured mail addressed to the
Participant at his or her address shown in the employment records of the
Company or at the location at which he or she is employed by the Company
or a subsidiary, a certificate or certificates for previously unissued
shares or reacquired shares of its Common Stock as the Company may elect.
(c) Delivery.
(i) The Company may postpone the time of delivery of
certificates for shares of its Common Stock for such additional time as
the Company shall deem necessary or desirable to enable it to comply with
the listing requirements of any securities exchange upon which the Common
Stock of the Company may be listed, or the requirements of the Securities
Act of 1933 or the Securities Exchange Act of 1934 or any Rules or
Regulations of the Securities and Exchange Commission promulgates
thereunder or the requirements of applicable state laws relating to
authorization, issuance or sale of securities.
(ii) If the Participant fails to accept delivery of the
shares of Common Stock of the Company upon tender of delivery thereof, his
or her right to exercise this Option with respect to such undelivered
shares may be terminated by the Company.
4. Notification of Disposition. Participant agrees to
notify the Company in writing, within thirty days, of any disposition
(whether by sale, exchange, gift, or otherwise) of shares of Common Stock
acquired by the Participant pursuant to the exercise of this Option within
one year of the transfer of such shares to the Participant.
5. Adjustments Upon Certain Events. Subject to the terms
of the Plan, in the event of any change in the outstanding Shares by
reason of any Share dividend or split, reorganization, recapitalization,
merger, consolidation, amalgamation, spin-off or combination transaction
or exchange of Shares or other similar events (collectively, an
"Adjustment Event"), the Committee may, in its sole discretion, make an
appropriate and equitable adjustment in the number of Shares subject to
this Agreement to reflect such Adjustment Event. Any such adjustment made
by the Committee shall be final and binding upon the Participant, the
Company and all other interested persons.
6. No Right to Continued Employment. Neither the Plan nor
this Agreement shall be construed as giving the Participant the right to
be retained in the employ of, or in any consulting relationship to, the
Company or any Affiliate. Further, the Company or an Affiliate may at any
time dismiss the Participant, free from any liability or any claim under
the Plan or this Agreement, except as otherwise expressly provided herein.
7. No Acquired Rights. In participating in the Plan, the
Participant acknowledges and accepts that the Board has the power to amend
or terminate the Plan, to the extent permitted thereunder, at any time and
that the opportunity given to the Participant to participate in the Plan
is entirely at the discretion of the Committee and does not obligate the
Company or any of its Affiliates to offer such participation in the future
(whether on the same or different terms). The Participant further
acknowledges and accepts that such Participant's participation in the Plan
is not to be considered part of any normal or expected compensation and
that the termination of the Participant's employment under any
circumstances whatsoever will give the Participant no claim or right of
action against the Company or its Affiliates in respect of any loss of
rights under this Agreement or the Plan that may arise as a result of such
termination of employment.
8. No Rights of a Shareholder. The Participant shall not
have any rights or privileges as a shareholder of the Company until the
Shares in question have been registered in the Company's register of
shareholders.
9. Legend on Certificates. Any Shares issued or
transferred to the Participant pursuant to Section 3 of this Agreement
shall be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the Plan or the rules, regulations,
and other requirements of the Securities and Exchange Commission, any
stock exchange upon which such Shares are listed, and any applicable
Federal or state laws or relevant securities laws of the jurisdiction of
the domicile of the Participant, and the Committee may cause a legend or
legends to be put on any certificates representing such Shares to make
appropriate reference to such restrictions.
10. Transferability. The Option may not be assigned,
alienated, pledged, attached, sold or otherwise transferred or encumbered
by the Participant otherwise than by will or by the laws of descent and
distribution. Any purported assignment, alienation, pledge, attachment,
sale, transfer or encumbrance not permitted by this Section 10 shall be
void and unenforceable against the Company or any Affiliate.
