hovnanian enterprises ar1999

Notes:	Hide Notes

Slide 1: Hovnanian Enterprises, Inc. 1999 Annual Report Slide 2: Hovnanian Enterprises, Inc. Company Proﬁle Table of Contents As one of America’s leading homebuilders, we design, build and sell a wide variety of home designs, from entry-level condominiums to luxury single family homes in planned communities in New Jersey, New York, Pennsylvania, California, Texas, North Carolina, Virginia, Maryland, Florida and Poland. We are proud of our reputation for building homes of superior quality and value. We also provide mortgage ﬁnancing for our homebuyers. According to Builder Magazine, we are the fourteenth largest builder of for-sale housing in the nation. We employ 1,642 Associates. About the Cover Financial Highlights............................................................... 1 Letter to Shareholders and Associates ................................... 2 Change and Success ............................................................... 4 Ten Year Financial Summary ................................................. 14 Financial Statements .............................................................. 29 Auditors’ Report.................................................................... 54 Corporate Information ................................... inside back cover From Kevork Hovnanian’s original ofﬁce to a luxury, high-end home in Dallas, Texas — Hovnanian Enterprises celebrates 40 years of Building Better. Pennsylvania 3 9 New York ® 2 1 New Jersey 22 50 Hovnanian Communities Maryland Active Proposed 1 4 Virginia 8 12 North Carolina 30 14 California 8 12 Texas 33 16 Florida 2 3 Poland 1 1 Common Stock* American Stock Exchange Symbol: HOV Fiscal 1999 High Low Fiscal 1998 High Low First Quarter Second Quarter Third Quarter Fourth Quarter $9.25 $8.94 $9.50 $8.88 $7.75 $6.81 $7.88 $6.00 $09.25 $11.50 $11.19 $09.88 $6.50 $8.56 $8.50 $6.00 At October 31, 1999 our Class A Common Stock was held by approximately 730 shareholders of record and our Class B Common Stock was held by approximately 629 shareholders of record. For additional information, visit our website at http://www.khov.com Slide 3: Financial Highlights Hovnanian Enterprises, Inc. For the Year Ended October 31, 1999 Contracts, Deliveries and Backlog (Dollars in Millions) 1998 1997 1996 1995 Net Sales Contracts Deliveries Contract Backlog at Year-End Revenues and Income (Dollars in Millions) $796.5 $908.6 $460.7 $806.2 $895.6 $381.8 $762.8) $731.8) $374.3) $738.3 $764.7 $292.4 $660.0 $740.5 $275.7 Total Revenues Pre-tax Earnings (Loss) Net Income (Loss) EBITDA Return on Average Stockholders’ Equity Assets, Debt and Equity (Dollars in Millions) $948.3 $050.6 $030.1 $089.4 14.0% $941.9 $041.3 $025.4 $085.0 13.4% $784.1) $ (12.1) $0 (7.0) $057.1) (3.8)% $807.5 $025.0 $017.3 $064.0 9.3% $777.7 $021.7 $014.1 $059.3 8.3% Total Assets Total Recourse Debt Stockholders’ Equity Earnings and Book Value Per Share (Shares in Thousands) $712.9 $320.1 $236.4 $589.1 $213.4 $201.4 $637.1) $285.0) $178.8) $614.1 $230.0 $193.6 $645.4 $280.7 $176.3 Fully Diluted Earnings (Loss) Per Share Fully Diluted Weighted Average Shares Outstanding Book Value Per Outstanding Share at Year-End $01.39 21,612 $10.67 $01.16 22,016 $09.34 $,(0.31) 22,506) $08.18) $00.75 23,120 $08.40 $00.61 23,032 $07.66 Revenues Dollars in Millions Earnings Per Share Fully diluted Stockholders’ Equity Dollars in Millions $942 $948 $1.39 $236 $784 $1.16 $201 $179 $0.60 97 98 99 97 98 99 97 98 99 Excluding the impact of writedowns and interest policy refinement 1999 Annual Report 1 Slide 4: To Our Shareholders and Associates These improvements are even more signiﬁcant, as last year’s results included a $0.13 per share gain from our I exit of the investment properties business. During 1999, we further strengthened our balance sheet. We ended the year with a strong 1.17:1 average debt to equity ratio despite two signiﬁcant acquisitions late in the year and the repurchase of 772,900 shares of our Class A common stock. We also issued $150 million of 9-1/8% Senior Notes due in 2009, and called in the remaining 11-1/4% Subordinated Notes due in 2002. t is appropriate that the millennium — with its promise of change and progress — follows on the heels of our 40th anniversary. Fiscal 1999 was a deﬁning year for us. We have history to celebrate, record proﬁts to announce and progress to report on improvement initiatives that will enable Hovnanian Enterprises to become THE BEST homebuilder in the nation. It is not simply growth and selective expansion that we seek, but overall excellence that is recognized by our customers, our Associates, our business partners and our shareholders. Reshaping Our Company “Fiscal 1999 was a deﬁning year “for us. We have history to celebrate, “record proﬁts to announce and “progress to report.” Early in ﬁscal 1999, we completed the divestiture of our commercial investment property business so that we could re-deploy our capital The Best Year Ever and focus our efforts on our core homebuilding and related ﬁnancial services business lines. One of our strategic goals is to become a dominant builder in select markets. During 1999, we forged a strategic alliance and made two key acquisitions that strengthened our position in two of the markets that we serve and added a promising new geographic market to our portfolio. In our Northeast Region, we acquired The Matzel & Mumford Organization, Inc., a New Jersey-based luxury homebuilder. In the Metro DC market, we allied with Domain Builders, Inc. and thereby established a Metro DC North area. In Texas, we acquired the Goodman Family of Builders L.P., the 8th largest homebuilder in the Dallas/Fort Worth area. These acquisitions are expected to be accretive to our earnings in ﬁscal 2000. Our entire organization has been sharply focused on enhanced proﬁtability and more intelligent use of resources in every business aspect. As a consequence, proﬁts and margins continued to climb in ﬁscal 1999; in fact, we achieved the most proﬁtable year in our history. While solid market conditions contributed to this success, we also beneﬁted from many of our improvement initiatives. For the ﬁscal year ended October 31, 1999, net income increased 18% to $30.1 million, or $1.39 per share, from $25.4 million or $1.16 per share in 1998. Total revenues in ﬁscal 1999 were $948.3 million versus $941.9 million in 1998. Homebuilding gross margins, excluding land sales, rose 360 basis points to 20.9% from 17.3% in 1998. Operating Highlights January Gold Award, “Best Attached Home Community in America,” won by K. Hovnanian’s Jacobs Ferry. March Opened our ﬁrst K. Hovnanian Home Design Gallery in Edison, New Jersey. 1998 December Completed our exit from the commercial investment properties business. 1999 February Strategic alliance with Domain Builders, Inc. allows us to establish a Metro DC North area. 2 Hovnanian Enterprises, Inc. Slide 5: Excellence in Building As we enter the 21st century, we will continue to build on the success and momentum that we achieved in 1999. Our Home Design Galleries will serve additional new communities, improving sales and proﬁts. A Product Development Group has been formed and charged with offering standardized lines of value-engineered home designs. Initially, these efﬁcient home designs will be used in our Metro DC, North Carolina and Northeast Region operations. Our ﬁrst value engineered concepts, tested in two Northeast Region communities this year, yielded signiﬁcant construction cost savings and were extremely Recognition of our excellence came from our industry, as the National Association of Home Builders awarded Gold honors to our Jacobs Ferry community in New Jersey, across the Hudson River from Manhattan, naming it “The Best Attached Home Community in America.” Additionally, our Four Seasons at Historic Smithville community, near Atlantic City, New Jersey, won a Silver award as “Detached Community of the Year” and kept alive our remarkable streak of active adult lifestyle honors. Looking Ahead well received by homebuyers. These more efﬁcient home designs will be phased into production over a two-to-three year period as we open future communities. To enhance productivity and proﬁts, we are making a signiﬁcant investment to streamline and standardize our processes and deploy a fully integrated enterprise-wide software system. We anticipate rolling our new processes and systems out as we open future communities. We are conﬁdent that our continued achievement of speciﬁcally-set goals will enable us to become THE BEST homebuilder in the nation. On behalf of our Board of Directors, management and Associates, we thank you for your support and look forward to sharing our continued successes with you. Sincerely, In 2000, we will once again focus on growing top line revenue, while continuing the bottom line proﬁt progress we have achieved in recent years. Our growth for ﬁscal 2000 will come from outside the Northeast Region and includes a delivery forecast of over 700 homes in both California and North Carolina and over 900 homes in Texas. Increased home deliveries are also planned for our Metro DC Division. Over the next few years, we anticipate further expansion in each of our existing markets. Although our existing communities are achieving evenness in quarterly deliveries, the opening of a record number of communities in ﬁscal 2000 will result in a signiﬁcant weighting of fourth quarter deliveries. Opening expenses, combined with more of the deliveries coming later in the year, will push the bulk of our ﬁscal 2000 proﬁts into our third and fourth quarters. However, we are conﬁdent about our ﬁnancial prospects for the entire year. Following this surge of openings, we will work to balance our quarterly deliveries at higher volumes. KEVORK S. HOVNANIAN Founder and Chairman ARA K. HOVNANIAN President and Chief Executive Ofﬁcer June Opened Dominguez Hills in southern Los Angeles, CA, our ﬁrst urban inﬁll community outside the Northeast Region. September Purchased land for our ﬁrst Four Seasons active adult community in Virginia. May Issued $150 million of 9-1/8 Senior Notes due in 2009. August Acquired The Matzel & Mumford Organization, Inc., a builder of luxury homes in New Jersey. October Entered the Texas market by acquiring the Goodman Family of Builders L.P., prominent in Dallas/Fort Worth area. 1999 Annual Report 3 Slide 6: Change and Success O ur vision of becoming THE BEST homebuilder in the nation, providing homebuyers with better homes at better prices and our shareholders Progress Report: Homebuyers utilizing our Home Design Gallery have increased the value of decorator selections purchased by approximately 20%. with superior returns, calls for us to embrace change. We’ve discussed portions of our “building block” approach toward improvement and change in prior reports. During ﬁscal 1999, the success of our changes enabled a signiﬁcant shift in our strategy. For the past few years, our improvement initiatives focused on proﬁt growth, and we increased our margins and earnings despite ﬂat revenues. Now, we are conﬁdent that these improvements are sustainable, and that they provide a strong base from which to add revenue growth to our focus. This conﬁdence led to the acquisition of two homebuilders and a strategic alliance during 1999. We are now a billiondollar company, with speciﬁc plans for continued growth to become a dominant, proﬁtable homebuilder in each of the markets that we serve. A second signiﬁcant shift also occurred during 1999: our corporate culture turned a corner; improvement has become our way of business life. The scope of change at our Company is all encompassing. Our Associates participate in this carefully controlled quest, and every homebuilding function, program and technology is an improvement target. During 1999, testing began on our fully integrated enterprise-wide software planning and control system, which will enable us to deploy efﬁcient standardized processes throughout the Company. An analysis of the beneﬁts of such a change shows that our new processes and systems can achieve substantial annual cost savings. More important, however, will be our new way of operating. This will bring us closer to our goals and enable us to proﬁtably grow a geographically diverse company with leadingedge technology into this new century. We have established a “program ofﬁce” to coordinate our many improvement initiatives as the pieces of our building-block puzzle come together. Satisfaction From Within 1999 Deliveries Number of Homes Total: 3,768 1,704 New Jersey 50 New York 309 Pennsylvania 198 Virginia 756 North Carolina 159 Florida 66 Texas 514 California Our Associates are the backbone for our improvement and growth initiatives. We have high expectations for Organizational Development: we hire the best 12 Poland Celebrating the ﬁrst 40 years 1959 Kevork S. Hovnanian emigrates to U.S. from Iraq and starts homebuilding company with three brothers. 1969 Splits amicably with brothers and founds K. Hovnanian Enterprises. Early products are shown above and at right. First ofﬁce 4 Hovnanian Enterprises, Inc. Slide 7: Homebuilding Gross Margin With the assistance of interior design professionals, our homebuyers can personalize their homes at K. Hovnanian’s Home Design Gallery, a state-of-theart interactive decorator selection center. Pictured at left (clockwise from front) is the management team from our Edison, NJ Gallery: Gabe Pasquale, Rose Giles and Jodi Ann Stasse. 15.6% 17.3% 20.9% 97 98 99 excluding land and lot sales 1971 Hovnanian condominium townhouses (below) were advertised in the ”Apartment Rental“ section of local newspapers instead of “Homes for Sale”. Ads (right) stressed the beneﬁts of ownership versus renting. 1979 20th Anniversary marketing literature (right) features lifestyle amenities at K. Hovnanian properties. 1999 Annual Report 5 Slide 8: Associates and provide useful and ongoing training. Within our core homebuilding business line, we offer effective career pathing and have a management development program that identiﬁes deserving candidates and moves them forward so that there truly is the opportunity to advance from within. Our goals include developing tomorrow’s leaders, generating superior performance and enhancing Associate satisfaction. We believe we have become our industry’s leader in working together with our Associates and allowing them to work with one another both in daily functions and improvement groups. Proof that these programs are working can be found in the following: during 1999, the voluntary turnover rate dropped from 28% in 1997 to 10% in 1999 and 84% of our Associates said they would recommend to a friend that they work for us, compared to a United States industry average of 65%. Building a Better Home Progress Report: Initial reports indicate that our efﬁcient new home designs are more popular with consumers - compared with traditional designs for similar homes - while saving the Company approximately $7,000 per home in materials and construction costs. Offering better homes at better prices involves design, construction and marketing, all of which are currently being addressed through our improvement and change process. Market-driven consumer surveys deﬁne the type and features of homes we should be building within each sub-market. We are working towards standardizing our home designs: an efﬁciently designed model home with different ﬁnish levels, can gratify many different buyers across multiple geographic markets. Standardized home designs allow us to reduce architectural costs, simplify budgeting and ordering, and shorten the construction cycle time. We are also reducing the number of vendors and subcontractors that we deal with, negotiating national contracts, and improving communications to where we can schedule daily tasks for each individual home and arrange justin-time materials delivery. To produce zero defect homes, we have improvement teams working to implement new processes which eliminate defects in such construction elements as windows, roofs, ceramic tile and vinyl ﬂooring. In Edison, New Jersey we have dedicated a sizable indoor facility for the testing of construction methods and materials, and the training of our own construction Associates and subcontractor personnel. We also build “idea houses” at selected communities, where the latest in potential design and features are showcased for consumer comment. Our latest idea home will 97 98 99 Average Debt-to-Equity Ratio 1.66:1 1.43:1 1.17:1 1979 Ara Hovnanian joins management team. 1983 Company goes public and is listed on the American Stock Exchange. 1978 Corporate headquarters opened in Red Bank, NJ. 6 Hovnanian Enterprises, Inc. Slide 9: Interest Coverage This home, at K. Hovnanian’s Four Seasons at Mapleton (NJ) is one example of why Four Seasons has been honored as “America’s Best Active Adult Lifestyle”. Four Seasons communities are planned for each of our geographic markets. Associates who will help make this happen include: (clockwise from the front) Ara Hovnanian; Joe Riggs, Northeast Region President; Bob Karen, Southeast Region President and Nick Pappas, California Division President. EBITDA/Interest incurred 3.6x 2.9x 1.6x 97 98 99 1986 Acquires New Fortis Corporation of North Carolina 1985 Crowds form at sales ofﬁce and K. Hovnanian communities sell out on ﬁrst day! 1999 Annual Report 7 Slide 10: test 150 new elements, from substantive construction materials to trendy decorative items. Those that “work,” from comfort, safety, cost and consumer desirability standpoints, can appear in our new communities within the year. Our ﬁrst Home Design Gallery, in Edison, New Jersey was opened during 1999 and has become an absolute success: Northeast Region customers tell us that it simpliﬁes and enhances their homebuying experience. The Gallery, a national leader in its content and comprehensiveness, is a state-of-the-art interactive decorator selection center showcasing an extensive variety of both interior and exterior home features. Here, with assistance from interior design professionals, consumers can see and integrate their colors and textures, kitchen cabinetry, ﬂooring, bathroom accessories, appliances and a wide variety of additional features that make a new home their own. Evidence that they are endorsing this concept can be seen by the increasing value of their purchases. Homes are sent to construction only after their new owners have completed Gallery selection: this greatly reduces the likelihood of change-caused construction delays. Each of the above steps addresses better quality, lower costs, enhanced proﬁtability and most importantly, a more delighted homebuyer. Acquisitions Capitalized Interest as a % of Inventory 7.3% 6.4% Progress Report: 90% of K. Hovnanian homebuyers would recommend that their friends and family purchase our homes. This satisfaction translates into nationwide leadership, as approximately 21% of our buyers purchase a K. Hovnanian home based on the recommendation of family or friends. In February 1999, in keeping with our goal of becoming a dominant builder in each of the markets that we serve, we formed our Metro DC North area through a strategic alliance with the highly experienced management team of Domain Builders, Inc. This operation will complement and build on our existing presence in the Metro DC market. Domain, which proﬁtably delivered 196 homes valued at $28 million during 1998, will develop our Metro DC North area. Combined with our Metro DC South area, we anticipate deliveries of over 250 homes in Metro DC during 2000. In August 1999, to strengthen our dominant position in our core Northeast Region, we acquired The Matzel & Mumford Organization, Inc., a luxury-market homebuilder based in Hazlet, New Jersey. This organization shares a similar culture to our own, with a focus on quality. It proﬁtably delivered 287 homes, valued at $117 million, during 1998, and it controls 2,500 prime home sites in New Jersey. Following the roll out of our new 97 4.1% 98 99 1988 Ara Hovnanian becomes President 1989 Hovnanian builds housing for Armenian earthquake relief 8 Hovnanian Enterprises, Inc. Slide 11: Book Value Per Share In two years, we have acquired three homebuilding companies and formed one strategic alliance. Our Matzel & Mumford division built this luxury home. Pictured clockwise from the front are the principals of these organizations: Bobby Ray of Goodman Family