Document:

Exhibit 4.1

 

 

K. HOVNANIAN ENTERPRISES, INC.

HOVNANIAN ENTERPRISES, INC.

AND THE OTHER GUARANTORS PARTY HERETO

61⁄2% Senior Notes due 2014

First Supplemental Indenture

Dated as of November 3, 2003

WACHOVIA BANK, NATIONAL ASSOCIATION,

as Trustee

 

 

TABLE OF CONTENTS

 

	
  Article
  1

  
	
  SCOPE OF SUPPLEMENTAL INDENTURE; GENERAL

  
	
   

  
	
  Section 1.01.

  	
  Scope of Supplemental Indenture; General

  
	
   

  
	
  ARTICLE 2

  
	
  CERTAIN DEFINITIONS

  
	
   

  
	
  Section 2.01.

  	
  Certain Definitions

  
	
  Section 2.02.

  	
  Rules of Construction

  
	
   

  
	
  Article
  3

  
	
  COVENANTS

  
	
   

  
	
  Section 3.01.

  	
  Existence

  
	
  Section 3.02.

  	
  Payment of Taxes and Other Claims

  
	
  Section 3.03.

  	
   Maintenance of Properties and Insurance

  
	
  Section 3.04.

  	
  Repurchase of Notes Upon Change of Control.

  
	
  Section 3.05.

  	
  Limitations on Indebtedness.

  
	
  Section 3.06.

  	
  Limitations on Restricted Payments.

  
	
  Section 3.07.

  	
  Limitations on Transactions with
  Affiliates.

  
	
  Section 3.08.

  	
  Limitations on Dispositions of Assets

  
	
  Section 3.09.

  	
  Offer to Purchase

  
	
  Section 3.10.

  	
  Limitations on Liens

  
	
  Section 3.11.

  	
  Limitations on Restrictions Affecting
  Restricted Subsidiaries

  
	
  Section 3.12.

  	
  Limitations on Mergers, Consolidations and
  Sales of Assets

  
	
  Section 3.13.

  	
  Reports to Holders of Notes

  
	
  Section 3.14.

  	
  Limitation of Applicability of Certain
  Covenants if Notes Rated Investment Grade.

  
	
  Section 3.15.

  	
  Applicability of Covenants Contained in the
  Base Indenture

  
	
   

  
	
  Article
  4

  
	
  Remedies

  
	
   

  
	
  Section 4.01.

  	
  Events of Default

  
	
  Section 4.02.

  	
  Additional Provisions Related to Events of
  Default

  

 

i

 

	
  Article
  5

  
	
  Guarantees;
  Release of Guarantor

  
	
   

  
	
  Section 5.01.

  	
  Unconditional Guarantees

  
	
  Section 5.02.

  	
  Release of a Guarantor

  
	
  Section 5.03.

  	
  Guarantors as “Obligors” for Provisions
  Included in the Indenture Pursuant to the Trust Indenture Act of 1939

  
	
   

  
	
  Article
  6

  
	
  Defeasance

  
	
   

  
	
  Section 6.01.

  	
  Defeasance

  
	
  Section 6.02.

  	
  Additional Provisions to Survive Legal
  Defeasance and Discharge

  
	
  Section 6.03.

  	
  Additional Covenant Defeasance

  
	
   

  
	
  Article
  7

  
	
  The
  Notes

  
	
   

  
	
  Section 7.01.

  	
  Form of Notes

  
	
  Section 7.02.

  	
  Depositary

  
	
  Section 7.03.

  	
  Certificated Notes

  
	
   

  
	
  Article
  8

  
	
  Redemption

  
	
   

  
	
  Section 8.01.

  	
  Optional Redemption

  
	
  Section 8.02.

  	
  Sinking Fund; Mandatory Redemption

  
	
  Section 8.03.

  	
  Applicability of Sections of the Base
  Indenture

  
	
   

  
	
  Article
  9

  
	
  Amendments,
  Supplements And Waivers

  
	
   

  
	
  Section 9.01.

  	
  Amendments, Supplements and Waivers

  
	
  Section 9.02.

  	
  Payments for Consents

  
	
   

  
	
  Article
  10

  
	
  Release
  Of Issuer

  
	
   

  
	
  Section 10.01.

  	
  Release of Issuer

  
	
   

  
	
  Article
  11

  
	
  Miscellaneous

  
	
   

  
	
  Section 11.01.

  	
  GOVERNING LAW

  
	
  Section 11.02.

  	
  No Adverse Interpretation of Other
  Agreements

  
				

 

ii

 

	
  Section 11.03.

  	
  Successors and Assigns

  
	
  Section 11.04.

  	
  Counterparts

  
	
  Section 11.05.

  	
  Severability

  
	
  Section 11.06.

  	
  Effect of Headings

  
	
  Section 11.07.

  	
  Conflict of Any Provision of Indenture with
  Trust Indenture Act of 1939

  
	
   

  
	
  SCHEDULE:

  
	
  1.

  	
  Guarantors

  
	
   

  
	
  EXHIBIT:

  
	
  A.

  	
  Form of Note

  
	
  B.

  	
  Form of Supplemental Indenture

  
			

 

iii

 

FIRST SUPPLEMENTAL
INDENTURE dated as of November 3, 2003 (“Supplemental
Indenture”) to the Indenture dated as of November 3, 2003 (the “Base Indenture” and as supplemented by this
Supplemental Indenture, the “Indenture”),
by and among K. HOVNANIAN ENTERPRISES, INC., a California corporation (the “Issuer”), HOVNANIAN ENTERPRISES, INC., a
Delaware Corporation (“Hovnanian”),
each of the Guarantors (as defined herein) and WACHOVIA BANK, NATIONAL
ASSOCIATION, as trustee (the “Trustee”).

 

Each party agrees as
follows for the benefit of the other party and for the equal and ratable
benefit of the holders of Notes (as defined herein):

 

WHEREAS, Hovnanian and the
Issuer have duly authorized the execution and delivery of the Base Indenture to
provide for the issuance from time to time of the Issuer’s unsecured senior
debt securities (the “Securities”)
and the Guarantees thereof to be issued in one or more series as in the
Indenture provided;

 

WHEREAS, Hovnanian, the
Issuer and the Guarantors desire and have requested the Trustee to join them in
the execution and delivery of this Supplemental Indenture in order to establish
and provide for the issuance by the Issuer of a series of Securities designated
as its 61⁄2% Senior Notes due 2014 (the “Notes”),
substantially in the form attached hereto as Exhibit A and guaranteed by
Hovnanian and the Guarantors (as defined herein), on the terms set forth
herein;

 

WHEREAS, the Issuer now
wishes to issue Notes in an aggregate principal amount of $215,000,000;

 

WHEREAS, Section 8.1 of
the Base Indenture provides that a supplemental indenture may be entered into
without the consent of the holders of any Securities by Hovnanian, the Issuer,
the Guarantors and the Trustee for such purpose provided certain conditions are
met;

 

WHEREAS, the conditions
set forth in the Indenture for the execution and delivery of this Supplemental
Indenture have been complied with; and

 

WHEREAS, all things
necessary to make this Supplemental Indenture a valid agreement of Hovnanian,
the Issuer, the Guarantors and the Trustee, in accordance with its terms, and a
valid amendment of, and supplement to, the Base Indenture have been done;

 

NOW, THEREFORE:

 

In consideration of the
premises and the purchase and acceptance of the Notes by the holders thereof
Hovnanian, the Issuer and the Guarantors mutually 

 

 

covenant and agree with the Trustee, for the
equal and ratable benefit of the holders of the Notes, that the Base Indenture
is supplemented and amended, to the extent expressed herein, as follows:

 

ARTICLE
1

Scope Of Supplemental Indenture; General

 

Section 1.01.  Scope of Supplemental Indenture;
General.  This Supplemental
Indenture supplements, and to the extent inconsistent therewith, replaces the
provisions of the Indenture, to which provisions reference is hereby made.

 

The changes, modifications
and supplements to the Indenture effected by this Supplemental Indenture shall
be applicable only with respect to, and govern the terms of, the Notes (which
shall be initially in the aggregate principal amount of $215,000,000) and shall
not apply to any other Securities that may be issued under the Indenture unless
a supplemental indenture with respect to such other Securities specifically
incorporates such changes, modifications and supplements.  Pursuant to this Supplemental Indenture,
there is hereby created and designated a series of Securities under the
Indenture entitled “61⁄2% Senior Notes due 2014.”  The Notes shall be in the form of Exhibit A hereto, the terms of
which are incorporated herein by reference. 
The Notes shall be guaranteed by Hovnanian and the Guarantors as
provided in such form and the Indenture.

 

Subject to Section 3.05
hereof, the Issuer may issue additional notes subsequent to the Issue Date
(such notes, the “Additional Notes”)
of the same series as the Notes.  In the
event that the Issuer shall issue and the Trustee shall authenticate any
Additional Notes issued under this Supplemental Indenture subsequent to the
Issue Date, the Issuer shall use its best efforts to obtain the same “CUSIP”
number for such Notes as is printed on the Notes outstanding at such time; provided, however, that if any series of
Notes issued under this Supplemental Indenture subsequent to the Issue Date is
determined, pursuant to an Opinion of Counsel in a form reasonably satisfactory
to the Trustee, to be a different class of security than the Notes outstanding
at such time for federal income tax purposes, the Issuer may obtain a “CUSIP”
number for such Notes that is different than the “CUSIP” number printed on the
Notes then outstanding. Notwithstanding the foregoing, all Notes issued under
this Supplemental Indenture shall vote and consent together on all matters as
one class, including without limitation, waivers, amendments, redemption and
Offers to Purchase, and no Notes will have the right to vote or consent as a
separate class from other Notes on any matter.

 

2

 

ARTICLE
2

Certain Definitions

 

Section 2.01.  Certain Definitions.  Section 1.1 of the Base Indenture
is hereby amended by adding the following definitions in their proper
alphabetical order which, in the event of a conflict with the definition of
terms in the Indenture, shall govern. 
Capitalized terms used but not defined herein have the meanings ascribed
to such terms in the Base Indenture.

 

“Acquired Indebtedness” means (a) with
respect to any Person that becomes a Restricted Subsidiary (or is merged into
Hovnanian, the Issuer or any Restricted Subsidiary) after the Issue Date,
Indebtedness of such Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary (or is merged into Hovnanian, the
Issuer or any Restricted Subsidiary) that was not incurred in connection with,
or in contemplation of, such Person becoming a Restricted Subsidiary (or being
merged into Hovnanian, the Issuer or any Restricted Subsidiary) and (b) with
respect to Hovnanian, the Issuer or any Restricted Subsidiary, any Indebtedness
expressly assumed by Hovnanian, the Issuer or any Restricted Subsidiary in
connection with the acquisition of any assets from another Person (other than
Hovnanian, the Issuer or any Restricted Subsidiary), which Indebtedness was not
incurred by such other Person in connection with or in contemplation of such
acquisition.  Indebtedness incurred in
connection with or in contemplation of any transaction described in clause (a)
or (b) of the preceding sentence shall be deemed to have been incurred by
Hovnanian or a Restricted Subsidiary, as the case may be, at the time such
Person becomes a Restricted Subsidiary (or is merged into Hovnanian, the Issuer
or any Restricted Subsidiary) in the case of clause (a) or at the time of the
acquisition of such assets in the case of clause (b), but shall not be deemed
Acquired Indebtedness.

 

“Additional Notes” has the meaning ascribed
to it in Article 1 hereof.

 

“Affiliate” means, when used with reference
to a specified Person any Person directly or indirectly controlling, or
controlled by or under direct or indirect common control with the Person
specified.

 

“Affiliate Transaction” has the meaning
ascribed to it in Section 3.07(a) hereof.

 

“Applicable Debt” means all Indebtedness of
Hovnanian or any of its Restricted Subsidiaries (a) under Credit Facilities or
(b) that is publicly traded (including in the Rule 144A market), including
without limitation the Issuer’s senior notes and senior subordinated notes
outstanding on the Issue Date.

 

3

 

“Asset Acquisition” means (a) an Investment
by Hovnanian, the Issuer or any Restricted Subsidiary in any other Person if,
as a result of such Investment, such Person shall become a Restricted
Subsidiary or shall be consolidated or merged with or into Hovnanian, the
Issuer or any Restricted Subsidiary or (b) the acquisition by Hovnanian, the
Issuer or any Restricted Subsidiary of the assets of any Person, which
constitute all or substantially all of the assets or of an operating unit or
line of business of such Person or which is otherwise outside the ordinary
course of business.

 

“Asset Disposition” means any sale,
transfer, conveyance, lease or other disposition (including, without
limitation, by way of merger, consolidation or sale and leaseback or sale of
shares of Capital Stock in any Subsidiary) (each, a “transaction”) by Hovnanian, the Issuer or any Restricted
Subsidiary to any Person of any Property having a Fair Market Value in any
transaction or series of related transactions of at least $5 million. The term
“Asset Disposition” shall not
include:

 

(a)                     a transaction between Hovnanian, the
Issuer and any Restricted Subsidiary or a transaction between Restricted
Subsidiaries,

 

(b)                    a transaction in the ordinary
course of business, including, without limitation, sales (directly or
indirectly), dedications and other donations to governmental authorities,
leases and sales and leasebacks of (i) homes, improved land and unimproved land
and (ii) real estate (including related amenities and improvements),

 

(c)                     a transaction involving the sale of
Capital Stock of, or the disposition of assets in, an Unrestricted Subsidiary,

 

(d)                    any exchange or swap of assets of
Hovnanian, the Issuer or any Restricted Subsidiary for assets that (x) are to
be used by Hovnanian, the Issuer or any Restricted Subsidiary in the ordinary
course of its Real Estate Business and (y) have a Fair Market Value not less
than the Fair Market Value of the assets exchanged or swapped,

 

(e)                     any sale, transfer, conveyance,
lease or other disposition of assets and properties that is governed by Section
3.12 hereof, or

 

(f)                       dispositions of mortgage loans and
related assets and mortgage-backed securities in the ordinary course of a
mortgage lending business.

 

“Attributable Debt” means, with respect to
any Capitalized Lease Obligations, the capitalized amount thereof determined in
accordance with GAAP.

 

4

 

“Bankruptcy Law” means title 11 of the
United States Code, as amended, or any similar federal or state law for the
relief of debtors.

 

“Capital Stock” means, with respect to any
Person, any and all shares, interests, participations or other equivalents
(however designated) of or in such Person’s capital stock or other equity
interests, and options, rights or warrants to purchase such capital stock or
other equity interests, whether now outstanding or issued after the Issue Date,
including, without limitation, all Disqualified Stock and Preferred Stock.

 

“Capitalized Lease Obligations” of any
Person means the obligations of such Person to pay rent or other amounts under
a lease that is required to be capitalized for financial reporting purposes in
accordance with GAAP, and the amount of such obligations will be the
capitalized amount thereof determined in accordance with GAAP.

 

“Cash Equivalents” means

 

(a)                     U.S. dollars;

 

(b)                    securities issued or directly and
fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of one year or less from the date of
acquisition;

 

(c)                     certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers’ acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million;

 

(d)                    repurchase obligations with a term
of not more than seven days for underlying securities of the types described in
clauses (b) and (c) above entered into with any financial institution meeting
the qualifications specified in clause (c) above;

 

(e)                     commercial paper rated P-1, A-1 or
the equivalent thereof by Moody’s or S&P, respectively, and in each case
maturing within six months after the date of acquisition; and

 

(f)                       investments in money market funds
substantially all of the assets of which consist of securities described in the
foregoing clauses (a) through (e).

 

“Certificated Note” means a Note registered
in individual form without interest coupons.

 

5

 

“Change of Control” means

 

(a)                     any sale, lease, or other transfer
(in one transaction or a series of transactions) of all or substantially all of
the consolidated assets of Hovnanian and its Restricted Subsidiaries to any
Person (other than a Restricted Subsidiary); provided,
however, that a transaction where the holders of all classes of
Common Equity of Hovnanian immediately prior to such transaction own, directly
or indirectly, more than 50% of all classes of Common Equity of such Person
immediately after such transaction shall not be a Change of Control;

 

(b)                    a “person” or “group”
(within the meaning of Section 13(d) of the Exchange Act (other than (x)
Hovnanian or (y) the Permitted Hovnanian Holders) becomes the “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act) of Common Equity of Hovnanian representing more than
50% of the voting power of the Common Equity of Hovnanian;

 

(c)                     Continuing Directors cease to
constitute at least a majority of the Board of Directors of Hovnanian;

 

(d)                    the stockholders of Hovnanian
approve any plan or proposal for the liquidation or dissolution of Hovnanian; provided, however, that a liquidation or
dissolution of Hovnanian which is part of a transaction that does not
constitute a Change of Control under the proviso contained in clause (a) above
shall not constitute a Change of Control; or

 

(e)                     a change of control shall occur as
defined in the instrument governing any publicly traded debt securities of
Hovnanian or the Issuer which requires Hovnanian or the Issuer to repay or
repurchase such debt securities.

 

“Common Equity” of any Person means Capital
Stock of such Person that is generally entitled to (a) vote in the election of
directors of such Person or (b) if such Person is not a corporation, vote or
otherwise participate in the selection of the governing body, partners, managers
or others that will control the management or policies of such Person.

 

“Consolidated Adjusted Tangible Assets” of
Hovnanian as of any date means the Consolidated Tangible Assets of Hovnanian,
the Issuer and the Restricted Subsidiaries at the end of the fiscal quarter
immediately preceding the date less any assets securing any Non-Recourse
Indebtedness, as determined in accordance with GAAP.

 

“Consolidated Cash Flow Available for Fixed Charges”
means, for any period, Consolidated Net Income for such period plus (each to
the extent deducted in calculating such Consolidated Net Income and determined
in accordance with GAAP) the sum for such period, without duplication, of:

 

6

 

(a)                     income taxes,

 

(b)                    Consolidated Interest Expense,

 

(c)                     depreciation and amortization
expenses and other non-cash charges to earnings, and

 

(d)                    interest and financing fees and
expenses which were previously capitalized and which are amortized to cost of
sales, minus

 

all other non-cash items (other than the
receipt of notes receivable) increasing such Consolidated Net Income.

 

“Consolidated Fixed Charge Coverage Ratio”
means, with respect to any determination date, the ratio of (x) Consolidated
Cash Flow Available for Fixed Charges for the prior four full fiscal quarters
(the “Four Quarter Period”) for
which financial results have been reported immediately preceding the
determination date (the “Transaction Date”),
to (y) the aggregate Consolidated Interest Incurred for the Four Quarter
Period. For purposes of this definition, “Consolidated
Cash Flow Available for Fixed Charges” and “Consolidated Interest Incurred” shall be
calculated after giving effect on a pro
forma basis for the period of such calculation to:

 

(a)                     the incurrence or the repayment,
repurchase, defeasance or other discharge or the assumption by another Person
that is not an Affiliate (collectively, “repayment”)
of any Indebtedness of Hovnanian, the Issuer or any Restricted Subsidiary (and
the application of the proceeds thereof) giving rise to the need to make such
calculation, and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), at any time on or after the first day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the
proceeds thereof), occurred on the first day of the Four Quarter Period, except
that Indebtedness under revolving credit facilities shall be deemed to be the average
daily balance of such Indebtedness during the Four Quarter Period (as reduced
on such pro forma basis by the
application of any proceeds of the incurrence of Indebtedness giving rise to
the need to make such calculation);

 

(b)                    any Asset Disposition or Asset
Acquisition (including, without limitation, any Asset Acquisition giving rise
to the need to make such calculation as a result of Hovnanian, the Issuer or
any Restricted Subsidiary (including any Person that becomes a Restricted
Subsidiary as a result of any such Asset Acquisition) incurring Acquired
Indebtedness at any time on or after the first day of the Four Quarter Period
and on or prior to the Transaction Date), as if such Asset Disposition or Asset
Acquisition (including the incurrence or repayment of any such Indebtedness)
and the inclusion, notwithstanding clause (b) of the

 

7

 

definition of “Consolidated Net Income,” of any Consolidated Cash Flow
Available for Fixed Charges associated with such Asset Acquisition as if it
occurred on the first day of the Four Quarter Period; provided, however, that the Consolidated
Cash Flow Available for Fixed Charges associated with any Asset Acquisition
shall not be included to the extent the net income so associated would be
excluded pursuant to the definition of “Consolidated Net Income,” other than
clause (b) thereof, as if it applied to the Person or assets involved before
they were acquired; and

 

(c)                     the Consolidated Cash Flow
Available for Fixed Charges and the Consolidated Interest Incurred attributable
to discontinued operations, as determined in accordance with GAAP, shall be
excluded.

 

Furthermore, in
calculating “Consolidated Cash Flow Available for Fixed Charges” for purposes
of determining the denominator (but not the numerator) of this “Consolidated
Fixed Charge Coverage Ratio,”

 

(a)                     interest on Indebtedness in respect
of which a pro forma calculation
is required that is determined on a fluctuating basis as of the Transaction
Date (including Indebtedness actually incurred on the Transaction Date) and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date, and

 

(b)                    notwithstanding clause (a) above,
interest on such Indebtedness determined on a fluctuating basis, to the extent
such interest is covered by agreements relating to Interest Protection
Agreements, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.

 

“Consolidated Interest Expense” of Hovnanian
for any period means the Interest Expense of Hovnanian, the Issuer and the
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP.

 

“Consolidated Interest Incurred” for any
period means the Interest Incurred of Hovnanian, the Issuer and the Restricted
Subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP.

