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EX-31.A - CEO 302 CERTIFICATION - HOVNANIAN ENTERPRISES INCex31adeo302.htm
EX-32.B - CFO 906 CERTIFICATION - HOVNANIAN ENTERPRISES INCex32bcfo906.htm
EX-32.A - CEO 906 CERTIFICATION - HOVNANIAN ENTERPRISES INCex32aceo906.htm
EX-31.B - CFO 302 CERTIFICATION - HOVNANIAN ENTERPRISES INCex31bcfo302.htm
EX-10.2 - 2010 LONG TERM INCENTIVE PROGRAM AGREEMENT CLASS B - HOVNANIAN ENTERPRISES INCex10longtermclb.htm
EX-10.1 - 2010 LONG TERM INCENTIVE PROGRAM AGREEMENT CLASS A - HOVNANIAN ENTERPRISES INCex10longtermcla.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
[ X ]           Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  For quarterly period ended JULY 31, 2010
OR

[    ]           Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-8551

Hovnanian Enterprises, Inc. (Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)

22-1851059 (I.R.S. Employer Identification No.)

110 West Front Street, P.O. Box 500, Red Bank, NJ  07701 (Address of Principal Executive Offices)

732-747-7800 (Registrant's Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ]    No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [    ]  No [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [    ]  No [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [   ]  Accelerated Filer  [ X ]
Non-Accelerated Filer  [   ]  (Do not check if smaller reporting company)   Smaller Reporting Company [   ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  63,113,576 shares of Class A Common Stock and 14,565,245 shares of Class B Common Stock were outstanding as of September 3, 2010.


 
 

 


HOVNANIAN ENTERPRISES, INC.
 
   
FORM 10-Q
 

INDEX
PAGE NUMBER
   
PART I.  Financial Information
 
Item l.  Financial Statements:
 
   
Condensed Consolidated Balance Sheets as of July 31,
 
2010 (unaudited) and October 31, 2009
3
   
Condensed Consolidated Statements of Operations (unaudited) for
the three and nine months ended July 31, 2010 and 2009
5
   
Condensed Consolidated Statement of Equity
 
(unaudited) for the nine months ended July 31, 2010
6
   
Condensed Consolidated Statements of Cash Flows (unaudited)
 
for the nine months ended July 31, 2010 and 2009
7
   
Notes to Condensed Consolidated Financial
 
Statements (unaudited)
9
   
Item 2.  Management's Discussion and Analysis
 
of Financial Condition and Results of Operations
31
   
Item 3.  Quantitative and Qualitative Disclosures
 
About Market Risk
60
   
Item 4.  Controls and Procedures
61
   
PART II.  Other Information
 
Item 1.  Legal Proceedings
61
   
Item 2.  Unregistered Sales of Equity Securities and
 
Use of Proceeds
61
   
Item 6.  Exhibits
62
   
Signatures
63


 
 

 


 
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)

 
July 31,
2010
 
October 31,
2009
ASSETS
(Unaudited)
 
(1)
       
Homebuilding:
     
  Cash and cash equivalents
$390,921
 
$419,955
       
  Restricted cash
117,792
 
152,674
       
  Inventories:
     
    Sold and unsold homes and lots under development
566,338
 
631,302
       
    Land and land options held for future
     
      development or sale
433,853
 
372,143
       
    Consolidated inventory not owned:
     
       Specific performance options
20,679
 
30,534
       Variable interest entities
34,817
 
45,436
       Other options
13,135
 
30,498
       
       Total consolidated inventory not owned
68,631
 
106,468
       
       Total inventories
1,068,822
 
1,109,913
       
  Investments in and advances to unconsolidated
     
    joint ventures
37,553
 
41,260
       
  Receivables, deposits, and notes
51,476
 
44,418
       
  Property, plant, and equipment – net
66,093
 
73,918
       
  Prepaid expenses and other assets
87,844
 
98,159
       
       Total homebuilding
1,820,501
 
1,940,297
       
Financial services:
     
  Cash and cash equivalents
19,315
 
6,737
  Restricted cash
3,648
 
4,654
  Mortgage loans held for sale
61,456
 
69,546
  Other assets
4,857
 
3,343
       
       Total financial services
89,276
 
84,280
       
Total assets
$1,909,777
 
$2,024,577

(1)  Derived from the audited balance sheet as of October 31, 2009.

See notes to condensed consolidated financial statements (unaudited).


 
 

 


 
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)

 
July 31,
2010
 
October 31,
2009
LIABILITIES AND EQUITY
(Unaudited)
 
(1)
       
Homebuilding:
     
  Nonrecourse land mortgages
$5,425 
 
$- 
  Accounts payable and other liabilities
282,009 
 
325,722 
  Customers’ deposits
11,268 
 
18,811 
  Nonrecourse mortgages secured by operating
     
    properties
20,875 
 
21,507 
  Liabilities from inventory not owned
59,590 
 
96,908 
       
      Total homebuilding
379,167 
 
462,948 
       
Financial services:
     
  Accounts payable and other liabilities
13,919 
 
14,507 
  Mortgage warehouse line of credit
55,958 
 
55,857 
       
      Total financial services
69,877 
 
70,364 
       
Notes payable:
     
  Senior secured notes
784,219 
 
783,148 
  Senior notes
711,508 
 
822,312 
  Senior subordinated notes
120,170 
 
146,241 
  Accrued interest
33,095 
 
26,078 
       
      Total notes payable
1,648,992 
 
1,777,779 
       
  Income tax payable
19,167 
 
62,354 
       
Total liabilities
2,117,203 
 
2,373,445 
       
Equity:
     
Hovnanian Enterprises, Inc. stockholders’ equity deficit:
     