11. Withholding. The Participant may be required to pay to
the Company or any Affiliate and the Company or any Affiliate shall have
the right and is hereby authorized to withhold from any transfer due under
this Agreement or under the Plan or from any compensation or other amount
owing to the Participant, applicable withholding taxes with respect to any
transfer under this Agreement or under the Plan and to take such action as
may be necessary in the opinion of the Company to satisfy all obligations
for the payment of such taxes. Notwithstanding the foregoing, if the
Participant's employment with the Company terminates prior to the transfer
of all of the Shares under this Agreement, the payment of any applicable
withholding taxes with respect to any further transfer of Shares under
this Agreement or the Plan shall be made solely through the sale of Shares
equal to the statutory minimum withholding liability.
12. Choice of Law. THE INTERPRETATION, PERFORMANCE AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
13. Option Subject to Plan. By entering into this
Agreement, the Participant agrees and acknowledges that the Participant
has received and read a copy of the Plan. The Option is subject to the
Plan. In the event of a conflict between any term or provision contained
herein and a term or provision of the Plan, the applicable terms and
provisions of the Plan will govern and prevail.
14. Signature in 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 executed this
Agreement.
HOVNANIAN ENTERPRISES, INC.
By:
PARTICIPANT
By:
Exhibit 10h
HOVNANIAN ENTERPRISES, INC.
1999 STOCK INCENTIVE PLAN
STOCK OPTION AGREEMENT
(Directors)
Participant: Date of Grant: Number of Class A Shares: Grant Price: Vesting Schedule: |
Date: Number of Shares:
Option Termination Date:
1. Grant of the Option. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the right to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate number of Class A Shares set forth above. This grant is made subject to the terms and conditions of the Company's 1999 Stock Incentive Plan, (the "Plan"), which Plan is incorporated herein by reference and subject to the amendments to the Plan. The purchase price of the Shares subject to the Option (the "Grant Price") shall be the price per Share set forth above. This Option is not an Incentive Stock Option within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code").
2. Vesting. The Option will vest in accordance with the schedule set forth above.
3. Exercise of Option.
(a) Period of Exercise.
(i) In General. The Options must be exercised before the Option Termination Date (the "Termination Date"). The Participant may exercise less than the full installment available to him under the Options, but he must exercise the Options in full shares of the Common Stock of the Company. The Participant is limited to ten exercises of the Options prior to the Termination Date.
(ii) Termination of Board of Directors Membership Other than Due to Death or Disability. If, prior to the Termination Date, the Participant ceases to be a member of the Board of Directors (otherwise than by reason of death or disability within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended ("Disability")), any Options, to the extent not previously exercised, shall remain exercisable until the earlier of (i) the Termination Date and (ii) the sixtieth (60th) day after the date the Participant ceases to be a member of the Board of Directors, and thereafter all Options to the extent not previously exercised shall terminate together with all other rights hereunder. The Options shall be wholly void and of no effect after the Termination Date.
(iii) Termination of Board of Directors Membership Due to Death. If, prior to the Termination Date, the Participant ceases to be a member of the Board of Directors due to the Participant's death, the Options shall immediately become fully exercisable and shall remain exercisable until the earlier of (i) the Termination Date and (ii) the first anniversary of the Participant's death. The Options may be exercisable by the person or persons to whom the Participant's rights under the Options shall pass by will or by the applicable laws of descent and distribution, and thereafter all Options to the extent not previously exercised shall terminate together with all other rights hereunder.
(iv) Termination of Board of Directors Membership Due to Disability. If, prior to the Termination Date, the Participant ceases to be a member of the Board of Directors due to the Participant's Disability, the Options shall immediately become fully exercisable and shall remain exercisable until the earlier of (i) the Termination Date and (ii) the first anniversary the date the Participant ceases to be a member of the Board of Directors, by the Participant or his or her designated personal representative on the Participant's behalf, and thereafter all Options to the extent not previously exercised shall terminate together with all other rights hereunder.