 

“Consolidated Net Income” for any period
means the aggregate net income (or loss) of Hovnanian and its Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP; provided that there will be excluded from
such net income (loss) (to the extent otherwise included therein), without
duplication:

 

8

 

(a)                     the net income (or loss) of (x) any
Unrestricted Subsidiary (other than a Mortgage Subsidiary) or (y) any Person
(other than a Restricted Subsidiary or a Mortgage Subsidiary) in which any
Person other than Hovnanian, the Issuer or any Restricted Subsidiary has an
ownership interest, except, in each case, to the extent that any such income
has actually been received by Hovnanian, the Issuer or any Restricted
Subsidiary in the form of cash dividends or similar cash distributions during
such period, which dividends or distributions are not in excess of Hovnanian’s,
the Issuer’s or such Restricted Subsidiary’s (as applicable) pro rata share of such Unrestricted
Subsidiary’s or such other Person’s net income earned during such period,

 

(b)                    except to the extent includable in
Consolidated Net Income pursuant to the foregoing clause (a), the net income
(or loss) of any Person that accrued prior to the date that (i) such Person
becomes a Restricted Subsidiary or is merged with or into or consolidated with
Hovnanian, the Issuer or any of its Restricted Subsidiaries (except, in the
case of an Unrestricted Subsidiary that is redesignated a Restricted Subsidiary
during such period, to the extent of its retained earnings from the beginning
of such period to the date of such redesignation) or (ii) the assets of such
Person are acquired by Hovnanian or any Restricted Subsidiary,

 

(c)                     the net income of any Restricted
Subsidiary to the extent that (but only so long as) the declaration or payment
of dividends or similar distributions by such Restricted Subsidiary of that
income is not permitted by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary during such period,

 

(d)                    the gains or losses, together with
any related provision for taxes, realized during such period by Hovnanian, the
Issuer or any Restricted Subsidiary resulting from (i) the acquisition of
securities, or extinguishment of Indebtedness, of Hovnanian or any Restricted
Subsidiary or (ii) any Asset Disposition by Hovnanian or any Restricted
Subsidiary,

 

(e)                     any extraordinary gain or loss
together with any related provision for taxes, realized by Hovnanian, the
Issuer or any Restricted Subsidiary, and

 

(f)                       any non-recurring expense recorded
by Hovnanian, the Issuer or any Restricted Subsidiary in connection with a
merger accounted for as a “pooling-of-interests” transaction;

 

provided, further, that for purposes of calculating
Consolidated Net Income solely as it relates to clause (iii) of Section 3.06(a)
hereof, clause (d)(ii) above shall not be applicable.

 

9

 

“Consolidated Net Worth” of any Person as of
any date means the stockholders’ equity (including any Preferred Stock that is
classified as equity under GAAP, other than Disqualified Stock) of such Person
and its Restricted Subsidiaries on a consolidated basis at the end of the
fiscal quarter immediately preceding such date, as determined in accordance
with GAAP, less any amount attributable to Unrestricted Subsidiaries.

 

“Consolidated Tangible Assets” of Hovnanian
as of any date means the total amount of assets of Hovnanian, the Issuer and
the Restricted Subsidiaries (less applicable reserves) on a consolidated basis
at the end of the fiscal quarter immediately preceding such date, as determined
in accordance with GAAP, less (a) Intangible Assets and (b) appropriate
adjustments on account of minority interests of other Persons holding equity
investments in Restricted Subsidiaries.

 

“Continuing Director” means a director who
either was a member of the Board of Directors of Hovnanian on the date of the
Indenture or who became a director of Hovnanian subsequent to such date and
whose election or nomination for election by Hovnanian’s stockholders, was duly
approved by a majority of the Continuing Directors on the Board of Directors of
Hovnanian at the time of such approval, either by a specific vote or by
approval of the proxy statement issued by Hovnanian on behalf of the entire
Board of Directors of Hovnanian in which such individual is named as nominee
for director.

 

“control” when used with respect to any
Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms “controlling”
and “controlled” have meanings
correlative to the foregoing.

 

“Credit Facilities” means, collectively,
each of the credit facilities and lines of credit of Hovnanian or one or more
Restricted Subsidiaries in existence on the Issue Date and one or more other
facilities and lines of credit among or between Hovnanian or one or more
Restricted Subsidiaries and one or more lenders pursuant to which Hovnanian or
one or more Restricted Subsidiaries may incur indebtedness for working capital
and general corporate purposes (including acquisitions), as any such facility
or line of credit may be amended, restated, supplemented or otherwise modified
from time to time, and includes any agreement extending the maturity of,
increasing the amount of, or restructuring, all or any portion of the
Indebtedness under such facility or line of credit or any successor facilities
or lines of credit and includes any facility or line of credit with one or more
lenders refinancing or replacing all or any portion of the Indebtedness under
such facility or line of credit or any successor facility or line of credit.

 

“Currency Agreement” of any Person means any
foreign exchange contract, currency swap agreement or other similar agreement
or arrangement

 

10

 

designed to protect such Person or any of its Subsidiaries against
fluctuations in currency values.

 

“Custodian” means any receiver, trustee,
assignee, liquidator or similar official under any Bankruptcy Law.

 

“Default” means any event, act or condition
that is, or after notice or the passage of time or both would be, an Event of
Default.

 

“Designation Amount” has the meaning
provided in the definition of Unrestricted Subsidiary.

 

“Disqualified Stock” means any Capital Stock
that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, (a) matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final maturity date of the Notes or (b)
is convertible into or exchangeable or exercisable for (whether at the option
of the issuer or the holder thereof) (i) debt securities or (ii) any Capital
Stock referred to in (a) above, in each case, at any time prior to the final
maturity date of the Notes; provided,
however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof (or the
holders of any security into or for which such Capital Stock is convertible,
exchangeable or exercisable) the right to require Hovnanian to repurchase or
redeem such Capital Stock upon the occurrence of a change in control occurring
prior to the final maturity date of the Notes shall not constitute Disqualified
Stock if the change in control provision applicable to such Capital Stock are
no more favorable to such holders than the provisions of Section 3.04 hereof
and such Capital Stock specifically provides that Hovnanian will not repurchase
or redeem any such Capital Stock pursuant to such provisions prior to
Hovnanian’s repurchase of the Notes as are required pursuant to Section 3.04
hereof.

 

“DTC” has the meaning ascribed to such term
in Section 7.02 hereof.

 

“Event of Default” means any event specified
as such in Section 4.01 hereof.

 

“expiration date” has the meaning ascribed
to it in Section 3.09(b) hereof.

 

“Extinguished Covenants” has the meaning
ascribed to such term in Section 3.14 hereof.

 

“Fair Market Value” means, with respect to
any asset, the price (after taking into account any liabilities relating to
such assets) that would be negotiated in an arm’s-length transaction for cash
between a willing seller and a willing and

 

11

 

able buyer, neither of which is under any compulsion to complete the
transaction, as such price is determined in good faith by the Board of
Directors of Hovnanian or a duly authorized committee thereof, as evidenced by
a resolution of such Board or committee.

 

“GAAP” or “generally accepted accounting
principles” means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on May 4, 1999.

 

“Global Note” has the meaning ascribed to
such term in Section 7.01 hereof.

 

“Global Note Holder” has the meaning
ascribed to such term in Section 7.02 hereof.

 

“guarantee” means any obligation, contingent
or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person: (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof, in whole or
in part; provided that the term
“guarantee” does not include endorsements for collection or deposit in the
ordinary course of business.  The term
“guarantee” used as a verb has a corresponding meaning.

 

“Guarantors” means (i) initially, Hovnanian
and each of the other Guarantors signatory hereto as set forth on Schedule 1
hereto, which includes each of Hovnanian’s Restricted Subsidiaries in existence
on the Issue Date, other than the Issuer, KHL, Inc. and K. Hovnanian Poland,
sp.z.o.o. and (ii) each of Hovnanian’s Subsidiaries which becomes a Guarantor
of the Notes pursuant to the provisions of this Indenture, and their
successors, in each case until released from its Guarantee pursuant to this
Indenture.

 

“Holder”, “Holder
of Securities”, “securityholder”
and similar terms mean in the case of a Note, the Person in whose name such
Note is registered in the books of the security register for the Notes.

 

12

 

“Hovnanian” has the meaning ascribed to it
in the preamble hereof and shall also refer to any successor obligor under the
Indenture.

 

“incurrence” has the meaning ascribed to it
in Section 3.05(a) hereof.

 

“Indebtedness” of any Person means, without
duplication,

 

(a)                     any liability of such Person (i)
for borrowed money or under any reimbursement obligation relating to a letter
of credit or other similar instruments (other than standby letters of credit or
similar instrument issued for the benefit of or surety, performance, completion
or payment bonds, earnest money notes or similar purpose undertakings or
indemnifications issued by, such Person in the ordinary course of business),
(ii) evidenced by a bond, note, debenture or similar instrument (including a
purchase money obligation) given in connection with the acquisition of any
businesses, properties or assets of any kind or with services incurred in
connection with capital expenditures (other than any obligation to pay a
contingent purchase price which, as of the date of incurrence thereof is not
required to be recorded as a liability in accordance with GAAP), or (iii) in
respect of Capitalized Lease Obligations (to the extent of the Attributable
Debt in respect thereof),

 

(b)                    any Indebtedness of others that
such Person has guaranteed to the extent of the guarantee, provided, however, that Indebtedness of
Hovnanian and its Restricted Subsidiaries will not include the obligations of
Hovnanian or a Restricted Subsidiary under warehouse lines of credit of
Mortgage Subsidiaries to repurchase mortgages at prices no greater than 98% of
the principal amount thereof, and upon any such purchase the excess, if any, of
the purchase price thereof over the Fair Market Value of the mortgages
acquired, will constitute Restricted Payments subject to Section 3.06 hereof,

 

(c)                     to the extent not otherwise
included, the obligations of such Person under Currency Agreements or Interest
Protection Agreements to the extent recorded as liabilities not constituting
Interest Incurred, net of amounts recorded as assets in respect of such
agreements, in accordance with GAAP, and

 

(d)                    all Indebtedness of others secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person;

 

provided, that Indebtedness shall not
include accounts payable, liabilities to trade creditors of such Person or
other accrued expenses arising in the ordinary course of business. The amount
of Indebtedness of any Person at any date shall be (i) the outstanding balance
at such date of all unconditional obligations as described above, net of any
unamortized discount to be accounted for as Interest Expense, in accordance
with GAAP, (ii) the maximum liability of such Person for any contingent
obligations under clause (a) above at such date, net of an unamortized

 

13

 

discount to be accounted for as Interest
Expense in accordance with GAAP, and (iii) in the case of clause (d) above, the
lesser of (x) the fair market value of any asset subject to a Lien securing the
Indebtedness of others on the date that the Lien attaches and (y) the amount of
the Indebtedness secured.

 

“Indenture” has the meaning ascribed to it
in the preamble hereof.

 

“Intangible Assets” of Hovnanian means all
unamortized debt discount and expense, unamortized deferred charges, goodwill,
patents, trademarks, service marks, trade names, copyrights, write-ups of
assets over their prior carrying value (other than write-ups which occurred
prior to the Issue Date and other than, in connection with the acquisition of
an asset, the write-up of the value of such asset (within one year of its
acquisition) to its fair market value in accordance with GAAP) and all other
items which would be treated as intangible on the consolidated balance sheet of
Hovnanian, the Issuer and the Restricted Subsidiaries prepared in accordance
with GAAP.

 

“Interest Expense” of any Person for any
period means, without duplication, the aggregate amount of (a) interest which,
in conformity with GAAP, would be set opposite the caption “interest expense”
or any like caption on an income statement for such Person (including, without
limitation, imputed interest included in Capitalized Lease Obligations, all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers’ acceptance financing, the net costs (but reduced by net
gains) associated with Currency Agreements and Interest Protection Agreements,
amortization of other financing fees and expenses, the interest portion of any
deferred payment obligation, amortization of discount or premium, if any, and
all other non-cash interest expense (other than interest and other charges
amortized to cost of sales), and (b) all interest actually paid by Hovnanian or
a Restricted Subsidiary under any guarantee of Indebtedness (including, without
limitation, a guarantee of principal, interest or any combination thereof) of
any Person other than Hovnanian, the Issuer or any Restricted Subsidiary during
such period; provided, that
Interest Expense shall exclude any expense associated with the complete
write-off of financing fees and expenses in connection with the repayment of
any Indebtedness.

 

“Interest Incurred” of any Person for any
period means, without duplication, the aggregate amount of (a) Interest Expense
and (b) all capitalized interest and amortized debt issuance costs.

 

“Interest Protection Agreement” of any Person
means any interest rate swap agreement, interest rate collar agreement, option
or futures contract or other similar agreement or arrangement designed to
protect such Person or any of its Subsidiaries against fluctuations in interest
rates with respect to Debt permitted to be incurred under the Indenture.

 

14

 

“Investment Grade” means, with respect to a
debt rating of the Notes, a rating of Baa3 or higher by Moody’s together with a
rating of BBB- or higher by S&P or, in the event S&P or Moody’s or both
shall cease rating the Notes (for reasons outside the control of Hovnanian or
the Issuer) and Hovnanian shall select any other Rating Agency, the equivalent
of such ratings by such other Rating Agency.

 

“Investments” of any Person means (a) all
investments by such Person in any other Person in the form of loans, advances
or capital contributions, (b) all guarantees of Indebtedness or other
obligations of any other Person by such Person, (c) all purchases (or other
acquisitions for consideration) by such Person of Indebtedness, Capital Stock
or other securities of any other Person and (d) all other items that would be
classified as investments in any other Person (including, without limitation,
purchases of assets outside the ordinary course of business) on a balance sheet
of such Person prepared in accordance with GAAP.

 

“Issue Date” means November 3, 2003.

 

“Issuer” has the meaning ascribed to it in
the preamble hereof and shall also refer to any successor obligor under the
Indenture.

 

“Lien” means, with respect to any Property,
any mortgage, lien, pledge, charge, security interest or encumbrance of any
kind in respect of such Property. For purposes of this definition, a Person
shall be deemed to own, subject to a Lien, any Property which it has acquired
or holds subject to the interest of a vendor or lessor under any conditional
sale agreement, capital lease or other title retention agreement relating to
such Property.

 

“Make-Whole Amount” means, in connection with
any optional redemption of any Note pursuant to Section 8.01 hereof, the
excess, if any, of: (a) the aggregate present value as of the date of such
redemption of each dollar of principal being redeemed and the amount of
interest (exclusive of interest accrued to the redemption date) that would have
been payable in respect of such dollar if such prepayment had not been made,
determined by discounting, on a semiannual basis, such principal and interest
at the Treasury Rate (determined on the business day preceding the date of such
redemption) plus 0.5%, from the respective dates on which such principal and
interest would have been payable if such payment had not been made; over (b)
the principal amount of the Note being redeemed.

 

“Marketable Securities” means (a) equity
securities that are listed on the New York Stock Exchange, the American Stock
Exchange or The Nasdaq National Market and (b) debt securities that are rated
by a nationally recognized rating agency, listed on the New York Stock Exchange
or the American Stock Exchange or covered by at least two reputable market
makers.

 

15

 

“Moody’s” means Moody’s Investors Service,
Inc. or any successor to its debt rating business.

 

“Mortgage Subsidiary” means any Subsidiary
of Hovnanian substantially all of whose operations consist of the mortgage
lending business.

 

“Net Cash Proceeds” means with respect to an
Asset Disposition, cash payments received (including any cash payments received
by way of deferred payment of principal pursuant to a note or installment
receivable or otherwise (including any cash received upon sale or disposition
of such note or receivable), but only as and when received), excluding any
other consideration received in the form of assumption by the acquiring Person
of Indebtedness or other obligations relating to the Property disposed of in
such Asset Disposition or received in any other non-cash form unless and until
such non-cash consideration is converted into cash therefrom, in each case, net
of all legal, title and recording tax expenses, commissions and other fees and
expenses incurred, and all federal, state and local taxes required to be
accrued as a liability under GAAP as a consequence of such Asset Disposition,
and in each case net of a reasonable reserve for the after-tax cost of any
indemnification or other payments (fixed and contingent) attributable to the
seller’s indemnities or other obligations to the purchaser undertaken by
Hovnanian, the Issuer or any of its Restricted Subsidiaries in connection with
such Asset Disposition, and net of all payments made on any Indebtedness which
is secured by or relates to such Property, in accordance with the terms of any
Lien or agreement upon or with respect to such Property or which must by its
terms or by applicable law be repaid out of the proceeds from such Asset
Disposition, and net of all contractually required distributions and payments
made to minority interest holders in Restricted Subsidiaries or joint ventures
as a result of such Asset Disposition.

 

“Non-Recourse Indebtedness” with respect to
any Person means Indebtedness of such Person for which (a) the sole legal
recourse for collection of principal and interest on such Indebtedness is
against the specific property identified in the instruments evidencing or
securing such Indebtedness and such property was acquired with the proceeds of
such Indebtedness or such Indebtedness was incurred within 90 days after the
acquisition of such property and (b) no other assets of such Person may be
realized upon in collection of principal or interest on such Indebtedness.
Indebtedness which is otherwise Non-Recourse Indebtedness will not lose its
character as Non-Recourse Indebtedness because there is recourse to the
borrower, any guarantor or any other Person for (i) environmental warranties
and indemnities, or (ii) indemnities for and liabilities arising from fraud,
misrepresentation, misapplication or non-payment of rents, profits, insurance
and condemnation proceeds and other sums actually received by the borrower from
secured assets to be paid to the lender, waste and mechanics’ liens.

 

16

 

“Notes” has the meaning ascribed to it in
the preamble hereof.

 

“Offer” has the meaning ascribed to it in
Section 3.09(a) hereof.

 

“Offer to Purchase” has the meaning ascribed
to it in Section 3.09(a) hereof.

 

“Paying Agent” refers to a Person engaged to
perform the obligations of the Trustee in respect of payments made or funds
held hereunder in respect of the Notes.

 

“Permitted Hovnanian Holders” means,
collectively, Kevork S. Hovnanian, Ara K. Hovnanian, the members of their
immediate families, the respective estates, spouses, heirs, ancestors, lineal
descendants, legatees and legal representatives of any of the foregoing and the
trustee of any bona fide trust of
which one or more of the foregoing are the sole beneficiaries or the grantors
thereof, or any entity of which any of the foregoing, individually or
collectively, beneficially own more than 50% of the Common Equity.

 

“Permitted Indebtedness” means

 

(a)                     Indebtedness under Credit
Facilities which does not exceed $590 million principal amount outstanding at
any one time;

 

(b)                    Indebtedness in respect of
obligations of Hovnanian and its Subsidiaries to the trustees under indentures
for debt securities;

 

(c)                     intercompany debt obligations of
(i) Hovnanian to the Issuer, (ii) the Issuer to Hovnanian, (iii) Hovnanian or
the Issuer to any Restricted Subsidiary and (iv) any Restricted Subsidiary to
Hovnanian or the Issuer or any other Restricted Subsidiary; provided, however, that any Indebtedness
of any Restricted Subsidiary or the Issuer or Hovnanian owed to any Restricted
Subsidiary or the Issuer that ceases to be a Restricted Subsidiary shall be
deemed to be incurred and shall be treated as an incurrence for purposes of
Section 3.05(a) hereof at the time the Restricted Subsidiary in question ceases
to be a Restricted Subsidiary;

 

(d)                    Indebtedness of Hovnanian or the
Issuer or any Restricted Subsidiary under any Currency Agreements or Interest
Protection Agreements in a notional amount no greater than the payments due (at
the time the related Currency Agreement or Interest Protection Agreement is
entered into) with respect to the Indebtedness or currency being hedged;

 

(e)                     Purchase Money Indebtedness;

 

17

 

(f)                       Capitalized Lease Obligations;

 

(g)                    obligations for, pledge of assets
in respect of, and guaranties of, bond financings of political subdivisions or
enterprises thereof in the ordinary course of business;

 

(h)                    Indebtedness secured only by office
buildings owned or occupied by Hovnanian or any Restricted Subsidiary, which
Indebtedness does not exceed $10 million aggregate principal amount outstanding
at any one time;

 

(i)                        Indebtedness under warehouse lines
of credit, repurchase agreements and Indebtedness secured by mortgage loans and
related assets of mortgage lending Subsidiaries in the ordinary course of a
mortgage lending business; and

 

(j)                        Indebtedness of Hovnanian or any
Restricted Subsidiary which, together with all other Indebtedness under this
clause (j), does not exceed $50 million aggregate principal amount outstanding
at any one time.

 

“Permitted Investment” means

 

(a)                     Cash Equivalents;

 

(b)                    any Investment in Hovnanian, the
Issuer or any Restricted Subsidiary or any Person that becomes a Restricted
Subsidiary as a result of such Investment or that is consolidated or merged
with or into, or transfers all or substantially all of the assets of it or an operating
unit or line of business to, Hovnanian or a Restricted Subsidiary;

 

(c)                     any receivables, loans or other
consideration taken by Hovnanian, the Issuer or any Restricted Subsidiary in
connection with any asset sale otherwise permitted by the Indenture;

 

(d)                    Investments received in connection
with any bankruptcy or reorganization proceeding, or as a result of
foreclosure, perfection or enforcement of any Lien or any judgment or
settlement of any Person in exchange for or satisfaction of Indebtedness or
other obligations or other property received from such Person, or for other
liabilities or obligations of such Person created, in accordance with the terms
of the Indenture;

 

(e)                     Investments in Currency Agreements
or Interest Protection Agreements described in the definition of Permitted
Indebtedness;

 

(f)                       any loan or advance to an executive
officer, director or employee of Hovnanian or any Restricted Subsidiary made in
the ordinary course of

 

18

 

business or in accordance with past practice; provided, however, that any such loan or
advance exceeding $1 million shall have been approved by the Board of Directors
of Hovnanian or a committee thereof consisting of disinterested members;

 

(g)                    Investments in joint ventures in a
Real Estate Business with unaffiliated third parties in an aggregate amount at
any time outstanding not to exceed 10% of Consolidated Tangible Assets at such
time;

 

(h)                    Investments in interests in
issuances of collateralized mortgage obligations, mortgages, mortgage loan
servicing, or other mortgage related assets;

 

(i)                                     obligations of Hovnanian or a
Restricted Subsidiary under warehouse lines of credit of Mortgage Subsidiaries
to repurchase mortgages; and

 

(j)                        Investments in an aggregate amount
outstanding not to exceed $10 million.