  Preferred stock, $.01 par value - authorized 100,000
     
    shares; issued 5,600 shares at July 31,
     
    2010 and at October 31, 2009 with a
     
    liquidation preference of $140,000
135,299 
 
135,299 
  Common stock, Class A, $.01 par value – authorized
     
    200,000,000 shares; issued 74,808,246 shares at
     
    July 31, 2010 and 74,376,946 shares at
     
    October 31, 2009 (including 11,694,720
     
    shares at July 31, 2010 and
     
    October 31, 2009 held in Treasury)
748 
 
744 
  Common stock, Class B, $.01 par value (convertible
     
    to Class A at time of sale) – authorized
     
    30,000,000 shares; issued 15,257,043 shares at
     
    July 31, 2010 and 15,265,067 shares at
     
    October 31, 2009 (including 691,748 shares at
     
    July 31, 2010 and October 31, 2009 held in
     
    Treasury) 
153 
 
153 
  Paid in capital - common stock
462,207 
 
455,470 
  Accumulated deficit
(691,306)
 
(826,007)
  Treasury stock - at cost
(115,257)
 
(115,257)
       
      Total Hovnanian Enterprises, Inc. stockholders’ equity deficit
(208,156)
 
(349,598)
       
  Non-controlling interest in consolidated joint ventures
730 
 
730 
       
      Total equity deficit
(207,426)
 
(348,868)
       
Total liabilities and equity
$1,909,777 
 
$2,024,577 

(1) Derived from the audited balance sheet as of October 31, 2009.

See notes to condensed consolidated financial statements (unaudited).


 
 

 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)

 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2010
 
2009
 
2010
 
2009
Revenues:
             
  Homebuilding:
             
    Sale of homes
$368,077 
 
$367,141 
 
$987,923 
 
$1,107,891 
    Land sales and other revenues
3,770 
 
11,044 
 
7,489 
 
24,731 
               
      Total homebuilding
371,847 
 
378,185 
 
995,412 
 
1,132,622 
  Financial services
8,753 
 
8,929 
 
23,418 
 
26,275 
               
      Total revenues
380,600 
 
387,114 
 
1,018,830 
 
1,158,897 
               
Expenses:
             
  Homebuilding:
             
    Cost of sales, excluding interest
306,054 
 
337,869 
 
822,796 
 
1,029,693 
    Cost of sales interest
22,184 
 
24,621 
 
60,777 
 
73,790 
    Inventory impairment loss and land option
       write-offs
48,959 
 
101,130 
 
55,111 
 
521,505 
               
      Total cost of sales
377,197 
 
463,620 
 
938,684 
 
1,624,988 
               
    Selling, general and administrative
42,184 
 
55,264 
 
127,615 
 
187,130 
               
      Total homebuilding expenses
419,381 
 
518,884 
 
1,066,299 
 
1,812,118 
               
  Financial services
6,168 
 
6,345 
 
17,194 
 
19,568 
               
  Corporate general and administrative
14,816 
 
15,494 
 
45,232 
 
64,763 
               
  Other interest
22,671 
 
23,942 
 
71,634 
 
66,696 
               
  Other operations
1,791 
 
1,957 
 
5,455 
 
8,550 
               
      Total expenses
464,827 
 
566,622 
 
1,205,814 
 
1,971,695 
               
Gain on extinguishment of debt
5,256 
 
37,016 
 
25,047 
 
427,804 
               
Loss from unconsolidated joint
             
  ventures
(871)
 
(5,537)
 
(853)
 
(38,220)
               
Loss before income taxes
(79,842)
 
(148,029)
 
(162,790)
 
(423,214)
               
State and federal income tax
  (benefit) provision:
             
  State
(6,988)
 
1,542 
 
(6,160)
 
23,318 
  Federal
 
19,341 
 
(291,331)
 
19,411 
               
    Total taxes
(6,988)
 
20,883 
 
(297,491)
 
42,729 
               
Net (loss) income
$(72,854)
 
$(168,912)
 
$134,701 
 
$(465,943)
               
Per share data:
             
Basic:
             
  (Loss) income per common share
$(0.92)
 
$(2.16)
 
$1.71 
 
$(5.96)
  Weighted average number of common
             
    shares outstanding
78,763 
 
78,065 
 
78,662 
 
78,208 
               
Assuming dilution:
             
  (Loss) income per common share
$(0.92)
 
$(2.16)
 
$1.69 
 
$(5.96)
  Weighted average number of common
             
    shares outstanding
78,763 
 
78,065 
 
79,873 
 
78,208 

See notes to condensed consolidated financial statements (unaudited).


 
 

 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In Thousands Except Share Amounts)
(Unaudited)

 
A Common Stock
 
B Common Stock
 
Preferred Stock
                   
 
Shares Issued and Outstanding
 
Amount
 
Shares Issued and Outstanding
 
Amount
 
Shares Issued and Outstanding
 
Amount
 
Paid-In
Capital
 
Accumulated Deficit
 
Treasury Stock
 
Non-Controlling Interest
 
Total Equity Deficit
                                           
Balance, November 1, 2009
62,682,226
 
$744
 
14,573,319
 
$153
 
5,600
 
$135,299
 
$455,470
 
$(826,007)
 
$(115,257)
 
$730
 
$(348,868)
                                           
Stock options amortization
  and issuances, net of tax
152,590
 
1
                 
3,785
             
3,786
                                           
Restricted stock 
  amortization, issuances and 
  forfeitures, net of tax
270,686
 
3
                 
2,952
             
2,955
                                           
Conversion of Class B to
  Class A Common Stock
8,024
     
(8,024)
                             
-
                                           
Net income
                           
134,701
         
134,701
                                           
Balance, July 31, 2010
63,113,526
 
$748
 
14,565,295
 
$153
 
5,600
 
$135,299
 
$462,207
 
$(691,306)
 
$(115,257)
 
$730
 
$(207,426)
                                           

See notes to condensed consolidated financial statements (unaudited).