of Builders, LP; Prem Puri of PC Homes; Michael Reiser and Mark Stemen of Domain Builders; Chaman Puri, also of PC Homes; and Roger Mumford (center) of The Matzel & Mumford Organization, Inc. $8.18 Fully diluted $10.67 $9.34 97 98 99 1992 1990 Hovnanian’s Society Hill in Newark — a model for urban renewal Hovnanian enters Washington D.C. market 1999 Annual Report 9 Slide 12: standardized processes and systems, Matzel & Mumford will be merged into our Northeast Region. In October 1999, in keeping with our stated goal of entering one additional geographic market, we acquired Dallas, Texas-based Goodman Family of Builders L.P. Goodman is ranked as America’s 87th-largest homebuilder by Builder Magazine, and is the 8th largest homebuilder in the promising Dallas/Ft. Worth market. In 1999, it expects to deliver 735 upscale entry and move-up homes valued at $137 million; during ﬁscal 2000, delivery plans climb to 900 homes. Managing Our Finances Progress Report: We are striving to improve our credit ratings. This quest has led to steadily improving ﬁnancial ratios. Debt-to-Equity ratio has decreased from 1.66:1 in 1997 to 1.17:1 in 1999. In addition, Interest Coverage Ratio has improved from 1.6x in 1997 to 3.6x in 1999. During 1999, we improved our credit statistics and strengthened our capital structure as we strive to improve our credit rating. In May, $150 million of 9-1/8% Senior Notes due in 2009 were issued, and the remaining $45.4 million principal amount of 11-1/4% Subordinated Notes due in 2002 were retired. We lowered our reliance on leverage and reduced our average debtto-equity ratio to 1.17:1 in 1999, compared to ratios of 1.43:1 in 1998 and 1.66:1 in 1997. We increased our interest coverage from 1.6 times in 1997 to 3.6 times in 1999. Average homebuilding gross margins continued to rise, both on a quarter-to-quarter and year-to-year basis. Stockholders equity also climbed to $236.4 million, or $10.67 a share in 1999, versus 1998’s $201.4 million or $9.34 a share and 1997’s $178.8 million or $8.18 a share. We feel conﬁdent that our shares are undervalued at the time of this writing. During 1999, we repurchased 772,900 shares of common stock at an average cost of $8.19 per share. We were able to use some of these repurchased shares in the acquisitions we made during the year. Perhaps the duration of the strong market for housing, or the perception in some quarters that interest rates will rise and negatively impact the homebuilding industry, contribute to our weak share price. We have a book value of $10.67 per share, improving margins, growing revenues and proﬁts, a creative and dedicated group of Associates and a rigorous, focused plan for the future. We believe that there are good and proﬁtable times ahead. We are conﬁdent that as the ambitious goals we have set for every operating group within our enterprise are achieved, our stock price will reﬂect our position as a growing leader in our industry. Net Income Dollars in Millions $30.1 $25.4 $13.5 97 98 99 Excluding the impact of writedowns and interest policy refinement 5 101 1996 Sacramento River 80 Sacramento YOSEMITE NATIONAL Starts 60 home townhouse project in Maly Kack, Poland KINGS CANYON NATIONAL PARK San Francisco Sunnyvale Oakland 580 680 Stockton PARK San Jose San Joaquin River 101 Fresno SEQUOIA NATIONAL PARK DEATH VALLEY NATIONAL MONUMENT 5 CALIFORNIA 15 40 101 Pasadena San Bernardino Riverside 10 Colorado River Los Angeles Long Beach San Diego 8 1994 Hovnanian opens California division 1996 Kevork S. Hovnanian is recipient of ﬁrst NJIT President’s Medal 10 Hovnanian Enterprises, Inc. Slide 13: Average Sales Price Our California Division is now able to serve all types of local homebuyers, including active adult and families seeking luxury homes such as the design above at our Winchester community in Murrieta. Pictured clockwise from the front is a group of Company Construction Associates from our Northeast Region: Linda Ferraro, Glenn Cottrell, Dennis Gottstein and Keith Voetsch. Dollars in Thousands $241.1 $216.4 $196.9 97 98 99 1997 Hovnanian launches website 1998 Hovnanian acquires P.C. Homes of Virginia strengthening operations in metro D.C. 1997 Recipient of prestigious National Housing Quality Award 1999 Annual Report 11 Slide 14: Board of Directors Kevork S. Hovnanian (76) Arthur M. Greenbaum, Esq. (74) Paul W. Buchanan (49) is the founder of the Company and has served as Chairman of the Board since its original incorporation in 1967. He served as Chief Executive Ofﬁcer from 1967 through 1997. In 1996, the New Jersey Institute of Technology awarded Mr. Hovnanian a President’s Medal for “Distinguished Achievement to an Outstanding Entrepreneur”. In 1992, Mr. Hovnanian was granted one of ﬁve nationwide Harvard Dively Awards for Leadership in Corporate Public Initiatives. has been a senior partner of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel, a law ﬁrm since 1950. has been Senior Vice President and Corporate Controller since May 1990. Mr. Buchanan was elected a Director of the Company in March 1982. Mr. Buchanan is a CPA and prior to joining the Company, he was employed by Deloitte, Haskins & Sells. Desmond P. McDonald (72) was a Director of Midlantic Bank, N.A. from 1976 to December 1995, Executive Committee Chairman of Midlantic Bank, N.A. from August 1992 to December 1995 and was President of Midlantic Bank, N.A. from 1976 to June 1992. He was also a Director of Midlantic Corporation Peter S. Reinhart* (49) has been Senior Vice President and General Counsel since April 1985 and was elected Secretary of the Company in February 1997. Mr. Reinhart was elected a Director of the Company in December 1981. Ara K. Hovnanian (42) to December 1995 and was Vice Chairman of Midlantic Corporation from June 1990 to July 1992. has been Chief Executive Ofﬁcer since 1997 after being appointed President in 1988 and Executive Vice President in 1983; joining the Company in 1979. In 1985, Governor Kean appointed Mr. Hovnanian to The Council on Affordable Housing and was reappointed to the Council in 1990 by Governor Florio. In 1994, Governor Whitman appointed him as member of the Governor’s Economic Master Plan Commission. Mr. Hovnanian serves as a Member of the Advisory Council of PNC Bank, The Monmouth Real Estate Investment Corporation and is on the Boards of a variety of charitable organizations. J. Larry Sorsby (44) has been Chief Financial Ofﬁcer of the Stephen D. Weinroth* (61) Company since 1996 and Senior Vice President and Treasurer since March 1991. He became a member of the Board in 1997. Prior to joining the Company in 1988, Mr. Sorsby was President and CEO of The MortgageBanque Inc., a wholly owned subsidiary of Gemcraft Inc. since 1985. Member of the Audit Committee is Chairman of the Board of Core Laboratories N.V. He is also a senior partner in Andersen, Weinroth & Co. L.P., a merchant banking ﬁrm. He has held such positions since 1994 and the beginning of 1996 respectively. From November 1993 until December 1995 he was Co-Chairman and Co-Chief Executive Ofﬁcer of VETTA Sports, Inc. From 1989 to the present, Mr. Weinroth has been Co-Chairman of the Board of Directors and Chairman of the Investment Committee of First Brittania N.V. 12 Hovnanian Enterprises, Inc. Slide 15: Hovnanian Enterprises, Inc. and Subsidiaries Communities Under Development Net Sales Contracts Homes October 31, 1999 October 31, 1998 For the Year Ended Dollars (In thousands) Percent Change October 31, 1999 October 31, 1998 Percent Change Northeast Region .................... North Carolina ....................... Florida .................................... Metro D.C. ............................. California................................ Texas ..................................... Poland..................................... Total ............................. 1,885 728 123 232 524 25 18 3,535 2,375 690 164 170 439 N/A 39 3,877 (20.6)% 5.5)% (25.0)% 36.5)% 19.4)% N/A)% (53.8)% (8.8)% $451,684 140,619 27,583 53,862 115,937 5,416 1,352 $796,453 $525,184 130,280 31,321 40,548 75,031 N/A 3,883 $806,247 (14.0)% 7.9)% (11.9)% 32.8)% 54.5)% N/A)% (65.2)% (1.2)% Contract Backlog .......................................... .......................................... October 31, 1999 Homes October 31, 1998 Percent Change Dollars (In thousands) October 31, 1999 October 31, 1998 Percent Change Northeast Region .................... North Carolina ....................... Florida .................................... Metro D.C. ............................. California................................ Texas ..................................... Poland..................................... Total ............................. Deliveries 1,125 207 37 149 129 261 13 1,921 1,132 235 73 115 119 N/A 7 1,681 (0.6)% (11.9)% (49.3)% 29.6)% 8.4)% N/A)% 85.7)% 14.3)% For the Year Ended $286,149 44,534 8,705 34,484 34,313 51,610 865 $460,660 $270,753 48,713 14,800 26,083 20,721 N/A 746 $381,816 5.7)% (8.6)% (41.2)% 32.2)% 65.6)% N/A)% 16.0)% 20.6)% Homes October 31, 1999 October 31, 1998 Percent Change October 31, 1999 Dollars (In thousands) October 31, 1998 Percent Change Northeast Region .................... North Carolina ....................... Florida .................................... Metro D.C. ............................. California................................ Texas ..................................... Poland..................................... Total ............................. 2,063 756 159 198 514 66 12 3,768 2,530 687 241 152 457 N/A 71 4,138 (18.5)% 10.0)% (34.0)% 30.3)% 12.5)% N/A)% (83.1)% (8.9)% $560,586 145,153 36,566 45,493 105,941 13,184 1,630 $908,553 $595,873 127,592 44,168 38,904 82,546 N/A 6,561 $895,644 (5.9)% 13.8)% (17.2)% 16.9)% 28.3)% N/A)% (75.2)% 1.4)% All statements in this Annual Report that are not historical facts should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors include, but are not limited to, changes in general economic conditions, ﬂuctuations in interest rates, increases in raw materials and labor costs, levels of competition and other factors described in detail in the Company’s Form 10-K for the year ended October 31, 1999. 13 Slide 16: Hovnanian Enterprises, Inc. and Subsidiaries Ten Year Financial Review Years Ended October 31, (In Thousands Except Number of Homes and Per Share Data) 1999 1998 1997) 1996 Statement of Operations Data: Total Revenue......................................................... Writedown of Inventory & Investment Properties .. Pre-Tax Income....................................................... Net Income............................................................. Net Income per common share............................... Diluted .............................................................. Weighted Average Shares Outstanding ............ (2) $948,287 $002,091 $050,617 $030,075 $0001.39 21,612 $941,947 $005,032 $041,292 $025,403 $0001.16 22,016 $784,136) $028,465) $,(12,124) $0,(6,970) $00,(0.31) 22,506) $807,464 $001,608 $25,006 $017,287 $0000.75 23,120 Balance Sheet Data: Cash ....................................................................... Inventory ................................................................ Total Assets ............................................................ Total Recourse Debt ............................................... Total Non-Recourse Debt....................................... Stockholders’ Equity............................................... Supplemental Financial Data: EBIT ....................................................................... EBITDA.................................................................. Cash Flow From Operating Activities .................... Interest Incurred ..................................................... EBIT/Interest Incurred ............................................ EBITDA/Interest Incurred....................................... Financial Statistics: Average Recourse Debt/Average Equity .................. Homebuilding Inventory Turnover ....................... (3) $019,365 $527,121 $712,861 $320,125 $010,069 $236,426 $014,792 $375,733 $589,102 $213,449 $015,616 $201,392 $010,550) $410,393) $637,082) $285,000) $024,455) $178,762) $020,731 $376,307 $614,111 $230,000 $029,069 $193,622 $083,051 $089,365 $035,479 $024,594 3.4x 3.6x $080,747 $085,040 $065,054 $028,947 2.8x 2.9x $052,116) $057,148) $,(30,708) $034,777) 1.5x) 1.6x) $058,771 $064,017 $045,797 $035,551 1.7x 1.8x 1.17:1 2.2x 20.9% 8.8% 14.0% 1.43:1 2.2x 17.3% 8.6% 13.4% 1.66:1) 1.8x) 15.6% 6.6% (3.8)% 1.71:1 1.8x 16.4% 7.3% 9.5% Homebuilding Gross Margin .................................. EBIT Margin .......................................................... Return on Average Equity ...................................... Operating Statistics: Net Sales Contracts - Homes .................................. Net Sales Contracts - Dollars ................................. Deliveries - Homes ................................................. Deliveries - Dollars ................................................. Backlog - Homes .................................................... Backlog - Dollars .................................................... (1) (1) (2) (3) 3,535 $796,453 3,768 $908,553 1,921 $460,660 3,877 $806,247 4,138 $895,644 1,681 $381,816 4,073) $762,750) 3,717) $731,807) 1,872) $374,314) 4,175 $738,331 4,134 $764,682 1,516 $292,376 The summary consolidated income data for the 12 month period ended October 31, 1994 is unaudited, but in management’s opinion includes all accruals and other adjustments necessary for a fair representation. Prior to the ﬁscal year ended October 31, 1996, represents basic shares outstanding. Derived by dividing total home and land sales by average homebuilding inventory. 14 Slide 17: Hovnanian Enterprises, Inc. and Subsidiaries Years Ended October 31, 1995 1994 ) (1) Years Ended February 28, 1994) 1993) 1992 1991) $777,745 $002,780 $021,654 $014,128 $0000.61 23,032 $(704,443) $(006,357) $(016,531) $(011,477) $(0000.50) 22,906) $587,010) $00000,0) $029,151) $018,645) $0000.82) 22,821) $429,315) $003,100) $014,525) $009,790) $0000.43) 22,775) $318,527 $00000,0 $001,894 $002,478 $0000.11 21,988 $275,428) $013,271) $ (21,182) $ (15,245) $00,(0.74) 20,695 $015,453 $404,413 $645,378 $280,650 $029,049 $176,335 $(017,437) $(386,540) $(612,925) $(299,200) $ 29,884) $(162,130) $028,094) $278,738) $539,602) $200,000) $028,941) $171,001) $017,065) $243,391) $465,029) $167,157) $035,008) $151,937) $015,889 $194,306 $399,455 $134,873 $028,569 $141,989 $015,793) $206,941) $437,930) $188,169) $027,752) $125,421) $055,178 $059,273 $ (3,358) $037,828 1.5x 1.6x $(048,247) $(051,906) $ (50,109) $28,353) 1.7x) 1.8x) $051,681) $054,716) $ (13,293) $025,968) 2.0x) 2.1x) $039,894) $042,818) $,(29,934) $022,155) 1.8x) 1.9x) $024,351 $027,239 $037,816 $020,463 1.2x 1.3x $015,587) $018,539) $ (15,742) $023,091) 0.7x) 0.8x) 2.02:1 1.7x 21.1% 7.1% 8.5% 1.62:1 2.0x 20.7% 6.8% 6.9% 1.34:1) 1.9x 22.0% 8.8% 11.8% 1.21:1) 1.7x 22.8% 9.3% 6.8% 1.32:1 1.4x 21.1% 7.6% 1.9% 1.43:1) 1.1x) 15.0% 5.7% (11.3)% 3,910 $660,033 4,244 $740,481 1,476 $275,701 3,546) $(546,185) 4,352) $(670,870) 1,810) $(310,455) 4,305) $606,601) 3,828) $557,489) 1,926) $278,127) 3,331) $436,848) 2,999) $397,306) 1,449) $199,751) 2,832 $366,089 2,383 $291,755 1,114 $145,261 1,828) $206,079) 1,999) $250,732) 741) $082,414) 15 Slide 18: Hovnanian Enterprises, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Capital Resources and Liquidity Our cash uses during the twelve months ended October 31, 1999 were for operating expenses, seasonal increases in housing inventories, construction, income taxes, interest, the repurchase of common stock, the redemption of subordinated indebtedness, and the acquisition of two homebuilding companies. We provided for our cash requirements from housing and land sales, the issuance of $150,000,000 Senior Notes, the revolving credit facility, the sale of commercial facilities, ﬁnancial service income, and other revenues. We believe that these sources of cash are sufﬁcient to ﬁnance our working capital requirements and other needs. Our net income historically does not approximate cash ﬂow from operating activities. The difference between net income and cash ﬂow from operating activities is primarily caused by changes in inventory levels, mortgage loans and liabilities, and depreciation and impairment losses. When we are expanding our operations, which was the case in ﬁscal 1999, inventory levels increase causing cash ﬂow from operating activities to decrease. Liabilities also increase as inventory levels increase. The increase in liabilities partially offsets the negative effect on cash ﬂow from operations caused by the increase in inventory levels. As mortgage loans increase, cash ﬂow from operations decreases. Conversely, as such loans decrease, cash ﬂow from operations increases. Depreciation and impairment losses always increase cash ﬂow from operating activities since they are non-cash charges to operations. We expect to be in an expansion mode in ﬁscal 2000. As a result, we expect cash ﬂow from operations to be less than net income in ﬁscal 2000. In December 1998 the Board of Directors increased the stock repurchase program to purchase up to 3 million shares of Class A Common Stock. This authorization expires on December 31, 2000. As of October 31, 1999, 2,364,400 shares were repurchased under this program of which 772,900 were repurchased during the year ended October 31, 1999. Our bank borrowings are made pursuant to a revolving credit agreement (the “Agreement”) which provides a revolving credit line and letter of credit line of up to $275,000,000 through July 2002. Interest is payable monthly and at various rates of either the prime rate or Libor plus 1.45%. We believe that we will be able either to extend the Agreement beyond July 2002 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. We currently are in compliance and intend to maintain compliance with the covenants under the Agreement. As of October 31, 1999, borrowings under the Agreement were $70,125,000. The subordinated indebtedness issued by us and outstanding as of October 31, 1999 was $100,000,000 9 3/4% Subordinated Notes due June 2005. On May 4, 1999, we issued $150,000,000 9 1/8% Senior Notes due in April 2009. On June 7, 1999, we redeemed the remaining $45,449,000 principal amount 11 1/4% Subordinated Notes due April 2002. The early retirement of these notes resulted in an extraordinary loss of $868,000 net of income taxes of $468,000. The remaining proceeds were used to reduce the outstanding balance on our “Revolving Credit Facility” to zero at that time and for general corporate purposes. Our mortgage banking subsidiary borrows under a $100,000,000 bank warehousing arrangement which expires in June 2000. Other ﬁnance subsidiaries formerly borrowed from a multi-builder owned ﬁnancial corporation and a builder owned ﬁnancial corporation to ﬁnance mortgage backed securities but in ﬁscal 1988 decided to cease further borrowing from multi-builder and builder owned ﬁnancial corporations. These non-recourse borrowings have been generally secured by mortgage loans originated by one of our subsidiaries. As of October 31, 1999, the aggregate outstanding principal amount of such borrowings was $33,733,000. 