 

“Permitted Liens” means

 

(a)                     Liens for taxes, assessments or
governmental or quasi-government charges or claims that (i) are not yet
delinquent, (ii) are being contested in good faith by appropriate proceedings
and as to which appropriate reserves have been established or other provisions
have been made in accordance with GAAP, if required, or (iii) encumber solely
property abandoned or in the process of being abandoned,

 

(b)                    statutory Liens of landlords and
carriers’, warehousemen’s, mechanics’, suppliers’, materialmen’s, repairmen’s
or other Liens imposed by law and arising in the ordinary course of business
and with respect to amounts that, to the extent applicable, either (i) are not
yet delinquent or (ii) are being contested in good faith by appropriate
proceedings and as to which appropriate reserves have been established or other
provisions have been made in accordance with GAAP, if required,

 

(c)                     Liens (other than any Lien imposed
by the Employer Retirement Income Security Act of 1974, as amended) incurred or
deposits made in the ordinary course of business in connection with workers’
compensation, unemployment insurance and other types of social security,

 

(d)                    Liens incurred or deposits made to
secure the performance of tenders, bids, leases, statutory obligations, surety
and appeal bonds, development obligations, progress payments, government
contacts, utility services, developer’s or other obligations to make on-site or
off-site improvements and other obligations of like nature (exclusive of
obligations for the payment of borrowed

 

19

 

money but including the items referred to in the parenthetical in
clause (a)(i) of the definition of “Indebtedness”), in each case incurred in
the ordinary course of business of Hovnanian, the Issuer and the Restricted
Subsidiaries,

 

(e)                     attachment or judgment Liens not
giving rise to a Default or an Event of Default,

 

(f)                       easements, dedications, assessment
district or similar Liens in connection with municipal or special district
financing, rights-of-way, restrictions, reservations and other similar charges,
burdens, and other similar charges or encumbrances not materially interfering
with the ordinary course of business of Hovnanian, the Issuer and the
Restricted Subsidiaries,

 

(g)                    zoning restrictions, licenses,
restrictions on the use of real property or minor irregularities in title
thereto, which do not materially impair the use of such real property in the
ordinary course of business of Hovnanian, the Issuer and the Restricted
Subsidiaries,

 

(h)                    Liens securing Indebtedness
incurred pursuant to clause (h) or (i) of the definition of Permitted
Indebtedness,

 

(i)                        Liens securing Indebtedness of
Hovnanian, the Issuer or any Restricted Subsidiary permitted to be incurred
under the Indenture; provided,
that the aggregate amount of all consolidated Indebtedness of Hovnanian, the
Issuer and the Restricted Subsidiaries (including, with respect to Capitalized
Lease Obligations, the Attributable Debt in respect thereof) secured by Liens
(other than Non-Recourse Indebtedness and Indebtedness incurred pursuant to
clause (i) of the definition of Permitted Indebtedness) shall not exceed 40% of
Consolidated Adjusted Tangible Assets at any one time outstanding (after giving
effect to the incurrence of such Indebtedness and the use of the proceeds
thereof),

 

(j)                        Liens securing Non-Recourse
Indebtedness of Hovnanian, the Issuer or any Restricted Subsidiary; provided, that such Liens apply only to
the property financed out of the net proceeds of such Non-Recourse Indebtedness
within 90 days after the incurrence of such Non-Recourse Indebtedness,

 

(k)                     Liens securing Purchase Money
Indebtedness; provided that such
Liens apply only to the property acquired, constructed or improved with the
proceeds of such Purchase Money Indebtedness within 90 days after the
incurrence of such Purchase Money Indebtedness,

 

(l)                        Liens on property or assets of
Hovnanian, the Issuer or any Restricted Subsidiary securing Indebtedness of
Hovnanian, the Issuer or any Restricted Subsidiary owing to Hovnanian, the
Issuer or one or more Restricted Subsidiaries,

 

20

 

(m)                  leases or subleases granted to
others not materially interfering with the ordinary course of business of
Hovnanian and the Restricted Subsidiaries,

 

(n)                    purchase money security interests
(including, without limitation, Capitalized Lease Obligations); provided that such Liens apply only to the
Property acquired and the related Indebtedness is incurred within 90 days after
the acquisition of such Property,

 

(o)                    any right of first refusal, right
of first offer, option, contract or other agreement to sell an asset; provided that such sale is not otherwise
prohibited under the Indenture,

 

(p)                    any right of a lender or lenders to
which Hovnanian, the Issuer or a Restricted Subsidiary may be indebted to
offset against, or appropriate and apply to the payment of such, Indebtedness
any and all balances, credits, deposits, accounts or money of Hovnanian, the
Issuer or a Restricted Subsidiary with or held by such lender or lenders or its
Affiliates,

 

(q)                    any pledge or deposit of cash or
property in conjunction with obtaining surety, performance, completion or
payment bonds and letters of credit or other similar instruments or providing
earnest money obligations, escrows or similar purpose undertakings or
indemnifications in the ordinary course of business of Hovnanian, the Issuer
and the Restricted Subsidiaries,

 

(r)                       Liens for homeowner and property
owner association developments and assessments,

 

(s)                     Liens securing Refinancing
Indebtedness; provided, that such
Liens extend only to the assets securing the Indebtedness being refinanced,

 

(t)                       Liens incurred in the ordinary
course of business as security for the obligations of Hovnanian, the Issuer and
the Restricted Subsidiaries with respect to indemnification in respect of title
insurance providers,

 

(u)                    Liens on property of a Person
existing at the time such Person is merged with or into or consolidated with
Hovnanian or any Subsidiary of Hovnanian or becomes a Subsidiary of Hovnanian; provided that such Liens were in existence
prior to the contemplation of such merger or consolidation or acquisition and
do not extend to any assets other than those of the Person merged into or
consolidated with Hovnanian or the Subsidiary or acquired by Hovnanian or its
Subsidiaries,

 

(v)                    Liens on property existing at the
time of acquisition thereof by Hovnanian or any Subsidiary of Hovnanian, provided that such Liens were in existence
prior to the contemplation of such acquisition,

 

21

 

(w)                  Liens existing on the Issue Date
and any extensions, renewals or replacements thereof, and

 

(x)                      Liens on specific items of
inventory or other goods and proceeds of any Person securing such Person’s
obligations in respect of bankers’ acceptances issued or created for the
account of such Person to facilitate the purchase, shipment or storage of such
inventory or other goods.

 

“Person”
means any individual, corporation, partnership, limited liability company,
joint venture, incorporated or unincorporated association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.

 

“Preferred
Stock” of any Person means all Capital Stock of such Person which
has a preference in liquidation or with respect to the payment of dividends.

 

“Property”
of any Person means all types of real, personal, tangible, intangible or mixed
property owned by such Person, whether or not included in the most recent
consolidated balance sheet of such Person and its Subsidiaries under GAAP.

 

“purchase
amount” has the meaning ascribed to it in Section 3.09(b) hereof.

 

“purchase
date” has the meaning ascribed to it in Section 3.09(b) hereof.

 

“Purchase
Money Indebtedness” means Indebtedness of Hovnanian, the Issuer or
any Restricted Subsidiary incurred for the purpose of financing all or any part
of the purchase price, or the cost of construction or improvement, of any
property to be used in the ordinary course of business by Hovnanian, the Issuer
and the Restricted Subsidiaries; provided,
however, that (a) the aggregate principal amount of such
Indebtedness shall not exceed such purchase price or cost and (b) such
Indebtedness shall be incurred no later than 90 days after the acquisition of
such property or completion of such construction or improvement.

 

“Qualified
Stock” means Capital Stock of Hovnanian other than Disqualified
Stock.

 

“Rating
Agency” means a statistical rating agency or agencies, as the case
may be, nationally recognized in the United States and selected by Hovnanian
(as certified by a resolution of the Board of Directors of Hovnanian) which
shall be substituted for S&P or Moody’s, or both, as the case may be.

 

22

 

“Real
Estate Business” means homebuilding, housing construction, real
estate development or construction and related real estate activities,
including the provision of mortgage financing or title insurance.

 

“Refinancing
Indebtedness” means Indebtedness (to the extent not Permitted
Indebtedness) that refunds, refinances or extends any Indebtedness of
Hovnanian, the Issuer or any Restricted Subsidiary (to the extent not Permitted
Indebtedness) outstanding on the Issue Date or other Indebtedness (to the
extent not Permitted Indebtedness) permitted to be incurred by Hovnanian, the
Issuer or any Restricted Subsidiary pursuant to the terms of the Indenture, but
only to the extent that:

 

(a)                     the Refinancing Indebtedness is
subordinated, if at all, to the Notes or the Guarantees, as the case may be, to
the same extent as the Indebtedness being refunded, refinanced or extended,

 

(b)                    the Refinancing Indebtedness is
scheduled to mature either (i) no earlier than the Indebtedness being refunded,
refinanced or extended or (ii) after the maturity date of the Notes,

 

(c)                     the portion, if any, of the
Refinancing Indebtedness that is scheduled to mature on or prior to the
maturity date of the Notes has a Weighted Average Life to Maturity at the time
such Refinancing Indebtedness is incurred that is equal to or greater than the
Weighted Average Life to Maturity of the portion of the Indebtedness being
refunded, refinanced or extended that is scheduled to mature on or prior to the
maturity date of the Notes, and

 

(d)                    such Refinancing Indebtedness is in
an aggregate principal amount that is equal to or less than the aggregate
principal amount then outstanding under the Indebtedness being refunded, refinanced
or extended.

 

“Registrar”
means a Person engaged to maintain the security register for the Notes.

 

“Repurchase
Date” has the meaning ascribed to it in Section 3.04(a) hereof.

 

“Restricted
Payment” means any of the following:

 

(a)                     the declaration or payment of any
dividend or any other distribution on Capital Stock of Hovnanian, the Issuer or
any Restricted Subsidiary or any payment made to the direct or indirect holders
(in their capacities as such) of Capital Stock of Hovnanian, the Issuer or any
Restricted Subsidiary (other than (i) dividends or distributions payable solely
in Qualified

 

23

 

Stock and (ii) in the case of the Issuer or Restricted Subsidiaries,
dividends or distributions payable to Hovnanian, the Issuer or a Restricted
Subsidiary);

 

(b)                    the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of Hovnanian, the
Issuer or any Restricted Subsidiary (other than a payment made to Hovnanian,
the Issuer or any Restricted Subsidiary); and

 

(c)                     any Investment (other than any
Permitted Investment), including any Investment in an Unrestricted Subsidiary
(including by the designation of a Subsidiary of Hovnanian as an Unrestricted
Subsidiary) and any amounts paid in accordance with clause (b) of the
definition of Indebtedness.

 

“Restricted
Subsidiary” means any Subsidiary of Hovnanian which is not an
Unrestricted Subsidiary.

 

“S&P”
means Standard and Poor’s Ratings Service, a division of McGraw Hill, Inc., a
New York corporation or any successor to its debt rating business.

 

“Securities”
has the meaning ascribed to it in the preamble hereof.

 

“Significant
Subsidiary” means any Subsidiary of Hovnanian which would constitute
a “significant subsidiary” as
defined in Rule 1-02(w)(1) or (2) of Regulation S-X under the Securities Act
and the Exchange Act as in effect on the Issue Date.

 

“Subsidiary”
of any Person means any corporation or other entity of which a majority of the
Capital Stock having ordinary voting power to elect a majority of the Board of
Directors or other persons performing similar functions is at the time directly
or indirectly owned or controlled by such Person.

 

“Successor”
has the meaning ascribed to it in Section 3.12(a) hereof.

 

“Supplemental
Indenture” has the meaning ascribed to it in the preamble hereof.

 

“Treasury
Rate” means, in connection with the calculation of any Make-Whole
Amount with respect to any Note, the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity, as
compiled by and published in the most recent Federal Reserve Statistical
Release H.15 (519) that has become publicly available at least two business
days prior to the redemption date (or, if such Statistical Release is no longer
published, any publicly available source or similar market data), equal to the
then remaining maturity of the Note being prepaid.  If no maturity exactly corresponds to such maturity, yields for
the published maturities occurring prior to and after such

 

24

 

maturity most closely corresponding to such maturity shall be
calculated pursuant to the immediately preceding sentence and the Treasury Rate
shall be interpolated or extrapolated from such yields on a straight-line
basis, rounding in each of such relevant periods to the nearest month.

 

“Trustee”
means the party named in the preamble hereof until a successor replaces such
party in accordance with the applicable provisions of the Indenture and
thereafter means the successor serving hereunder.

 

“Unrestricted
Subsidiary” means any Subsidiary of Hovnanian so designated by a
resolution adopted by the Board of Directors of Hovnanian or a duly authorized
committee thereof as provided below; provided
that (a) the holders of Indebtedness thereof do not have direct or indirect
recourse against Hovnanian, the Issuer or any Restricted Subsidiary, and
neither Hovnanian, the Issuer nor any Restricted Subsidiary otherwise has
liability for, any payment obligations in respect of such Indebtedness
(including any undertaking, agreement or instrument evidencing such
Indebtedness), except, in each case, to the extent that the amount thereof
constitutes a Restricted Payment permitted by the Indenture, in the case of
Non-Recourse Indebtedness, to the extent such recourse or liability is for the
matters discussed in the last sentence of the definition of “Non-Recourse
Indebtedness,” or to the extent such Indebtedness is a guarantee by such
Subsidiary of Indebtedness of Hovnanian, the Issuer or a Restricted Subsidiary
and (b) no holder of any Indebtedness of such Subsidiary shall have a right to
declare a default on such Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity as a result of a default on
any Indebtedness of Hovnanian, the Issuer or any Restricted Subsidiary.  As of the Issue Date, the Unrestricted
Subsidiaries will be the following:

 

Athena Portfolio Investors, L.P., Brightbeach
Development, Ltd., Brighton Homes At Walden, Ltd., Brighton Homes At Walden
Management, L.L.C., Corner Of The Zone, L.L.C., Eastern Title Agency, Inc.,
Founders Title Agency, Inc., Gosling Road Development Co., Inc., Governor’s
Abstract Co., Inc., Heritage Pines, L.L.C., Hexter Fair Land Title Company I, Inc.,
Homebuyer’s Mortgage, Inc., Hovnanian Financial Services I, Inc., Hovnanian
Financial Services II, Inc., Hovnanian Financial Services IV, Inc., K.
Hovnanian At Port Imperial Urban Renewal II, L.L.C., K. Hovnanian At Port
Imperial Urban Renewal III, L.L.C., K. Hovnanian Investment Properties, Inc.,
K. Hovnanian Mortgage, Inc., K. Hovnanian Summit Homes of Pennsylvania, L.L.C.,
K. Hovnanian Venture I, L.L.C., K. Hovnanian Winward Homes, L.L.C., Kings
Crossing at Montgomery, L.L.C., Laurel Highlands, L.L.C., McKinley Court,
L.L.C., M&M At Monroe Woods, L.L.C., MM-Beachfront North I, L.L.C., New
Homebuyers Title Company, L.L.C., New Homebuyers Title Co. (Virginia) L.L.C.,
New Homebuyer’s Title, L.L.C., Paddocks, L.L.C., Parkway Development, Sovereign
Group, L.P., Pinnacle Mortgage Group, Inc., Preston

 

25

 

Grande Homes, Inc., RR Houston Developers, L.L.C., RR Houston
Development, L.P., RR Houston Investment, L.P., RR Houston Investors, L.L.C.,
Section 13 of the Hills, L.L.C., Title Group II, L.L.C., Town Homes at
Montgomery, L.L.C., 12th Street Residential, Ltd., Washington Homes at
Renaissance Plaza, L.L.C., WHI-Republic, L.L.C., and Wright Farm, L.L.C.

 

Subject to the foregoing, the Board of
Directors of Hovnanian or a duly authorized committee thereof may designate any
Subsidiary in addition to those named above to be an Unrestricted Subsidiary; provided, however, that (a) the net amount
(the “Designation Amount”) then
outstanding of all previous Investments by Hovnanian and the Restricted
Subsidiaries in such Subsidiary will be deemed to be a Restricted Payment at
the time of such designation and will reduce the amount available for
Restricted Payments under Section 3.06 hereof to the extent provided therein, (b)
Hovnanian must be permitted under Section 3.06 hereof to make the Restricted
Payment deemed to have been made pursuant to clause (a), and (c) after giving
effect to such designation, no Default or Event of Default shall have occurred
or be continuing. In accordance with the foregoing, and not in limitation
thereof, Investments made by any Person in any Subsidiary of such Person prior
to such Person’s merger with Hovnanian or any Restricted Subsidiary (but not in
contemplation or anticipation of such merger) shall not be counted as an
Investment by Hovnanian or such Restricted Subsidiary if such Subsidiary of
such Person is designated as an Unrestricted Subsidiary.

 

The Board of Directors of Hovnanian or a duly
authorized committee thereof may also redesignate an Unrestricted Subsidiary to
be a Restricted Subsidiary provided, however,
that (a) the Indebtedness of such Unrestricted Subsidiary as of the date of
such redesignation could then be incurred under Section 3.05 hereof and (b)
immediately after giving effect to such redesignation and the incurrence of any
such additional Indebtedness, Hovnanian and the Restricted Subsidiaries could
incur $1.00 of additional Indebtedness under Section 3.05(a) hereof.  Any such designation or redesignation by the
Board of Directors of Hovnanian or a committee thereof will be evidenced to the
Trustee by the filing with the Trustee of a certified copy of the resolution of
the Board of Directors of Hovnanian or a committee thereof giving effect to
such designation or redesignation and an Officers’ Certificate certifying that
such designation or redesignation complied with the foregoing conditions and
setting forth the underlying calculations of such Officers’ Certificate.  The designation of any Person as an
Unrestricted Subsidiary shall be deemed to include a designation of all
Subsidiaries of such Person as Unrestricted Subsidiaries; provided, however, that the ownership of
the general partnership interest (or a similar member’s interest in a limited
liability company) by an Unrestricted Subsidiary shall not cause a Subsidiary
of Hovnanian of which more than 95% of the equity interest is held by Hovnanian
or one or more Restricted Subsidiaries to be deemed an Unrestricted Subsidiary.

 

26

 

“Weighted
Average Life to Maturity” means, when applied to any Indebtedness or
portion thereof at any date, the number of years obtained by dividing (a) the
sum of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including, without limitation, payment at final maturity, in
respect thereof, by (ii) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such payment
by (b) the sum of all such payments described in clause (a)(i) above.

 

Section 2.02.  Rules of Construction.  Unless the context otherwise requires or except as otherwise
expressly provided, an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP.

 

ARTICLE
3

Covenants

 

Section 3.01.  Existence. 
Hovnanian
and the Issuer will each do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and the existence of
each of its Restricted Subsidiaries in accordance with their respective
organizational documents, and the material rights, licenses and franchises of
Hovnanian, the Issuer and each Restricted Subsidiary, provided that Hovnanian and the Issuer are
not required to preserve any such right, license or franchise, or the existence
of any Restricted Subsidiary, if the maintenance or preservation thereof is no
longer desirable in the conduct of the business of Hovnanian and its Restricted
Subsidiaries taken as a whole; and provided
further that this Section does not prohibit any transaction
otherwise permitted by Sections 3.08 and 3.12 hereof.

 

Section 3.02.  Payment of Taxes and Other Claims.  Hovnanian will pay or discharge,
and cause each of its Subsidiaries to pay or discharge before the same become
delinquent (a) all material taxes, assessments and governmental charges levied
or imposed upon Hovnanian or any Subsidiary or its income or profits or
property, and (b) all material lawful claims for labor, materials and supplies
that, if unpaid, might by law become a Lien upon the property of Hovnanian or
any Subsidiary, other than any such tax, assessment, charge or claim the
amount, applicability or validity of which is being contested in good faith by
appropriate proceedings and for which adequate reserves have been established.

 

Section 3.03. 
Maintenance of Properties and
Insurance.(a)  Hovnanian will cause all
properties used or useful in the conduct of its business or the business of any
of its Restricted Subsidiaries to be maintained and kept in good condition,
repair and working order as in the judgment of Hovnanian may be necessary so
that the business of Hovnanian and its Restricted Subsidiaries may

 

27

 

be properly and advantageously conducted at all times; provided that nothing in this Section
prevents Hovnanian or any Restricted Subsidiary from discontinuing the use,
operation or maintenance of any of such properties or disposing of any of them,
if such discontinuance or disposal is, in the judgment of Hovnanian, desirable
in the conduct of the business of Hovnanian and its Restricted Subsidiaries
taken as a whole.

 

(b)          Hovnanian will provide or cause to
be provided, for itself and its Restricted Subsidiaries, insurance (including
appropriate self-insurance) against loss or damage of the kinds customarily
insured against by corporations similarly situated and owning like properties,
including, but not limited to, products liability insurance and public
liability insurance, with reputable insurers, in such amounts, with such
deductibles and by such methods as are customary for corporations similarly
situated in the industry in which Hovnanian and its Restricted Subsidiaries are
then conducting business.

 

Section 3.04.  Repurchase of Notes Upon Change of Control.

 

(a)           In the event that there shall occur
a Change of Control, each Holder of Notes shall have the right, at such
Holder’s option, to require the Issuer to purchase all or any part of such
Holder’s Notes on a date (the “Repurchase
Date”) that is no later than 90 days after notice of the Change of
Control, at 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the Repurchase Date.

 

(b)                    On or before the thirtieth day
after any Change of Control, the Issuer is obligated to mail or cause to be
mailed, to all Holders of record of Notes and to the Trustee a notice regarding
the Change of Control and the repurchase right.  The notice shall state the Repurchase Date, the date by which the
repurchase right must be exercised, the price for the Notes and the procedure
which the Holder must follow to exercise such right. Substantially
simultaneously with mailing of the notice, the Issuer shall cause a copy of
such notice to be published in a newspaper of general circulation in the
Borough of Manhattan, The City of New York. To exercise such right, the Holder
of such Note must deliver, at least ten days prior to the Repurchase Date,
written notice to the Issuer (or an agent designated by the Issuer for such
purpose) of the Holder’s exercise of such right, together with the Note with
respect to which the right is being exercised, duly endorsed for transfer; provided, however, that if mandated by
applicable law, a Holder may be permitted to deliver such written notice nearer
to the Repurchase Date than may be specified by the Issuer.

 

(c)                     The Issuer will comply with
applicable law, including Section 14(e) of the Exchange Act and Rule l4e-1
thereunder, if applicable, if the Issuer is required to give a notice of a
right of repurchase as a result of a Change of Control.

 

28

 

Section 3.05.  Limitations on Indebtedness.

 

(a)           Hovnanian and the Issuer will not,
and will not cause or permit any Restricted Subsidiary, directly or indirectly,
to create, incur, assume, become liable for or guarantee the payment of
(collectively, an “incurrence”)
any Indebtedness (including Acquired Indebtedness) unless, after giving effect
thereto and the application of the proceeds therefrom, the Consolidated Fixed
Charge Coverage Ratio on the date thereof would be at least 2.0 to 1.0.

 

(b)                    Notwithstanding the foregoing, the
provisions of the Indenture will not prevent the incurrence of:

 

(i)             Permitted Indebtedness,

 

(ii)          Refinancing Indebtedness,

 

(iii)       Non-Recourse Indebtedness,

 

(iv)      any Guarantee of Indebtedness
represented by the Notes, and

 

(v)         any guarantee of Indebtedness
incurred under Credit Facilities in compliance with the Indenture.