(b) Method of Exercise. Subject to the provisions of the Plan, the Options may be exercised by written notice to the Company stating the number of shares with respect to which it is being exercised and accompanied by payment of the Option Price (a) by certified or bank cashier's check payable to the order of the Company in New York Clearing House Funds, (b) by surrender or delivery to the Company of shares of its Common Stock that have been held by the Participant for at least six months (or such other period of time as may be determined by the Board of Directors), or (c) in any other form acceptable to the Company, together with payment or arrangement for payment of any minimum federal income or other tax required to be withheld by the Company. As soon as practical after receipt of such notice and payment, the Company shall, without transfer or issue tax or other incidental expense to the Participant, deliver to the Participant at the offices of the Company at 10 Highway 35, Red Bank, New Jersey, or such other place as may be mutually acceptable, or, at the election of the Company, by first class insured mail addressed to the Participant at his address shown in the employment records of the Company or at the location at which he is employed by the Company or subsidiary, a certificate or certificates for previously unissued shares or reacquired shares of its Common Stock as the Company may elect.
(c) Delivery of Shares.
(i) The Company may postpone the time of delivery of certificates for shares of its Common Stock for such additional time as the Company shall deem necessary or desirable to enable it to comply with the listing requirements of any securities exchange upon which the Common Stock of the Company may be listed, or the requirements of the Securities Act of 1933 or the Securities Exchange Act of 1934 or any Rules or Regulations of the Securities and Exchange Commission promulgates thereunder or the requirements of applicable state laws relating to authorization, issuance or sales of securities.
(ii) If the Participant fails to accept delivery of the shares of Common Stock of the Company upon tender of delivery thereof, his or her right to exercise the Options with respect to such undelivered shares may be terminated by the Company
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee may, in its sole discretion, make an appropriate and equitable adjustment in the number of Shares subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Board and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms).
6. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
7. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 8 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions.
8. Transferability. The Options shall, during the Participant's lifetime, be exercisable only by the Participant, and neither it nor any right hereunder shall be transferable otherwise than by will or the laws of descent and distribution or be subject to attachment, execution or other similar process. Notwithstanding the foregoing, an Participant may transfer the Options in whole or in part by gift or domestic relations order to a family member of the Participant (a "Permitted Transferee") and, following any such transfer, such Options or portion thereof shall be exercisable only by the Permitted Transferee, provided that no such Options or portion thereof is transferred for value, and provided further that, following any such transfer, neither such Options or any portion thereof nor any right hereunder shall be transferable other than to the Participant or otherwise than by will or the laws of descent and distribution or be subject to attachment, execution or other similar process. For purposes of this paragraph, "family member" includes any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships, any person sharing the Participant's household (other than a tenant or employee), trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the Participant) control the management of assets and any other entity in which these persons (or the Participant) own more than fifty percent of the voting interests. In the event of any attempt by the Participant to alienate, assign, pledge, hypothecate or otherwise dispose of his or her Options or of any right hereunder, except as provided for herein, or in the event of any levy or any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate his Options by notice to the Participant and it shall thereupon become null and void.
9. Choice of Law. THE INTERPRETATION, PERFORMANCE AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
10. Option Subject to Plan. By entering into this Agreement,
the Participant agrees and acknowledges that the Participant has received and
read a copy of the Plan. The Option is subject to the Plan. In the event of
a conflict between any term or provision contained herein and a term or
provision of the Plan, the applicable terms and provisions of the Plan will
govern and prevail.
11. Signature in 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 executed this Agreement.
HOVNANIAN ENTERPRISES, INC.
/S/ARA K. HOVNVNIAN
Ara K. Hovnanian
President
Chief Executive Officer
|
PARTICIPANT:
Exhibit 10i
HOVNANIAN ENTERPRISES, INC.
1999 STOCK INCENTIVE PLAN
RESTRICTED SHARE UNIT AGREEMENT
Participant Date of Grant
Number of RSUs:
Dates of Vesting and Transfer of Class A Shares:
Date Number of RSU's
1. Grant of RSUs. For valuable consideration, receipt of
which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware
Corporation (the "Company"), hereby grants the number of restricted share
units ("RSUs") listed above to the Participant, on the terms and conditions
hereinafter set forth. This grant is made pursuant to the terms and
conditions of the 1999 Stock Incentive Plan of the Company (the "Plan"),
which Plan, as amended from time to time, is incorporated herein by reference
and made a part of this Agreement. Each RSU represents the unfunded,
unsecured right of the Participant to receive a Share on the date(s)
specified herein. Capitalized terms not otherwise defined herein shall have
the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the RSUs in
accordance with the schedule set forth above.