 
 

 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

 
Nine Months Ended
 
July 31,
 
2010
 
2009
Cash flows from operating activities:
     
Net income (loss)
$134,701 
 
$(465,943)
  Adjustments to reconcile net income (loss) to net cash
     
    provided by operating activities:
     
      Depreciation
9,089 
 
13,114 
      Compensation from stock options and awards
7,022 
 
10,968 
      Stock option cancellations
 
12,269 
      Amortization of bond discounts and deferred financing costs
3,757 
 
915 
      (Gain) loss on sale and retirement of property
     
        and assets
(71)
 
320 
      Loss from unconsolidated joint ventures
853 
 
38,220 
      Distributions of earnings from unconsolidated joint ventures
1,812 
 
2,418 
      Gain on extinguishment of debt
(25,047)
 
(427,804)
      Inventory impairment and land option write-offs
55,111 
 
521,505 
      Decrease (increase) in assets:
     
        Mortgage notes receivable
8,090 
 
30,458 
        Restricted cash, receivables, prepaids, deposits and
     
          other assets
36,258 
 
36,035 
        Inventories
(14,020)
 
272,123 
        State and Federal income tax assets
 
126,826 
     (Decrease) increase in liabilities:
     
        State and Federal income tax liabilities
(43,187)
 
60,428 
        Customers’ deposits
(7,543)
 
(3,007)
        Accounts payable, interest and other accrued liabilities
(74,884)
 
(174,230)
          Net cash provided by operating activities
91,941 
 
54,615 
Cash flows from investing activities:
     
  Net proceeds from sale of property and assets
348 
 
1,009 
  Purchase of property, equipment and other fixed assets
(1,503)
 
(552)
  Investments in and advances to unconsolidated
     
    joint ventures
(3,595)
 
(9,637)
  Distributions of capital from unconsolidated joint ventures
4,637 
 
4,596 
          Net cash used in investing activities
(113)
 
(4,584)
Cash flows from financing activities:
     
  Proceeds (payments) from mortgages and notes
4,793 
 
(1,864)
  Net payments related to mortgage
     
    warehouse line of credit
101 
 
(34,971)
  Deferred financing costs from note issuances
(1,602)
 
(3,987)
  Principal payments and debt repurchases
(111,576)
 
(306,136)
          Net cash used in financing activities
(108,284)
 
(346,958)
Net increase (decrease) in cash and cash equivalents
(16,456)
 
(296,927)
Cash and cash equivalents balance, beginning
     
  of period
426,692 
 
848,056 
Cash and cash equivalents balance, end of period
$410,236 
 
$551,129 


 
 

 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
(Continued)

 
Nine Months Ended
 
July 31,
 
2010
 
2009
Supplemental disclosures of cash flow:
     
  Cash paid (received) during the period for:
     
     Interest, net of capitalized interest
$125,912 
 
$181,136 
     Income taxes
$(254,304)
 
$(145,437)

Supplemental disclosure of noncash financing activities:

In the first quarter of fiscal 2009, the Company issued $29.3 million of 18.0% Senior Secured Notes due 2017 in exchange for $71.4 million of unsecured senior notes.

See notes to condensed consolidated financial statements (unaudited).


 
 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Hovnanian Enterprises, Inc. and Subsidiaries (“the Company”, “we”, “us” or “our”) has reportable segments consisting of six Homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and the Financial Services segment (see Note 15).

The accompanying unaudited Condensed Consolidated Financial Statements include our accounts and those of all wholly-owned subsidiaries after elimination of all intercompany balances and transactions.  Certain immaterial prior year amounts have been reclassified to conform to the current year presentation.

1.  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, all adjustments for interim periods presented have been made, which include normal recurring accruals and deferrals necessary for a fair presentation of our consolidated financial position, results of operations, and cash flows.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates, and these differences could have a significant impact on the financial statements.  Results for interim periods are not necessarily indicative of the results which might be expected for a full year.  The balance sheet at October 31, 2009 has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) as the primary source of accounting principles generally accepted in the United States of America (“US GAAP”) recognized by the FASB to be applied by nongovernmental entities. Although the establishment of the ASC did not change US GAAP, it did change the way we refer to US GAAP throughout this document to reflect the updated referencing convention.

2.  For the three and nine months ended July 31, 2010, the Company’s total stock-based compensation expense was $2.6 million and $7.1 million, respectively.  Included in this total stock-based compensation expense was the vesting of stock options of $1.2 million and $3.7 million for the three and nine months ended July 31, 2010, respectively.

3.  Interest costs incurred, expensed and capitalized were:

 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
(In thousands)
2010
 
2009
 
2010
 
2009
               
Interest capitalized at
             
  beginning of period
$155,126
 
$179,282 
 
$164,340
 
$170,107 
Plus interest incurred(1)
38,107
 
43,944 
 
116,449
 
145,042 
Less cost of sales interest
             
  expensed
22,184
 
24,621 
 
60,777
 
73,790 
Less other interest expensed(2)(3)
22,671
 
23,942 
 
71,634
 
66,696 
Interest capitalized at
             
  end of period(4)
$148,378
 
$174,663 
 
$148,378
 
$174,663 

(1)           Data does not include interest incurred by our mortgage and finance subsidiaries.
(2)
Our assets that qualify for interest capitalization (inventory under development) do not exceed
 
our debt, and therefore, the portion of interest not covered by qualifying assets must be directly
 
expensed.
(3)
Interest on completed homes and land in planning, which does not qualify for capitalization,
 
must be expensed directly.
(4)
We have incurred significant inventory impairments in recent years, which are determined based
 
on total inventory including capitalized interest.  However, the capitalized interest amounts shown
 
above are gross amounts before allocating any portion of the impairments to capitalized interest.

4.  Accumulated depreciation at July 31, 2010 and October 31, 2009 amounted to $72.2 million and $67.4 million, respectively, for our homebuilding property, plant and equipment.