 

(c)           For purposes of determining
compliance with this covenant, in the event that an item of Indebtedness may be
incurred through the first paragraph of this covenant or by meeting the
criteria of one or more of the types of Indebtedness described in the second
paragraph of this covenant (or the definitions of the terms used therein),
Hovnanian, in its sole discretion,

 

(i)             may classify such item of
Indebtedness under and comply with either of such paragraphs (or any of such
definitions), as applicable,

 

(ii)          may classify and divide such item
of Indebtedness into more than one of such paragraphs (or definitions), as
applicable, and

 

(iii)       may elect to comply with such
paragraphs (or definitions), as applicable, in any order.

 

(d)          Hovnanian and the Issuer will not,
and will not cause or permit any Guarantor to, directly or indirectly, in any
event incur any Indebtedness that purports to be by its terms (or by the terms
of any agreement governing such Indebtedness) subordinated to any other
Indebtedness of Hovnanian or of such Guarantor, as the case may be, unless such
Indebtedness is also by its terms (or by the terms of any agreement governing
such Indebtedness) made expressly

 

29

 

subordinated to the Notes or the Guarantee of such Guarantor, as the
case may be, to the same extent and in the same manner as such Indebtedness is
subordinated to such other Indebtedness of Hovnanian or such Guarantor, as the
case may be.

 

Section 3.06.  Limitations on Restricted Payments.

 

(a)           Hovnanian and the Issuer will not,
and will not cause or permit any Restricted Subsidiary to, directly or
indirectly, make any Restricted Payment unless:

 

(i)             no Default or Event of Default
shall have occurred and be continuing at the time of or immediately after
giving effect to such Restricted Payment;

 

(ii)          immediately after giving effect to
such Restricted Payment, Hovnanian could incur at least $1.00 of Indebtedness
pursuant to Section 3.05(a) hereof; and

 

(iii)       immediately after giving effect to
such Restricted Payment, the aggregate amount of all Restricted Payments
(including the Fair Market Value of any non-cash Restricted Payment) declared
or made after May 4, 1999 does not exceed the sum of:

 

(A)                                            50% of the Consolidated Net Income
of Hovnanian on a cumulative basis during the period (taken as one accounting
period) from and including February 1, 1999 and ending on the last day of
Hovnanian’s fiscal quarter immediately preceding the date of such Restricted
Payment (or in the event such Consolidated Net Income shall be a deficit, minus
100% of such deficit), plus

 

(B)                                              100% of the aggregate net cash
proceeds of and the Fair Market Value of Property received by Hovnanian from
(1) any capital contribution to Hovnanian after February 1, 1999 or any issue
or sale after February 1, 1999 of Qualified Stock (other than to any Subsidiary
of Hovnanian) and (2) the issue or sale after February 1, 1999 of any
Indebtedness or other securities of Hovnanian convertible into or exercisable
for Qualified Stock of Hovnanian that have been so converted or exercised, as
the case may be, plus

 

(C)                                              in the case of the disposition or
repayment of any Investment constituting a Restricted Payment made after May 4,
1999, an amount (to the extent not included in the calculation of Consolidated
Net Income referred to in (A)) equal to the lesser of

 

30

 

(x) the return of capital with respect to
such Investment (including by dividend, distribution or sale of Capital Stock)
and (y) the amount of such Investment that was treated as a Restricted Payment,
in either case, less the cost of the disposition or repayment of such
Investment (to the extent not included in the calculation of Consolidated Net
Income referred to in (A)), plus

 

(D)                                             with respect to any Unrestricted
Subsidiary that is redesignated as a Restricted Subsidiary after May 4, 1999,
in accordance with the definition of Unrestricted Subsidiary (so long as the
designation of such Subsidiary as an Unrestricted Subsidiary was treated as a
Restricted Payment made after the Issue Date, and only to the extent not
included in the calculation of Consolidated Net Income referred to in (A)), an
amount equal to the lesser of (x) the proportionate interest of Hovnanian or a
Restricted Subsidiary in an amount equal to the excess of (I) the total assets
of such Subsidiary, valued on an aggregate basis at the lesser of book value
and Fair Market Value thereof, over (II) the total liabilities of such
Subsidiary, determined in accordance with GAAP, and (y) the Designation Amount
at the time of such Subsidiary’s designation as an Unrestricted Subsidiary, plus

 

(E)                                               $17 million, minus

 

(F)                                               the aggregate amount of all
Restricted Payments (other than Restricted Payments referred to in clause (iii)
of paragraph (b) below) made after February 1, 1999 through May 4, 1999.

 

(b)         Clauses (ii) and (iii) of paragraph
(a) will not prohibit:

 

(i)             the payment of any dividend within
60 days of its declaration if such dividend could have been made on the date of
its declaration without violation of the provisions of the Indenture;

 

(ii)          the repurchase, redemption or
retirement of any shares of Capital Stock of Hovnanian in exchange for, or out
of the net proceeds of the substantially concurrent sale (other than to a Subsidiary
of Hovnanian) of, other shares of Qualified Stock; and

 

(iii)       the purchase, redemption or other
acquisition, cancellation or retirement for value of Capital Stock, or options,
warrants, equity appreciation rights or other rights to purchase or acquire
Capital Stock, of Hovnanian or any Subsidiary held by officers or employees or
former officers or employees of Hovnanian or any Subsidiary (or their estates
or 

 

31

 

beneficiaries under their
estates) not to exceed $10 million in the aggregate since May 4, 1999;

 

provided, however that each Restricted Payment
described in clauses (i) and (ii) of this sentence shall be taken into account
for purposes of computing the aggregate amount of all Restricted Payments
pursuant to clause (iii) of the immediately preceding paragraph.

 

(c)          For purposes of determining the
aggregate and permitted amounts of 
Restricted Payments made, the amount of any guarantee of any Investment
in any Person that was initially treated as a Restricted Payment and which was
subsequently terminated or expired, net of any amounts paid by Hovnanian or any
Restricted Subsidiary in respect of such guarantee, shall be deducted.

 

(d)                   In determining the “Fair Market
Value of Property” for purposes of clause (iii) of paragraph (a), Property
other than cash, Cash Equivalents and Marketable Securities shall be deemed to
be equal in value to the “equity value” of the Capital Stock or other
securities issued in exchange therefor. 
The equity value of such Capital Stock or other securities shall be
equal to (i) the number of shares of Common Equity issued in the transaction
(or issuable upon conversion or exercise of the Capital Stock or other
securities issued in the transaction) multiplied by the closing sale price of
the Common Equity on its principal market on the date of the transaction (less,
in the case of Capital Stock or other securities which require the payment of
consideration at the time of conversion or exercise, the aggregate
consideration payable thereupon) or (ii) if the Common Equity is not then
traded on the New York Stock Exchange, American Stock Exchange or The Nasdaq
National Market, or if the Capital Stock or other securities issued in the
transaction do not consist of Common Equity (or Capital Stock or other
securities convertible into or exercisable for Common Equity), the value (if
more than $10 million) of such Capital Stock or other securities as determined
by a nationally recognized investment banking firm retained by the Board of
Directors of Hovnanian.

 

Section 3.07.  Limitations on Transactions with Affiliates.

 

(a)          Hovnanian and the Issuer will not,
and will not cause or permit any Restricted Subsidiary to, make any loan,
advance, guarantee or capital contribution to, or for the benefit of, or sell,
lease, transfer or otherwise dispose of any property or assets to or for the
benefit of, or purchase or lease any property or assets from, or enter into or
amend any contract, agreement or understanding with, or for the benefit of, any
Affiliate of Hovnanian or any Affiliate of any of Hovnanian’s Subsidiaries or
any holder of 10% or more of the Common Equity of Hovnanian (including any
Affiliates of such holders), in a single transaction or series of related
transactions (each, an “Affiliate Transaction”),
except for any Affiliate Transaction the terms of which are at least as
favorable as the terms

 

32

 

which could be obtained by Hovnanian, the Issuer or such Restricted
Subsidiary, as the case may be, in a comparable transaction made on an arm’s
length basis with Persons who are not such a holder, an Affiliate of such a
holder or an Affiliate of Hovnanian or any of Hovnanian’s Subsidiaries.

 

(b)                   In addition, Hovnanian and the
Issuer will not, and will not cause or permit any Restricted Subsidiary to,
enter into an Affiliate Transaction unless:

 

(i)             with respect to any such Affiliate
Transaction involving or having a value of more than $1 million, Hovnanian
shall have (x) obtained the approval of a majority of the Board of Directors of
Hovnanian and (y) either obtained the approval of a majority of Hovnanian’s
disinterested directors or obtained an opinion of a qualified independent
financial advisor to the effect that such Affiliate Transaction is fair to
Hovnanian, the Issuer or such Restricted Subsidiary, as the case may be, from a
financial point of view, and

 

(ii)          with respect to any such Affiliate
Transaction involving or having a value of more than $10 million, Hovnanian
shall have (x) obtained the approval of a majority of the Board of Directors of
Hovnanian and (y) delivered to the Trustee an opinion of a qualified
independent financial advisor to the effect that such Affiliate Transaction is
fair to Hovnanian, the Issuer or such Restricted Subsidiary, as the case may
be, from a financial point of view.

 

(c)          Notwithstanding the foregoing, an
Affiliate Transaction will not include:

 

(i)             any contract, agreement or
understanding with, or for the benefit of, or plan for the benefit of, employees
of Hovnanian or its Subsidiaries generally (in their capacities as such) that
has been approved by the Board of Directors of Hovnanian,

 

(ii)          Capital Stock issuances to
directors, officers and employees of Hovnanian or its Subsidiaries pursuant to
plans approved by the stockholders of Hovnanian,

 

(iii)       any Restricted Payment otherwise
permitted under Section 3.06 hereof,

 

(iv)      any transaction between or among
Hovnanian and one or more Restricted Subsidiaries or between or among
Restricted Subsidiaries (provided, however,
no such transaction shall involve any other Affiliate of Hovnanian (other than
an Unrestricted Subsidiary to the extent the

 

33

 

applicable amount constitutes a Restricted
Payment permitted by the Indenture)),

 

(v)         any transaction between one or more
Restricted Subsidiaries and one or more Unrestricted Subsidiaries where all of
the payments to, or other benefits conferred upon, such Unrestricted
Subsidiaries are substantially contemporaneously dividended, or otherwise
distributed or transferred without charge, to Hovnanian or a Restricted
Subsidiary,

 

(vi)      issuances, sales or other transfers
or dispositions of mortgages and collateralized mortgage obligations in the
ordinary course of business between Restricted Subsidiaries and Unrestricted
Subsidiaries of Hovnanian, and

 

(vii)   the payment of reasonable and
customary fees to, and indemnity provided on behalf of, officers, directors,
employees or consultants of Hovnanian, the Issuer or any Restricted Subsidiary.

 

Section 3.08.  Limitations on Dispositions of Assets.  (a) Hovnanian and the Issuer will
not, and will not cause or permit any Restricted Subsidiary to, make any Asset
Disposition unless (x) Hovnanian (or such Restricted Subsidiary, as the case
may be) receives consideration at the time of such Asset Disposition at least
equal to the Fair Market Value thereof, and (y) not less than 70% of the
consideration received by Hovnanian (or such Restricted Subsidiary, as the case
may be) is in the form of cash, Cash Equivalents and Marketable Securities.

 

The amount of (i) any Indebtedness (other
than any Indebtedness subordinated to the Notes) of Hovnanian or any Restricted
Subsidiary that is actually assumed by the transferee in such Asset Disposition
and (ii) the fair market value (as determined in good faith by the Board of
Directors of Hovnanian) of any property or assets received that are used or
useful in a Real Estate Business, shall be deemed to be consideration required
by clause (y) above for purposes of determining the percentage of such
consideration received by Hovnanian or the Restricted Subsidiaries.

 

(b)         The Net Cash Proceeds of an Asset
Disposition shall, within one year, at Hovnanian’s election, (1) be used by
Hovnanian or a Restricted Subsidiary in the business of the construction and
sale of homes conducted by Hovnanian and the Restricted Subsidiaries or any
other business of Hovnanian or a Restricted Subsidiary existing at the time of
such Asset Disposition or (2) to the extent not so used, be applied to make an
Offer to Purchase Notes and, if Hovnanian or a Restricted Subsidiary elects or
is required to do so repay, purchase or redeem any other unsubordinated
Indebtedness (on a pro rata basis
if the amount available for such repayment, purchase or redemption is less than
the

 

34

 

aggregate amount of (i) the principal amount of the Notes tendered in
such offer to purchase and (ii) the lesser of the principal amount, or accreted
value, of such other unsubordinated Indebtedness, plus, in each case accrued
interest to the date of repayment, purchase or redemption) at 100% of the
principal amount or accreted value thereof, as the case may be, plus accrued
and unpaid interest, if any, to the date of repurchase or repayment.

 

(c)                    Notwithstanding the foregoing, (A)
Hovnanian will not be required to apply such Net Cash Proceeds to the
repurchase of Notes in accordance with clause (2) of the preceding sentence
except to the extent that such Net Cash Proceeds, together with the aggregate
Net Cash Proceeds of prior Asset Dispositions (other than those so used) which
have not been applied in accordance with this provision and as to which no
prior Offer to Purchase shall have been made, exceed 5% of Consolidated
Tangible Assets and (B) in connection with an Asset Disposition, Hovnanian and
the Restricted Subsidiaries will not be required to comply with the
requirements of clause (y) of the first sentence of the first paragraph of this
covenant to the extent that the non-cash consideration received in connection
with such Asset Disposition, together with the sum of all non-cash
consideration received in connection with all prior Asset Dispositions that has
not yet been converted into cash, does not exceed 5% of Consolidated Tangible
Assets; provided, however, that
when any non-cash consideration is converted into cash, such cash shall
constitute Net Cash Proceeds and be subject to the preceding sentence.

 

Section
3.09.  Offer to
Purchase.  (a)An “Offer to Purchase”
means an offer by the Issuer to purchase Notes as required by the
Indenture.  An Offer to Purchase must be
made by written offer (the “offer”)
sent to the Holders.  The Issuer will
notify the Trustee at least 15 days (or such shorter period as is acceptable to
the Trustee) prior to sending the offer to Holders of its obligation to make an
Offer to Purchase, and the offer will be sent by the Issuer or, at the Issuer’s
request, by the Trustee in the name and at the expense of the Issuer.

 

(b)         The offer must include or state the
following as to the terms of the Offer to Purchase:

 

(i)             the provision of the Indenture
pursuant to which the Offer to Purchase is being made;

 

(ii)          the aggregate principal amount of
the outstanding Notes offered to be purchased by the Issuer pursuant to the
Offer to Purchase (including, if less than 100%, the manner by which such
amount has been determined pursuant to the Indenture) (the “purchase amount”);

 

(iii)       the purchase price, including the
portion thereof representing accrued interest;

 

35

 

(iv)      an expiration date (the “expiration date”) not less than 30 days or
more than 60 days after the date of the offer, and a settlement date for
purchase (the “purchase date”) not
more than five Business Days after the expiration date;

 

(v)         information concerning the business
of Hovnanian and its Subsidiaries which the Issuer in good faith believes will
enable the Holders to make an informed decision with respect to the Offer to
Purchase, at a minimum to include

 

(A)      the most recent annual and
quarterly financial statements and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for Hovnanian,

 

(B)        a description of material
developments in Hovnanian’s business subsequent to the date of the latest of
the financial statements (including a description of the events requiring the
Issuer to make the Offer to Purchase), and

 

(C)        if applicable, appropriate pro forma financial information concerning
the Offer to Purchase and the events requiring the Issuer to make the Offer to
Purchase;

 

(vi)      a Holder may tender all or any
portion of its Notes, subject to the requirement that any portion of a Note
tendered must be in a multiple of $1,000 principal amount;

 

(vii)   the place or places where Notes are
to be surrendered for tender pursuant to the Offer to Purchase;

 

(viii)        each Holder electing to tender a
Note pursuant to the offer will be required to surrender such Note at the place
or places specified in the offer prior to the close of business on the
expiration date (such Note being, if the Issuer or the Trustee so requires,
duly endorsed or accompanied by a duly executed written instrument of
transfer);

 

(ix)        interest on any Note not tendered,
or tendered but not purchased by the Issuer pursuant to the Offer to Purchase,
will continue to accrue;

 

(x)           on the purchase date the purchase
price will become due and payable on each Note accepted for purchase, and
interest on Notes purchased will cease to accrue on and after the purchase
date;

 

36

 

(xi)        Holders are entitled to withdraw
Notes tendered by giving notice, which must be received by the Issuer or the
Trustee not later than the close of business on the expiration date, setting
forth the name of the Holder, the principal amount of the tendered Notes, the
certificate number of the tendered Notes and a statement that the Holder is
withdrawing all or a portion of the tender;

 

(xii)     (A) if Notes in an aggregate
principal amount less than or equal to the purchase amount are duly tendered
and not withdrawn pursuant to the Offer to Purchase, the Issuer will purchase
all such Notes, and (B) if the Offer to Purchase is for less than all of the
outstanding Notes and Notes in an aggregate principal amount in excess of the
purchase amount are tendered and not withdrawn pursuant to the offer, the
Issuer will purchase Notes having an aggregate principal amount equal to the
purchase amount on a pro rata
basis, with adjustments so that only Notes in multiples of $1,000 principal
amount will be purchased;

 

(xiii)       if any Note is purchased in part,
new Notes equal in principal amount to the unpurchased portion of the Note will
be issued; and

 

(xiv)      if any Note contains a CUSIP or
ISIN number, no representation is being made as to the correctness of the CUSIP
or ISIN number either as printed on the Notes or as contained in the offer and
that the Holder should rely only on the other identification numbers printed on
the Notes.

 

(c)          Prior to the purchase date, the
Issuer will accept tendered Notes for purchase as required by the Offer to
Purchase and deliver to the Trustee all Notes so accepted together with an
Officers’ Certificate specifying which Notes have been accepted for purchase.  On the purchase date, the purchase price
will become due and payable on each Note accepted for purchase, and interest on
Notes purchased will cease to accrue on and after the purchase date.  The Trustee will promptly return to Holders
any Notes not accepted for purchase and send to Holders new Notes equal in
principal amount to any unpurchased portion of any Notes accepted for purchase
in part.

 

(d)                   The Issuer will comply with Rule
14e-1 under the Exchange Act and all other applicable laws in making any Offer
to Purchase, and the above procedures will be deemed modified as necessary to
permit such compliance.

 

Section 3.10. 
Limitations on Liens.  Hovnanian and the Issuer will
not, and will not cause or permit any Restricted Subsidiary to, create, incur,
assume or suffer to exist any Liens, other than Permitted Liens, on any of its
Property, or on any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, unless

 

37

 

contemporaneously therewith or prior thereto all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
obligation or liability so secured until such time as such indebtedness is no
longer secured by a Lien.

 

Section 3.11.  Limitations on Restrictions Affecting
Restricted Subsidiaries.  Hovnanian
and the Issuer will not, and will not cause or permit any Restricted Subsidiary
to, create, assume or otherwise cause or suffer to exist or become effective
any consensual encumbrance or restriction (other than encumbrances or
restrictions imposed by law or by judicial or regulatory action or by
provisions of agreements that restrict the assignability thereof) on the
ability of any Restricted Subsidiary to:

 

(a)                    pay dividends or make any other distributions
on its Capital Stock or any other interest or participation in, or measured by,
its profits, owned by Hovnanian or any other Restricted Subsidiary, or pay
interest on or principal of any Indebtedness owed to Hovnanian or any other
Restricted Subsidiary,

 

(b)                   make loans or advances to Hovnanian
or any other Restricted Subsidiary, or

 

(c)                    transfer any of its property or
assets to Hovnanian or any other Restricted Subsidiary,

 

except for:

 

(i)             encumbrances or restrictions
existing under or by reason of applicable law,

 

(ii)          contractual encumbrances or
restrictions in effect on the Issue Date and any amendments, modifications,
restatements, renewals, supplements, refundings, replacements or refinancings
thereof, provided that such
amendments, modifications, restatements, renewals, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a whole, with
respect to such dividend and other payment restrictions than those contained in
such contractual encumbrances or restrictions, as in effect on the Issue Date,

 

(iii)       any restrictions or encumbrances
arising under Acquired Indebtedness; provided
that such encumbrance or restriction applies only to either the assets that
were subject to the restriction or encumbrance at the time of the acquisition
or the obligor on such Indebtedness and its Subsidiaries prior to such
acquisition,

 

38

 

(iv)      any restrictions or encumbrances
arising in connection with Refinancing Indebtedness; provided, however, that any restrictions and encumbrances of
the type described in this clause (iv) that arise under such Refinancing
Indebtedness shall not be materially more restrictive or apply to additional
assets than those under the agreement creating or evidencing the Indebtedness
being refunded, refinanced, replaced or extended,

 

(v)         any Permitted Lien, or any other
agreement restricting the sale or other disposition of property, securing
Indebtedness permitted by the Indenture if such Permitted Lien or agreement
does not expressly restrict the ability of a Subsidiary of Hovnanian to pay
dividends or make or repay loans or advances prior to default thereunder,

 

(vi)      reasonable and customary borrowing
base covenants set forth in agreements evidencing Indebtedness otherwise
permitted by the Indenture,

 

(vii)   customary non-assignment provisions
in leases, licenses, encumbrances, contracts or similar assets entered into or
acquired in the ordinary course of business,

 

(viii)         any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition,

 

(ix)        encumbrances or restrictions
existing under or by reason of the Indenture or the Notes,

 

(x)           purchase money obligations that
impose restrictions on the property so acquired of the nature described in
clause (c) of the preceding paragraph,

 

(xi)        Liens permitted under the Indenture
securing Indebtedness that limit the right of the debtor to dispose of the
assets subject to such Lien,

 

(xii)     provisions with respect to the
disposition or distribution of assets or property in joint venture agreements,
assets sale agreements, stock sale agreements and other similar agreements,

 

(xiii)          customary provisions of any
franchise, distribution or similar agreements,

 

39

 

(xiv)     restrictions on cash or other
deposits or net worth imposed by contracts entered into in the ordinary course
of business, and

 

(xv)    any encumbrance or restrictions of
the type referred to in clauses (a), (b) or (c) of the first paragraph of this
section imposed by any amendments, modifications, restatements, renewals, supplements,
refinancings, replacements or refinancings of the contracts, instruments or
obligations referred to in clauses (i) through (xiv) of this paragraph, provided that such amendments,
modifications, restatements, renewals, supplements, refundings, replacements or
refinancings are, in the good faith judgment of Hovnanian’s Board of Directors,
no more restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment restrictions
prior to such amendment, modification, restatement, renewal, supplement,
refunding, replacement or refinancing.