(b) The Company shall transfer to the Participant, after an
applicable vesting date, a number of Class A Shares equal to the number of
RSUs that became vested on that vesting date (rounded up to the next whole
share), provided, however, that upon the final transfer of Shares to the
Participant (i) such number of Shares shall be reduced to the extent
necessary to reflect any previous rounding up pursuant to this sentence, and
(ii) in lieu of a fractional Share, the Participant shall receive a cash
payment equal to the Fair Market Value of such fractional Share. If the
Participant is eligible to participate in, and has elected to defer the
transfer of Shares pursuant to the terms of a nonqualified deferred
compensation plan maintained by the Company, such Shares shall be so
deferred, and any such deferral, when paid, shall be paid in Shares. Once the
transfer of any Shares is deferred, the rights and privileges of the
Participant with respect to such Shares shall be determined solely pursuant
to the terms of the applicable plan, and not pursuant to the terms and
conditions of this Agreement.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement,
if the Participant's employment with the Company and its Affiliates is
terminated due to death or due to Disability, the Company shall cause there
to be transferred to the Participant, as soon as practicable following such
termination, a number of Shares equal to the aggregate number of then
unvested RSUs granted to the Participant under this Agreement; provided,
however, that upon the transfer of such Shares to the Participant, in lieu of
a fractional Share, the Participant shall receive a cash payment equal to the
Fair Market Value of such fractional Share. In the event of the death of the
Participant, the transfer of Shares under this Section 2(c) shall be made in
accordance with the beneficiary designation form on file with the Company;
provided, however, that, in the absence of any such beneficiary designation
form, the transfer of Shares under this Section 2(c) shall be made to the
person or persons to whom the Participant's rights under the Agreement shall
pass by will or by the applicable laws of descent and distribution. For
purposes of this Agreement, "Disability" shall mean "Disability" as defined
in the Plan.
(d) Upon each transfer or deferral of Shares in accordance with
Sections 2(a), 2(b) and 2(c) of this Agreement, a number of RSUs equal to the
number of Shares transferred to the Participant or deferred shall be
extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this
Agreement, upon the Participant's termination of employment for any reason
other than death or Disability, any unvested RSUs shall immediately terminate
for no further consideration.
3. Dividends. If on any date while RSUs are outstanding
hereunder the Company shall pay any dividend on the Shares (other than a
dividend payable in Shares), the number of RSUs granted to the Participant
shall, as of such dividend payment date, be increased by a number of RSUs
equal to: (a) the product of (x) the number of RSUs held by the Participant
as of the related dividend record date, multiplied by (y) the per Share
amount of any cash dividend (or, in the case of any dividend payable in whole
or in part other than in cash, the per Share value of such dividend, as
determined in good faith by the Committee), divided by (b) the Fair Market
Value of a Share on the payment date of such dividend. In the case of any
dividend declared on Shares that is payable in the form of Shares, the number
of RSUs granted to the Participant shall be increased by a number equal to
the product of (a) the RSUs that are held by the Participant on the related
dividend record date, multiplied by (b) the number of Shares (including any
fraction thereof) payable as a dividend on a Share.
4. Adjustments Upon Certain Events. Subject to the terms of
the Plan, in the event of any change in the outstanding Shares by reason of
any Share dividend or split, reorganization, recapitalization, merger,
consolidation, amalgamation, spin-off or combination transaction or exchange
of Shares or other similar events (collectively, an "Adjustment Event"), the
Committee may, in its sole discretion, make an appropriate and equitable
adjustment in the number of RSUs subject to this Agreement to reflect such
Adjustment Event. Any such adjustment made by the Committee shall be final
and binding upon the Participant, the Company and all other interested
persons.