16 Slide 19: Hovnanian Enterprises, Inc. and Subsidiaries The book value of our inventories, rental condominiums, and commercial properties completed and under development amounted to the following: October 31, 1999 October 31, 1998 Residential real estate inventory ......................................................... Senior residential rental property ....................................................... Total residential real estate............................................................... Commercial properties ....................................................................... Combined Total ............................................................................... $527,121,000 10,650,000 537,771,000 109,000 $537,880,000 $375,733,000 10,794,000 386,527,000 17,832,000 $404,359,000 Total residential real estate increased $151,244,000 from October 31, 1998 to October 31, 1999 as a result of an inventory increase of $151,388,000 less depreciation of senior residential rental property. The increase in residential real estate inventory was primarily due to the acquisition of two homebuilding companies during the quarter ended October 31, 1999 and increases in California where we expect to signiﬁcantly grow our business in ﬁscal 2000. These increases were offset by a decrease in our Northeast Region where delivery of homes is expected to decrease in ﬁscal 2000. Residential homes under construction or completed and included in residential real estate inventory at October 31, 1999 are expected to be closed during the next twelve months. Most residential real estate, completed or under development, is ﬁnanced through our line of credit, senior notes and subordinated indebtedness. We usually option property for development prior to acquisition. By optioning property, we are only subject to the loss of a small option fee and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is kept to a minimum. The following table summarizes housing lots included in our total residential real estate: ..................................................................................................... ..................................................................................................... Total Home Lots Contracted Not Delivered Remaining Lots Available October 31, 1999: Owned ............................................................................... Optioned............................................................................ Total............................................................................... October 31, 1998: Owned ............................................................................... Optioned............................................................................ Total ............................................................................... 9,730 17,078 26,808 1,825 96 1,921 7,905 16,982 24,887 8,054 13,668 21,722 1,673 8 1,681 6,381 13,660 20,041 The following table summarizes our started or completed unsold homes in active, substantially completed and suspended communities: October 31, 1999 .......................................... .......................................... Unsold Homes Models Total Unsold Homes October 31, 1998 Models Total Northeast Region(1)............. North Carolina .................. Florida ............................... Metro D.C. ........................ California........................... Texas.................................. Poland................................ Total............................ (1) 114 129 5 13 53 225 14 553 31 — — 9 10 28 — 78 145 129 5 22 63 253 14 631 180 93 24 23 78 — 11 409 16 — 6 11 21 — — 54 196 93 30 34 99 — 11 463 Includes 6 unsold homes and 2 model homes from a New Jersey homebuilder acquired on August 7, 1999. 17 Slide 20: Hovnanian Enterprises, Inc. and Subsidiaries Prior to the second quarter of ﬁscal 1997, our commercial properties represented long-term investments in commercial and retail facilities completed or under development. At the end of the second quarter of ﬁscal 1997, we announced we were planning an orderly exit from the business of owning investment properties. During ﬁscal 1997 and 1998, we sold all our commercial facilities and a 50% owned partnership sold its retail center. During ﬁscal 1999 we sold three land parcels. See “Results of Operations - Investment Properties.” Collateral Mortgage Financing - collateral for bonds payable consists of collateralized mortgages receivable which are pledged against non-recourse collateralized mortgage obligations. Financial Services - mortgage loans held for sale consist of residential mortgages receivable of which $32,844,000 and $71,002,000 at October 31, 1999 and October 31, 1998, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. The balance of mortgage loans held for sale are being held as an investment. We may incur risk with respect to mortgages that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, we have incurred minimal credit losses. Results of Operations Our operations consist primarily of residential housing development and sales in our Northeast Region (comprised primarily of New Jersey, southern New York state, and eastern Pennsylvania), in southeastern Florida, North Carolina, Metro D. C. (northern Virginia), southern California, Texas and Poland. Our Texas operations are the result of the acquisition of a Texas homebuilder on October 1, 1999. In addition, we had developed and operated commercial properties as longterm investments in New Jersey, and, to a lesser extent, Florida, but have exited this business (see “Investment Properties” below). During the years ended October 31, 1999, 1998, and 1997, our Northeast Region, California Division and North Carolina Division housing operations consistently produced operating proﬁts. In ﬁscal 1999, our Metro D.C. Division and Texas acquisition also produced proﬁts. In 1999 and 1998, ﬁnancial services operations were proﬁtable. In addition, in 1998 and 1997 we earned proﬁts from the liquidation of commercial properties. These proﬁts have been reduced by net losses from our other housing divisions, corporate overhead, the writedown of certain residential inventories and commercial properties to their estimated fair value and the write-off of optioned properties and related approval, engineering and capitalized interest costs. See “Notes to Consolidated Financial Statements - Note 11”. Prior to ﬁscal 1998, our ﬁrst two quarters produced the least amount of deliveries for the year and the fourth quarter produced the most deliveries for the year, sometimes in excess of 40% of total homes delivered. In ﬁscal 1998 management made a concerted effort to change this trend using new management tools to focus on delivery evenness and through a new quarterly bonus incentive plan. The percentage distribution of deliveries for the last three years is as follows: Quarter Ended ................................................................................. January 31 April 30 July 31 October 31 Total 1999 .................................................................. 1998 .................................................................. 1997 .................................................................. 22% 24% 16% 22% 23% 19% 25% 26% 25% 31% 27% 40% 100% 100% 100% During the year ended October 31, 1999 a higher percentage was delivered in the fourth quarter due to the acquisition of two homebuilding companies. In ﬁscal 2000 we expect a higher percentage of deliveries later in the ﬁscal year resulting from the projected ﬂow of deliveries from recent homebuilding company acquisitions and the timing of community grand openings in our Northeast Region and California Division. 18 Slide 21: Hovnanian Enterprises, Inc. and Subsidiaries Total Revenues Compared to the same prior period, revenues increased (decreased) as follows: Year Ended (Dollars in Thousands) .......................................... October) 31,1999) October) 31, 1998) October) 31, 1997) Homebuilding: Sale of homes........................................................................ Land sales and other revenues .............................................. Financial services ..................................................................... Investment properties............................................................... Collateralized mortgage ﬁnancing............................................ Total change ......................................................................... Percent change...................................................................... $12,909) 1,998) 1,141) (9,544) (164) $06,340) 0.7% $163,837) (11,572) 8,363) (2,646) (171) $157,811) 20.1% $(32,875) 8,371) (481) 2,838) (1,181) $(23,328) (2.9%) Homebuilding Compared to the same prior period, housing revenues increased $12.9 million or 1.4% for the year ended October 31, 1999, after increasing $163.8 million or 22.4% for the year ended October 31, 1998, and decreasing $32.9 million or 4.3% for the year ended October 31, 1997. Housing revenues are recorded at the time each home is delivered and title and possession have been transferred to the buyer. Information on homes delivered by market area is set forth below: Year Ended (Dollars in Thousands)..................................... October 31,1999 October 31, 1998 October 31, 1997 Northeast Region(1): Housing Revenues................................................................... Homes Delivered..................................................................... North Carolina: Housing Revenues................................................................... Homes Delivered..................................................................... Florida: Housing Revenues................................................................... Homes Delivered..................................................................... Metro D.C.: Housing Revenues................................................................... Homes Delivered..................................................................... California: Housing Revenues................................................................... Homes Delivered..................................................................... Texas: Housing Revenues................................................................... Homes Delivered..................................................................... Poland: Housing Revenues................................................................... Homes Delivered..................................................................... Totals: Housing Revenues................................................................... Homes Delivered..................................................................... (1) $560,586 2,063 $595,873 2,530 $445,817 2,128 $145,153 756 $127,592 687 $125,242 695 $036,566 159 $044,168 241 $074,146 418 $045,493 198 $038,904 152 $014,398 70 $105,941 514 $082,546 457 $069,252 365 $013,184 66 — — — — $001,630 12 $006,561 71 $002,952 41 $908,553 3,768 $895,644 4,138 $731,807 3,717 Fiscal 1999 includes $31,961,000 housing revenues and 88 homes from a New Jersey homebuilder acquired on August 7, 1999. 19 Slide 22: Hovnanian Enterprises, Inc. and Subsidiaries The overall increase in housing revenues was the net result of increases in average sales prices offset by decreased deliveries. The increase in average sales prices during the year ended October 31, 1999 is primarily due to the increases in all markets except Metro D.C. The increased average sales prices in the Northeast Region and North Carolina were primarily attributed to the rise in base home prices and the sale of more decorator and structural options. In Florida, average sales prices increased as a result of fewer communities, all of which are higher priced single family developments. In Metro D.C., average sales prices decreased because of a change in product mix to smaller single family homes. In California, sales prices increased due to a change in product mix to larger, more expensive homes. The decrease in homes delivered was primarily due to signiﬁcant decreases in the Northeast Region and Florida while the other divisions increased deliveries slightly. The decrease in the Northeast Region was attributable to fewer communities open for sale. We expect the Northeast Region to stay at roughly the 2,000 home level in ﬁscal 2000 and then increase in ﬁscal 2001 due to an increase of active selling communities. In Florida, due to operating losses we decided to cut back operations in ﬁscal 1997 and have only one active community delivering homes in ﬁscal 2000. All other divisions increased home deliveries in 1999 due to the increase in the number of active selling communities. In ﬁscal 2000 we expect a signiﬁcant home delivery increase in California. In addition, consolidated home deliveries will increase in ﬁscal 2000 due to a full year of operations in Texas. Unaudited quarterly housing revenues and net sales contracts using base sales prices by market area for the years ending October 31, 1999, 1998, and 1997 are set forth below: ................................................. Quarter Ended October 31, 1999 July 31, 1999 April 30, 1999 January 31, 1999 .................................................................. (In Thousands) .................................................. Housing Revenues: Northeast Region(1) ............................... North Carolina ..................................... Florida .................................................. Metro D.C. ........................................... California.............................................. Texas .................................................... Poland................................................... Total ................................................. Sales Contracts (Net of Cancellations): Northeast Region(1) ............................... North Carolina ..................................... Florida .................................................. Metro D.C. ........................................... California.............................................. Texas .................................................... Poland................................................... Total ................................................. (1) $164,899 47,251 9,012 15,541 37,290 13,184 282 $287,459 $142,503 38,269 9,690 11,400 24,792 — 417 $227,071 $126,501 30,553 9,531 6,005 26,548 — — $199,138 $126,683 29,080 8,333 12,547 17,311 — 931 $194,885 $135,514 25,757 2,532 12,246 36,197 5,416 698 $218,360 $111,083 33,078 4,471 14,338 37,788 — 172 $200,930 $114,924 50,673 9,050 16,201 24,135 — — $214,983 $90,163 31,111 11,530 11,077 17,817 — 482 $162,180 Includes $31,961,000 housing revenues and $12,922,000 sales contracts in the quarter ended October 31, 1999 from a New Jersey homebuilder acquired on August 7, 1999. 20 Slide 23: Hovnanian Enterprises, Inc. and Subsidiaries .............................................. .................................................................. (In Thousands) .................................................. October 31, 1998 Quarter Ended July 31, 1998 April 30, 1998 January 31, 1998 Housing Revenues: Northeast Region.................................. North Carolina ..................................... Florida .................................................. Metro D.C. ........................................... California.............................................. Poland................................................... Total ................................................. Sales Contracts (Net of Cancellations): Northeast Region.................................. North Carolina ..................................... Florida .................................................. Metro D.C. ........................................... California.............................................. Poland................................................... Total ................................................. .............................................. .................................................................. (In Thousands) .................................................. October 31, 1997 $157,882 38,997 11,291 16,687 22,980 2,283 $250,120 $162,847 34,655 8,111 11,256 18,832 2,199 $237,900 $136,133 28,264 15,254 4,843 17,613 1,460 $203,567 $139,011 25,676 9,512 6,118 23,121 619 $204,057 $114,144 37,085 5,385 11,834 21,325 1,758 $191,531 $124,144 33,302 9,503 15,265 25,402 516 $208,132 $188,082 35,990 8,631 9,583 9,535 332 $252,153 $98,814 23,903 7,802 3,866 18,769 1,277 $154,431 Quarter Ended July 31, 1997 April 30, 1997 January 31, 1997 Housing Revenues: Northeast Region.................................. North Carolina ..................................... Florida .................................................. Metro D.C. ........................................... California.............................................. Poland................................................... Total ................................................. Sales Contracts (Net of Cancellations): Northeast Region.................................. North Carolina ..................................... Florida .................................................. Metro D.C. ........................................... California.............................................. Poland................................................... Total ................................................. $134,280 29,409 11,134 5,618 24,255 2,109 $206,805 $124,860 30,339 15,296 3,761 22,785 436 $197,477 $118,840 35,988 21,399 5,279 22,383 468 $204,357 $092,544 31,506 9,708 2,478 16,268 1,607 $154,111 $193,513 41,566 28,951 5,214 23,317 1,212 $293,773 $118,186 35,293 14,325 2,759 15,113 1,008 $186,684 $070,678 26,341 17,042 3,018 18,489 667 $136,235 $063,440 22,042 13,828 3,407 12,333 65 $115,115 21 Slide 24: Hovnanian Enterprises, Inc. and Subsidiaries Our contract backlog using base sales prices by market area is set forth below: ......................................................................... (Dollars in Thousands)...................................... October 31, 1999 October 31, 1998 October 31, 1997 Northeast Region(1): Total Contract Backlog .......................................................... Number of Homes ................................................................. North Carolina: Total Contract Backlog .......................................................... Number of Homes ................................................................. Florida: Total Contract Backlog .......................................................... Number of Homes ................................................................. Metro D.C.: Total Contract Backlog .......................................................... Number of Homes ................................................................. California: Total Contract Backlog .......................................................... Number of Homes ................................................................. Texas: Total Contract Backlog .......................................................... Number of Homes ................................................................. Poland: Total Contract Backlog .......................................................... Number of Homes ................................................................. Totals: Total Contract Backlog .......................................................... Number of Homes ................................................................. (1) $286,149 1,125 $270,753 1,132 $266,889 1,287 $044,534 207 $048,713 235 $045,879 232 $008,705 37 $014,800 73 $025,315 150 $034,484 149 $026,083 115 $007,621 27 $034,313 129 $020,721 119 $025,636 137 $051,610 261 — — — — $000,865 13 $000,746 7 $002,974 39 $460,660 1,921 $381,816 1,681 $374,314 1,872 Fiscal 1999 includes $38,832,000 total contract backlog and 123 number of homes from a New Jersey homebuilder acquired on August 7, 1999. We have written down or written off certain residential inventories $2.1, $4.0 million, and $14.0 million during the years ended October 31, 1999, 1998, and 1997, respectively, to their estimated fair value. See “Notes to Consolidated Financial Statements - Note 11” for additional explanation. These writedowns and writeoffs were incurred primarily because of lower property values, a change in the marketing strategy to liquidate a particular property, or the decision not to exercise an option. During the year ended October 31, 1999 we wrote off one residential land option including approval and engineering costs amounting to $0.3 million. We did not exercise this option because the community’s proforma proﬁtability did not produce an adequate return on investment commensurate with the risk. In addition, we wrote down one land parcel in Florida, one residential community in New York and two residential communities in North Carolina. The Florida land parcel was written down based on recent purchase offers. The communities were written down based on our decision to discontinue selling homes and offer the remaining lots for sale. The result of the above decisions was a reduction in inventory carrying amounts to fair value, resulting in a $1.8 million impairment loss in accordance with FAS 121. 