 

Section 3.12. 
Limitations on Mergers,
Consolidations and Sales of Assets.  This
Section 3.12 shall replace the provisions contained in Sections 9.1 and 9.2 of
the Base Indenture in its entirety and the references to Article Nine in
Section 9.3 of the Base Indenture shall refer to this Section 3.12.  Neither the Issuer nor any Guarantor will
consolidate or merge with or into, or sell, lease, convey or otherwise dispose
of all or substantially all of its assets (including, without limitation, by
way of liquidation or dissolution), or assign any of its obligations under the
Notes, the Guarantees or the Indenture (as an entirety or substantially as an
entirety in one transaction or in a series of related transactions), to any
Person (in each case other than in a transaction in which Hovnanian, the Issuer
or a Restricted Subsidiary is the survivor of a consolidation or merger, or the
transferee in a sale, lease, conveyance or other disposition) unless:

 

(a)          the Person formed by or surviving
such consolidation or merger (if other than Hovnanian, the Issuer or the
Guarantor, as the case may be), or to which such sale, lease, conveyance or
other disposition or assignment will be made (collectively, the “Successor”), is a corporation or other
legal entity organized and existing under the laws of the United States or any
state thereof or the District of Columbia, and the Successor assumes by
supplemental indenture in a form reasonably satisfactory to the Trustee all of
the obligations of Hovnanian, the Issuer or the Guarantor, as the case may be,
under the Notes or a Guarantee, as the case may be, and the Indenture,

 

(b)         immediately after giving effect to
such transaction, no Default or Event of Default has occurred and is
continuing, and

 

(c)          immediately after giving effect to
such transaction, Hovnanian (or its Successor) could incur at least $1.00 of
Indebtedness pursuant to Section 3.05(a) hereof.

 

40

 

The foregoing provisions shall not apply to
(i) a transaction involving the sale or disposition of Capital Stock of a
Guarantor, or the consolidation or merger of a Guarantor, or the sale, lease,
conveyance or other disposition of all or substantially all of the assets of a
Guarantor, that in any such case results in such Guarantor being released from
its Guarantee pursuant to Section 5.02 hereof, or (ii) a transaction the
purpose of which is to change the state of incorporation of Hovnanian, the
Issuer or any Guarantor.

 

Section 3.13.  Reports to Holders of Notes.  In addition to the provisions set forth in Sections 4.3 and 4.4 of
the Base Indenture, in the event that Hovnanian is no longer subject to the
periodic reporting requirements of the Exchange Act, it will nonetheless
continue to file reports with the Commission and the Trustee and mail such
reports to each Holder of Notes as if it were subject to such reporting
requirements.  Regardless of whether
Hovnanian is required to furnish such reports to its stockholders pursuant to
the Exchange Act, Hovnanian will cause its consolidated financial statements
and a “Management’s Discussion and Analysis of Results of Operations and
Financial Condition” written report, similar to those that would have been
required to appear in annual or quarterly reports, to be delivered to Holders
of Notes.

 

Section 3.14.  Limitation of Applicability of Certain
Covenants if Notes Rated Investment Grade.

 

(a)          The Issuer, Hovnanian and its
Restricted Subsidiaries’ obligations to comply with the provisions of the
Indenture under this Article 3 (except for Sections 3.01, 3.02, 3.03, 3.04,
3.10, 3.12 (other than clause (c) of the first paragraph thereof), 3.13 and
3.15 hereof) will terminate (such terminated covenants, the “Extinguished Covenants”) and cease to have
any further effect from and after the first date when the Notes issued under
the Indenture are rated Investment Grade; provided
that if the Notes subsequently cease to be rated Investment Grade,
then, from and after the time the Notes cease to be rated Investment Grade, the
Issuer’s, Hovnanian’s and its Restricted Subsidiaries’ obligation to comply
with the Extinguished Covenants shall be reinstated.

 

(b)          In the event of any such reinstatement
of the obligation to comply with the Extinguished Covenants, no action taken or
omitted to be taken by the Issuer, Hovnanian or any of its Subsidiaries prior
to such reinstatement shall give rise to a Default or Event of Default under
the Indenture upon reinstatement; provided that
with respect to Restricted Payments made after any such reinstatement, the
amount of Restricted Payments made after May 4, 1999 will be calculated as
though Section 3.06 hereof had been in effect during the entire period after
such date.

 

Section 3.15.  Applicability of Covenants Contained in the
Base Indenture.  Except for
Section 3.6 of the Base Indenture (which is deleted in its entirety and

 

41

 

replaced with Section 3.10 hereof), each of the agreements and
covenants of the Issuer and/or Hovnanian, as applicable, contained in Article
Three of the Base Indenture shall apply to the Notes.

 

ARTICLE
4

Remedies

 

Section 4.01.  Events of Default.  (a)
“Event of Default” means any one
or more of the following events and this Section 4.01 (i) through (ix) replaces
Sections 5.1 (a), (b), (c), (d), (e), (f), (g) and (h) of the Base Indenture in
their entirety:

 

(i)             the failure by Hovnanian, the
Issuer and the Guarantors to pay interest on any Note when the same becomes due
and payable and the continuance of any such failure for a period of 30 days;

 

(ii)          the failure by Hovnanian, the
Issuer and the Guarantors to pay the principal or premium of any Note when the
same becomes due and payable at maturity, upon acceleration or otherwise;

 

(iii)       the failure by Hovnanian, the
Issuer or any Restricted Subsidiary to comply with any of its agreements or
covenants in, or provisions of, the Notes, the Guarantee or the Indenture and
such failure continues for the period and after the notice specified below
(except in the case of a default under Sections 3.04 and 3.12 hereof, which
will constitute Events of Default with notice but without passage of time);

 

(iv)      the acceleration of any
Indebtedness (other than Non-Recourse Indebtedness) of Hovnanian, the Issuer or
any Restricted Subsidiary that has an outstanding principal amount of $10
million or more, individually or in the aggregate, and such acceleration does
not cease to exist, or such Indebtedness is not satisfied, in either case
within 30 days after such acceleration;

 

(v)         the failure by Hovnanian, the
Issuer or any Restricted Subsidiary to make any principal or interest payment
in an amount of $10 million or more, individually or in the aggregate, in
respect of Indebtedness (other than Non-Recourse Indebtedness) of Hovnanian or
any Restricted Subsidiary within 30 days of such principal or interest becoming
due and payable (after giving effect to any applicable grace period set forth
in the documents governing such Indebtedness);

 

(vi)      a final judgment or judgments that
exceed $10 million or more, individually or in the aggregate, for the payment
of money having

 

42

 

been entered by a court or courts of
competent jurisdiction against Hovnanian, the Issuer or any of its Restricted
Subsidiaries and such judgment or judgments is not satisfied, stayed, annulled
or rescinded within 60 days of being entered;

 

(vii)   Hovnanian, the Issuer or any
Restricted Subsidiary that is a Significant Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:

 

(A)    commences a voluntary case,

 

(B)  consents to the entry of an order for relief against it in an
involuntary case,

 

(C)  consents to the appointment of a Custodian of it or for all or
substantially all of its property, or

 

(D)  makes a general assignment for the benefit of its creditors;

 

(viii)       a court of competent jurisdiction
enters an order or decree under any Bankruptcy Law that:

 

(A)      is for relief against Hovnanian,
the Issuer or any Restricted Subsidiary that is a Significant Subsidiary as
debtor in an involuntary case,

 

(B)        appoints a Custodian of Hovnanian,
the Issuer or any Restricted Subsidiary that is a Significant Subsidiary or a
Custodian for all or substantially all of the property of Hovnanian or any
Restricted Subsidiary that is a Significant Subsidiary, or

 

(C)   orders the liquidation of Hovnanian, the Issuer or any Restricted
Subsidiary that is a Significant Subsidiary,

 

and the order or decree remains unstayed and
in effect for 60 days; or

 

(ix)        any Guarantee of a Guarantor which
is a Significant Subsidiary ceases to be in full force and effect (other than
in accordance with the terms of such Guarantee and the Indenture) or is
declared null and void and unenforceable or found to be invalid or any
Guarantor denies its liability under its Guarantee (other than by reason of
release of a Guarantor from its Guarantee in accordance with the terms of the
Indenture and the Guarantee).

 

43

 

A Default as described in subclause (iii)
above will not be deemed an Event of Default until the Trustee notifies
Hovnanian, or the Holders of at least 25 percent in principal amount of the
then outstanding Notes notify Hovnanian and the Trustee, of the Default and
(except in the case of a default with respect to Sections 3.04 and 3.12 hereof)
Hovnanian does not cure the Default within 60 days after receipt of the notice.
The notice must specify the Default, demand that it be remedied and state that
the notice is a “Notice of Default.” If such a Default is cured within such
time period, it ceases.

 

(b)          The first sentence of the second
paragraph and the third paragraph in Section 5.1 of the Base Indenture is
replaced, with respect to the Notes, in its entirety with the following:

 

If an Event of Default
(other than an Event of Default with respect to Hovnanian or the Issuer
resulting from subclauses (vii) or (viii) above), shall have occurred and be
continuing under the Indenture, the Trustee by notice to Hovnanian, or the
Holders of at least 25 percent in principal amount of the Notes then
outstanding by notice to Hovnanian and the Trustee, may declare all Notes to be
due and payable immediately. Upon such declaration of acceleration, the amounts
due and payable on the Notes will be due and payable immediately. If an Event
of Default with respect to Hovnanian or the Issuer specified in subclauses
(vii) or (viii) above occurs, such an amount will ipso facto become and be immediately due and payable without
any declaration, notice or other act on the part of the Trustee and Hovnanian
or any Holder.

 

Section 4.02.  Additional Provisions Related to Events of
Default.  The provisions of
Sections 5.1 (except as specified above), 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8 and
5.9 of the Base Indenture shall apply to the Notes; provided that (x) the reference in the last paragraph of
Section 5.1 of the Base Indenture shall be to clauses (i) and (ii) of Section
4.01(a) hereof, (y) the parenthetical contained in Section 5.8 of the Base
Indenture shall be replaced with the following: “(the term ‘defaults’ for the
purposes of this Section 5.8 being hereby defined to be any default or Event of
Default as defined in the First Supplemental Indenture)” and (z) all references
contained in Section 5.8 of the Base Indenture to clause (d) shall be replaced
with the following: “clause (iii)”.  In
addition, Hovnanian is required to deliver to the Trustee prompt written notice
of the occurrence of any default or Event of Default.

 

44

 

ARTICLE
5

Guarantees; Release of Guarantor

 

Section 5.01.  Unconditional Guarantees.  (a) Hovnanian and each of the other Guarantors hereby (and will so
long, in the case of a Restricted Subsidiary, as it remains a Restricted
Subsidiary) Guarantee the Notes in accordance with the provisions of Article
Thirteen of the Base Indenture.

 

(b)          Each Guarantor, by execution
hereof, agrees to be bound by the Base Indenture, as supplemented by this
Supplemental Indenture, with respect to the Notes as if such Guarantor was a
party to both the Base Indenture and this Supplemental Indenture.

 

Each existing Restricted
Subsidiary (other than KHL, Inc., the Issuer (for so long as it remains the
Issuer) and K. Hovnanian Poland, sp.z.o.o.) will be a Guarantor.  Hovnanian is permitted to cause any
Unrestricted Subsidiary to be a Guarantor. 
If the Issuer, Hovnanian or any of its Restricted Subsidiaries acquires
or creates a Restricted Subsidiary after the Issue Date, the new Restricted
Subsidiary must (subject to Section 5.02(b) hereof) provide a Guarantee
Notation, substantially in the form of Exhibit A to the Base Indenture and
shall also execute a supplemental indenture in the form of Exhibit B hereto, and
deliver an Opinion of Counsel to the Trustee in accordance with Section 8.4 of
the Base Indenture.

 

Section 5.02.  Release of a Guarantor.  (a) If all or substantially all
of the assets of any Guarantor other than Hovnanian or all of the Capital Stock
of any Guarantor other than Hovnanian is sold (including by consolidation,
merger, issuance or otherwise) or disposed of (including by liquidation,
dissolution or otherwise) by Hovnanian or any of its Subsidiaries, or, unless
Hovnanian elects otherwise, if any Guarantor other than Hovnanian is designated
an Unrestricted Subsidiary in accordance with the terms of the Indenture, then
such Guarantor (in the event of a sale or other disposition of all of the
Capital Stock of such Guarantor or a designation as an Unrestricted Subsidiary)
or the Person acquiring such assets (in the event of a sale or other
disposition of all or substantially all of the assets of such Guarantor) shall
be deemed automatically and unconditionally released and discharged from any of
its obligations under the Indenture without any further action on the part of
the Trustee or any Holder of the Notes.

 

(b)          Upon the release of the guarantee
by a Guarantor (including, for the avoidance of doubt, the Issuer after it
ceases to be the Issuer pursuant to Article Fourteen of the Base Indenture)
other than Hovnanian under all then outstanding Applicable Debt, at any time
after the suspension of the Extinguished Covenants pursuant to Section 3.14
hereof, the Guarantee of such Guarantor under the Indenture will be released
and discharged in respect of the Notes at such time and no Restricted
Subsidiary thereafter acquired or created will be required to be a Guarantor in
respect of the Notes; provided that
the foregoing shall not

 

45

 

apply to any release of any Guarantor done in contemplation of, or in
connection with, any cessation of the Notes being rated Investment Grade. In
the event that (i) any such released Guarantor thereafter guarantees any Applicable
Debt (or if any released guarantee under any Applicable Debt is reinstated or
renewed) or (ii) the Extinguished Covenants cease to be suspended pursuant to
Section 3.14 hereof then any such released Guarantor and any other Restricted
Subsidiary of Hovnanian then existing (other than the Restricted Subsidiaries
named in Section 5.01(b) hereof) will Guarantee the Notes on the terms and
conditions set forth in the Indenture. 
For purposes of this clause (b), Applicable Debt secured by a Lien on
such Restricted Subsidiary’s Property or issued by such Restricted Subsidiary
shall be deemed guaranteed by such Restricted Subsidiary.

 

(c)                     An Unrestricted Subsidiary that is
a Guarantor shall be deemed automatically and unconditionally released and
discharged from all obligations under its Guarantee upon notice from Hovnanian
to the Trustee to such effect, without any further action required on the part
of the Trustee or any Holder.

 

Section 5.03.  Guarantors as “obligors” for Provisions
Included in the Indenture Pursuant to the Trust Indenture Act of 1939.  Each provision included in the
Indenture which is required to be included by any of Sections 310 to 317 of the
Trust Indenture Act of 1939, inclusive, or is deemed applicable to the
Indenture by virtue of the provisions of the Trust Indenture Act of 1939, and
which applies to an “obligor,” as that term is defined under the Trust
Indenture Act of 1939, shall apply to each of the Guarantors.

 

ARTICLE
6

Defeasance

 

Section 6.01.  Defeasance. 
The provisions of Article Ten of the Base Indenture shall
apply to the Notes in their entirety; provided,
that the “obligations” referred to in each of Section 10.2 and Section 10.3 of
the Base Indenture will also apply to the “obligations” of Hovnanian and the
Guarantors with respect to their Guarantees in the case of Section 10.2 of the
Base Indenture and with respect to the covenants and events of default
specified herein in the case of Section 10.3 of the Base Indenture.

 

Section 6.02.  Additional Provisions to Survive Legal
Defeasance and Discharge.  Section
10.2 of the Base Indenture is hereby amended to (x) delete the “and” following
clause (c) and before clause (d) of such section and to replace it with “;” and
(y) add the following clauses (e) and (f) to the end of such section, “(e) the
rights of registration of transfer and exchange of the Notes; and (f) the
rights of Holders of Notes that are beneficiaries with respect to property so
deposited with the Trustee payable to all or any of them”.

 

46

 

Section 6.03.  Additional Covenant Defeasance.  In addition to the “obligations”
referred to in Section 10.3 of the Base Indenture, “Covenant Defeasance”, as
defined in such Section, will also apply to the release of obligations of the
Issuer, Hovnanian and the Guarantors set forth in Section 3.04 through 3.11
hereof, inclusive and clause (c) of Section 3.12 hereof, Section 5.01 hereof
and each Guarantor’s obligations under its Guarantee Notation and clauses (iii)
(with respect to the covenants so defeased), (iv), (v), (vi) and (ix) of
Section 4.01 hereof will no longer constitute Events of Default.

 

ARTICLE
7

The Notes

 

Section 7.01.  Form of Notes.  The
Notes will be issued as Global Securities in the form of Exhibit A hereto (the
“Global Note”).  The terms of such Notes are herein
incorporated by reference and are part of this Supplemental Indenture.

 

Section 7.02.  Depositary. 
The Depositary for the Global Note will initially be The
Depositary Trust Company (“DTC”)
and the Global Note will be deposited on or about the Issue Date with, or on
behalf of, DTC and registered in the name of Cede & Co., as nominee of DTC
(such nominee being referred to herein as the “Global Note Holder”).

 

Section 7.03.  Certificated Notes.  In addition to the provisions set forth in Section 2.8 of the Base
Indenture, any Person having a beneficial interest in the Global Note may, upon
request to the Trustee, exchange such beneficial interest for Notes in the form
of Certificated Notes.  Upon any such
issuance, the Trustee is required to register such Certificated Notes in the
name of, and cause the same to be delivered to, such Person or Persons (or the
nominee of any thereof).

 

ARTICLE
8

Redemption

 

Section 8.01.  Optional Redemption.  The Notes will be redeemable, in
whole, at any time, or in part, from time to time, at the option of the Issuer
upon not less than 30 nor more than 60 days’ notice at a redemption price equal
to the sum of:

 

(a)                     100% of the principal amount
thereof, plus accrued and unpaid interest thereon to the redemption date; plus

 

(b)                    the Make-Whole Amount.

 

47

 

The Trustee shall have no
responsibility in connection with the calculation of such redemption price.

 

Section 8.02.  Sinking Fund; Mandatory Redemption.  There is no sinking fund for, or
mandatory redemption of, the Notes.

 

Section 8.03.  Applicability of Sections of the Base
Indenture.  The provisions of
Sections 12.2, 12.3 and 12.4 of the Base Indenture in respect of the Notes
shall apply to any optional redemption of the Notes.  Section 12.5 of the Base Indenture shall not so apply.

 

ARTICLE
9

Amendments, Supplements And Waivers

 

Section 9.01.  Amendments, Supplements and Waivers.  The Issuer, Hovnanian, the
Guarantors and the Trustee may amend, supplement or waive the Indenture, the
Guarantees or the Notes as provided in Article Eight of the Base Indenture; provided that, in addition to the
provisions of Section 8.2 of the Base Indenture, no amendment, supplement or
waiver shall, without the consent of each Holder affected: (i) alter the
provisions (including related definitions) set forth in Article 8 hereof or
Section 3.04 or 3.08 hereof; or (ii) release any Guarantor from any of its
obligations under its Guarantee or the Indenture otherwise than in accordance
with the Indenture.

 

Section 9.02. 
Payments for Consents.  Neither the Issuer, Hovnanian nor
any of its Subsidiaries or Affiliates may, directly or indirectly, pay or cause
to be paid any consideration, whether by way of interest, fee or otherwise, to
any Holder for or as an inducement to any consent, waiver or amendment of any
of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that consent, waive or agree to amend such term or provision within the
time period set forth in the solicitation documents relating to the consent,
waiver or amendment.

 

ARTICLE
10

Release Of Issuer

 

Section 10.01. 
Release of Issuer.  The Issuer may be released from
its obligations under the Indenture and the Notes in accordance with the
provisions of Article Fourteen of the Base Indenture and the following is added
at the end of clause (3) of Article Fourteen thereof: “until such time, if any,
as such Guarantee may be released pursuant to Section 5.02 hereof”.

 

48

 

ARTICLE
11

Miscellaneous

 

Section 11.01.  GOVERNING LAW.  THIS SUPPLEMENTAL INDENTURE, THE NOTES AND EACH
GUARANTEE SHALL BE DEEMED TO BE A CONTRACT UNDER THE LAWS OF THE STATE OF NEW
YORK AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF SUCH STATE.

 

Section 11.02. 
No Adverse Interpretation of Other
Agreements.  This
Supplemental Indenture may not be used to interpret another indenture or loan
or debt agreement of Hovnanian, the Issuer or any subsidiary of Hovnanian.  Any such indenture or loan or debt agreement
may not be used to interpret this Supplemental Indenture.

 

Section 11.03.  Successors and Assigns.  All covenants and agreements of
the Issuer, Hovnanian and the Guarantors in this Supplemental Indenture and the
Notes shall bind their respective successors and assigns and inure to the
benefit of their respective successors and assigns.  All agreements of the Trustee in this Supplemental Indenture
shall bind its successors and assigns and inure to the benefit of their
respective successors and assigns.

 

Section 11.04.  Counterparts.  The parties may sign any number of counterparts of
this Supplemental Indenture.  Each
signed counterpart shall be an original, but all of them together represent the
same agreement.

 

Section 11.05.  Severability.  To the extent permitted by applicable law, in case any
one or more of the provisions contained in this Supplemental Indenture or in
the Notes shall for any reason be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not
affect any other provisions of this Supplemental Indenture or of the Notes.

 

Section 11.06.  Effect of Headings.  The Article and Section headings herein and the Table
of Contents are for convenience only and shall not affect the construction
hereof.

 

Section 11.07.  Conflict of Any Provision of Indenture with
Trust Indenture Act of 1939.  If
and to the extent that any provision of this Supplemental Indenture limits,
qualifies or conflicts with another provision included in this Supplemental
Indenture or in the Indenture which is required to be included herein by any of
Sections 310 to 317 of the Trust Indenture Act of 1939, inclusive, or is deemed
applicable to this Indenture by virtue of the provisions of the Trust Indenture
Act of 1939, such required provision shall control.

 

49

 

SIGNATURES

 

IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the date first above written. 

 

	
   

  	
  K. HOVNANIAN
  ENTERPRISES, INC., as the Issuer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  HOVNANIAN
  ENTERPRISES, INC., as Guarantor

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  On behalf of
  each entity named in Schedule 1 hereto, as Guarantors

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

	
  WACHOVIA
  BANK, NATIONAL ASSOCIATION, as Trustee

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

50

 

SCHEDULE 1

 

Guarantors

ALL SEASONS, INC.

ARROW PROPERTIES, INC.

CONDOMINIUM COMMUNITY (BOWIE
NEW TOWN), INC.

CONDOMINIUM COMMUNITY (LARGO
TOWN), INC.

CONDOMINIUM COMMUNITY (PARK
PLACE), INC.

CONDOMINIUM COMMUNITY (QUAIL RUN),
INC.