5.  We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts.  If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value.  We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community.  For the nine months ended July 31, 2010, our discount rates used for the impairments recorded ranged from 17.5% to 20.3%.  Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments.  We recorded inventory impairments, which are presented in the Condensed Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs” and deducted from Inventory of $49.7 million and $94.6 million for the three months ended July 31, 2010 and 2009, respectively, and $54.1 million and $491.4 million for the nine months ended July 31, 2010 and 2009, respectively.

The following table represents inventory impairments by homebuilding segment for the three and nine months ended July 31, 2010 and 2009:

 
Three Months Ended
 
Three Months Ended
(Dollars in millions)
July 31, 2010
 
July 31, 2009

 
Number of
Communities
Dollar
Amount of
Impairment
Pre-
Impairment
Value(1)
 
Number of
Communities
Dollar
Amount of
Impairment
Pre-
Impairment
Value(1)
Northeast
6
$13.5
$29.8
 
5
$20.3
$65.9
Mid-Atlantic
-
-
-
 
9
14.5
36.5
Midwest
-
-
-
 
4
1.4
5.0
Southeast
7
1.1
3.8
 
17
2.8
11.8
Southwest
1
0.1
0.2
 
7
6.0
21.3
West
14
35.0
48.4
 
9
49.6
72.7
Total
28
$49.7
$82.2
 
51
$94.6
$213.2

 
Nine Months Ended
 
Nine Months Ended
(Dollars in millions)
July 31, 2010
 
July 31, 2009

 
Number of
Communities
Dollar
Amount of
Impairment
Pre-
Impairment
Value(1)
 
Number of
Communities
Dollar
Amount of
Impairment
Pre-
Impairment
Value(1)
Northeast
8
$16.6
$35.5
 
24
$181.9
$392.7
Mid-Atlantic
2
0.5
1.5
 
46
40.8
131.8
Midwest
-
-
-
 
8
5.4
17.0
Southeast
13
1.5
5.0
 
73
28.3
94.1
Southwest
2
0.2
0.4
 
41
32.4
84.4
West
15
35.3
48.8
 
49
202.6
372.2
Total
40
$54.1
$91.2
 
241
$491.4
$1,092.2

(1)  Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s
      impairments.

"Homebuilding-Inventory impairment loss and land option write-offs" on the Condensed Consolidated Statements of Operations also includes write-offs of options, and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not intend to exercise options in various locations because the communities' proforma profitability is not projected to produce adequate returns on investment commensurate with the risk.  The total write-offs were $(0.7) million and $6.5 million for the three months ended July 31, 2010 and 2009, respectively, and $1.0 million and $30.1 million for the nine months ended July 31, 2010 and 2009, respectively.  Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs.

The following table represents write-offs of such costs (after giving effect to any recovered deposits in the applicable period) and the number of lots walked away from by homebuilding segment for the three and nine months ended July 31, 2010 and 2009:

 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
 
2010
 
2009
 
2010
 
2009

(Dollars in millions)
Number of Walk-Away Lots
 
Dollar Amount of Write-Offs
 
Number of Walk-Away Lots
 
Dollar Amount of Write-Offs
 
Number of Walk-Away Lots
 
Dollar Amount of Write-Offs
 
Number of Walk-Away Lots
 
Dollar Amount of Write-Offs
                               
Northeast
-
 
-
 
78
 
$3.2 
 
259
 
$1.5 
 
684
 
$9.7 
Mid-Atlantic
-
 
-
 
4
 
(0.3)
 
184
 
0.1
 
1,906
 
8.2 
Midwest
547
 
-
 
64
 
 
547
 
(0.1)
 
222
 
1.4 
Southeast
-
 
$(0.7)
 
-
 
 
-
 
(0.6)
 
153
 
(0.1)
Southwest
-
 
-
 
121
 
3.6 
 
409
 
0.1
 
879
 
10.3 
West
-
 
-
 
158
 
 
-
 
-
 
158
 
0.6 
Total
547
 
$(0.7)
 
425
 
$6.5 
 
1,399
 
$1.0 
 
4,002
 
$30.1 

We have decided to mothball (or stop development on) certain communities in some of our segments where we have determined the current performance does not justify further investment at this time.  When we decide to mothball a community, the inventory is reclassified from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale”.  During the third quarter of fiscal 2010, we did not mothball any communities but re-activated one previously mothballed community and sold five previously mothballed communities, which is the primary cause of the net reduction in the book value of our mothballed communities of $41.1 million, net of an impairment reserve balance of $12.2 million.  As of July 31, 2010, the net book value associated with our 61 total mothballed communities was $234.8 million, net of impairment charges of $543.1 million.

6.  We establish a warranty accrual for repair costs under $5,000 per occurrence to homes, community amenities and land development infrastructure.  We accrue for warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer.  In addition, we accrue for warranty costs over $5,000 per occurrence as part of our general liability insurance deductible, which is expensed as selling, general and administrative costs.  For homes delivered in fiscal 2010 and 2009, our deductible under our general liability insurance is $20 million per occurrence with an aggregate $20 million for liability claims and an aggregate $21.5 million for construction defect claims.  Additions and charges in the warranty reserve and general liability accrual for the three and nine months ended July 31, 2010 and 2009 were as follows:

 
 

 



 
Three Months Ended
 
Nine Months Ended
 
July 31,
 
July 31,
(In thousands)
2010
 
2009
 
2010
 
2009
               
Balance, beginning of period
$127,350 
 
$118,887 
 
$127,868 
 
$125,738 
Additions
7,600 
 
21,610 
 
27,046 
 
42,657 
Charges incurred
(11,313)
 
(10,839)
 
(31,277)
 
(38,737)
Balance, end of period
$123,637 
 
$129,658 
 
$123,637 
 
$129,658 

Warranty accruals are based upon historical experience.  We engage a third-party actuary that uses our historical warranty data and other data to assist management estimate our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and workers compensation programs.  The estimates include provisions for inflation, claims handling and legal fees.