22 Slide 25: Hovnanian Enterprises, Inc. and Subsidiaries During the year ended October 31, 1998, we wrote down one Florida residential community and one New Jersey parcel of land for sale. In the Florida residential community, higher discounts were being offered to speed up sales. At the New Jersey land site, lots were being contracted at prices lower than anticipated. The result of the above decisions was a reduction in inventory carrying amounts to fair value, resulting in a $1.9 million impairment loss in accordance with FAS 121. We also wrote off three New Jersey residential land options including approval, engineering and capitalized interest costs amounting to $2.1 million. We did not exercise these options because of changes in local market conditions and difﬁculties in obtaining government approvals. During the year ended October 31, 1997, we wrote down certain residential communities, and wrote off certain residential land options including approval, engineering and capitalized interest costs. In Florida, our return on investment was unsatisfactory. As a result, we established a goal to reduce our investment in Florida by $25.0 million. To do so on an accelerated basis, we reduced prices and offered pricing concessions in all Florida residential communities. We also decided to sell all inactive properties in Florida. In the Northeast Region, we changed the product type to be constructed on a parcel of land we own. In an active community in the Northeast Region, we incurred unforeseen development costs. Also in the Northeast, we decided to sell an optioned property instead of developing it. The result of the above decisions was a reduction in fair values below carrying amounts and, in accordance with FAS 121, we recorded an impairment loss on the related inventories. At October 31, 1997, residential inventories were reduced $9.3 million to reduce such inventories to estimated fair value. The Northeast Region also wrote off costs associated with three optioned properties and related approval, engineering and capitalized interest costs amounting to $4.7 million. In two cases, we decided not to exercise the option due to environmental problems. The third option was not exercised because the community’s proforma proﬁtability did not produce an adequate return on investment commensurate with the risk. Cost of sales includes expenses for housing and land and lot sales. A breakout of such expenses for housing sales and housing gross margin is set forth below: Year Ended ................................................................ (Dollars In Thousands) .................................... October 31, 1999 October 31, 1998 October 31, 1997 Sale of homes ............................................................................ Cost of sales .............................................................................. Housing gross margin ............................................................... Gross margin percentage ........................................................... $908,553 718,259 $190,294 20.9% $895,644 740,871 $154,773 17.3% $731,807 617,312 $114,495 15.6% Cost of sales expenses as a percentage of home sales revenues are presented below: ................................................................ ................................................................ ................................................................ Year Ended October 31, 1999 October 31, 1998 October 31, 1997 Sale of homes.............................................................................. Cost of sales: Housing, land and development costs ..................................... Commissions ........................................................................... Financing concessions.............................................................. Overheads ............................................................................... Total cost of sales ....................................................................... Gross margin percentage............................................................. 100.0% 71.0% 2.0% 0.8% 5.3% 79.1% 20.9% 100.0% 74.8% 1.9% 0.7% 5.3% 82.7% 17.3% 100.0% 76.0% 2.0% 0.9% 5.5% 84.4% 15.6% 23 Slide 26: Hovnanian Enterprises, Inc. and Subsidiaries We sell a variety of home types in various local communities, each yielding a different gross margin. As a result, depending on the mix of both the communities and of home types delivered, consolidated gross margin will ﬂuctuate up or down. During the year ended October 31, 1999, our gross margin percentage increased 3.6% from the previous year. This can be attributed to higher gross margins being achieved in each of our markets. Higher gross margins are primarily attributed to positive effects from process redesign and quality programs that reduced the housing and land development costs, selective price increases or reduced selling incentives in our stronger markets, and an increased percentage of deliveries from the better performing communities. Another factor affecting the gross margin percentage is in the Northeast Region gross margin percentages are higher compared to our other markets. In 1999, the gross margin was negatively affected by a lower percentage of housing revenues from the Northeast Region amounting to 61.7% in ﬁscal 1999 compared to 66.5% in ﬁscal 1998. In ﬁscal 2000 we expect margins to remain the same or decrease slightly. This is primarily the result of a higher percentage of deliveries coming from outside the Northeast Region where margins are historically lower. During the year ended October 31, 1998, gross margins increased in all our markets compared to the prior year except Florida. The reasons for the increase in 1998 are the same as above for 1999. In addition, deliveries increased in the Northeast Region to 66.5% compared to the prior year of 60.9%. Selling and general administrative expenses as a percentage of homebuilding revenues increased to 8.8% for the year ended October 31, 1999 from 7.5% for the year ended October 31, 1998 which had decreased from 8.2% for the year ended October 31, 1997. The dollar amount of selling and general expenses has increased the last two years to $81.4 million for the year ended October 31, 1999 from $67.5 million for the year ended October 31, 1998 which increased from $62.5 million for the previous year. The overall percentage and dollar increases in such expenses in 1999 are attributable to increases in all our markets but primarily due to fewer deliveries in our Northeast Region and due to Northeast Region and California administration cost increases. The percentage decrease during the year ended October 31, 1998 was due to increased deliveries. The dollar increase in 1998 was due to increased administration and marketing costs. Land Sales and Other Revenues Land sales and other revenues consist primarily of land and lot sales, interest income, contract deposit forfeitures, cash discounts, national contract rebates, and corporate owned life insurance beneﬁts. A breakout of land and lot sales is set forth below: ................................................................ ................................................................ (In Thousands) ................................................. Year Ended October 31, 1999 October 31, 1998 October 31, 1997 Land and lot sales ...................................................................... Cost of sales............................................................................... Land and lot sales gross margin ................................................. $12,077 11,766 $00,311 $8,636 8,070 $0,566 $22,855 17,005 $05,850 Land and lot sales are incidental to our residential housing operations and are expected to continue in the future but may signiﬁcantly ﬂuctuate up or down. Financial Services Financial services consists primarily of originating mortgages from our homebuyers, as well as from third parties, selling such mortgages in the secondary market, and title insurance activities. 24 Slide 27: Hovnanian Enterprises, Inc. and Subsidiaries During the year ended October 31, 1999 and 1998 ﬁnancial services provided a $1.0 and $2.1 million pretax proﬁt, respectively, up from break even in 1997. In the market areas served by our whollyowned mortgage banking subsidiaries, approximately 57%, 58%, and 51% of our non-cash homebuyers obtained mortgages originated by these subsidiaries during the years ended October 31, 1999, 1998, and 1997, respectively. Our mortgage banking goals are to improve proﬁtability by increasing the capture rate of our homebuyers and expanding our business to include originations from unrelated third parties. During the years ended October 31, 1999 and 1998, third party loans amounted to 48% and 40%, respectively, of total mortgage closings. Most servicing rights on new mortgages originated by us will be sold as the loans are closed. Investment Properties Investment Properties consist of rental properties, property management, and gains or losses from sale of such property. See “Capital Resources and Liquidity” for information on our decision to sell our investment properties. We plan to liquidate all properties except for our senior rentals. At October 31, 1999, all properties except one small land parcel had been liquidated. During the year ended October 31, 1999 we sold three land parcels for a total sales price of $20.8 million and recorded a net loss before income taxes of $0.5 million. During the years ended October 31, 1998 and 1997, investment property revenues included a $6.5 million pretax gain and a $4.9 million pretax gain, respectively, from the sale of its commercial facilities and land. Investment properties’ expenses do not include interest expense (see “Interest” below). Collateralized Mortgage Financing In the years prior to February 29, 1988 we pledged mortgage loans originated by our mortgage banking subsidiaries against collateralized mortgage obligations (“CMOs”). Subsequently, we discontinued our CMO program. As a result, CMO operations are diminishing as pledged loans are decreasing through principal amortization and loan payoffs, and related bonds are reduced. In recent years, as a result of bonds becoming callable, we have also sold a portion of our CMO pledged mortgages. Corporate General and Administrative Corporate general and administrative expenses includes the operations at our headquarters in Red Bank, New Jersey. Such expenses include our executive ofﬁces, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, and administration of insurance, quality, and safety. As a percentage of total revenues, such expenses were 3.0%, 2.2%, and 1.9% for the years ended October 31, 1999, 1998, and 1997, respectively. In 1999, the increase was primarily attributed to increased expenditures for long term improvement initiatives. In 1998, the increase was primarily attributed to increased bonus accruals (there were no bonus accruals based on the Return on Equity incentive program in 1997), increased depreciation from the amortization of capitalized process redesign costs in prior years and increased expenditures for long term improvement initiatives. Our long term improvement initiatives include total quality, process redesign (net of capitalized expenses), and training. Such initiatives resulted in additional expenses for the years ended October 31, 1999, 1998, and 1997 amounting to $7.5 million, $3.8 million, and $2.2 million, respectively. Beginning in ﬁscal year 2000 we will be required to capitalize certain computer software development costs in accordance with SOP 98-1, “Accounting For the Costs of Computer Software Development For or Obtained For Internal Use”. We have not yet determined the impact on net income in connection with the adoption of SOP 98-1. 25 Slide 28: Hovnanian Enterprises, Inc. and Subsidiaries Interest Interest expense includes housing, land and lot, and rental properties interest. Interest expense is broken down as follows: ................................................................ ................................................................ (In Thousands) ................................................. October 31, 1999 Year Ended October 31, 1998 October 31, 1997 Sale of homes ............................................................................. Land and lot sales ...................................................................... Rental properties........................................................................ Total........................................................................................... $28,093 1,082 1,168 $30,343 $31,499 652 2,272 $34,423 $29,505 962 5,308 $35,775 Housing interest as a percentage of sale of home revenues amounted to 3.1%, 3.5%, and 4.0% for the years ended October 31, 1999, 1998, and 1997, respectively. The decrease in the percentage for the years ended October 31, 1999 and 1998 was primarily due to decreased levels of debt during the year compared to the prior year. This decrease is the result of management’s goal to deleverage the Company, and debt reductions from cash generated by the liquidation of investment properties and earnings. Other Operations Other operations consist primarily of miscellaneous residential housing operations, amortization of senior and subordinated note issuance expenses, earnout payments from homebuilding company acquisitions and corporate owned life insurance loan interest. Total Taxes Total taxes as a percentage of income before income taxes amounted to 38.9% and 36.7% for the years ended October 31, 1999 and 1998, respectively. Net tax beneﬁts as a percentage of the loss before income taxes amounted to 42.5% for the year ended October 31, 1997. Deferred federal and state income tax assets primarily represent the deferred tax beneﬁts arising from temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If for some reason the combination of future years income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried back to prior years to recover the deferred tax assets. As a result, management is conﬁdent such deferred tax assets are recoverable regardless of future income. (See “Notes to Consolidated Financial Statements - Note 10” for an additional explanation of taxes.) Extraordinary Loss On June 7, 1999, we redeemed $45,449,000 of our outstanding 11 1/4% Subordinated Notes due 2002 at an average price of 101.875% of par which resulted in an extraordinary loss of $868,000 net of income taxes of $468,000. 26 Slide 29: Hovnanian Enterprises, Inc. and Subsidiaries Year 2000 Issues We have fully implemented a plan to resolve our information technology (“IT”) and non-IT system year 2000 issues. We designated a full-time year 2000 project leader, engaged consultants to review and evaluate our plan, completed the identiﬁcation of our IT and non-IT noncompliant systems and evaluated subcontractors’ and suppliers’ state of readiness. Our plan prioritized our efforts on our software systems and computer hardware equipment. We believe we have upgraded, ﬁxed or retired 100% of our critical noncompliant systems. All other IT and non-IT systems are not considered critical to our operations, and if noncapable for year 2000, would only be an inconvenience. The cost of implementing the plan did not have a material impact on earnings in ﬁscal 1999 and was funded through operations. We are concerned about the readiness of our subcontractors and suppliers. We have communicated with 100% of these third parties. We have been informed that substantially all of the subcontractors and suppliers are year 2000 compliant. Any third parties whose lack of readiness as to year 2000 issues would have an impact on our operations are being replaced. In most cases, we use more than one subcontractor and supplier so ﬁnding replacements was not difﬁcult. We believe we have solved all signiﬁcant year 2000 issues. We do not believe we will have material lost revenues due to the year 2000 issues. Based on the above, we did not develop a worst-case year 2000 scenario. However, we have a year 2000 contingency plan which, if necessary, is ready to implement. Inﬂation Inﬂation has a long-term effect on us because increasing costs of land, materials and labor result in increasing sales prices of our homes. In general, these price increases have been commensurate with the general rate of inﬂation in our housing markets and have not had a signiﬁcant adverse effect on the sale of our homes. A signiﬁcant inﬂationary risk faced by the housing industry generally is that rising housing costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers. In recent years, in the price ranges in which we sell homes, we have not found this risk to be a signiﬁcant problem. Inﬂation has a lesser short-term effect on us because we generally negotiate ﬁxed price contracts with our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a speciﬁed number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 57% of our homebuilding cost of sales. 27 Slide 30: Hovnanian Enterprises, Inc. and Subsidiaries Quantitative and Qualitative Disclosures About Market Risk. The primary market risk facing us is interest rate risk on our long term debt. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse line of credit are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from FNMA, FHLMC, GNMA securities and private investors. Accordingly the risk from mortgage loans is not material. We do not hedge interest rate risk other than on mortgage loans using ﬁnancial instruments. We are also subject to foreign currency risk but this risk is not material. The following tables set forth as of October 31, 1999 and 1998, our long term debt obligations, principal cash ﬂows by scheduled maturity, weighted average interest rates and estimated fair market value (“FMV”). There have been no signiﬁcant changes in our market risk from October 31, 1998 to October 31, 1999. As of October 31, 1999 for the Year Ended October 31, (Dollars in Thousands) 2000 2001 2002 2003 2004 Thereafter Total FMV @ 10/31/99 Long Term Debt(1): Fixed Rate....... Average interest rate........... Variable Rate.... Average interest rate........... $4,999 8.80% $0,600 6.00% $132 7.60% $927 8.75% $138 7.63% — — $2,585 7.04% — — $74 8.38% — — $250,613 9.37% — — $258,541 $246,164 9.34% — $001,527 $001,527 7.67% — As of October 31, 1998 for the Year Ended October 31, (Dollars in Thousands) 1999 2000 2001 2002 2003 Thereafter Total FMV @ 10/31/98 Long Term Debt(1): Fixed Rate....... Average interest rate........... Variable Rate.... Average interest rate........... (1) $0,115 7.59% $1,932 9.22% $119 7.62% $600 8.00% $132 $50,804 7.60% 10.70% $926 — 8.64% — $2,581 7.04% — — $100,685 9.74% — — $154,436 $145,186 10.01% — $003,458 $003,458 8.85% — Does not include bonds collateralized by mortgages receivable. 28 Slide 31: Hovnanian Enterprises, Inc. and Subsidiaries Consolidated Statements of Operations ......................................................................................... ......................................................................................... ......................................................................................... (In Thousands Except Per Share Data) ............................................ Year Ended October 31,) 1999) October 31,) 1998) October 31, 1997 Revenues: ....................................................................................................... Homebuilding: Sale of homes .................................................................................................... Land sales and other revenues (Note 12) .......................................................... Total Homebuilding..................................................................................... Financial Services ................................................................................................... Investment Properties (Note 12) ............................................................................ Collateralized Mortgage Financing ........................................................................ Total Revenues............................................................................................. Expenses: Homebuilding: Cost of sales...................................................................................................... Selling, general and administrative.................................................................... Inventory impairment loss (Note 11) ................................................................ Total Homebuilding..................................................................................... Financial Services ................................................................................................... Investment Properties: Operations ........................................................................................................ Provision for impairment loss (Note 11)........................................................... Total Investment Properties.......................................................................... Collateralized Mortgage Financing ........................................................................ Corporate General and Administrative (Note 3) .................................................... Interest ................................................................................................................... Other operations.................................................................................................... Total Expenses ............................................................................................. Income (Loss) Before Income Taxes and Extraordinary Loss ...................................... State and Federal Income Taxes: State (Note 10)....................................................................................................... Federal (Note 10)................................................................................................... Total Taxes .................................................................................................. Extraordinary Loss From Extinguishment of Debt, Net of Income Taxes (Note 8) ............................................................................ Net Income (Loss).................................................................................................. Per Share Data: Basic: Income (Loss) Per Common Share Before Extraordinary Loss .......................... Extraordinary Loss ........................................................................................... Income (Loss) ................................................................................................... Assuming Dilution: Income (Loss) Per Common Share Before Extraordinary Loss .......................... Extraordinary Loss ........................................................................................... Income (Loss).................................................................................................... See notes to consolidated ﬁnancial statements. $908,553) 17,409) 925,962) 20,239) 1,567) 519) 948,287) $895,644) 15,411) 911,055) 19,098) 11,111) 683) 941,947) $731,807) 26,983) 758,790) 10,735) 13,757) 854) 784,136) 730,025) 81,396) 2,091) 813,512) 19,195) 1,772) 1,772) 504) 28,652) 30,343) 3,692) 897,670) 50,617) 5,093) 14,581) 19,674) (868) $030,075) 748,941) 67,519) 3,994) 820,454) 17,010) 3,395) 1,038) 4,433) 672) 21,048) 34,423) 2,615) 900,655) 41,292) 3,572) 11,569) 15,141) (748) $025,403) 634,317) 62,475) 14,019) 710,811) 10,780) 5,909) 14,446) 20,355) 878) 15,088) 35,775) 2,573) 796,260) (12,124) 1,796) (6,950) (5,154) $0 (6,970) $0001.45) (.04) $0001.41) $0001.43) (.04) $0001.39) $0001.20) (.03) $0001.17) $0001.19) (.03) $0001.16) $0 0(0.31) $0 0(0.31) $0 0(0.31) $0 0(0.31) 29 Slide 32: Hovnanian Enterprises, Inc. and Subsidiaries Consolidated Balance Sheets ........................................................................................................................................ (In Thousands) ................................................................................................................................ October 31, 1999 October 31, 1998 Assets Homebuilding: Cash and cash equivalents (Note 5) .................................................................................... $017,163 $013,306 Inventories - At the lower of cost or fair value (Notes 7 and 11): Sold and unsold homes and lots under development ...................................................... Land and land options held for future development or sale ........................................... Total Inventories ....................................................................................................... 475,196 51,925 527,121 332,225 43,508 375,733 Receivables, deposits, and notes (Note 12).......................................................................... 30,675 29,490 Property, plant, and equipment - net (Note 4)..................................................................... 26,500 16,831 Prepaid expenses and other assets (Note 15) ....................................................................... Total Homebuilding .................................................................................................. 55,308 656,767 32,650 468,010 Financial Services: Cash .................................................................................................................................. Mortgage loans held for sale (Note 6)................................................................................. Other assets ......................................................................................................................... Total Financial Services ............................................................................................. 2,202 33,158 1,563 36,923 1,486 71,611 3,717 76,814 Investment Properties: Held for sale: Land and improvements (Notes 4 and 11) ..................................................................... Other assets.................................................................................................................... Held for investment: Cash ............................................................................................................................... Rental property - net (Note 4)........................................................................................ Other assets.................................................................................................................... Total Investment Properties ....................................................................................... Collateralized Mortgage Financing: Collateral for bonds payable (Note 6) ................................................................................. Other assets ......................................................................................................................... Total Collateralized Mortgage Financing .................................................................. 109 556 17,832 295 762 10,794 868 30,551 10,650 889 12,204 5,006 238 5,244 5,970 426 6,396 Income Taxes Receivable - Including deferred tax beneﬁts (Note 10)....................................... Total Assets .............................................................................................................................. See notes to consolidated ﬁnancial statements. 1,723 $712,861 7,331 $589,102 30 Slide 33: Hovnanian Enterprises, Inc. and Subsidiaries ........................................................................................................................................ (In Thousands) ................................................................................................................................ October 31,) 1999) October 31,) 1998) Liabilities and Stockholders’ Equity Homebuilding: Nonrecourse land mortgages (Note 7)................................................................................. Accounts payable and other liabilities ................................................................................. Customers’ deposits (Note 5) .............................................................................................. Nonrecourse mortgages secured by operating properties (Note 7) ...................................... Total Homebuilding .................................................................................................. Financial Services: Accounts payable and other liabilities ................................................................................. Mortgage warehouse line of credit (Notes 6 and 7) ............................................................ Total Financial Services ............................................................................................. Investment Properties: Accounts payable and other liabilities ................................................................................. Total Investment Properties ....................................................................................... Collateralized Mortgage Financing: Accounts payable and other liabilities ................................................................................. Bonds collateralized by mortgages receivable (Note 6)........................................................ Total Collateralized Mortgage Financing................................................................... Notes Payable: Revolving credit agreement (Note 7) ................................................................................... Senior notes (Note 8)........................................................................................................... Subordinated notes (Note 8)................................................................................................ Accrued interest................................................................................................................... Total Notes Payable .................................................................................................. Total Liabilities.......................................................................................................... Commitments and Contingent Liabilities (Notes 5 and 14) Stockholders’ Equity (Notes 12 and 13): Preferred Stock, $.01 par value-authorized 100,000 shares; none issued Common Stock, Class A, $.01 par value-authorized 87,000,000 shares; issued 17,218,442 shares in 1999 and 15,803,297 shares in 1998 (including 2,710,274 shares in 1999 and 1,937,374 shares in 1998 held in Treasury) ...................... Common Stock, Class B, $.01 par value-(convertible to Class A at time of sale)authorized 13,000,000 shares; issued 7,997,083 shares in 1999 and 8,040,171 shares in 1998 (both years include 345,874 shares held in Treasury) .......................................... Paid in Capital..................................................................................................................... Retained Earnings (Note 8) ................................................................................................. Treasury Stock - at cost ....................................................................................................... Total Stockholders’ Equity ........................................................................................ Total Liabilities and Stockholders’ Equity ................................................................................ See notes to consolidated ﬁnancial statements. $006,407) 73,057) 25,647) 3,662) 108,773) $011,846) 53,765) 23,857) 3,770) 93,238) 1,218) 30,034) 31,252) 2,422) 66,666) 69,088) 932) 932) 1,373) 1,373) 3,699) 3,699) 6) 5,652) 5,658) 70,125) 150,000) 100,000) 11,654) 331,779) 476,435) 68,000) 145,449) 4,904) 218,353) 387,710) 172) 157) 79) 45,856) 213,257) (22,938) 236,426) $712,861) 80) 34,561) 183,182) (16,588) 201,392) $589,102) 31 Slide 34: Hovnanian Enterprises, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity A Common Stock .......................................... .......................................... (Dollars in Thousands) .................. Shares) Issued and) Outstanding) B Common Stock Shares Issued and Outstanding Paid-In Capital Retained Earnings Treasury Stock Amount Amount Total Balance, October 31, 1996 ........ Conversion of Class B to Class A common stock ......... Treasury stock purchases ........... Net Loss..................................... Balance, October 31, 1997 ........ Sale of Common Stock Under Employee Stock Option Plan .......................... Conversion of Class B to Class A common stock .................. Treasury stock purchases ........... Net Income ................................ Balance, October 31, 1998 ........ Sale of common stock under Employee Stock Option Plan .......................... Acquisitions (Note 15)............... Conversion of Class B to Class A common stock .................. Treasury stock purchases ........... Net Income ................................ Balance, October 31, 1999 ........ 15,135,348) $155 7,901,705) $82) $33,935 $164,749) $(5,299) $193,622) 146,893) (1,184,400) 1 (146,893) (1) (7,890) (6,970) (7,890) (6,970) 178,762) 14,097,841) 156 7,754,812) 81) 33,935 157,779) (13,189) 114,667) 60,515) (407,100) 1 (60,515) (1) 626 626) (3,399) 25,403) (3,399) 25,403) 201,392) 13,865,923) $157 7,694,297) 80) 34,561 183,182) (16,588) 10,000) 1,362,057 43,088) (772,900) 1 13 1 (43,088) (1) 58 11,237 59) 11,250 (6,350) 30,075) (6,350) 30,075) 14,508,168) $172 7,651,209) $79) $45,856 $213,257) $(22,938) $236,426) See notes to consolidated ﬁnancial statements. 32 Slide 35: Hovnanian Enterprises, Inc. and Subsidiaries Consolidated Statements of Cash Flows ......................................................................................... ......................................................................................... (In thousands) .................................................................................. October 31,) 1999) Year Ended October 31,) 1998) October 31,) 1997) Cash Flows From Operating Activities: Net Income (Loss) .................................................................................................... Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation........................................................................................................ Loss (gain) on sale and retirement of property and assets ................................... Extraordinary loss from extinguishment of Debt net of income taxes................. Deferred income taxes......................................................................................... Impairment losses ............................................................................................... Decrease (increase) in assets: Mortgage notes receivable.............................................................................. Receivables, prepaids and other assets ........................................................... Inventories ..................................................................................................... Increase (decrease) in liabilities: State and Federal income taxes ...................................................................... Customers’ deposits ....................................................................................... Interest and other accrued liabilities............................................................... Post development completion costs................................................................ Accounts payable ........................................................................................... Net cash provided by (used in) operating activities .................................. Cash Flows From Investing Activities: Net proceeds from sale of property and assets ......................................................... Purchase of property ................................................................................................ Acquisition of homebuilding companies................................................................... Investment in and advances to unconsolidated afﬁliates .......................................... Investment in income producing properties.............................................................. Net cash provided by (used in) investing activities ................................... Cash Flows From Financing Activities: Proceeds from mortgages and notes ......................................................................... Proceeds from senior debt ........................................................................................ Principal payments on mortgages and notes............................................................. Principal payments on subordinated debt ................................................................ Purchase of treasury stock........................................................................................ Proceeds from sale of stock ...................................................................................... Net cash provided by (used in) ﬁnancing activities ................................... Net Increase (Decrease) In Cash.................................................................................... Cash and Cash Equivalent Balance, Beginning Of Year ................................................ Cash and Cash Equivalent Balance, End Of Year ......................................................... Supplemental Disclosures Of Cash Flow: Cash paid during the year for: Interest (net of amount capitalized)................................................................ Income Taxes ................................................................................................. Non-cash Investing and Finance Activities: Debt assumed on sale of property and assets ........................................................... Stock issued for acquisitions ......................................................................................... See notes to consolidated ﬁnancial statements. $30,075) $25,403) $ (6,970) 6,314) 283) 868) 3,056) 2,091) 46,012) (9,475) (53,592) 3,020) (1,269) 9,203) 3,293) (4,400) 35,479) 19,094) (13,381) (12,249) 249) (843) (7,130) 850,320) 150,000) (972,265) (46,302) (6,350) 59) (24,538) 3,811) 15,554) $19,365) 4,293) (6,189) 748) 1,987) 5,032) (17,343) 6,410) 30,666) 3,651) 1,490) 2,235) 4,438) 2,233) 65,054) 30,436) (3,135) 243) (3,844) 23,700) 632,531) (668,987) (45,284) (3,399) 626) (84,513) 4,241) 11,313) $15,554) 5,032) (4,760) (4,568) 28,465) 4,332) (6,830) (48,105) (7,325) 10,007) 3,726) (8,746) 5,034) (30,708) 14,997) (3,156) 195) (11,099) 937) 1,139,780) (1,101,969) (10,000) (7,890) 19,921) (9,850) 21,163) $11,313) $23,731) $16,257) $35,315) $12,303) $13,530) $35,869) $06,809) $11,250) 33 Slide 36: Hovnanian Enterprises, Inc. and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended October 31, 1999, 1998, and 1997 1. Basis of Presentation and Segment Information Basis of Presentation - The accompanying consolidated ﬁnancial statements include our accounts and all wholly-owned subsidiaries after elimination of all signiﬁcant intercompany balances and transactions. Segment Information - Statement of Financial Accounting Standards No. 131 (“FAS 131”) “Disclosures About Segments of an Enterprise and Related Information” established new standards for segment reporting based on the way management organizes segments within a company for making operating decisions and assessing performance. Our ﬁnancial reporting segments consist of homebuilding, ﬁnancial services, collateralized mortgage ﬁnancing, and corporate. Our homebuilding operations comprise the most substantial part of our business, with approximately 97% of consolidated revenues in years ended October 31, 1999, 1998, and 1997 contributed by the homebuilding operations. We are a Delaware corporation, currently building and selling homes in more than 110 new home communities in New Jersey, Pennsylvania, New York, Florida, North Carolina, Virginia, California, Texas and Poland. We offer a wide variety of homes that are designed to appeal to ﬁrst time buyers, ﬁrst and second time move up buyers, luxury buyers, active adult buyers and empty nesters. Our ﬁnancial services operations provide mortgage banking and title services to the homebuilding operations’ customers and third parties. We do not retain or service the mortgages that we originate but rather, sell the mortgages and related servicing rights to investors. Corporate primarily includes the operations of our corporate ofﬁce whose primary purpose is to provide information services, human resources, management reporting, training, cash management, internal audit, risk management, and administration of process redesign, quality and safety. Assets, liabilities, revenues and expenses of our reportable segments are separately included in the consolidated balance sheets and consolidated statements of operations. 