CONDOMINIUM COMMUNITY (TRUMAN
DRIVE), INC.

CONSULTANTS CORPORATION

DESIGNED CONTRACTS, INC.

EXC, INC.

FORTIS HOMES, INC.

GOODMAN FAMILY OF BUILDERS,
L.P.

HOUSING-HOME SALES, INC.

HOVNANIAN DEVELOPMENTS OF
FLORIDA, INC.

K. HOV INTERNATIONAL, INC.

K. HOV IP, II, INC.

K. HOV IP, INC.

K. HOVNANIAN ACQUISITIONS, INC.

K. HOVNANIAN AT ASHBURN
VILLAGE, INC.

K. HOVNANIAN AT BALLANTRAE
ESTATES, INC.

K. HOVNANIAN AT BARRINGTON,
INC.

K. HOVNANIAN AT BELMONT, INC.

K. HOVNANIAN AT BERNARDS IV,
INC.

K. HOVNANIAN AT BRANCHBURG III,
INC.

K. HOVNANIAN AT BRIDGEPORT,
INC.

K. HOVNANIAN AT BRIDGEWATER VI,
INC.

K. HOVNANIAN AT BULL RUN, INC.

K. HOVNANIAN AT BURLINGTON III,
INC.

K. HOVNANIAN AT BURLINGTON,
INC.

K. HOVNANIAN AT CALABRIA, INC.

K. HOVNANIAN AT CAMERON CHASE,
INC.

K. HOVNANIAN AT CARMEL DEL MAR,
INC.

K. HOVNANIAN AT CASTILE, INC.

K. HOVNANIAN AT CEDAR GROVE I,
INC.

K. HOVNANIAN AT CEDAR GROVE II,
INC.

K. HOVNANIAN AT CHAPARRAL, INC.

K. HOVNANIAN AT CLARKSTOWN,
INC.

K. HOVNANIAN AT CRESTLINE, INC.

K. HOVNANIAN AT DOMINGUEZ
HILLS, INC.

K. HOVNANIAN AT DOMINION RIDGE,
INC.

K. HOVNANIAN AT EAST BRUNSWICK
VI, INC.

 

1-1

 

K. HOVNANIAN AT EAST WHITELAND
I, INC.

K. HOVNANIAN AT EXETER HILLS,
INC.

K. HOVNANIAN AT FAIR LAKES
GLEN, INC.

K. HOVNANIAN AT FAIR LAKES,
INC.

K. HOVNANIAN AT FREEHOLD
TOWNSHIP I, INC.

K. HOVNANIAN AT HACKETTSTOWN,
INC.

K. HOVNANIAN AT HAMPTON OAKS,
INC.

K. HOVNANIAN AT HERSHEY’S MILL,
INC.

K. HOVNANIAN AT HIGHLAND
VINEYARDS, INC.

K. HOVNANIAN AT HOLLY CREST,
INC.

K. HOVNANIAN AT HOPEWELL IV,
INC.

K. HOVNANIAN AT HOPEWELL VI,
INC.

K. HOVNANIAN AT HOWELL
TOWNSHIP, INC.

K. HOVNANIAN AT HUNTER ESTATES,
INC.

K. HOVNANIAN AT KINGS GRANT I,
INC.

K. HOVNANIAN AT KLOCKNER FARMS,
INC.

K. HOVNANIAN AT LA TERRAZA,
INC.

K. HOVNANIAN AT LA TROVATA,
INC.

K. HOVNANIAN AT LAKEWOOD, INC.

K. HOVNANIAN AT LOWER SAUCON
II, INC.

K. HOVNANIAN AT LOWER SAUCON,
INC.

K. HOVNANIAN AT MAHWAH II, INC.

K. HOVNANIAN AT MAHWAH IV, INC.

K. HOVNANIAN AT MAHWAH V, INC.

K. HOVNANIAN AT MAHWAH VI, INC.

K. HOVNANIAN AT MAHWAH VII,
INC.

K. HOVNANIAN AT MAHWAH VIII,
INC.

K. HOVNANIAN AT MANALAPAN, INC.

K. HOVNANIAN AT MARLBORO II,
INC.

K. HOVNANIAN AT MARLBORO
TOWNSHIP IV, INC.

K. HOVNANIAN AT MARLBORO
TOWNSHIP III, INC.

K. HOVNANIAN OF METRO DC SOUTH,
INC.

K. HOVNANIAN AT MONTCLAIR NJ,
INC.

K. HOVNANIAN AT MONTCLAIR, INC.

K. HOVNANIAN AT MONTGOMERY I,
INC.

K. HOVNANIAN AT NORTHERN
WESTCHESTER, INC.

K. HOVNANIAN AT NORTHLAKE, INC.

K. HOVNANIAN AT OCEAN WALK,
INC.

K. HOVNANIAN AT P.C. PROPERTIES,
INC.

K. HOVNANIAN AT PARK RIDGE,
INC.

K. HOVNANIAN AT PEEKSKILL, INC.

K. HOVNANIAN AT PERKIOMEN I,
INC.

K. HOVNANIAN AT PERKIOMEN II,
INC.

K. HOVNANIAN AT PLAINSBORO III,
INC.

K. HOVNANIAN AT PRINCETON, INC.

 

1-2

 

K. HOVNANIAN AT RANCHO
CHRISTIANITOS, INC.

K. HOVNANIAN AT RESERVOIR
RIDGE, INC.

K. HOVNANIAN AT RIVER OAKS,
INC.

K. HOVNANIAN AT SAN SEVAINE,
INC.

K. HOVNANIAN AT SARATOGA, INC.

K. HOVNANIAN AT SCOTCH PLAINS
II, INC.

K. HOVNANIAN AT SCOTCH PLAINS,
INC.

K. HOVNANIAN AT SMITHVILLE,
INC.

K. HOVNANIAN AT SOUTH BRUNSWICK
III, INC.

K. HOVNANIAN AT SOUTH BRUNSWICK
V, INC.

K. HOVNANIAN AT STONE CANYON,
INC.

K. HOVNANIAN AT STONEGATE, INC.

K. HOVNANIAN AT STONY POINT,
INC.

K. HOVNANIAN AT STUART ROAD,
INC.

K. HOVNANIAN AT SULLY STATION,
INC.

K. HOVNANIAN AT SUMMERWOOD,
INC.

K. HOVNANIAN AT SYCAMORE, INC.

K. HOVNANIAN AT TANNERY HILL,
INC.

K. HOVNANIAN AT THE BLUFF, INC.

K. HOVNANIAN AT THE CEDARS,
INC.

K. HOVNANIAN AT THE GLEN, INC.

K. HOVNANIAN AT THORNBURY, INC.

K. HOVNANIAN AT TIERRASANTA,
INC.

K. HOVNANIAN AT TUXEDO, INC.

K. HOVNANIAN AT UNION TOWNSHIP
I, INC.

K. HOVNANIAN AT UPPER MAKEFIELD
I, INC.

K. HOVNANIAN AT UPPER MERION,
INC.

K. HOVNANIAN AT VAIL RANCH,
INC.

K. HOVNANIAN AT WALL TOWNSHIP
VI, INC.

K. HOVNANIAN AT WALL TOWNSHIP
VIII, INC.

K. HOVNANIAN AT
WASHINGTONVILLE, INC.

K. HOVNANIAN AT WAYNE III, INC.

K. HOVNANIAN AT WAYNE V, INC.

K. HOVNANIAN AT WILDROSE, INC.

K. HOVNANIAN AT WOODMONT, INC.

K. HOVNANIAN COMPANIES
NORTHEAST, INC.

K. HOVNANIAN COMPANIES OF
CALIFORNIA, INC.

K. HOVNANIAN COMPANIES OF
MARYLAND, INC.

K. HOVNANIAN COMPANIES OF METRO
WASHINGTON, INC.

K. HOVNANIAN COMPANIES OF NEW
YORK, INC.

K. HOVNANIAN COMPANIES OF NORTH
CAROLINA, INC.

K. HOVNANIAN COMPANIES OF
PENNSYLVANIA, INC.

K. HOVNANIAN COMPANIES OF
SOUTHERN CALIFORNIA, INC.

K. HOVNANIAN CONSTRUCTION
MANAGEMENT, INC.

K. HOVNANIAN DEVELOPMENTS OF
ARIZONA, INC.

 

1-3

 

K. HOVNANIAN DEVELOPMENTS OF
CALIFORNIA, INC.

K. HOVNANIAN DEVELOPMENTS OF
MARYLAND, INC.

K. HOVNANIAN DEVELOPMENTS OF
METRO WASHINGTON, INC.

K. HOVNANIAN DEVELOPMENTS OF
MICHIGAN, INC.

K. HOVNANIAN DEVELOPMENTS OF
NEW JERSEY II, INC.

K. HOVNANIAN DEVELOPMENTS OF
NEW JERSEY, INC.

K. HOVNANIAN DEVELOPMENTS OF
NEW YORK, INC.

K. HOVNANIAN DEVELOPMENTS OF
OHIO, INC.

K. HOVNANIAN DEVELOPMENTS OF
PENNSYLVANIA, INC.

K. HOVNANIAN DEVELOPMENTS OF
SOUTH CAROLINA, INC.

K. HOVNANIAN DEVELOPMENTS OF
TEXAS, INC.

K. HOVNANIAN DEVELOPMENTS OF
WEST VIRGINIA, INC.

K. HOVNANIAN EQUITIES, INC.

K. HOVNANIAN FORECAST HOMES,
INC.

K. HOVNANIAN INVESTMENT
PROPERTIES OF NEW JERSEY, INC.

K. HOVNANIAN MARINE, INC.

K. HOVNANIAN PA REAL ESTATE,
INC.

K. HOVNANIAN PORT IMPERIAL
URBAN RENEWAL, INC.

K. HOVNANIAN PROPERTIES OF NB
THEATRE, INC.

K. HOVNANIAN PROPERTIES OF
NEWARK URBAN RENEWAL CORPORATION, INC.

K. HOVNANIAN PROPERTIES OF
NORTH BRUNSWICK V, INC.

K. HOVNANIAN PROPERTIES OF
PISCATAWAY, INC.

K. HOVNANIAN PROPERTIES OF RED
BANK, INC.

K. HOVNANIAN PROPERTIES OF
WALL, INC.

K. HOVNANIAN REAL ESTATE
INVESTMENT, INC.

KHC ACQUISITION, INC.

KHIP III, INC.

LANDARAMA, INC.

M&M AT LONG BRANCH, INC.

MATZEL & MUMFORD OF
DELAWARE, INC.

MCNJ, INC.

MMIP III, INC.

PARTHENON GROUP, INC.

PINE BROOK COMPANY, INC.

QUE CORPORATION

REFLECTIONS OF YOU INTERIORS,
INC.

SEABROOK ACCUMULATION
CORPORATION

STONEBROOK HOMES, INC.

THE MATZEL & MUMFORD
ORGANIZATION, INC.

THE NEW FORTIS CORPORATION

THE SOUTHAMPTON CORPORATION

WASHINGTON HOMES OF WEST
VIRGINIA, INC.

WASHINGTON HOMES, INC.

WASHINGTON HOMES, INC. OF
VIRGINIA

 

1-4

 

WESTMINSTER HOMES (CHARLOTTE),
INC.

WESTMINSTER HOMES OF TENNESSEE,
INC.

WESTMINSTER HOMES, INC.

WH LAND I, INC

WH LAND II, INC.

WH PROPERTIES, INC.

ARBOR WEST, L.L.C.

DULLES COPPERMINE, L.L.C.

K. HOVNANIAN AT 4S RANCH,
L.L.C.

K. HOVNANIAN AT ARBOR HEIGHTS,
LLC

K. HOVNANIAN AT ASHBURN
VILLAGE, L.L.C.

K. HOVNANIAN AT BARNEGAT I,
L.L.C.

K. HOVNANIAN AT BERKELEY,
L.L.C.

K. HOVNANIAN AT BERNARDS V,
L.L.C.

K. HOVNANIAN AT BLOOMS
CROSSING, L.L.C.

K. HOVNANIAN AT BLUE HERON
PINES, L.L.C.

K. HOVNANIAN AT BRENBROOKE,
L.L.C.

K. HOVNANIAN AT BRIDGEWATER I,
L.L.C.

K. HOVNANIAN AT CAMDEN I,
L.L.C.

K. HOVNANIAN AT CARMEL VILLAGE,
L.L.C.

K. HOVNANIAN AT CEDAR GROVE
III, L.L.C.

K. HOVNANIAN AT CHESTER I,
L.L.C.

K. HOVNANIAN AT CLIFTON, L.L.C.

K. HOVNANIAN AT CLIFTON II,
L.L.C.

K. HOVNANIAN AT CORTEZ HILL,
L.L.C.

K. HOVNANIAN AT CRANBURY,
L.L.C.

K. HOVNANIAN AT CURRIES WOODS,
L.L.C.

K. HOVNANIAN AT DENVILLE,
L.L.C.

K. HOVNANIAN AT EASTLAKE,
L.L.C.

K. HOVNANIAN AT EDGEWATER, L.L.C.

K. HOVNANIAN AT EGG HARBOR
TOWNSHIP, L.L.C.

K. HOVNANIAN AT ENCINITAS
RANCH, L.L.C.

K. HOVNANIAN AT FOREST MEADOWS,
L.L.C.

K. HOVNANIAN AT FREEHOLD
TOWNSHIP, L.L.C.

K. HOVNANIAN AT GREAT NOTCH,
L.L.C.

K. HOVNANIAN AT GUTTENBERG,
L.L.C.

K. HOVNANIAN AT HAMBURG, L.L.C.

K. HOVNANIAN AT HAMBURG
CONTRACTORS, L.L.C.

K. HOVNANIAN AT JACKSON I,
L.L.C.

K. HOVNANIAN AT JACKSON, L.L.C.

K. HOVNANIAN AT JERSEY CITY IV,
L.L.C.

K. HOVNANIAN AT JERSEY CITY V
URBAN RENEWAL CO., L.L.C.

K. HOVNANIAN AT KENT ISLAND,
L.L.C.

K. HOVNANIAN AT KINCAID, L.L.C.

K. HOVNANIAN AT KING FARM,
L.L.C.

 

1-5

 

K. HOVNANIAN AT LA COSTA,
L.L.C.

K. HOVNANIAN AT LA HABRA
KNOLLS, L.L.C.

K. HOVNANIAN AT LAFAYETTE
ESTATES, L.L.C.

K. HOVNANIAN AT LAKE RIDGE
CROSSING, L.L.C.

K. HOVNANIAN AT LAKE TERRAPIN,
L.L.C.

K. HOVNANIAN AT LAWRENCE V,
L.L.C.

K. HOVNANIAN AT LINWOOD, L.L.C.

K. HOVNANIAN AT LITTLE EGG
HARBOR, L.L.C.

K. HOVNANIAN AT LITTLE EGG
HARBOR CONTRACTORS, L.L.C.

K. HOVNANIAN AT LONG BRANCH I,
L.L.C.

K. HOVNANIAN AT LOWER MACUNGIE
TOWNSHIP I, L.L.C.

K. HOVNANIAN AT LOWER MACUNGIE
TOWNSHIP II, L.L.C.

K. HOVNANIAN AT LOWER MAKEFIELD
TOWNSHIP I, L.L.C.

K. HOVNANIAN AT LOWER MORELAND
I, L.L.C.

K. HOVNANIAN AT LOWER MORELAND
II, L.L.C.

K. HOVNANIAN AT MANALAPAN II,
L.L.C.

K. HOVNANIAN AT MANALAPAN III,
L.L.C.

K. HOVNANIAN AT MANSFIELD I,
LLC

K. HOVNANIAN AT MANSFIELD II,
LLC

K. HOVNANIAN AT MANSFIELD III,
L.L.C.

K. HOVNANIAN AT MARLBORO
TOWNSHIP V, L.L.C.

K. HOVNANIAN AT MARLBORO
TOWNSHIP VIII, L.L.C.

K. HOVNANIAN AT MARLBORO VI,
L.L.C.

K. HOVNANIAN AT MARLBORO VII,
L.L.C.

K. HOVNANIAN AT MENIFEE, L.L.C.

K. HOVNANIAN AT MIDDLE
TOWNSHIP, L.L.C.

K. HOVNANIAN AT MIDDLETOWN II,
L.L.C.

K. HOVNANIAN AT MIDDLETOWN,
L.L.C.

K. HOVNANIAN AT MONROE, L.L.C.

K. HOVNANIAN AT MOSAIC, L.L.C.

K. HOVNANIAN AT MT. OLIVE
TOWNSHIP, L.L.C.

K. HOVNANIAN AT NORTH BERGEN,
L.L.C.

K. HOVNANIAN AT NORTH BRUNSWICK
VI, L.L.C.

K. HOVNANIAN AT NORTH HALEDON,
L.L.C.

K. HOVNANIAN AT NORTH WILDWOOD,
L.L.C.

K. HOVNANIAN AT NORTHAMPTON, L.L.C.

K. HOVNANIAN AT NORTHFIELD,
L.L.C.

K. HOVNANIAN AT OLD BRIDGE,
L.L.C.

K. HOVNANIAN AT OLDE ORCHARD,
L.L.C.

K. HOVNANIAN AT PACIFIC BLUFFS,
L.L.C.

K. HOVNANIAN AT PARAMUS, L.L.C.

K. HOVNANIAN AT PARK LANE,
L.L.C.

K. HOVNANIAN AT RANCHO SANTA
MARGARITA, L.L.C.

K. HOVNANIAN AT RANDOLPH I,
L.L.C.

K. HOVNANIAN AT READINGTON II,
L.L.C.

 

1-6

 

K. HOVNANIAN AT RIVERBEND II,
L.L.C.

K. HOVNANIAN AT RIVERBEND,
L.L.C.

K. HOVNANIAN AT RODERUCK.
L.L.C.

K. HOVNANIAN AT ROWLAND
HEIGHTS, L.L.C.

K. HOVNANIAN AT SAYREVILLE,
L.L.C.

K. HOVNANIAN AT SKYE ISLE,
L.L.C.

K. HOVNANIAN AT SMITHVILLE III,
L.L.C.

K. HOVNANIAN AT SOMERS POINT,
L.L.C.

K. HOVNANIAN AT SOUTH AMBOY,
L.L.C.

K. HOVNANIAN AT SOUTH BANK,
L.L.C.

K. HOVNANIAN AT SOUTH
BRUNSWICK, L.L.C.

K. HOVNANIAN AT SPRING HILL
ROAD, L.L.C.

K. HOVNANIAN AT ST. MARGARETS,
L.L.C.

K. HOVNANIAN AT SUNSETS, L.L.C.

K. HOVNANIAN AT THE GABLES,
L.L.C.

K. HOVNANIAN AT TRAIL RIDGE,
L.L.C.

K. HOVNANIAN AT UPPER FREEHOLD
TOWNSHIP II, L.L.C.

K. HOVNANIAN AT UPPER FREEHOLD
TOWNSHIP III, L.L.C.

K. HOVNANIAN AT UPPER UWCHLAN,
L.L.C.

K. HOVNANIAN AT UPPER UWCHLAN
II, L.L.C.

K. HOVNANIAN AT WANAQUE, L.L.C.

K. HOVNANIAN AT WASHINGTON,
L.L.C.

K. HOVNANIAN AT WAYNE VIII,
L.L.C.

K. HOVNANIAN AT WAYNE IX,
L.L.C.

K. HOVNANIAN AT WEST MILFORD,
L.L.C.

K. HOVNANIAN AT WEST WINDSOR,
L.L.C.

K. HOVNANIAN AT WILLOW BROOK,
L.L.C.

K. HOVNANIAN AT WINCHESTER,
L.L.C.

K. HOVNANIAN AT WOODHILL
ESTATES, L.L.C.

K. HOVNANIAN AT WOOLWICH,
L.L.C.

K. HOVNANIAN CENTRAL ACQUISITIONS,
L.L.C.

K. HOVNANIAN COMPANIES OF METRO
D.C. NORTH, L.L.C.

K. HOVNANIAN COMPANIES, L.L.C.

K. HOVNANIAN EASTERN
PENNSYLVANIA, L.L.C.

K. HOVNANIAN FOUR SEASONS AT
GOLD HILL, L.L.C.

K. HOVNANIAN FOUR SEASONS AT
HISTORIC VIRGINIA, L.L.C.

K. HOVNANIAN GREAT WESTERN
BUILDING COMPANY, L.L.C.

K. HOVNANIAN GREAT WESTERN
HOMES, L.L.C.

K. HOVNANIAN HOLDINGS NJ,
L.L.C.

K. HOVNANIAN NORTH CENTRAL
ACQUISITIONS, L.L.C.

K. HOVNANIAN NORTH JERSEY
ACQUISITIONS, L.L.C.

K. HOVNANIAN NORTHEAST
SERVICES, L.L.C.

K. HOVNANIAN OF HOUSTON II,
L.P.

K. HOVNANIAN OF HOUSTON, L.P.

K. HOVNANIAN OHIO REALTY,
L.L.C.

 

1-7

 

K. HOVNANIAN PENNSYLVANIA
ACQUISITIONS, L.L.C.

K. HOVNANIAN SHORE
ACQUISITIONS, L.L.C.

K. HOVNANIAN SOUTH JERSEY
ACQUISITION, L.L.C.

K. HOVNANIAN SOUTHERN NEW
JERSEY, L.L.C.

K. HOVNANIAN SUMMIT HOLDINGS,
L.L.C.

K. HOVNANIAN SUMMIT HOMES,
L.L.C.

K. HOVNANIAN SUMMIT HOMES OF
MICHIGAN, L.L.C.

K. HOVNANIAN SUMMIT HOMES OF
WEST VIRGINIA, L.L.C.

K. HOVNANIAN’S FOUR SEASONS AT
BEAUMONT, L.L.C.

K. HOVNANIAN’S FOUR SEASONS AT
HEMET, L.L.C.

K. HOVNANIAN’S FOUR SEASONS AT
PALM SPRINGS, L.L.C.

K. HOVNANIAN’S FOUR SEASONS AT
VINT HILL, L.L.C.

K. HOVNANIAN’S FOUR SEASONS,
L.L.C.

K. HOVNANIAN’S PRIVATE HOME
PORTFOLIO, L.L.C.

KHIP, LLC

KINGS COURT AT MONTGOMERY,
L.L.C.

M&M AT APPLE RIDGE, L.L.C.

M&M AT BROOKHILL, L.L.C.

M&M AT CHESTERFIELD, L.L.C.

M&M AT EAST MILL, L.L.C.