Insurance claims paid by our insurance carriers were $6.9 million and $6.8 million for the three months ended July 31, 2010 and 2009, respectively, and $17.1 million and $26.3 million for the nine months ended July 31, 2010 and 2009, respectively.

7.  We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations, and we are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.
 
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment. The particular environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and homebuilding activity.
 
As previously reported in the Company’s 10-Q for the quarters ended January 31, 2010 and April 30, 2010, the Company was engaged in discussions with the U. S. Environmental Protection Agency (“EPA”) and the U.S. Department of Justice (“DOJ”) regarding alleged violations of storm water discharge requirements. In resolution of this matter, in April 2010 we agreed to the terms of a Consent Decree with the EPA, DOJ and the states of Virginia, Maryland, West Virginia and the District of Columbia (collectively the “States”). The Consent Decree was approved by the federal district court in August 2010. Under the terms of the Consent Decree we have paid a fine of $1.0 million collectively to the United States and the States and have agreed to perform under the terms of the Consent Decree for a minimum of three years, which includes implementing certain operational and training measures nationwide to facilitate ongoing compliance with storm water regulations.

We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules, and regulations and their interpretations and application.

The Company is also involved in the following litigation:

A subsidiary of the Company has been named as a defendant in a purported class action suit filed on May 30, 2007 in the United States District Court for the Middle District of Florida, Randolph Sewell, et al., v. D’Allesandro & Woodyard, et al., alleging violations of the federal securities acts, among other allegations, in connection with the sale of some of the subsidiary’s homes in Fort Myers, Florida. Plaintiffs filed an amended complaint on October 19, 2007. Plaintiffs sought to represent a class of certain home purchasers in southwestern Florida and sought damages, rescission of certain purchase agreements, restitution of out-of-pocket expenses, and attorneys’ fees and costs. The Company’s subsidiary filed a Motion to Dismiss the amended complaint on December 14, 2007. Following oral argument on the Motion in September 2008, the court dismissed the amended complaint with leave for plaintiffs to amend. Plaintiffs filed a second amended complaint on October 31, 2008. The Company’s subsidiary filed a Motion to Dismiss this second amended complaint. The Court dismissed portions of the second amended complaint.  The Court dismissed additional portions of the second amended complaint on April 28, 2010. While we have determined that a loss related to this case is not probable, it is not possible to estimate a loss or range of loss related to this matter at this time.

8.  Cash and cash equivalents include cash deposited in checking accounts, overnight repurchase agreements, certificates of deposit, Treasury Bills and government money market funds with maturities of 90 days or less when purchased.  Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts.  We believe we help to mitigate this risk by depositing our cash in major financial institutions.  At July 31, 2010, $238.9 million of the total cash and cash equivalents was in cash equivalents, the book value of which approximates fair value.

9.  In connection with the issuance of our senior secured first lien notes in the fourth quarter of fiscal 2009, we terminated our revolving credit facility and refinanced the borrowing capacity thereunder.  Also in connection with the refinancing, we entered into certain stand alone cash collateralized letter of credit agreements and facilities under which there were a total of $97.3 million and $130.3 million of letters of credit outstanding as of July 31, 2010 and October 31, 2009, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. As of July 31, 2010 and October 31, 2009, the amount of cash collateral in these segregated accounts was $101.5 million and $135.2 million, respectively, which is reflected in “Restricted cash” on the Condensed Consolidated Balance Sheets.
 
Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. Our secured Master Repurchase Agreement with Citibank, N.A. (“Citibank Master Repurchase Agreement”) is a short-term borrowing facility that provides up to $50 million through April 5, 2011. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors.  Interest is payable upon the sale of each mortgage loan to a permanent investor at LIBOR plus 4.00%.  As of July 31, 2010, the aggregate principal amount of all borrowings under the Citibank Master Repurchase Agreement was $36.3 million. The Citibank Master Repurchase Agreement requires K. Hovnanian Mortgage to satisfy and maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few weeks), the immateriality to us on a consolidated basis of the size of the facility, the levels required by these financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the Citibank Master Repurchase Agreement, we do not consider any of these covenants to be substantive or material. As of July 31, 2010, we believe we were in compliance with the covenants of the Citibank Master Repurchase Agreement.

In addition to the Citibank Master Repurchase Agreement discussed above, on July 19, 2010, K. Hovnanian Mortgage executed a secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”) which is a short-term borrowing facility that provides up to $25 million through July 18, 2011. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors.  Interest is payable monthly on outstanding advances at LIBOR floor of 2.00% plus applicable margin ranging from 2.50% to 3.00% based on the takeout investor and type of loan.  As of July 31, 2010, the aggregate principal amount of all borrowings under the Chase Master Repurchase Agreement was $19.7 million. The Chase Master Repurchase Agreement requires K. Hovnanian Mortgage to satisfy and maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few weeks), the immateriality to us on a consolidated basis of the size of the facility, the levels required by these financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the Chase Master Repurchase Agreement, we do not consider any of these covenants to be substantive or material. As of July 31, 2010, we believe we were in compliance with the covenants of the Chase Master Repurchase Agreement. 