2. Signiﬁcant of Accounting Policies Use of Estimates - The preparation of ﬁnancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a signiﬁcant impact on the ﬁnancial statements. Business Combinations - When we make an acquisition of another company, we use the purchase method of accounting in accordance with Accounting Principal Board Opinion 16 (“APB 16”) “Business Combinations”. Under APB 16 we record as our cost the acquired assets less liabilities assumed. Any difference between the cost of an acquired company and the sum of the fair values of tangible and identiﬁed intangible assets less liabilities is recorded as goodwill. The reported income of an acquired company includes the operations of the acquired company after acquisition, based on the acquisition costs. Income Recognition - Income from sales is recorded when title is conveyed to the buyer, subject to the buyer’s ﬁnancial commitment being sufﬁcient to provide economic substance to the transaction. Cash and Cash Equivalents - Cash and cash equivalents include cash deposited in checking accounts, overnight repurchase agreements, certiﬁcates of deposit, Treasury bills and government money market funds with original maturities of 90 days or less when purchased. Fair Value of Financial Instruments - The fair value of ﬁnancial instruments is determined by reference to various market data and other valuation techniques as appropriate. Our ﬁnancial instruments consist of cash equivalents, mortgages and notes receivable, mortgages and notes payable, and the senior and subordinated notes payable. Unless otherwise disclosed, the fair value of ﬁnancial instruments approximates their recorded values. Inventories - For inventories of communities under development, a loss is recorded when events and circumstances indicate impairment and the undiscounted future cash ﬂows generated are less than the related carrying amounts. The impairment loss is based on expected revenue, cost to complete including interest, and selling costs. Inventories and long-lived assets held for sale are recorded at the lower of cost or fair value less selling costs. Fair value is deﬁned in Statement of Financial Accounting Standard No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“FAS 121”) as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Construction costs are accumulated during the period of construction and charged to cost of sales under speciﬁc identiﬁcation methods. Land, land development, and common facility costs in a community are amortized equally based upon the number of homes to be constructed in each housing community. Interest costs related to properties in progress are capitalized during the construction period and expensed along with the associated cost of sales as the related inventories are sold (see Note 7). 34 Slide 37: Hovnanian Enterprises, Inc. and Subsidiaries The cost of land options is capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations when we determine we will not exercise the option. Property - Historically, our rental operations arose primarily from rental of commercial properties. All commercial rental property has been liquidated as of October 31, 1998. At October 31, 1999 we own two senior residential rental properties. Intangible Assets - Any intangible assets acquired by us are amortized on a straight line basis over its useful life. Goodwill resulting from company acquisitions during the year ended October 31, 1999 is being amortized over 10 years and reported in the consolidated statements of income as “Other Operations”. During the years ended October 31, 1999, 1998, and 1997, goodwill amortization amounted to $261,000, $134,000, and $134,000, respectively. The carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the estimated undiscounted cash ﬂows of the company acquired over the remaining amortization period, the carrying amount of the goodwill is reduced by the estimated shortfall of cash ﬂows. In addition, we assess long-lived assets for impairment under FAS 121. Under those rules, goodwill associated with assets acquired in a purchase business combination is included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. Post Development Completion Costs - In those instances where a development is substantially completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover the cost of such work. Advertising Costs - Advertising costs are treated as period costs and expensed as incurred. During the years ended October 31, 1999, 1998, and 1997, advertising costs expensed amounted to $11,995,000, $10,531,000, and $12,559,000, respectively. Deferred Income Tax - Deferred income taxes or income tax beneﬁts are provided for temporary differences between amounts recorded for ﬁnancial reporting and for income tax purposes. Common Stock - Each share of Class A Common Stock entitles its holder to one vote per share and each share of Class B Common Stock entitles its holder to ten votes per share. The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B Common Stock. If a shareholder desires to sell shares of Class B Common Stock, such stock must be converted into shares of Class A Common Stock. On December 10, 1998, our Board of Directors approved an increase in the stock repurchase plan to purchase up to 3 million shares. The 3 million shares equals 13.0% of our total and outstanding shares as of December 16, 1996 when the initial repurchase plan was approved by the Board. As of October 31, 1999, 2,364,400 shares have been repurchased under this program. Depreciation - The straight-line method is used for both ﬁnancial and tax reporting purposes for all assets. Prepaid Expenses - Prepaid expenses which relate to speciﬁc housing communities (model setup, architectural fees, homeowner warranty, etc.) are amortized to costs of sales as the applicable inventories are sold. All other prepaid expenses are amortized over a speciﬁc time period or as used and charged to overhead expense. Stock Options - Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” establishes a fair value-based method of accounting for stock-based compensation plans, including stock options. Registrants may elect to continue accounting for stock option plans under Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” but are required to provide proforma net income and earnings per share information “as if” the new fair value approach had been adopted. We intend to continue accounting for our stock option plan under APB 25. Under APB 25, no compensation expense was recognized because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant (see Note 13). Per Share Calculations - Statement of Financial Accounting Standards No. 128 (“FAS 128”) “Earnings Per Share” requires the presentation of basic earnings per share and diluted earnings per share, and is effective for annual periods ending after December 15, 1997. We adopted FAS 128 in the year ended October 31, 1998. Basic earnings per common share is computed using the weighted average number of shares outstanding and is the same calculation as reported in prior years. Basic weighted average shares outstanding at October 31, 1999, 1998, and 1997 amounted to 21,404,473 shares, 21,781,105 shares, and 22,409,063 shares, respectively. Diluted earnings per common share has been presented for prior years and is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock of 208,000, 235,000, and 97,000 for the years ended October 31, 1999, 1998, and 1997, respectively. 35 Slide 38: Hovnanian Enterprises, Inc. and Subsidiaries Accounting Pronouncements Not Yet Adopted - In March 1998, the AICPA issued SOP-98-1, Accounting For the Costs of Computer Software Developed For or Obtained For Internal Use. We plan to adopt the SOP on November 1, 1999. The SOP will require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. We currently expense such costs as incurred. We have not yet determined the impact on net income or earnings per share in connection with the adoption of SOP 98-1. Reclassiﬁcations - Certain amounts in the 1998 and 1997 consolidated ﬁnancial statements have been reclassiﬁed to conform to the 1999 presentation. 3. Corporate Initiatives We have embarked on long term improvement initiatives of total quality, process redesign, and training. Included in Corporate General and Administrative is $7,502,000, $3,756,000, and $2,216,000 for the years ended October 31, 1999, 1998, and 1997, respectively, related to such initiatives. 4. Property Homebuilding property, plant, and equipment consists of land, land improvements, buildings, building improvements, furniture and equipment used to conduct day to day business. Homebuilding accumulated depreciation related to these assets at October 31, 1999 and October 31, 1998 amounted to $19,550,000 and $15,088,000, respectively. We owned and held for sale three parcels of commercial land at October 31, 1998. During the three months ended January 31, 1999 we sold the three land parcels for a total sales price of $20.8 million and recorded a loss before income taxes of $0.5 million. At October 31, 1999 all commercial facilities and land (except for one small parcel) have been liquidated. We are retaining two senior citizen residential rental communities. Accumulated depreciation on rental property at October 31, 1999 and October 31, 1998 amounted to $2,211,000 and $1,826,000, respectively. 5. Escrow Cash We hold escrow cash amounting to $5,578,000 and $4,775,000 at October 31, 1999 and October 31, 1998, respectively, which primarily represents customers' deposits which are restricted from use by us. We are able to release escrow cash by pledging letters of credit. At October 31, 1999 and October 31, 1998, $10,000,000 and $14,000,000 was released from escrow and letters of credit were pledged, respectively. Escrow cash accounts are substantially invested in short-term certiﬁcates of deposit or time deposits. 6. Mortgages and Notes Receivable Our wholly-owned mortgage banking subsidiary originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary mortgage market, servicing released, or prior to February 28, 1987 pledged against, collateralized mortgage obligations (“CMOs”). At October 31, 1999 and October 31, 1998, respectively, $32,844,000 and $71,002,000 of such mortgages were pledged against our mortgage warehouse line (see “Notes to Consolidated Financial Statements - Note 7”). We may incur risk with respect to mortgages that are delinquent and not pledged against CMOs, but only to the extent the losses are not covered by mortgage insurance or resale value of the home. Historically, we have incurred minimal credit losses. The mortgage loans held for sale are carried at the lower of cost or market value, determined on an aggregate basis. There was no valuation adjustment at October 31, 1999. 7. Mortgages and Notes Payable Substantially all of the nonrecourse land mortgages are short-term borrowings. Nonrecourse mortgages secured by operating properties are installment obligations having annual principal maturities in the following years ending October 31, of approximately $119,000 in 2000, $132,000 in 2001, $138,000 in 2002, $2,585,000 in 2003, $74,000 in 2004 and $613,000 after 2004. The interest rates on these obligations range from 7.000% to 8.375%. We have an unsecured Revolving Credit Agreement (“Agreement”) with a group of banks which provides up to $275,000,000 through July 2002. Interest is payable monthly and at various rates of either the prime rate or LIBOR plus 1.45%. In addition, we pay a fee equal to .325% per annum on the weighted average unused portion of the line. 36 Slide 39: Hovnanian Enterprises, Inc. and Subsidiaries Interest costs incurred, expensed and capitalized were: (Dollars In Thousands) October 31, 1999 Year Ended October 31, 1998 October 31, 1997 Interest incurred(1): Residential(3) ............................................................................. Commercial(4) ........................................................................... Total incurred .......................................................................... Interest expensed: Residential(3) ............................................................................. Commercial(4) ........................................................................... Total expensed......................................................................... Interest capitalized at beginning of year...................................... Plus acquired entity interest ........................................................ Plus interest incurred .................................................................. Less interest expensed ................................................................. Less impairment write-off ........................................................... Less sale of assets........................................................................ Interest capitalized at end of year ............................................... Interest capitalized at end of year: Residential(3) ............................................................................. Commercial(2) ........................................................................... Total interest capitalized .......................................................... (1) (2) $23,426 1,168 $24,594 $29,175 1,168 $30,343 $25,545 3,397 24,594 30,343 1,227 $21,966 $21,516 450 $21,966 $26,675 2,272 $28,947 $32,151 2,272 $34,423 $35,950 28,947 34,423 460 4,469 $25,545 $23,868 1,677 $25,545 $29,469 5,308 $34,777 $30,467 5,308 $35,775 $39,152 34,777 35,775 1,220 984 $35,950 $29,804 6,146 $35,950 Data does not include interest incurred by our mortgage and ﬁnance subsidiaries. Data does not include a reduction for depreciation. (3) Represents acquisition interest for construction, land and development costs which is charged to interest expense when land is not under active development and when homes are delivered. (4) Represents interest allocated to or incurred on long term debt for investment properties and charged to interest expense. Average interest rates and average balances outstanding for short-term debt are as follows: October% 31, 1999% October% 31, 1998% October% 31, 1997% (Dollars In Thousands) Average outstanding borrowings............................................... Average interest rate during period ........................................... Average interest rate at end of period(1) ..................................... Maximum outstanding at any month end ................................. (1) $055,495% $098,090% $133,760% 9.2% 8.4% 8.2% 7.2% 6.9% 7.8% $117,085% $125,325% $184,550% Average interest rate at the end of the period excludes any charges on unused loan balances. In addition, we have a secured mortgage loan warehouse agreement with a group of banks which provides up to $100,000,000 through June 27, 2000. Interest is payable monthly and at various rates. The interest rate at October 31, 1999 was 6.4%. 37 Slide 40: Hovnanian Enterprises, Inc. and Subsidiaries 8. Senior and Subordinated Notes On April 29, 1992, we issued $100,000,000 principal amount of 11 1/4% Subordinated Notes due April 15, 2002. In October 1998, we redeemed $44,551,000 principal amount at an average price of 101.6% of par. The funds were provided by the revolving credit agreement and resulted in an extraordinary loss of $748,000 net of an income tax beneﬁt of $403,000. In June 1999, we redeemed the remaining $45,449,000 principal amount at an average price of 101.875% of par. The funds for this redemption were provided by the issuance of Senior Notes and resulted in an extraordinary loss of $868,000 net of an income tax beneﬁt of $468,000. On June 7, 1993, we issued $100,000,000 principal amount of 9 3/4% Subordinated Notes due June 1, 2005. Interest is payable semi-annually. The notes are redeemable in whole or in part at our option, initially at 104.875% of their principal amount on or after June 1, 1999 and reducing to 100% of their principal amount on or after June 1, 2002. On May 4, 1999, we issued $150,000,000 principal amount of 9 1/8% Senior Notes due May 1, 2009. Interest is payable semi-annually. The notes are redeemable in whole or in part at our option, initially at 104.563% of their principal amount on or after May 1, 2004 and reducing to 100% of their principal amount on or after May 1, 2007. The indentures relating to the Senior and Subordinated Notes and the Revolving Credit Agreement contain restrictions on the payment of cash dividends. At October 31, 1999, $35,415,000 of retained earnings were free of such restrictions. The fair value of both the Senior Notes and Subordinated Notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. The fair value of the Senior Notes and Subordinated Notes is estimated at $143,250,000 and $94,500,000, respectively, as of October 31, 1999. 9. Retirement Plan In December 1982, we established a deﬁned contribution savings and investment retirement plan. Under such plan there are no prior service costs. All associates are eligible to participate in the retirement plan and employer contributions are based on a percentage of associate contributions. Plan costs charged to operations amount to $1,976,000, $1,523,000, and $1,520,000 for the years ended October 31, 1999, 1998, and 1997, respectively. 10. Income Taxes Income Taxes payable (receivable) including deferred beneﬁts, consists of the following: ................................................................................................. (In Thousands) .............................................................................................. October) 31, 1999) October) 31, 1998) State income taxes: Current ...................................................................................................... $$$0$$1(,437) Deferred ..................................................................................................... (758) Federal income taxes: Current ...................................................................................................... 4,311) Deferred ..................................................................................................... (5,713) Total...................................................................................................... $(1,723) $)2,897) (1,495) 36) (8,769) $(7,331) The provision for income taxes is composed of the following charges (beneﬁts): October 31, 1999 Year Ended October) 31, 1998) October) 31, 1997) (In Thousands) Current income tax expense: Federal(1) ........................................................................................ State(2) ............................................................................................ ................................................................................................. Deferred income tax expense: Federal .......................................................................................... State .............................................................................................. ................................................................................................. Total ......................................................................................... (1) $13,253 4,954 18,207 860 139 999 $19,206 $09,177 3,484 12,661 1,989 88 2,077 $14,738 $(2,381) 2,051) (330) (4,569) (255) (4,824) $(5,154) The current federal income tax expense includes a tax beneﬁt of $468,000 and $403,000 in the years ended October 31, 1999 and 1998, respectively, relating to the loss on the redemption of Subordinated Notes that was reported as an extraordinary item in the “Statement of Operations.” (2) The current state income tax expense is net of the use of state loss carryforwards amounting to $5,860,000, $8,495,000, and $13,439,000 for the years ended October 31, 1999, 1998, and 1997. 38 Slide 41: Hovnanian Enterprises, Inc. and Subsidiaries The deferred tax liabilities or assets have been recognized in the consolidated balance sheets due to temporary differences as follows: ..................................................................................................... (In Thousands) ............................................................................... October) 31, 1999) October) 31, 1998 Deferred tax assets: Deferred income .................................................................................... Maintenance guarantee reserves ............................................................ Provision to reduce inventory to net realizable value............................. Inventory impairment loss ..................................................................... Uniform capitalization of overhead ....................................................... Post development completion costs ....................................................... State net operating loss carryforwards................................................... Other ..................................................................................................... Total................................................................................................... Valuation allowance(3) ............................................................................ Deferred tax assets................................................................................. Deferred tax liabilities: Deferred interest .................................................................................... Installment sales .................................................................................... Accelerated depreciation........................................................................ Acquisition goodwill.............................................................................. Total.................................................................................................. Net deferred tax assets.............................................................................. (3) $00,40) 711) —) 2,545) 3,365) 4,238) 29,440) 1,378) 41,717) (29,440) 12,277) 31) 137) 2,916) 2,722) 5,806) $6,471) $,00040) 701) 136) 6,077) 2,967) 1,379) 27,205) 843) 39,348) (27,205) 12,143) 31) 137) 1,711) —) 1,879) $10,264) The net change in the valuation allowance of $2,235,000 results from an increase in the separate company state net operating losses that may not be fully utilized. The effective tax rates varied from the expected rate. The sources of these differences were as follows: October 31, 1999 Year Ended October) 31, 1998) October) 31, 1997) Computed “expected” tax rate ....................................................... State income taxes, net of Federal income tax beneﬁt..................... Company owned life insurance ....................................................... Low income housing tax credit....................................................... Other .............................................................................................. Effective tax rate............................................................................. 35.0)% 6.5)% (.1)% (2.8)% .4)% 39.0)% 35.0)% 6.0)% (1.6)% (3.4)% .7)% 36.7)% (35.0)% 11.6)% (6.2)% (11.2)% (1.9)% (42.7)% We have state net operating loss carryforwards for ﬁnancial reporting and tax purposes of $359,000,000 due to expire between the years October 31, 2000 and October 31, 2014. 11. Reduction of Inventory to Fair Value In accordance with FAS 121, we record impairment losses on inventories related to communities under development when events and circumstances indicate that they may be impaired and the undiscounted cashﬂows estimated to be generated by those assets are less than their related carrying amounts. As of October 31, 1998 and 1997, inventory with a carrying amount of $3,077,000 and $33,143,000, respectively, was written down by $353,000 and $9,258,000, respectively, to its fair value. This was based on our evaluation of the expected revenue, cost to complete including interest and selling cost. The writedown during the year ended October 31, 1998 was attributed to one community in Florida where homes are being discounted to accelerate sales. The writedowns during the year ended October 31, 1997 were attributable to numerous communities in Florida after we decided to reduce our investment in that state and two communities in New Jersey resulting from a product type change and unforeseen development costs. Also in accordance with FAS 121, we record impairment losses on inventories and long-lived assets held for sale when the related carrying amount exceeds the fair value less the selling cost. As of October 31, 1999, 1998 and 1997, inventory and commercial properties with a carrying amount of $4,539,000, $4,629,000 and $32,008,000, respectively, was written down by $1,801,000, $2,588,000 and $12,690,000, respectively, to its fair value. The writedowns during the year ended October 31, 1999 were attributed to one land parcel in Florida and two residential communities in North Carolina. The Florida land parcel was written down based on recent purchase offers. The communities were written down based on our decision to discontinue selling homes and offer the 39 Slide 42: Hovnanian Enterprises, Inc. and Subsidiaries remaining lots for sale. The writedowns during the year ended October 31, 1998 were attributed to one parcel of land being sold as lots and a commercial retail center parcel of land which incurred higher land development costs, both in New Jersey. The writedowns during the year ended October 31, 1997 were attributable to four residential parcels of land in Florida, one residential parcel of land in New Jersey, one multi-use commercial parcel of land in New Jersey and two Florida commercial facilities with expansion land attached to one facility. During the year ended October 31, 1998, when these commercial facilities were liquidated, we recovered the carrying value. During the years ended October 31, 1999, 1998 and 1997, we recovered the carrying value or recognized nominal losses on the land held for sale which was subsequently liquidated. The total aggregate impairment losses, which are presented in the consolidated statements of operations, on the inventory held for development and the land or commercial facilities held for sale were $1,801,000, $2,941,000, and $21,948,000 for the years ended October 31, 1999, 1998 and 1997, respectively. On the statement of operations the lines entitled “Homebuilding - Inventory impairment loss” and “Investment Properties - Provision for impairment loss” also include writeoffs of options including approval, engineering and capitalized interest costs. During the year ended October 31, 1999 the writeoffs amounted to $290,000 and zero, respectively. During the year ended October 31, 1998, the writeoffs amounted to $2,091,000 and zero, respectively. During the year ended October 31, 1997, the writeoffs amounted to $4,761,000 and $1,756,000, respectively. During 1999 we did not exercise an option because the community’s proforma proﬁtability did not produce an adequate return on investment commensurate with the risk. During 1998, we did not exercise three residential options because of changes in local market conditions and difﬁculties in obtaining government approvals. During 1997, we decided not to exercise three residential options due to environmental problems or the property’s proforma did not produce an adequate return on investment commensurate with the risk and one commercial property option because an anchor tenant with an acceptable credit rating could not be found. 12. Transactions With Related Parties Our Board of Directors has adopted a general policy providing that it will not make loans to our ofﬁcers or directors or their relatives at an interest rate less than the interest rate at the date of the loan on six month U.S. Treasury Bills, that the aggregate of such loans will not exceed $3,000,000 at any one time, and that such loans will be made only with the approval of the members of our Board of Directors who have no interest in the transaction. At October 31, 1999 and 1998 included in receivables, deposits and notes are related party receivables from ofﬁcers and directors amounted to $2,718,000 and $2,117,000, respectively. Interest income from these loans for October 31, 1999, 1998, and 1997 amounted to $108,000, $97,000, and $100,000, respectively. We provide property management services to various limited partnerships including one partnership in which Mr. A. Hovnanian, our Chief Executive Ofﬁcer, President and a Director, is a general partner, and members of his family and certain ofﬁcers and directors are limited partners. During the years ended October 31, 1999, 1998, and 1997 we received $80,000, $67,000, and $76,000, respectively, in fees for such management services. At October 31, 1999 and 1998, no amounts were due us by these partnerships. 40 Slide 43: Hovnanian Enterprises, Inc. and Subsidiaries 13. Stock Plans We have a stock option plan for certain ofﬁcers and key employees. Options are granted by a Committee appointed by the Board of Directors. The exercise price of all stock options must be at least equal to the fair market value of the underlying shares on the date of the grant. Options granted prior to May 14, 1998 vest in three equal installments on the ﬁrst, second and third anniversaries of the date of the grant. Options granted on or after May 14, 1998 vest in four equal installments on the third, fourth, ﬁfth and sixth anniversaries of the date of the grant. All options expire ten years after the date of the grant. In addition, during the years ended October 31, 1999 and 1997 each of the three outside directors of the Company were granted options to purchase 5,000 shares at the same price and terms as those granted to ofﬁcers and key employees. Stock option transactions are summarized as follows: .......................................... .......................................... .......................................... .......................................... October31, 1999Weighted Average Fair Value(1) and Exercise Price October31, 1998Weighted Average Fair Value(1) and Exercise Price Weighted Average Fair OctoberValue(1) and 31, 1997- Exercise Price Options outstanding at beginning of period .......... 1,415,000 Granted.......................... 171,000 Exercised........................ 10,000 Forfeited ........................ Options outstanding at end of period.................... 1,576,000 Options exercisable at end of period.................... 1,106,666 Price range of options ...... outstanding ...................... Weighted-average remaining contractual life ................. (1) $8.13 $7.87 $5.81 1,336,500291,500114,66798,3331,415,0001,013,166$5.13$11.50- $7.83 1,156,000$9.09 190,500$5.45 $9.98 10,000$8.13 1,336,5001,069,333$5.13$11.50- $8.04 $6.47 $5.81 $7.83 $8.29 $5.13$11.50 5.0 yrs. 5.4 yrs.- 5.4 yrs.- Fair value of options at grant date approximate exercise price. Pro forma information regarding net income and earnings per share is required under the fair value method of Financial Accounting Standards No. 123 (“FAS 123”) “Accounting for Stock-Based Compensation” and is to be calculated as if we had accounted for our stock options under the fair value method of FAS 123. The fair value for these options is established at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997: risk- free interest rate of 6.4%, 4.5% and 5.8%, respectively; divided yield of zero; volatility factor of the expected market price of our common stock of 0.41, 0.46 and 0.47, respectively; and a weighted-average expected life of the option of 7.7, 7.5 and 7.0 years, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics signiﬁcantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and are not likely to be representative of the effects on reported net income for future years, if applicable. 41 Slide 44: Hovnanian Enterprises, Inc. and Subsidiaries For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. Our pro forma information follows (in thousands except for earnings per share information): Year Ended .............................................................................................. .............................................................................................. October 31, 1999 October 31, 1998 October 31, 1997 Pro forma net income (loss) ............................................... Pro forma basic earnings (loss) per share ........................... Pro forma diluted earnings (loss) per share ........................ $29,851 $001.39 $001.38 $25,107 $001.15 $001.14 $(7,131) $0(0.32) $0(0.32) For the year ended October 31, 1999, we modiﬁed our bonus plan for certain associates. A portion of their bonus will be paid by issuing a deferred right to receive our Class A Common Stock. The number of shares will be calculated by dividing the portion of the bonus subject to the deferred right award by our stock price on the date the bonus is earned. 25% of the deferred right award will vest, and shares will be issued, one year after the year end and then 25% a year for the next three years. For the year ended October 31, 1999, approximately 200,000 deferred rights were awarded in lieu of $1,534,000 of bonus payments. 14. Commitments and Contingent Liabilities We are involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on us. We were involved in an action resulting from the non-performance by a land owner (the “Defendant”) to sell real property to us. We entered into a Settlement Agreement and Mutual Release (“SAMR”) relating to this action. Pursuant to the terms of the SAMR, the Defendant stipulated to a judgement in our favor in the amount of $3,535,349, which would result in a gain amounting to approximately $2,500,000. The Defendant also granted us an option to acquire the real property which was the subject of the action at a speciﬁed price in satisfaction of the judgement. In the event we do not exercise the option, we may enforce the judgement against such real property and certain other assets of the Defendant subsequent to June 30, 2000. We have not reﬂected this settlement in our ﬁnancial statements as of October 31, 1999. As of October 31, 1999 and 1998, respectively, we are obligated under various performance letters of credit amounting to $4,091,000 and $6,934,000. (See Note 5) 42 Slide 45: Hovnanian Enterprises, Inc. and Subsidiaries 15. Acquisitions On August 7, 1999 we acquired the Matzel and Mumford Organization, Inc, (“M & M”), a New Jersey homebuilder and its related entities. On October 1, 1999 we acquired the Goodman Family of Builders, L.P., (“Goodman”) a Texas homebuilder and its related entities. The combined initial purchase price for both acquisitions was approximately $21,200,000 in cash and 1,845,359 shares of our Class A Common Stock at a weighted average share price of $7.18, of which 483,302 shares are being held in escrow (and thus not reported as issued and outstanding at October 31, 1999) for pre-acquisition contingencies. At the dates of the acquisition we loaned the acquired entities approximately $85,000,000 to pay off their third party debt. The Goodman Purchase Agreement provides for an additional contingent payment equal to 75% of the Goodman pretax proﬁt, as deferred, from October 1, 1999 to December 31, 1999; this contingent payment is not included in the purchase price above but will be recorded, if any, to goodwill when the future earnings requirement has been met. In addition, both the M & M and Goodman acquisitions provide for other payments to be made generally dependent upon the achievement of certain future operating and return objectives. Both acquisitions were accounted for as a purchase with the results of operations of the acquired entities included in our consolidated ﬁnancial statements as of the dates of acquisitions. The purchase prices were allocated based on estimated fair values at the dates of the acquisitions. An intangible asset equal to the excess purchase prices over the fair values of net assets acquired of $16,422,000 is recorded in prepaid expenses and other assets on the consolidated balance sheet; this amount is being amortized on a straight-line basis over a period of ten years. The following unaudited pro forma information presents a summary of our consolidated results of operations as if the acquisitions had occurred as of November 1, 1998 and 1997 with pro forma adjustments to give effect to amortization of goodwill, additional compensation, interest expense on acquisition debt and certain other adjustments, together with related income tax effects: ................................................................................................. (In Thousands Except Per Share)................................................................... Year Ended October 31, 1999) 1998) Total Revenues .............................................................................................. Income Before Extraordinary Item ................................................................ Net Income Before Adjusting Inventories to Fair Value at the Date of Acquisition .......................................................................... Basic Earnings Per Share ............................................................................... Diluted Earnings Per Share............................................................................ $1,142,690 $00,36,859 $00,35,991 $00,001.60 $00,001.58 $1,180,964 $00,29,475 $00,28,727 $00,001.24 $00,001.23 These proforma results have been prepared for comparative purposes only and include certain adjustments including additional amortization expense as a result of goodwill, additional compensation and increased interest expense on acquisition debt. Cost of sales does not include inventory fair value adjustments at November 1, 1998 and 1997 which would reduce earnings per share. They do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect on November 1, 1997 and 1998 or of future results of operations of the consolidated entities. 43 Slide 46: Hovnanian Enterprises, Inc. and Subsidiaries 16. Unaudited Summarized Consolidated Quarterly Information Summarized quarterly ﬁnancial information for the years ended October 31, 1999 and 1998 is as follows: .............................................................................. .............................................................................. (In Thousands Except Per Share Data) ......................... October) 31, 1999) Three Months Ended July) 31, 1999) April) 30, 1999) January) 31, 1999) Revenues ................................................................... Expenses ................................................................... Income before income taxes and extraordinary loss.. State and Federal income tax .................................... Extraordinary loss from extinguishment of debt, net of income taxes....................................... Net income ............................................................... Per Share Data: Basic: Income per common share before extraordinary loss .......................................... Extraordinary loss ............................................. Net Income........................................................ Weighted average number of common shares outstanding........................... Assuming Dilution: Income per common share before extraordinary loss .......................................... Extraordinary loss ............................................. Net Income........................................................ Weighted average number of common shares outstanding........................... ................................................................................... $298,828) $284,928) $013,900) $005,015) $236,671) $222,601) $014,070) $005,592) $000(868) $007,610) $209,309 $196,840 $012,469 $005,017 $203,479 $193,301 $010,178 $004,050 $008,885) $007,452 $006,128 $0000.41) ) $0000.41) 21,726) $0000.40) $000,(.04) $0000.36) 20,979) $0000.35 $0000.35 21,266 $0000.28 $0000.28 21,512 $0000.41) $0000.41) 21,902) October) 31, 1998) $0000.40) $000,(.04) $0000.35) 21,206) July) 31, 1998) $0000.35 $0000.35 21,488 April) 30, 1998) $0000.28 $0000.28 21,725 January) 31, 1998) Three Months Ended .............................................................................. (In Thousands Except Per Share Data) ......................... Revenues ................................................................... Expenses ................................................................... Income before income taxes and extraordinary loss.. State and Federal income tax .................................... Extraordinary loss from extinguishment of debt, net of income taxes....................................... Net income .............................................................. Per Share Data: Basic: Income per common share before extraordinary loss .......................................... Extraordinary loss ............................................. Net Income........................................................ Weighted average number of common shares outstanding........................... Assuming Dilution: Income per common share before extraordinary loss .......................................... Extraordinary loss ............................................. Net Income........................................................ Weighted average number of common shares outstanding........................... $267,542) $255,268) $012,274) $004,762) $000(748) $006,764) $248,125) $235,735) $012,390) $004,677) $212,320 $204,710 $007,610 $002,597 $213,960 $204,942 $009,018 $003,105 $007,713) $005,013 $005,913 $0000.35) $000,(.03) $0000.32) 21,661) $0000.35) $0000.35) 21,785) $0000.23 $0000.23 21,848 $0000.27 $0000.27 21,834 $0000.34) $000,(.03) $0000.31) 21,896) $0000.35) $0000.35) 22,018) $0000.23 $0000.23 22,042 $0000.27 $0000.27 21,985 44 Slide 47: Hovnanian Enterprises, Inc. and Subsidiaries 17. Financial Financial Information of Subsidiary Issuer and Subsidiary Guarantors Hovnanian Enterprises, Inc., the parent company (the “Parent”) is the issuer of publicly traded common stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc., (the “Subsidiary Issuer”) was the issuer of certain Senior Notes on May 4, 1999. The Subsidiary Issuer acts as a ﬁnance and management entity that as of October 31, 1999 had issued and outstanding $100,000,000 subordinated notes, $150,000,000 senior notes and a revolving credit agreement with an outstanding balance of $70,125,000. The subordinated notes, senior notes and the revolving credit agreement are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the “Guarantor Subsidiaries”), with the exception of four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the “K. Hovnanian” trade name and a subsidiary engaged in homebuilding activity in Poland (collectively the “Nonguarantor Subsidiaries”), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the senior notes and revolving credit agreement of the Subsidiary Issuer. In lieu of providing separate audited ﬁnancial statements for the Guarantor Subsidiaries we have included the accompanying consolidated condensed ﬁnancial statements based on our understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 of the Securities and Exchange Commission’s Regulations S-X and Staff Accounting Bulletin 53. Management does not believe that separate ﬁnancial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate ﬁnancial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed ﬁnancial information presents the results of operations, ﬁnancial position and cash ﬂows of (i) the Parent (ii) the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv) the Non-guarantor Subsidiaries of the Parent and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. 45 Slide 48: Hovnanian Enterprises, Inc. and Subsidiaries Consolidating Condensed Balance Sheet October 31, 1999 ............... ........................ (Thousands of Dollars) ......... Parent Subsidiary Issuer Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations Consolidated Assets Homebuilding: Cash and cash equivalents................. $0000,47 Inventories............ ........................... Receivables, deposits, and notes....... 6 Property, plant, and equipment. ....... Prepaid expenses and other assets .... Total Homebuilding..................... Financial Services................................... Investment Properties: Held for sale. ................................... Held for investment ......................... Total Investment Properties.. ....... Collateralized Mortgage Financing ........ Income Taxes Receivable ....................... Investments in and amounts due to and from consolidated subsidiaries ........................................... Total Assets ........................................... (4,303) 53 $0(5,395) 7,979 17,417 14,734 34,735 $022,405 523,192 22,690 9,046 40,537 617,870 (4,807) 665 11,539 12,204 $ 00106 3,929 37 37 4,109 41,730 $0000000, $ 17,163 527,121 30,675 26,500 55,308 656,767 36,923) 665 11,539 12,204 5,244 (374) 8,562 (2,162) 5,244 1,723 240,676 $236,426 304,811 $339,172 (305,942) $327,887 2,252 $51,173 (241,797) $(241,797) $712,861 Liabilities Homebuilding: Accounts payable and other liabilities........ ................................ $0,00000 Customers’ deposits...... .................... Nonrecourse mortgages..................... Total Homebuilding..................... Financial Services................................... Investment Properties ............................ Collateralized Mortgage Financing ........ Notes Payable........................................ Total Liabilities ............................ Stockholders’ Equity.............................. 236,426 $007,060 $065,930 25,351 10,069 101,350 495 932 $000,67 296 363 30,757 3,699 $0000000, $073,057 25,647 10,069 108,773 31,252 932 3,699 331,779 476,435 7,060 331,491 338,551 621 $339,172 288 103,065 224,822 $327,887 34,819 16,354 $51,173 (241,797) $(241,797) 236,426 $712,861 Total Liabilities and Stockholders’ Equity........................... $236,426 46 Slide 49: Hovnanian Enterprises, Inc. and Subsidiaries Consolidating Condensed Balance Sheet October 31, 1998 ............... ........................ (Thousands of Dollars) .................. Parent Subsidiary Issuer Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations Consolidated Assets Homebuilding: Cash and cash equivalents................. Inventories......................................... Receivables, deposits, and notes........ Property, plant, and equipment ......... Prepaid expenses and other assets ..... Total Homebuilding..................... Financial Services................................... Investment Properties: Held for sale .................................... Held for investment. ........................ Total Investment Properties ......... Collateralized Mortgage Financing ........ Income Taxes Receivables-Including deferred tax beneﬁts ............................. Investments in and amounts due to and from consolidated subsidiaries ........................................... Total Assets ........................................... Liabilities Homebuilding: Accounts payable and other liabilities................... ........................... Customers’ deposits.............................. Nonrecourse mortgages ........................ Total Homebuilding ............................ Financial Services................................... Investment Properties ............................ Collateralized Mortgage Financing ........ Notes Payable........................................ Total Liabilities........................... Stockholders’ Equity.............................. Total Liabilities and Stockholders’ Equity........................... $0000,14 $0,(9,660) 2,618 10,180 9,931 13,069 187 201 $021,732 373,364 26,872 6,627 22,530 451,125 1,461 18,127 12,424 30,551 $01,220 2,369 24 2 3,615 75,353 $0000000 $013,306 375,733 29,490 16,831 32,650 468,010 76,814 18,127 12,424 30,551 6,396 41 382 8,419 (1,511) 6,396 7,331 201,150 $201,392 210,648 $224,099 (236,457) $255,099 7,941 $91,794 (183,282) $(183,282) $589,102 $000000, $005,908 $047,636 23,367 15,616 86,619 677 1,373 $00,221 490 711 68,411 5,658 $0000000 $053,765 23,857 15,616 93,238 69,088 1,373 5,658 218,353 387,710 005,908 218,182 224,090 201,392 $201,392 9 $224,099 171 88,840 166,259 $255,099 74,780 17,014 $91,794 (183,282) $(183,282) 201,392 $589,102 47 Slide 50: Hovnanian Enterprises, Inc. and Subsidiaries Consolidating Condensed Statement of Operations Twelve Months Ended October 31, 1999 ............... ........................ (Thousands of Dollars) .................... Parent) Subsidiary Issuer Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations) Consolidated) Revenues: Homebuilding .................................... Financial Services ............................... Investment Properties ......................... Collateralized Mortgage Financing..... Intercompany Charges........................ Equity In Pretax Income of Consolidated Subsidiaries................. Total Revenues................................ Expenses: Homebuilding .................................... Financial Services ............................... Investment Properties ......................... Collateralized Mortgage Financing..... Corporate General and Administration ................................... Interest ............................................... Other Operations ............................... Total Expenses ................................ Income (Loss) Before Income Taxes....... State and Federal Income Taxes............. Extraordinary Loss.. .............................. Net Income (Loss) ................................. $00(159) $1,120) $922,639 3,561 2,757 72 $22,767 16,678 519 $(20,405) (1,190) (91,767) (50,776) $925,962) 20,239) 1,567) 519) 91,695) 50,776) 50,617) 92,815) 929,029 832,314 2,757 2,732 39,964 1,918 16,866 504 (164,138) (20,720) (428) (960) 948,287) 813,512) 19,195) 1,772) 504) 28,652) 30,343) 3,692) 897,670) 50,617) 19,674) (868) $030,075) 27,415) 60,922) 1,774) 90,111) 50,617) 19,674) (868) $30,075) 2,704) 917) (868) $0,919) 1,468 30,381 1,904 871,556 57,473 21,453 $036,020 316 14 19,618 20,346 7,771 $12,575 (231) (61,276) (83,615) (80,523) (30,141) 868) $(49,514) ˛ 48 Slide 51: Hovnanian Enterprises, Inc. and Subsidiaries Consolidating Condensed Statement of Operations Twelve Months Ended October 31, 1998 ............... ........................ (Thousands of Dollars) .................. Parent) Subsidiary) Issuer) Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations) Consolidated) Revenues: Homebuilding....................................... Financial Services.................................. Investment Properties ........................... Collateralized Mortgage Financing....... Intercompany Charges.......................... Equity In Pretax Income of Consolidated Subsidiaries.................... Total Revenues .................................... Expenses: Homebuilding....................................... Financial Services.................................. Investment Properties ........................... Collateralized Mortgage Financing....... Corporate General and Administration .................................... Interest ................................................. Other Operations ................................. Total Expenses..................................... Income (Loss) Before Income Taxes....... State and Federal Income Taxes............. Extraordinary Loss ................................ Net Income (Loss) ................................. $000000 $1,441) $902,952 3,817 12,180 3,844 $26,210 15,281 683 $(19,548) (1,069) (88,010) (41,292) $911,055) 19,098) 11,111) 683) 84,166) 41,292) 41,292) 85,607) 922,793 42,174 (149,919) 941,947) 833,470 3,049 5,179 6,219 14,165 672 (19,235) (204) (746) 820,454) 17,010) 4,433) 672) 21,048) 34,423) 2,615) 900,655) 41,292) 15,141) (748) $025,403) 20,388) 61,972) 1,680) 84,040) 41,292) 15,141) (748) $25,403) 1,567) (64) (748) $0,883) 897 34,184 921 877,700 45,093 16,315 $028,778 515 14 21,585 20,589 7,975 $12,614 (237) (62,248) (82,670) (67,249) (24,226) 748) $(42,275) 49 Slide 52: Hovnanian Enterprises, Inc. and Subsidiaries Consolidating Condensed Statement of Operations Twelve Months Ended October 31, 1997 ............... ........................ (Thousands of Dollars) .................... Parent Subsidiary Issuer Guarantor) Subsidiaries) NonGuarantor Subsidiaries Eliminations) Consolidated) Revenues: Homebuilding .................................... Financial Services ............................... Investment Properties ......................... Collateralized Mortgage Financing..... Intercompany Charges........................ Equity In Pretax Income of Consolidated Subsidiaries ............... Total Revenues .......................... Expenses: Homebuilding .................................... Financial Services ............................... Investment Properties ......................... Collateralized Mortgage Financing..... Corporate General and Administration ................................ Interest ............................................... Other Operations ............................... Total Expenses........................... Income (Loss) Before Income Taxes....... State and Federal Income Taxes............. Net Income (Loss) ................................. $000000 $0,895 $754,972) 3,090) 14,822) 7,346) $14,053 7,645 854 $(11,130) (1,065) (85,083) 12,124) $758,790) 10,735) 13,757) 854) 77,737 (12,124) (12,124) 78,632 780,230) 22,552 (85,154) 748,136) 717,637) 3,063) 21,031) 3,331 8,101 878 (10,157) (384) (676) 710,811) 10,780) 20,355) 878) 15,088) 35,775) 2,573) 796,260) (12,124) (5,154) $0(6,970) 14,671 58,870 1,951 75,492 (12,124) (5,154) $(6,970) 3,140 367 $2,773 737) 36,555) 608) 779,631) 599) (830) $001,429) 157 14 12,481 10,071 4,028 $06,043 (320) (59,807) (71,344) (13,810) (3,565) $(10,245) 50 Slide 53: Hovnanian Enterprises, Inc. and Subsidiaries Consolidating Condensed Statement of Cash Flows Twelve Months Ended October 31, 1999 ............... ........................ (Thousands of Dollars) .................... Parent) Subsidiary) Issuer) Guarantor) Subsidiaries) NonGuarantor) Subsidiaries) Eliminations Consolidated Cash Flows From Operating Activities: Net Income (loss) ............................... Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities ........... Net Cash Provided By (Used In) Operating Activities............................ Net Cash Provided By (Used In) Investing Activities ............................. Net Cash Provided By (Used In) Financing Activities ............................ Intercompany Investing and Financing Activities - Net ................................... Net Increase (Decrease) In Cash ............ Cash and Cash Equivalent Balance, Beginning of Period ............................ Cash and Cash Equivalent Balance, End of Period ..................................... $30,075) $ 919) $36,020) $12,575) $(49,514) $30,075) 15,774) 45,849) 311) 1,230) (123,977) (87,957) 63,782) 76,357) 49,514) 5,404) 35,479) (9,478) 1,868) 480) (7,130) (6,291) 106,676) (40,326) (84,597) (24,538) (39,526) 32) 14) $000,46) (94,163) 4,265) (9,660) $(5,395) 128,000) 1,585) 23,023) $24,608) 5,689) (2,071) 2,177) $0,0106) 3,811) 15,554) $19,365) 51 Slide 54: Hovnanian Enterprises, Inc. and Subsidiaries Consolidating Condensed Statement of Cash Flows Twelve Months Ended October 31, 1998 ............... ........................ (Thousands of Dollars) .................. Parent) Subsidiary) Issuer) Guarantor) Subsidiaries) NonGuarantor) Subsidiaries) Eliminations) Consolidated) Cash Flows From Operating Activities: Net Income (loss) ................................. Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities................ Net Cash Provided By (Used In) Operating Activities............................ Net Cash Provided By (Used In) Investing Activities................................ Net Cash Provided By (Used In) Financing Activities .............................. Intercompany Investing and Financing Activities - Net ..................................... Net Increase (Decrease) In Cash ............ Cash and Cash Equivalent Balance, Beginning of Period .............................. Cash and Cash Equivalent Balance, End of Period ....................................... $25,403) $00883) $28,778) $12,614) $(42,275) $25,403) (22,675) 2,728) 1,708) 2,591) 33,340) 62,118) (14,997) (2,383) 42,275) 39,651) 65,054) (1,789) 26,090) (601) 23,700) (2,773) (71,551) (26,687) 16,498) (84,513) 49) 4) 10) $000,14) 66,574) (4,175) (5,485) $(9,660) (52,355) 9,166) 13,857) $23,023) (14,268) (754) 2,931) $02,177) $000000, 4,241) 11,313) $15,554) 52 Slide 55: Hovnanian Enterprises, Inc. and Subsidiaries Consolidating Condensed Statement of Cash Flows Twelve Months Ended October 31, 1997 ............... ........................ (Thousands of Dollars) .................. Parent) Subsidiary) Issuer) Guarantor) Subsidiaries) NonGuarantor) Subsidiaries) Eliminations) Consolidated) Cash Flows From Operating Activities: Net Income (loss) ............................... Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities ........... Net Cash Provided By (Used In) Operating Activities ........................ Net Cash Provided By (Used In) Investing Activities ............................. Net Cash Provided By (Used In) Financing Activities ............................ Intercompany Investing and Financing Activities - Net ................................... Net Increase (Decrease) In Cash ............ Cash and Cash Equivalent Balance, Beginning of Period ............................ Cash and Cash Equivalent Balance, End of Period ..................................... $(6,970) $)2,773) $01,429) $6,043) $(10,245) $)(6,970) 30,787) 23,817) (121,105) (118,332) 56,498) 57,927) (163) 5,880) 10,245 (23,738) (30,708) (2,327) 3,327) (63) 937) (7,890) 55,000) (14,965) (12,224) 19,921) (15,926) 1) 9) $00010) 61,423) (4,236) (1,249) $(5,485) (50,708) (4,419) 18,276) $13,857) 5,211) (1,196) 4,127) $2,931) $000000, (9,850) 21,163) $11,313) 53 Slide 56: Hovnanian Enterprises, Inc. and Subsidiaries Independent Auditors’ Report To the Board of Directors and Stockholders of Hovnanian Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Hovnanian Enterprises, Inc. and subsidiaries as of October 31, 1999 and 1998, and the related consolidated statements of income, stockholders’ equity and cash ﬂows for each of the three years in the period ended October 31, 1999. These ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the consolidated ﬁnancial position of Hovnanian Enterprises, Inc. and subsidiaries at October 31, 1999 and 1998, and the consolidated results of their operations and their cash ﬂows for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles. Ernst & Young LLP New York, New York December 16, 1999 54 Slide 57: Hovnanian Enterprises, Inc. and Subsidiaries Board of Directors and Corporate Ofﬁcers KEVORK S. HOVNANIAN Chairman of the Board and Director ARA K. HOVNANIAN President, Chief Executive Ofﬁcer and Director ARTHUR M. GREENBAUM, ESQ. Director and Partner Greenbaum, Rowe, Smith, Ravin & Davis D E S M O N D P. M C D O N A L D Director STEPHEN D. WEINROTH Director and Partner Andersen, Weinroth and Co., L.P. PA U L W. B U C H A N A N Senior Vice President – Corporate Controller and Director WILLIAM L. CARPITELLA Senior Vice President – Organizational Development PETER S. CORSI Vice President for Quality T I M O T H Y P. M A S O N Vice President – Risk Management NANCY A. MARRAZZO Assistant Treasurer PETER S. REINHART Senior Vice President General Counsel and Director AV N I S H A R M A Vice President and Chief Information Ofﬁcer J . L A R RY S O R S B Y Senior Vice President, Treasurer, Chief Financial Ofﬁcer and Director Hovnanian Enterprises, Inc. and Subsidiaries Corporate Information Annual Meeting March 16, 2000, 10:00 a.m. American Stock Exchange 86 Trinity Place New York, New York Stock Listing Hovnanian Enterprises, Inc. Class A common stock is traded on the American Stock Exchange under symbol HOV. Form 10-K A copy of form 10-K, as ﬁled with the Securities and Exchange Commission, is available upon request to the Ofﬁce of the Controller Hovnanian Enterprises, Inc. 10 Highway 35, P.O. Box 500 Red Bank, New Jersey 07701 (732) 747-7800 Investor Relations Contact Laura A. Camisa Director of Investor Relations (732) 747-7800 Email: ir@khov.com Auditors Ernst & Young LLP 1211 Avenue of the Americas New York, New York 10036 Counsel Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017-3909 Transfer Agent and Registrar BankBoston, N.A. c/o EquiServe Limited Partnership P.O. Box 8040 Boston, MA 02266-8040 http://www.EquiServe.com Trustee First Union National Bank Corporate Trust Bond Administration 21 South Street Morristown, NJ 07960 For additional information, visit our website at http://www.khov.com Slide 58*: ® Hovnanian Enterprises, Inc. 10 Highway 35, PO Box 500 Red Bank, NJ 07701 (732) 747-7800 For additional information, visit our website at http://www.khov.com