M&M AT HERITAGE WOODS,
L.L.C.

M&M AT KENSINGTON WOODS,
L.L.C.

M&M AT MORRISTOWN, L.L.C.

M&M AT SHERIDAN, L.L.C.

M&M AT SPARTA, L.L.C.

M&M AT SPINNAKER POINTE,
L.L.C.

M&M AT SPRUCE HOLLOW,
L.L.C.

M&M AT SPRUCE MEADOWS,
L.L.C.

M&M AT SPRUCE RUN, L.L.C.

M&M AT THE HIGHLANDS,
L.L.C.

M&M AT WEST ORANGE, L.L.C.

MATZEL & MUMFORD AT
CRANBURY KNOLL, L.L.C.

MATZEL & MUMFORD AT
FREEHOLD, L.L.C.

MATZEL & MUMFORD AT
HERITAGE LANDING, L.L.C.

MATZEL & MUMFORD AT
MONTGOMERY, L.L.C.

MATZEL & MUMFORD AT
PHILLIPSBURG, L.L.C.

MATZEL & MUMFORD AT SOUTH
BRUNSWICK, L.L.C.

MATZEL & MUMFORD AT
WOODLAND CREST, L.L.C.

M & M INVESTMENTS, L.P.

MMIP, L.L.C.

RIDGEMORE UTILITY, L.L.C.

THE LANDINGS AT SPINNAKER
POINTE, L.L.C.

WASHABAMA, L.P.

WASHINGTON HOMES AT COLUMBIA
TOWN CENTER, L.L.C.

WASHINGTON HOMES OF MARYLAND I,
L.L.C.

 

1-8

 

WESTMINSTER HOMES OF ALABAMA,
L.L.C.

WESTMINSTER HOMES OF
MISSISSIPPI, L.L.C.

WESTMINSTER HOMES OF SOUTH
CAROLINA, L.L.C.

WOODLAND LAKES CONDOS AT BOWIE
NEWTOWN, LLC

 

1-9

 

Exhibit A

 

[THIS NOTE IS
A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND
IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A
SUCCESSOR DEPOSITARY.  UNLESS AND UNTIL
IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE
MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST COMPANY, A NEW
YORK CORPORATION (THE “DEPOSITARY”), TO THE NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.

 

UNLESS THIS
NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY TO THE
ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO.  OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT IS MADE TO CEDE
& CO.  OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.](1)

 

 

(1)  This should be included only if the Note is issued in global form.

 

A-1

 

[FACE OF NOTE]

 

K. HOVNANIAN ENTERPRISES, INC.

 

	
  REGISTERED –
  No. 

  	
   

  	
   

  	
   

  	
   

  	
  CUSIP No.:

  	
   

  
	
   

  	
   

  	
   

  	
  $

  	
   

  
	
  61⁄2% Senior Notes due 2014

  
								

 

K. Hovnanian Enterprises, Inc.,
a California corporation (the “Issuer”, which term includes any successor
under the Indenture hereinafter referred to), for value received hereby
promises to pay to
                    ,
or registered assigns, the principal sum of
                              ($               )
Dollars on January 15, 2014.

 

Interest Payment Dates:  January 15 and July 15, commencing January
15, 2004

 

Interest Record Dates:  January 1 and July 1

 

Reference is hereby made to the
further provisions of this Note set forth on the reverse hereof, which will for
all purposes have the same effect as if set forth at this place.

 

	
   

  	
  K. HOVNANIAN
  ENTERPRISES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Dated:

  

 

 

 

	
  CERTIFICATE
  OF AUTHENTICATION

  	
   

  
	
   

  	
   

  
	
  Wachovia
  Bank, National Association, as Trustee, certifies that this is one of the
  Securities of the series designated herein referred to in the within
  mentioned Indenture.

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  
	
   

  	
   

  
	
  WACHOVIA
  BANK, NATIONAL

  ASSOCIATION, as Trustee

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized
  Signatory

  	
   

  
				

 

A-2

 

[REVERSE SIDE OF NOTE]

 

K. HOVNANIAN ENTERPRISES, INC.

 

61⁄2% Senior Notes due 2014

 

1.                                       Interest
and Principal.

 

K. HOVNANIAN
ENTERPRISES, INC. (the “Issuer”, which term includes any successor
under the Indenture hereinafter referred to), a California corporation, promises
to pay interest on the principal amount of this Note at the rate per annum
shown above.  The Issuer will pay
interest semiannually on January 15 and July 15 of each year, commencing
January 15, 2004, until the principal is paid or made available for
payment.  Interest on the Notes will
accrue from the most recent date to which interest has been paid or duly
provided for or, if no interest has been paid, from November 3, 2003, provided
that, if there is no existing default in the payment of interest, and if this
Note is authenticated between a record date referred to on the face hereof and
the next succeeding interest payment date, interest shall accrue from such
succeeding interest payment date. 
Interest will be computed on the basis of a 360-day year of twelve
30-day months.

 

The Issuer
promises to pay the principal of this Note on January 15, 2014.

 

2.                                       Method
of Payment.

 

The Issuer
will pay interest on the Notes (except defaulted interest, if any, which will
be paid on such special payment date to Holders of record on such special
record date as may be fixed by the Issuer) to the persons who are registered
Holders of Notes at the close of business on the January 1 and July 1
immediately preceding the interest payment date. Holders must surrender Notes
to a Paying Agent to collect principal payments. The Issuer will pay principal
and interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts.  Payment of principal of, premium, if any, and interest on the
Global Notes registered in the name of, or held by the Depositary or its
nominee will be made in immediately available funds to the Depositary or its
nominee, as the case may be, as the registered Holder of such Global Notes.  If any of the Notes are no longer
represented by Global Notes, payment of interest on the definitive Notes may,
at the Issuer’s option, be made by check mailed directly to Holders at their
registered address.

 

3.                                       Paying
Agent and Registrar.

 

Initially,
Wachovia Bank, National Association (the “Trustee”) will act as Paying Agent and
Registrar.  The Issuer may change or
appoint any Paying Agent,

 

A-3

 

Registrar or co-Registrar
without notice to any Holder.  The
Issuer or any of its Subsidiaries may act as Paying Agent, Registrar or
co-Registrar.

 

4.                                       Indenture.

 

The Issuer
issued the Notes under an Indenture (the “Base Indenture”) dated November 3, 2003,
among the Issuer, Hovnanian and the Trustee, the terms of which have been
established in the First Supplemental Indenture (the “First Supplemental Indenture”)
dated as of November 3, 2003, among the Issuer, Hovnanian, the Guarantors and
the Trustee (the Base Indenture, as supplemented by the First Supplemental
Indenture, the “Indenture”), pursuant to Section 2.3 of the Base
Indenture.  This Note is one of the
Securities of the series designated as the “61⁄2% Senior Notes due 2014” of the
Issuer.  The Issuer may issue additional
Notes of this series after this Note has been issued.  This Note and any additional notes of this series subsequently
issued under the Indenture shall be treated as a single series for all purposes
under the Indenture and shall vote and consent together on all matters as one
class, including, without limitation, waivers, amendments, redemption and
offers to purchase.  The terms of the
Notes and the Guarantees include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (“TIA”)
as in effect on the date of the Indenture. 
The Notes and the Guarantees are subject to all such terms, and Holders
are referred to the Indenture and the TIA for a statement of them.  To the extent permitted by applicable law,
in the event of any inconsistency between the terms of this Note and the terms
of the Indenture, the terms of the Indenture will control.

 

Capitalized terms not defined
herein have the meanings given to those terms in the Indenture.

 

The Issuer
will furnish to any Holder upon written request and without charge a copy of
the Indenture and the First Supplemental Indenture.  Requests may be made to: K. Hovnanian Enterprises, Inc., 10
Highway 35, P.O. Box 500, Red Bank, New Jersey 07701, Attention: Chief
Financial Officer.

 

5.                                       Optional
Redemption.

 

The Notes will
be redeemable, in whole, at any time, or in part, from time to time, at the
option of the Issuer upon not less than 30 nor more than 60 days’ notice at a
redemption price equal to the sum of:

 

(a)                                  100%
of the principal amount thereof, plus accrued and unpaid interest thereon to
the redemption date; plus

 

(b)                                 the
Make-Whole Amount.

 

A-4

 

The Trustee
shall have no responsibility in connection with the calculation of such
redemption price.

 

“Make-Whole Amount”
means, in connection with any optional redemption of any Note, the excess, if
any, of: (a) the aggregate present value as of the date of such redemption of
each dollar of principal being redeemed and the amount of interest (exclusive
of interest accrued to the redemption date) that would have been payable in
respect of such dollar if such prepayment had not been made, determined by
discounting, on a semiannual basis, such principal and interest at the Treasury
Rate (determined on the business day preceding the date of such redemption)
plus 0.5%, from the respective dates on which such principal and interest would
have been payable if such payment had not been made; over (b) the principal
amount of the Note being redeemed.

 

“Treasury
Rate” means, in connection with the calculation of any Make-Whole
Amount with respect to any Note, the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity, as
compiled by and published in the most recent Federal Reserve Statistical
Release H.15 (519) that has become publicly available at least two business
days prior to the redemption date (or, if such Statistical Release is no longer
published, any publicly available source or similar market data), equal to the
then remaining maturity of the Note being prepaid.  If no maturity exactly corresponds to such maturity, yields for
the published maturities occurring prior to and after such maturity most
closely corresponding to such maturity shall be calculated pursuant to the immediately
preceding sentence and the Treasury Rate shall be interpolated or extrapolated
from such yields on a straight-line basis, rounding in each of such relevant
periods to the nearest month.

 

If less than
all of the Notes are to be redeemed at any time, the Trustee will select Notes
for redemption on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem appropriate and fair.

 

No Notes of
$1,000 in original principal amount or less shall be redeemed in part. Notices
of redemption may not be conditional.

 

If any Note is
to be redeemed in part only, the notice of redemption that relates to that Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion of the original Note
will be issued in the name of the Holder thereof upon cancellation of the
original Note. Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions thereof called for redemption.

 

6.                                       Mandatory
Redemption.

 

There is no
sinking fund for, or mandatory redemption of, the Notes.

 

A-5

 

7.                                       Denominations,
Transfer, Exchange.

 

The Notes are
in registered form only without coupons in denominations of $1,000 of principal
amount and integral multiples of $1,000. 
A Holder may transfer or exchange Notes in accordance with the
Indenture.  The Registrar may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture.  Pursuant to the Indenture,
there are certain periods during which the Registrar is not required to
transfer or exchange any Note or certain portions of a Note.

 

8.                                       Persons
Deemed Owners.

 

The registered
Holder of this Note shall be treated as the owner of it for all purposes.

 

9.                                       Unclaimed
Money.

 

Any money
deposited with the Trustee or any Paying Agent, or then held by the Issuer, in
trust for the payment of the principal of, premium or interest on any Note and
remaining unclaimed for two years after such principal, and premium, if any, or
interest has become due and payable shall be paid to the Issuer on its request
or (if then held by the Issuer) shall be discharged from such trust; and the
Holder of such Note shall thereafter, as an unsecured creditor, look only to
the Issuer for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Issuer as
trustee thereof, shall thereupon cease; provided,
however,
that the Trustee or such Paying Agent, before being required to make any such
repayment, may at the expense of the Issuer cause to be published once, in the
New York Times and The Wall Street Journal (national edition), notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than 30 days from the date of such notification or publication, any
unclaimed balance of such money then remaining will be repaid to the Issuer.

 

10.                                 Discharge
and Defeasance.

 

Subject to
certain conditions set forth in the Indenture, the Issuer, Hovnanian and the
Guarantors at any time may terminate some or all of their obligations under the
Notes and the Indenture if the Issuer deposits with the Trustee money and/or
U.S. Government Obligations for the payment of principal, premium, if any, and
interest on the Notes to maturity or redemption, as the case may be.

 

A-6

 

11.                                 Defaults
and Remedies.

 

If an Event of
Default, as defined in the Indenture, occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount of the Notes may declare all
the Notes to be due and payable.  If a
bankruptcy or insolvency default with respect to the Issuer or Hovnanian occurs
and is continuing, the Notes automatically become due and payable.  Holders may not enforce the Indenture or the
Notes except as provided in the Indenture. 
The Trustee may require an indemnity satisfactory to it before it
enforces the Indenture or the Notes. 
Subject to certain limitations, Holders of a majority in principal amount
of the Notes then outstanding may direct the Trustee in its exercise of remedies.

 

12.                                 Amendment,
Supplement, Waiver.

 

Subject to
certain exceptions, the Indenture, the Notes or the Guarantees may be amended
or supplemented, or default may be waived, with the consent of the Holders of a
majority in principal amount of the outstanding Notes.  Without notice to or the consent of any
Holder, the Issuer, Hovnanian, the Guarantors and the Trustee may amend or
supplement the Indenture, the Notes or the Guarantees to, among other things
set forth in the Indenture, cure any ambiguity, defect or inconsistency if such
amendment or supplement does not adversely affect the interests of the Holders
in any material respect.

 

13.                                 Trustee
Dealings With Issuer.

 

The Trustee,
in its individual or any other capacity, may become the owner or pledgee of
Notes and may otherwise deal with the Issuer or its affiliates, with the same
rights as if it were not Trustee; however, if it acquires any conflicting
interest (as defined in the TIA), it must eliminate such conflict, apply to the
Commission for permission to continue or resign.

 

14.                                 No
Recourse Against Others.

 

An
incorporator, and any past, present or future director, officer, employee or
stockholder, as such, of the Issuer, Hovnanian or the Guarantors shall not have
any liability for any obligations of the Issuer, Hovnanian or the Guarantors
under the Notes, the Indenture or the Guarantees or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder by
accepting a Note waives and releases all such liability.  The waiver and release are part of the
consideration for the issue of the Notes.

 

15.                                 Guarantees.

 

The Notes will
be entitled to the benefits of certain Guarantees made for the benefit of the
Holders.  Reference is hereby made to
the Indenture for a statement of the respective rights, limitation of rights,
duties and obligations thereunder of the Guarantors, the Trustee and the
Holders.

 

A-7

 

16.                                 Governing
Law.

 

THIS NOTE
SHALL BE DEEMED TO BE A CONTRACT UNDER THE LAWS OF THE STATE OF NEW YORK AND
FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF SUCH STATE.

 

17.                                 CUSIP
NUMBERS.

 

Pursuant to a
recommendation promulgated by the Committee on Uniform Note Identification
Procedures, the Issuer has caused CUSIP numbers to be printed on the Notes, and
the Trustee may use CUSIP numbers in notices as a convenience to Holders.  No representation is made as to the accuracy
of such numbers either as printed on the Notes or as contained in any notice
and reliance may be placed only on the other identification numbers placed
thereon.

 

18.                                 Authentication.

 

This Note
shall not be valid until an authorized signatory of the Trustee (or an
authenticating agent) manually signs the certificate of authentication on the
other side of this Note.

 

19.                                 Abbreviations.

 

Customary
abbreviations may be used in the name of a Holder or an assignee, such as: TEN
COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (=
joint tenants with right of survivorship and not as tenants in common), CUST (=
custodian), and U/G/M/A (= Uniform Gifts to Minors Act).

 

A-8

 

ASSIGNMENT FORM

 

If you the
Holder want to assign this Note, fill in the form below:

 

I or we assign
and transfer this Note to

 

	
   

  
	
  (Insert assignee’s social security or tax ID number)

  
	
   

  
	
   

  
	
  (Print or type assignee’s name, address, and zip code)

  

 

and irrevocably appoint
                                   agent
to transfer this Note on the books of the Issuer.  The agent may substitute another to act for him.

 

	
  Date:

  	
   

  	
   

  	
  Your
  signature:

  	
   

  
	
   

  	
  (Sign
  exactly as your name appears on the other side of this Note)

  
	
   

  
	
  Signature
  Guarantee:

  	
   

  
	
   

  	
  Signature
  must be guaranteed by participant in a recognized Signature Guarantee
  Medallion Program (or other signature guarantor program reasonably acceptable
  to the Trustee)

  
						

 

A-9

 

OPTION OF HOLDER TO ELECT PURCHASE

 

If you wish to
have all of this Note purchased by the Issuer pursuant to Section 3.04 or 3.08
of the First Supplemental Indenture, check the box: o

 

If you wish to
have a portion of this Note purchased by the Issuer pursuant to Section 3.04 or
3.08 of the First Supplemental Indenture, state the amount (in original
principal amount) below:

 

	
  $

  	
   

  	
   

  

 

	
   

  	
   

  
	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
  Your
  signature:

  	
   

  
	
   

  	
   

  	
  (Sign
  exactly as your name appears on the other side of this Note)

  
	
   

  	
   

  	
   

  
	
  Signature
  Guarantee:

  	
   

  
	
   

  	
   

  	
  Signature
  must be guaranteed by participant in a recognized Signature Guarantee
  Medallion Program (or other signature guarantor program reasonably acceptable
  to the Trustee)

  
						

 

A-10

 

 

SCHEDULE OF
INCREASES OR DECREASES

IN THE GLOBAL NOTE*

 

The following increases or decreases in this
Global Note have been made:

 

	
  Date of Exchange

  	
   

  	
  Amount of

  decrease in

  Principal Amount

  of this Global

  Note

  	
   

  	
  Amount of

  increase in

  Principal Amount

  of this Global

  Note

  	
   

  	
  Principal
  Amount

  of this Global

  Note following

  such decrease (or

  increase)

  	
   

  	
  Signature
  of

  authorized

  signatory of

  Trustee or

  Custodian

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

*                                         This
should be included only if the Note is issued in global form.

 

A-11

 

EXHIBIT B

 

 

SUPPLEMENTAL
INDENTURE

 

dated as of
               ,
       

 

among

 

K. HOVNANIAN ENTERPRISES, INC.

 

HOVNANIAN ENTERPRISES, INC.

 

The Other Guarantors Party Hereto

 

and

 

WACHOVIA BANK, NATIONAL ASSOCIATION,

as Trustee

 

 

61⁄2% Senior Notes due 2014

 

B-1

 

THIS
[             ]
SUPPLEMENTAL INDENTURE (this “[             ]
Supplemental Indenture”), entered into as of
             ,
       , among K. Hovnanian Enterprises,
Inc., a California corporation (the “Issuer”), Hovnanian Enterprises, Inc. (“Hovnanian”),
[list each new guarantor and its jurisdiction of incorporation] (each an “Undersigned”)
and Wachovia Bank, National Association, as trustee (the “Trustee”).

 

RECITALS

 

WHEREAS, the
Issuer, Hovnanian, the other Guarantors party thereto and the Trustee entered
into the Indenture dated as of November 3, 2003 (as supplemented, the “Indenture”)
as supplemented by the First Supplemental Indenture dated as of
November 3, 2003 (the “First Supplemental Indenture”), relating to
the Issuer’s 61/2% Senior Notes due 2014 (the “Notes”);

 

WHEREAS, as a
condition to the purchase of the Notes by the Holders, Hovnanian agreed
pursuant to the Indenture to cause any newly acquired or created Restricted
Subsidiaries to provide Guarantees of the Notes, subject to certain
limitations.

 

AGREEMENT

 

NOW,
THEREFORE, in consideration of the premises and mutual covenants herein
contained and intending to be legally bound, the parties hereto hereby agree as
follows:

 

SECTION 1.  Capitalized terms used herein and not
otherwise defined herein are used as defined in the Indenture.

 

SECTION 2. 
Each Undersigned, by its execution of this
[             ]
Supplemental Indenture, agrees to be a Guarantor under the Indenture and to be
bound by the terms of the Indenture applicable to Guarantors, including, but
not limited to Article Thirteen of the Base Indenture and Article 5
of the First Supplemental Indenture. 
Each Undersigned will also execute a Guarantee Notation in respect of
the Notes.

 

SECTION 3. 
This
[             ]
Supplemental Indenture shall be governed by and construed in accordance with
the laws of the State of New York.

 

SECTION 4. 
This
[             ]
Supplemental Indenture may be signed in various counterparts which together
will constitute one and the same instrument.

 

SECTION 5. 
This
[             ]
Supplemental Indenture is an amendment supplemental to the Indenture and the
Indenture and this [             ]
Supplemental Indenture will henceforth be read together.

 

B-2

 

IN WITNESS
WHEREOF, the parties hereto have caused this
[             ]
Supplemental Indenture to be duly executed as of the date first above written.

 

	
   

  	
  K. HOVNANIAN ENTERPRISES, INC.,

  as Issuer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  HOVNANIAN ENTERPRISES, INC.,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [GUARANTOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  WACHOVIA BANK, NATIONAL

  ASSOCIATION,

  as Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

B-3Exhibit
10.1

 

EMPLOYMENT
AGREEMENT

 

This Agreement is entered into by and between August
Technology Corporation (“August Technology ” or the “Company”), a Minnesota
corporation, with its principal place of business at 4900 West 78th
Street, Bloomington, Minnesota 55435, and Pam Lampert of 5331 Kellogg Avenue,
Edina, MN 55424 (“Employee”).

 

WHEREAS, Employee
desires employment with August Technology or has been employed with August
Technology and wishes to continue employment under the terms and conditions set
forth in this Agreement;

 

WHEREAS, Employee
acknowledges and agrees that he has and will continue to have access to
confidential, proprietary and trade secret information in the course of his/her
employment and continued employment with August Technology, the unauthorized
use or disclosure of which would cause irreparable harm to August Technology;

 

WHEREAS, August
Technology and Employee wish to set forth the terms of their agreement in
writing;

 

NOW, THEREFORE, in
consideration of the foregoing and the mutual covenants contained herein and
for other good and valuable consideration the receipt and sufficiency of which
is specifically acknowledged by the parties, August Technology and Employee
agree as follows:

 

1.                                      Employment.  August Technology agrees to employ or
continue to employ Employee, effective September 2, 2003, and Employee accepts
employment or continued employment, upon the terms and conditions set forth in
this Agreement.

 

2.                                      Term of
Employment.  August
Technology shall continue to employ Employee for an indefinite duration until
his/her employment is terminated in accordance with Paragraph 8 of this
Agreement.

 

3.                                      Duties
and Responsibilities.  Employee
shall devote his/her time, attention and best efforts to the duties and
responsibilities of his/her position, and to the business and affairs of August
Technology.  Employee’s title shall be
as set forth in Exhibit A as “Employee’s Title”, reporting to the person or
office as set forth in Exhibit A as “Manager”. 
Employee shall perform all duties and responsibilities of the position
he/she holds with August Technology as those duties and responsibilities may
change from time to time.  Employee
shall comply with August Technology’s standards, policies and procedures in
effect and as they may change from time to time; provided that to the extent
such policies and procedures are inconsistent with this Agreement, the
provisions of this Agreement shall control.