10.  At July 31, 2010, we had $797.2 million ($784.2 million net of discount) of outstanding senior secured notes, comprised of $0.5 million 11 1/2% Senior Secured Notes due 2013, $785.0 million 10 5/8% Senior Secured Notes due 2016 and $11.7 million 18% Senior Secured Notes due 2017.  At July 31, 2010 we also had $713.2 million of outstanding senior notes ($711.5 million net of discount), comprised of $35.5 million 8% Senior Notes due 2012, $54.4 million 6 1/2% Senior Notes due 2014, $29.2 million 6 3/8% Senior Notes due 2014, $52.7 million 6 1/4% Senior Notes due 2015, $173.2 million 6 1/4% Senior Notes due 2016, $172.3 million 7 1/2% Senior Notes due 2016 and $195.9 million 8 5/8% Senior Notes due 2017.  In addition, we had $120.2 million of outstanding senior subordinated notes, comprised of $66.7 million 8 7/8% Senior Subordinated Notes due 2012, and $53.5 million 7 3/4% Senior Subordinated Notes due 2013.

During the three months ended January 31, 2010, the remaining $13.6 million of our 6% Senior Subordinated Notes due 2010 matured and was paid.  In addition, during the three and nine months ended July 31, 2010, we repurchased in open market transactions $2.0 million and $27.0 million principal amount of our 6 1/2% Senior Notes due 2014, respectively, $9.0 million and $54.5 million principal amount of our 6 3/8% Senior Notes due 2014, respectively, $13.6 million and $29.5 million principal amount of our 6 1/4% Senior Notes due 2015, respectively.  Also, during the nine months ended July 31, 2010, we repurchased in open market transactions $1.4 million principal amount of 8 7/8% Senior Subordinated Notes due 2012, and $11.1 million principal amount of 7 3/4% Senior Subordinated Notes due 2013.  The aggregate purchase price for these repurchases was $19.3 million and $97.9 million for the three and nine months ended July 31, 2010, respectively, plus accrued and unpaid interest.  These repurchases resulted in a gain on extinguishment of debt of $5.3 million and $25.0 million for the three and nine months ended July 31, 2010, respectively, net of the write-off of unamortized discounts and fees.  The gains from the repurchases are included in the Condensed Consolidated Statement of Operations for the three and nine months ended July 31, 2010 as “Gain on extinguishment of debt”.

We and each of our subsidiaries are guarantors of the senior secured, senior and senior subordinated notes, except for K. Hovnanian Enterprises, Inc. (“K. Hovnanian”), the issuer of the notes, certain of our financial services subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures and our foreign subsidiary (see Note 20).  The indentures governing the senior secured, senior and senior subordinated notes do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries, including K. Hovnanian, the issuer of the senior secured, senior and senior subordinated notes, to incur additional indebtedness (other than certain permitted indebtedness, refinancing indebtedness and non-recourse indebtedness), pay dividends and make distributions on common and preferred stock, repurchase senior notes and senior subordinated notes (with respect to the senior secured first-lien notes indenture), make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets and enter into certain transactions with affiliates.  The indentures also contain events of default which would permit the holders of the senior secured, senior, and senior subordinated notes to declare those notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the notes or other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy, and insolvency and, with respect to the indentures governing the senior secured notes, the failure of the documents granting security for the senior secured notes to be in full force and effect and the failure of the liens on any material portion of the collateral securing the senior secured notes to be valid and perfected. As of July 31, 2010, we believe we were in compliance with the covenants of the indentures governing our outstanding notes. Under the terms of the indentures, we have the right to make certain redemptions and, depending on market conditions and covenant restrictions, may do so from time to time. We may also continue to make debt purchases and/or exchanges from time to time through tender offers, open market purchases, private transactions, or otherwise depending on market conditions and covenant restrictions.

If our consolidated fixed charge coverage ratio, as defined in the indentures governing our senior secured, senior, and senior subordinated notes, is less than 2.0 to 1.0, we are restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness, and non-recourse indebtedness. As a result of this restriction, we are currently restricted from paying dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. If current market trends continue or worsen, we will continue to be restricted from paying dividends through fiscal 2010, and possibly beyond.  Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our bond indentures or otherwise affect compliance with any of the covenants contained in the bond indentures.

The 10 5/8% Senior Secured Notes due 2016 are secured by a first-priority lien, the 11 1/2% Senior Secured Notes due 2013 are secured by a second-priority lien and the 18% Senior Secured Notes due 2017 are secured by a third-priority lien, in each case, subject to permitted liens and other exceptions, on substantially all the assets owned by us, K. Hovnanian (the issuer of the senior secured notes) and the guarantors, in the case of the 11 1/2% Senior Secured Notes due 2013 and the 18% Senior Secured Notes due 2017, to the extent such assets secure obligations under the 10 5/8% Senior Secured Notes due 2016.  At July 31, 2010, the aggregate book value of the real property collateral securing these notes was approximately $776.6 million, which does not include the impact of inventory investments, home deliveries, or impairments thereafter and which may differ from the appraised value. In addition, cash collateral securing these notes was $357.4 million as of July 31, 2010, which includes $101.5 million of restricted cash also collateralizing certain letters of credit.  Subsequent to such date, cash uses include general business operations and real estate and other investments.

11.  Each share of Class A Common Stock entitles its holder to one vote per share and each share of Class B Common Stock entitles its holder to ten votes per share.  The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B Common Stock.  If a shareholder desires to sell shares of Class B Common Stock, such stock must be converted into shares of Class A Common Stock.

Basic earnings per share is computed by dividing net income (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (the “denominator”) for the period.  Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and non-vested shares of restricted stock.  For the nine months ended July 31, 2010, diluted earnings per common share was computed using the weighted average number of shares outstanding adjusted for the 1.2 million incremental shares attributed to non-vested stock and outstanding options to purchase common stock.  Any options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation.  For the nine months ended July 31, 2010, 3.5 million options to purchase common stock had an exercise price greater than the average market price. For the three months ended July 31, 2010, and the three and nine months ended July 31, 2009, 7.1 million, 8.0 million and 6.8 million, respectively, of non-vested stock and options to purchase common stock were outstanding and anti-dilutive as we had a net loss in each of those periods.