5. No Right to Continued Employment. Neither the Plan nor
this Agreement shall be construed as giving the Participant the right to be
retained in the employ of, or in any consulting relationship to, the Company
or any Affiliate. Further, the Company or an Affiliate may at any time
dismiss the Participant, free from any liability or any claim under the Plan
or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the
Participant acknowledges and accepts that the Board has the power to amend or
terminate the Plan, to the extent permitted thereunder, at any time and that
the opportunity given to the Participant to participate in the Plan is
entirely at the discretion of the Committee and does not obligate the Company
or any of its Affiliates to offer such participation in the future (whether
on the same or different terms). The Participant further acknowledges and
accepts that such Participant's participation in the Plan is not to be
considered part of any normal or expected compensation and that the
termination of the Participant's employment under any circumstances
whatsoever will give the Participant no claim or right of action against the
Company or its Affiliates in respect of any loss of rights under this
Agreement or the Plan that may arise as a result of such termination of
employment.
7. No Rights of a Shareholder. The Participant shall not have
any rights or privileges as a shareholder of the Company until the Shares in
question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred
to the Participant pursuant to Section 2 of this Agreement shall be subject
to such stop transfer orders and other restrictions as the Committee may deem
advisable under the Plan or the rules, regulations, and other requirements of
the Securities and Exchange Commission, any stock exchange upon which such
Shares are listed, and any applicable Federal or state laws or relevant
securities laws of the jurisdiction of the domicile of the Participant, and
the Committee may cause a legend or legends to be put on any certificates
representing such Shares to make appropriate reference to such restrictions.
9. Transferability. RSUs may not be assigned, alienated,
pledged, attached, sold or otherwise transferred or encumbered by the
Participant otherwise than by will or by the laws of descent and
distribution, and any purported assignment, alienation, pledge, attachment,
sale, transfer or encumbrance not permitted by this Section 9 shall be void
and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the
Company or any Affiliate and the Company or any Affiliate shall have the
right and is hereby authorized to withhold from any transfer due under this
Agreement or under the Plan or from any compensation or other amount owing to
the Participant, applicable withholding taxes with respect to any transfer
under this Agreement or under the Plan and to take such action as may be
necessary in the opinion of the Company to satisfy all obligations for the
payment of such taxes. Notwithstanding the foregoing, if the Participant's
employment with the Company terminates prior to the transfer of all of the
Shares under this Agreement, the payment of any applicable withholding taxes
with respect to any further transfer of Shares under this Agreement or the
Plan shall be made solely through the sale of Shares equal to the statutory
minimum withholding liability.
11. Choice of Law. THE INTERPRETATION, PERFORMANCE AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
12. RSUs Subject to Plan. By entering into this Agreement, the
Participant agrees and acknowledges that the Participant has received and
read a copy of the Plan. All RSUs are subject to the Plan. In the event of
a conflict between any term or provision contained herein and a term or
provision of the Plan, the applicable terms and provisions of the Plan will
govern and prevail.
13. Signature in 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 executed this
Agreement.
HOVNANIAN ENTERPRISES, INC.
By:
PARTICIPANT
By:
CERTIFICATIONS
Exhibit 31(a)
I, Ara K. Hovnanian, President and Chief Executive Officer of Hovnanian
Enterprises, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 10, 2006 /S/ARA K. HOVNANIAN Ara K. Hovnanian President and Chief Executive Officer |
CERTIFICATIONS
Exhibit 31(b)
I, J. Larry Sorsby, Executive Vice President and Chief Financial Officer
of Hovnanian Enterprises, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 10, 2006 /S/J. LARRY SORSBY J. Larry Sorsby Executive Vice President and Chief Financial Officer |
Exhibit 32(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc.
(the "Company") on Form 10-Q for the period ended January 31, 2006 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Ara K. Hovnanian, President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: March 10, 2006 /S/ARA K. HOVNANIAN Ara K. Hovnanian President and Chief Executive Officer |
Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc.
(the "Company") on Form 10-Q for the period ended January 31, 2006 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, J. Larry Sorsby, Executive Vice President and Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: March 10, 2006 /S/J. LARRY SORSBY J. Larry Sorsby Executive Vice President and Chief Financial Officer |