 

4.                                      Compensation.  August Technology shall pay Employee a gross
annual salary as set forth in Exhibit A as “Base Salary”, less appropriate
payroll deductions.  Employee may also
receive incentive compensation in accordance with the Annual Incentive Plan, as
issued and as may change from time to time by the Company, or any other similar
plan authorized by the Board of Directors. 
Employee’s compensation may be periodically increased or adjusted as
authorized by

 

 

 

the Board of Directors in the case of the Chief Executive Officer, or,
in the case of all others, as recommended by the Chief Executive Officer and
approved by the Board of Directors.

 

5.                                      Business
Expenses.  August
Technology will, in accordance with its policies and practices as such may
change from time to time, reimburse Employee for all ordinary and necessary
business expenses after receipt of appropriate documentation of such expenses.

 

6.                                      Benefits.  Employee shall be entitled to insurance and
other benefits provided to key management employees in accordance with
applicable plan documents and commensurate with vice president and higher
positions within the Company.  Benefits
provided to employees are subject to change in the discretion of August
Technology.

 

7.                                      Stock
Options.  At the discretion of August Technology,
Employee may be granted stock options from time to time, which options shall be
subject to the terms and conditions of the August Technology Corporation 1997
Stock Option Plan, as amended from time to time, or any successor plan, and the
related stock option agreements. 
Further, Employee shall be eligible to participate in the August
Technology Corporation 2000 Employee Stock Purchase Plan, as amended from time
to time, or any successor plan, subject to the terms and conditions contained
therein.

 

8.                                      Termination.  Employee’s employment under this Agreement
may be terminated:

 

(a)                                  At
any time upon mutual written agreement of the parties;

 

(b)                                 By
either Employee or August Technology at any time, with or without cause, upon
thirty (30) days’ written notice to the other;

 

(c)                                  By
August Technology immediately upon notice to Employee for cause which shall be
defined as:

 

(i)                                     Employee’s
material failure or neglect, or refusal to perform, the duties and
responsibilities of his/her position and/or the reasonable direction of the
Board of Directors or his/her superiors;

 

(ii)                                  Commission
by Employee of any willful, intentional or negligent act that has the effect of
injuring the reputation, business or performance of August Technology;

 

(iii)                               Employee’s
conviction of a crime, or commission

of any act involving
moral turpitude;

 

(iv)                              Any
material default or nonperformance of the terms of this Agreement, or any
violation of 

 

2

 

Paragraphs 10, 11, 12, 14
and/or 15 of this Employment Agreement; or

 

(d)                                 Employee’s
employment will terminate immediately upon his/her death.

 

Upon Employee’s
resignation or termination under this Paragraph 8 for any reason, August
Technology shall pay Employee his/her Base Salary through the Employee’s last
date of employment, and any accrued and unused vacation or other paid time off
through the Employee’s last date of employment.  Employee’s entitlement to any vested pension, profit sharing or
other benefits shall be governed by applicable plan documents.  In the event Employee’s employment is
terminated either by Employee or August Technology under Paragraph 8 (b),
August Technology may elect, in its sole discretion, to pay Employee his/her
salary for the thirty (30) day notice period in lieu of Employee’s continued
performance of duties during the notice period.  In the event Employee is terminated by August Technology in
accordance with Paragraph 8 (b), August Technology shall, in addition to the
above, pay Employee a severance at his/her then current Base Salary rate for
the time period as set forth in Exhibit A as “Severance Period”, to be paid
according to the normal payroll schedule, directly following the thirty (30)
day notice period, and August Technology shall, if the Employee elects to
continue group health or other group benefits as allowed by COBRA, make the
COBRA payments for the Severance Period. 
Employee shall not be entitled to any further or other payments or
benefits of any kind upon the Employee’s termination or resignation under this
Paragraph 8.  In the event, Employee is
entitled to Change in Control benefits as set forth in Paragraph 9, Employee
shall not be entitled to any severance or notice rights under this Paragraph 8.

 

9.                                      Change
in Control.  If, within eighteen
(18) months following a Change in Control (as defined below), Employee’s employment
is terminated (as defined below), then:

 

(a)                                  Employee
shall be paid his/her last Base Salary on a regular payroll cycle as of the
effective date for the time period as set forth in Exhibit A as “Change In
Control Severance Period” from the effective date of such termination;

 

(b)                                 For
the same Change In Control Severance Period from the effective date of such
termination as set forth in Paragraph 9(b), the Company shall, if Employee
elects to continue group health or other group benefits as allowed under COBRA,
make the COBRA payments for the Change In Control Severance Period;

 

(c)                                  The
right to exercise all unexpired and non-vested stock options in favor of
Employee shall immediately vest and accelerate; and

 

(d)                                 Limitation
on Change of Control Payments. 
Employee shall not be entitled to receive any Change of Control Action,
as defined below, which would constitute an “excess parachute payment” for
purposes of Code

 

3

 

Section 280G, or any
successor provision, and the regulations thereunder.  In the event any Change of Control Action payable to Employee
would constitute an “excess parachute payment,” then the acceleration of the
exercisability of such stock options and the payments to such Participant pursuant
to this Paragraph 9 shall be reduced to the largest extent or amount as will
result in no portion of such payments being subject to the excise tax imposed
by Section 4999 of the Code.  For
purposes of this Paragraph 9, a “Change of Control Action” shall mean any
payment, benefit or transfer of property in the nature of compensation paid to
or for the benefit of Employee under any arrangement which is considered
contingent on a Change of Control for purposes of Code Section 280G, including,
without limitation, any and all salary, bonus, incentive, restricted stock,
stock option, compensation or benefit plans, programs or other arrangements,
and shall include benefits payable under this Agreement.

 

(e)                                  “Change of Control.”  For purposes of this Agreement, “Change of
Control” shall mean any of the following events occurring after the date of
this Agreement:

 

(1)                                  A
merger or consolidation to which the Company is a party, an acquisition by the
Company involving the issuance of the Company’s securities as consideration for
the acquired business, or any combination of fully closed and completed
mergers, consolidations or acquisitions during any consecutive twenty-four (24)
month period, if the individuals and entities who were shareholders of the
Company immediately prior to the effective date of such merger, consolidation,
or acquisition (or prior to the effective date of the first of a combination of
such transactions) have, immediately following the effective date of such
merger, consolidation or acquisition (or following the effective date of the
last of a combination of such transactions), beneficial ownership (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty
percent (50%) of the total combined voting power of all classes of securities
issued by the surviving corporation for the election of directors of the
surviving corporation;

 

(2)                                  The
acquisition of direct or indirect beneficial ownership (as defined in Rule
13d-3 under the Securities Exchange Act of 1934) of securities of the Company
by any person or entity or by a group of associated persons or entities acting
in concert in one or a series of transactions, which causes the aggregate
beneficial ownership of such person, entity or group to equal or exceed twenty
percent (20%) or more of the total combined voting power of all classes of the
Company’s then issued and outstanding securities;

 

4

 

(3)                                  The
sale of the properties and assets of the Company substantially as an entirety,
to any person or entity which is not a wholly-owned subsidiary of the Company;

 

(4)                                  The
stockholders of the Company approve any plan or proposal for the liquidation of
the Company; or

 

(5)                                  A
change in the composition of the Board of the Company at any time during any
consecutive twenty-four (24) month period such that the “Continuity Directors”
no longer constitute at least a seventy percent (70%) majority of the Board.
For purposes of this event, “Continuity Directors” means (i) those members of the
Board who were directors at the beginning of such consecutive twenty-four (24)
month period or at the date of this Agreement if this Agreement was entered
into less than twenty-four months prior to the change in composition of the
Board; and (ii) any new director whose election to the Board of Directors or
nominations for election to the Board of Directors was approved by a vote of at
least two-thirds (2/3) of the directors identified in the immediately preceding
clause (i).

 

(6)                                  The
Company enters into a letter of intent, an agreement in principle or a
definitive agreement relating to an event described in Paragraph 9(e)(1),
9(e)(2), 9(e)(3), 9(e)(4), or 9(e)(5) that ultimately results in such a Change
of Control, or a tender or exchange offer or proxy contest is commenced that
ultimately results in an event described in Paragraph 9(e)(2) or 9(e)(5).

 

(f)                                    Termination.  For purposes of this Paragraph 9,
“Termination” shall mean any of the following events occurring within eighteen
(18) months after a Change of Control:

 

(1)                                  The termination of Employee’s employment by the
Company for any reason, with or without cause, except for termination resulting
from conduct by Employee constituting (a) a felony involving moral turpitude
under either federal law or the law of the State of Minnesota, or (b)
Employee’s willful failure to fulfill his/her employment duties with the
Company; provided, however, that for purposes of this clause (c), an act or
failure to act by Employee shall not be “willful” unless it is done, or omitted
to be done, in bad faith and without any reasonable belief that Employee’s
action or omission were in the best interests of the Company; or

 

5

 

(2)                                  The termination of employment with the Company by
Employee for Good Reason.  Such
termination shall be accomplished by, and effective upon, Employee giving
written notice to Company of his/her decision to terminate.  “Good Reason” shall mean a good faith
determination by Employee, in Employee’s sole and absolute judgment, that any
one or more of the following events has occurred, at any time during the term
of this Agreement or after a Change of Control; provided, however, that such
event shall not constitute “Good Reason” if Employee has expressly consented to
such event in writing or if Employee fails to provide written notice of his/her
decision to terminate within sixty (60) days of the occurrence of such event:

 

(a)                                  A material change in Employee’s reporting
responsibilities, titles or offices, or any removal of Employee from or any
failure to re-elect Employee to any of such positions, which has the effect of
materially diminishing Employee’s responsibility or authority;

 

(b)                                 A reduction by the Company in Employee’s base
salary (as increased from time to time);

 

(c)                                  A requirement imposed by the Company on Employee
that results in Employee being based at a location that is outside of a
twenty-five (25) mile radius of Employee’s prior job location;

 

(d)                                 Without the adoption of a replacement plan,
program or arrangement that provides benefits to Employee that are equal to or
greater than those benefits that are discontinued or adversely affected:

 

i.                                          A failure by the Company to continue in effect,
within its maximum stated term, any pension, bonus, incentive, stock ownership,
stock purchase, stock option, life insurance, health, accident, disability, or
any other employee compensation or benefit plan, program or arrangement, in
which Employee is or has been participating;

 

ii.                                       The taking of any action by the Company that
would adversely affect Employee’s participation or materially reduce Employee’s
benefits under any of such plans, programs or arrangements; or

 

6

 

(e)                                  Any action by the Company that would materially
adversely affect the physical conditions in or under which Employee performs
his/her employment duties; or

 

(f)                                    Any material breach by the Company of this
Employment Agreement between Employee and the Company.

 

Termination for “Good Reason” shall not include
Employee’s death or a termination for any reason other than the events
specified in clauses (a) through (f) above.

 

10.                               Confidential
Information.  During the term of
this Agreement and at all times thereafter, Employee shall not directly or indirectly
use or disclose any trade secret, proprietary or confidential information of
August Technology or any subsidiary for the benefit of any person or entity
other than August Technology or any subsidiary without prior written approval
of August Technology’s Board of Directors. 
For purposes of this Agreement, in addition to all materials and
information protected by applicable statute or law, the parties acknowledge
that confidential information shall include any information, whether in print,
on computer disc or tape or otherwise, which is not public information and
which relates to August Technology or any subsidiary, or August Technology’s or
any subsidiary’s existing or reasonably foreseeable business, including but not
limited to information relating to research, development, technology,
manufacturing processes, purchasing and sales, information relating to sales
and other financial strategies, plans and/or goals, information relating to
proprietary rights and data, ideas, know-how, and/or trade secrets, information
regarding the identity and/or needs of clients or customers, client or customer
lists and other client or customer information, information regarding active
and inactive accounts of August Technology or any subsidiary, and information
relating to August Technology’s or any subsidiary’s methods of operation.

 

11.                               Noncompetition
Obligations.  As a condition to
and in consideration of his/her employment and continued employment, and in
exchange for the severance and Change of Control provisions as set forth in
Paragraphs 8 and 9 of this Employment Agreement, and the mutual covenants
herein, Employee agrees that, during his/her employment and for a period of one
(1) year following his/her voluntary or involuntary resignation or termination
for any reason, the Employee will not, on behalf of himself/herself or any
other person or entity:

 

(a)                                  Directly or indirectly solicit, on Employee’s own
behalf, or on behalf of another, any of August Technology’s or any subsidiary’s
customers or potential customers with whom Employee or Employee’s supervisees
had contact, either directly or indirectly, within the twelve months
immediately preceding Employee’s resignation or termination of employment, for
the purpose of providing, selling, or attempting to sell any products or
services competing with those provided or sold by August Technology or any
subsidiary, or clearly contemplated thereby due to research, development,

 

7

 

engineering,
applications, licensing, or other like projects in process, at the time of
resignation or termination; or

 

(b)                                 hire
or attempt to hire, or influence or solicit, or attempt to influence or
solicit, either directly or indirectly, any employee of August Technology or
any subsidiary to leave or terminate his/her or her employment, or to work for
any other person or entity.

 

12.                               Work Product and Inventions.  August Technology shall be entitled to all
of the benefits, profits, results and work product arising from or incident to
all work, services, advice and activities of Employee, including without
limitation all rights in inventions (as set forth below), trademark or trade
name creations, and copyrightable materials. 
Employee shall not, during the term of his/her employment by August Technology,
be interested, directly or indirectly, in any manner, including, but not
limited to, as partner, officer, advisor, or in any other capacity in any other
business similar to, or in competition with, August Technology’s or any
subsidiary’s business.

 

Employee agrees to
communicate promptly and fully to August Technology all inventions,
discoveries, improvements or designs conceived or reduced to practice by
Employee during the period of his/her employment with August Technology (alone
or jointly with others), and, except as provided in this Paragraph 12, Employee
will and hereby does assign to August Technology and/or its nominees all of the
Employee’s right, title and interest in such inventions, discoveries,
improvements or designs and all of his/her right, title and interest in any
patents, patent applications or copyrights based thereon without obligation on
the part of August Technology or any subsidiary to make any further
compensation, royalty or payment to Employee. 
Employee further agrees to assist August Technology and/or its nominee
(without charge but at no expense to Employee) at any time and in every proper
way to obtain and maintain for its and/or their own benefit, patents for all
such inventions, discoveries and improvements and copyrights for all such
designs.

 

This Agreement does not
obligate Employee to assign to August Technology any invention, discovery,
improvement or design for which no equipment, supplies, facility or trade
secret information of August Technology or any subsidiary was used and which
was developed entirely on Employee’s own time, and (1) which does not relate
(a) directly to the business of August Technology or any subsidiary, or (b) to
August Technology’s or any subsidiary’s actual or demonstrably anticipated research
or development, or (2) which does not result from any work performed by
Employee for August Technology or any subsidiary.

 

13.                               Exempt
Inventions.  Identified under
Exempt Inventions in Exhibit A by descriptive title are all of the Inventions,
if any, in which Employee possesses any right, title or interest prior to
Employee’s employment with August Technology or execution of this Employment
Agreement which are not subject to the terms hereof.

 

14.                               Copyrights.  Employee acknowledges that any documents,
drawings, computer software or other work of authorship prepared by Employee
within the scope of his/her employment is a “work made for hire” under U.S.
copyright laws and that, accordingly, August Technology

 

8

 

exclusively owns all copyright rights in such works of authorship.  For purposes of this paragraph, “scope of
employment” means that the work of authorship (a) relates to any subject matter
pertaining to his/her employment, (b) relates to or is directly or indirectly
connected with the existing or reasonably foreseeable business, products,
projects or confidential information of August Technology or any subsidiary, or
(c) involves the use of any time, material or facility of August Technology or any
subsidiary.

 

15.                               Return
of Property.  Employee shall,
immediately upon his/her involuntary or voluntary resignation or termination
from employment for any reason, deliver to August Technology all documents and
other items, whether on computer disc or tape or otherwise, including all
copies thereof, belonging to August Technology or any subsidiary or in any way
related to the business of August Technology or any subsidiary or the services
Employee performed for August Technology or any subsidiary, including but not
limited to any documents or items containing trade secret, proprietary, or
confidential information, documents in any way relating to any inventions or
copyrights, client or customer information, information relating to August
Technology’s or any subsidiary’s processes or procedures and any other
materials or documents of any sort relating to August Technology or any
subsidiary.  Employee shall not retain
any copies or summaries of any kind of documents and materials covered by this
Paragraph 15.

 

16.                               Remedy
upon Violation.  Employee and
August Technology agree that a breach or threatened breach of Paragraphs 10,
11, 12, 14 or 15 would cause irreparable harm to August Technology and/or its
subsidiaries, and that monetary damages alone would not be an adequate
remedy.  Employee agrees that August
Technology and any subsidiary shall be entitled, in addition to any other
remedy it may have at law or in equity, to an injunction, without the posting
of a bond if allowed by applicable law or with the posting of a minimal bond if
required, enjoining or restraining Employee from any violation or violations or
threatened violation or violations of Paragraphs 10, 11, 12, 14 and 15, and/or
for specific performance of duties and obligations under such paragraphs, and
Employee hereby consents to the issuance of such injunction.  If any rights or restrictions contained in
Paragraphs 10, 11, 12, 14 and 15 shall be deemed to be unenforceable by reason
of the extent, duration or geographic scope, or other provision thereof, the
parties contemplate that the Court shall reduce such extent, duration or
geographic scope or other provision and enforce Paragraphs 10, 11, 12, 14 and
15 in their reduced form for all purposes in the manner contemplated by such
Paragraphs.

 

17.                               Other Agreements.  By Employee’s signature to this Agreement,
Employee warrants that he/she is not subject to any employment, noncompetition,
confidentiality, inventions or other obligations or agreements which would
prevent or restrict the Employee in any way from accepting employment with
August Technology and fully performing his/her duties and responsibilities as
described in this Agreement.  Employee,
by his/her signature to this Agreement, further warrants that he/she has not
taken and will not take any trade secret, proprietary or confidential
information of any former employer, and will not use or disclose any such
information to anyone in the performance of duties and responsibilities under
this Agreement.

 

9

 

18.                               Successors and Assigns.  This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of August Technology.

 

19.                               Notices.  All notices and other communications to be
given under this Agreement shall be in writing and shall be deemed to be given
when delivered personally, or when mailed by registered or certified mail,
addressed to the party to whom such notice is intended to be given, at the last
known address for that party or at such other address as the party may specify
by written notice.

 

(a)                                  In
the case of August Technology, the notice shall be provided to:

 

General Counsel

August Technology
Corporation

4900 West 78th
Street

Bloomington, MN 55435

 

(b)                                 In
the case of Employee, the notice shall be provided to:

 

Pamela V. Lampert

5331 Kellogg Avenue

Edina, MN 55424

 

Either party may, by
written notice hereunder, designate a change of address.  Any notice, if mailed properly addressed,
postage prepaid, registered or certified mail, shall be deemed dispatched on the
registered date or that stamped on the certified mail receipt, and shall be
deemed received within the fifth business day thereafter, or when it is
actually received, whichever is sooner.

 

20.                               Survival of Provisions.  Employee acknowledges and agrees that
the restrictions and obligations set forth in Paragraphs 10, 11, 12, 13, 14, 15
and 16 of this Agreement are reasonable, shall survive his/her resignation from
or the termination of his/her employment, and shall apply to him/her whether
his/her resignation or termination from employment is voluntary or involuntary
and regardless of the reason for such resignation or termination.

 

21.                               Nonwaivers.  No failure on the part of either party to
exercise, and no delay in exercising, any right or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right or remedy hereunder preclude any other or further exercise thereof or the
exercise of any right or remedy granted hereby or by any related document or by
law.

 

22.                               Governing
Law.  This Agreement shall be
construed and interpreted according to the laws of the State of Minnesota,
without reference to its conflict of laws provisions.

 

23.                               Paragraph
Headings.  Paragraph headings
are included in this Agreement for convenience of reference only, and are not
intended to be full or accurate descriptions of the contents hereof.

 

10

 

24.                               Counterparts.
 This Agreement may be executed in
two (2) or more counterparts, each of which shall be deemed an original, but
all of which shall constitute one (1) and the same instrument.

 

25.                               Entire
Agreement.  This Agreement
states the entire Agreement of the parties on the subjects set forth herein,
and merges and supersedes all prior agreements and understandings between the
parties.  No modification, termination,
or attempted waiver of any provision of this Agreement will be valid unless it
is made in writing and signed by the party against whom the same is sought to
be enforced, and is specifically identified as a modification, termination,
release, waiver or discharge of this Agreement.  If any term, clause or provision of this Agreement shall for any
reason be adjudged invalid, unenforceable or void, the same shall not impair or
invalidate any of the other provisions contained herein, all of which shall be
performed in accordance with their respective terms.

 

	
   

  	
  AUGUST
  TECHNOLOGY CORPORATION

  
	
   

  	
   

  
	
  Dated:  September 6, 2003

  	
  By

  	
  /s/ DAVID L. KLENK

  	
   

  
	
   

  	
   

  	
  Its

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Dated:  September 6, 2003

  	
  By

  	
  /s/ PAMELA LAMPERT

  	
   

  
	
   

  	
   

  	
  Employee

  
										

 

11

 

EXHIBIT A

 

 

	
  Employee’s Name

  	
   

  	
  =

  	
  Pam Lampert

  
	
   

  	
   

  	
   

  	
   

  
	
  Employee’s Title

  	
   

  	
  =

  	
  VP, Employee Services

  
	
   

  	
   

  	
   

  	
   

  
	
  Manager

  	
   

  	
  =

  	
  David Klenk, President
  & COO

  
	
   

  	
   

  	
   

  	
   

  
	
  Base Salary

  	
   

  	
  =

  	
  $125,000

  
	
   

  	
   

  	
   

  	
   

  
	
  Severance Period

  	
   

  	
  =

  	
  twelve (12) months

  
	
   

  	
   

  	
   

  	
   

  
	
  Change In Control
  Severance Period

  	
   

  	
  =

  	
  eighteen (18) months

  
	
   

  	
   

  	
   

  	
   

  
	
  Exempted Inventions

  	
   

  	
  =

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Initials of approval:

  	
   

  	
  AUGUST TECHNOLOGY CORP.

  	
  DLK

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  EMPLOYEE

  	
  PL

  
						

 

12

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00057-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00057-of-00352.parquet"}]]