On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares of Class A Common Stock.  There have been no purchases during the nine months ended July 31, 2010.  As of July 31, 2010, 3.4 million shares of Class A Common Stock have been purchased under this program.

12.  On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000.  Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%.  The Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares beginning on the fifth anniversary of their issuance.  The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of Series A Preferred Stock.  The depositary shares are listed on the NASDAQ Global Market under the symbol “HOVNP”.  During the three and nine months ended July 31, 2010 and 2009, we did not make any dividend payments on the Series A Preferred Stock as a result of covenant restrictions in the indentures governing our senior secured, senior and senior subordinated notes discussed above.  We anticipate we will be restricted from paying dividends for the foreseeable future.

13.  On August 4, 2008, we announced that our Board of Directors adopted a shareholder rights plan (the “Rights Plan”) designed to preserve shareholder value and the value of certain income tax assets primarily associated with net operating loss carryforwards (“NOL”) and built-in losses under Section 382 of the Internal Revenue Code. Our ability to use NOLs and built-in losses would be limited if there was an “ownership change” under Section 382. This would occur if shareholders owning (or deemed under Section 382 to own) 5% or more of our stock increase their collective ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a defined period of time. The Rights Plan was adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382. Under the Rights Plan, one right was distributed for each share of Class A Common Stock and Class B Common Stock outstanding as of the close of business on August 15, 2008. Effective August 15, 2008, if any person or group acquires 4.9% or more of the outstanding shares of Class A Common Stock without the approval of the Board of Directors, there would be a triggering event causing significant dilution in the voting power of such person or group. However, existing stockholders who owned, at the time of the Rights Plan’s adoption, 4.9% or more of the outstanding shares of Class A Common Stock will trigger a dilutive event only if they acquire additional shares. The approval of the Board of Directors’ decision to adopt the Rights Plan may be terminated by the Board at any time, prior to the Rights being triggered. The Rights Plan will continue in effect until August 15, 2018, unless it expires earlier in accordance with its terms. The approval of the Board of Directors’ decision to adopt the Rights Plan was submitted to a stockholder vote and approved at a Special Meeting of stockholders held on December 5, 2008. Also at the Special Meeting on December 5, 2008, our stockholders approved an amendment to our Certificate of Incorporation to restrict certain transfers of Class A Common Stock in order to preserve the tax treatment of our net operating loss carryforwards and built-in losses under Section 382 of the Internal Revenue Code. Subject to certain exceptions pertaining to pre-existing 5% stockholders and Class B stockholders, the transfer restrictions in the amended Certificate of Incorporation generally restrict any direct or indirect transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the effect would be to: (i) increase the direct or indirect ownership of our stock by any person (or public group) from less than 5% to 5% or more of our common stock; (ii) increase the percentage of our common stock owned directly or indirectly by a person (or public group) owning or deemed to own 5% or more of our common stock; or (iii) create a new public group. Transfers included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage ownership (direct or indirect) of common stock would exceed the 5% thresholds discussed above, or to persons whose direct or indirect ownership of common stock would by attribution cause another person (or public group) to exceed such threshold.

14.  Total income tax benefit was $7.0 million for the three months ended July 31, 2010, primarily due to a decrease in tax reserves for uncertain tax positions.  The total income tax benefit was $297.5 million for the nine months ended July 31, 2010, primarily due to the benefit recognized for a federal net operating loss carryback.  On November 6, 2009, President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009, under which the Company was able to carryback its 2009 net operating loss five years to previously profitable years that were not available to the Company for carryback prior to this tax legislation.  We recorded a benefit for the carryback of $291.3 million in the first quarter of fiscal 2010.  We received $274.1 million of the federal income tax refund in the second quarter of 2010 and expect to receive the remaining $17.2 million by the first quarter of fiscal 2011.

Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income.  If the combination of future years income (or loss) and the reversal of the timing differences results in a loss, such losses can be carried back to income in prior years, if available, or carried forward to future years to recover the deferred tax assets.  In accordance with ASC 740 “Income Taxes” (ASC 740), we evaluate our deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a "more likely than not" standard.  Given the continued downturn in the homebuilding industry during 2007, 2008 and 2009, which has resulted in additional inventory and intangible impairments, we were in a three year cumulative loss position as of October 31, 2009.  According to ASC 740, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are realizable.  Our valuation allowance for current and deferred tax assets increased $33.0 million during the three months ended July 31, 2010 due to reserving for the federal tax benefit generated from the losses during the period.  However, the allowance decreased $240.9 million during the nine months ended July 31, 2010 primarily due to the impact of the federal net operating loss carryback recorded in the first quarter of 2010, partially offset by additional reserves recorded for the federal tax benefit generated from the losses during the period.  At July 31, 2010, our total valuation allowance amounted to $746.6 million.

15.  Our operating segments are components of our business for which discrete financial information is available and reviewed regularly by the chief operating decision-maker, our Chief Executive Officer, to evaluate performance and make operating decisions.  Based on this criteria, each of our communities qualifies as an operating segment, and therefore, it is impractical to provide segment disclosures for this many segments.  As such, we have aggregated the homebuilding operating segments into six reportable segments.

Our homebuilding operating segments are aggregated into reportable segments based primarily upon geographic proximity, similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell homes.  The Company’s reportable segments consist of the following six homebuilding segments and a financial services segment:

Homebuilding:
 (1) Northeast (New Jersey, New York, Pennsylvania)
 (2) Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia, Washington D.C.)
 (3) Midwest (Illinois, Kentucky, Minnesota, Ohio)
 (4) Southeast (Florida, Georgia, North Carolina, South Carolina)
 (5) Southwest (Arizona, Texas)
 (6) West (California)

Financial Services

Operations of the Company’s Homebuilding segments primarily include the sale and construction of single-family attached and detached homes, attached townhomes and condominiums, mid-rise condominiums, urban infill and active adult homes in planned residential developments.  In addition, from time to time, the homebuilding segments include land sales.  Operations of the Company’s Financial Services segment include mortgage banking and title services provided to the homebuilding operations’ customers.  We do not retain or service mortgages that we originate but rather sell the mortgages and related servicing rights to investors.

Corporate and unallocated primarily represents operations at our headquarters in Red Bank, New Jersey.  This includes our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality, and safety.  It also includes interest income and interest expense resulting from interest incurred that cannot be capitalized in inventory in the Homebuilding segments, as well as the gains or losses on extinguishment of debt from debt repurchases or exchanges.
 
Evaluation of segment performance is based primarily on operating earnings from continuing operations before provision for income taxes (“(Loss) income before income taxes”).  (Loss) income before income taxes for the Homebuilding segments consists of revenues generated from the sales of homes and land, (loss) income from unconsolidated entities, management fees and other income, less the cost of homes and land sold, selling, general and administrative expenses, interest expense and non-controlling interest expense.  Income before income taxes for the Financial Services segment consists of revenues generated from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses and interest expenses incurred by the Financial Services segment.

Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.

 
 

 

Financial information relating to the Company’s operations was as follows:

 
Three Months Ended
 
Nine Months Ended
 
July 31,
 
July 31,
 (In thousands)
2010
 
2009
 
2010
 
2009
               
Revenues:
             
  Northeast
$92,179 
 
$86,163 
 
$218,686 
 
$259,610 
  Mid-Atlantic
72,876 
 
76,521 
 
207,615 
 
217,362 
  Midwest
24,437 
 
30,075 
 
63,986 
 
81,069 
  Southeast
28,843 
 
23,617 
 
76,003 
 
92,404 
  Southwest
103,597 
 
113,403 
 
289,968 
 
317,370 
  West
49,966 
 
48,070 
 
138,936 
 
161,438 
     Total homebuilding
371,898 
 
377,849 
 
995,194 
 
1,129,253 
  Financial services
8,753 
 
8,929 
 
23,418 
 
26,275 
  Corporate and unallocated
(51)
 
336 
 
218 
 
3,369 
     Total revenues
$380,600 
 
$387,114 
 
$1,018,830 
 
$1,158,897 
               
(Loss) income before income taxes:
             
  Northeast
$(15,510)
 
$(43,201)
 
$(30,281)
 
$(273,511)
  Mid-Atlantic
3,248 
 
(16,834)
 
5,369 
 
(66,590)
  Midwest
(1,190)
 
(3,806)
 
(7,215)
 
(18,548)
  Southeast
(1,352)
 
(7,900)
 
(6,307)
 
(47,933)
  Southwest
7,033 
 
(16,036)
 
17,969 
 
(55,760)
  West
(39,070)
 
(63,795)
 
(49,477)
 
(259,582)
     Homebuilding loss
        before income taxes
(46,841)
 
(151,572)
 
(69,942)
 
(721,924)
  Financial services
2,585 
 
2,584 
 
6,224 
 
6,707 
  Corporate and unallocated
(35,586)
 
959 
 
(99,072)
 
292,003 
     Loss before income taxes
$(79,842)
 
$(148,029)
 
$(162,790)
 
$(423,214)

 
July 31,
 
October 31,
(In thousands)
2010
 
2009
       
Assets:
     
  Northeast
$507,603 
 
$559,257 
  Mid-Atlantic
180,009 
 
200,908 
  Midwest
56,988 
 
54,560 
  Southeast
53,853 
 
60,441 
  Southwest
211,146 
 
191,495 
  West
182,191 
 
163,710 
     Total homebuilding
1,191,790 
 
1,230,371 
  Financial services
89,276 
 
84,280 
  Corporate and unallocated
628,711 
 
709,926 
     Total assets
$1,909,777 
 
$2,024,577 

16.  Per ASC 810 “Consolidation” (“ASC 810”), a Variable Interest Entity (“VIE”) is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur.  If an entity is deemed to be a VIE pursuant to ASC 810, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE.

Based on the provisions of ASC 810, we have concluded that, whenever we option land or lots from an entity and pay a non-refundable deposit, a VIE is created under condition (ii) (b) and (c) of the previous paragraph.  We have been deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected theoretical losses if they occur.  For each VIE created with a significant nonrefundable option fee (we currently define significant as greater than $100,000 because we have determined that in the aggregate the VIEs related to deposits of this size or less are not material), we compute expected losses and residual returns based on the probability of future cash flows as outlined in ASC 810.  If we are deemed to be the primary beneficiary of the VIE, we consolidate it on our balance sheet.  The fair value of the VIE inventory, as of the date of consolidation, is reported as “Consolidated inventory not owned - variable interest entities”.

Typically, the determining factor in whether or not we are the primary beneficiary is the nonrefundable deposit amount as a percentage of the total purchase price because it determines the amount of the first risk of loss we take on the contract.  The higher this percentage deposit, the more likely we are to be the primary beneficiary.  Other important criteria that impact the outcome of the analysis are the probability of getting the property through the approval process for residential homes, because this impacts the ultimate value of the property, as well as determining who is the party responsible (seller or buyer) for funding the approval process and development work that will take place prior to our decision to exercise the option.

Management believes the guidance for VIEs was not clearly thought out for application in the homebuilding industry for land and lot options, because we can have an option and put down a small deposit as a percentage of the purchase price and still have to consolidate the entity.  Our exposure to loss as a result of our involvement with the VIE is only the deposit, not its total assets consolidated on our balance sheet.  In certain cases, we will have to place inventory the VIE has optioned to other developers on our balance sheet. In addition, if the VIE has creditors, its debt will be placed on our balance sheet even though the creditors have no recourse against us.  Based on these observations, we believe consolidating VIEs based on land and lot option deposits does not reflect the economic realities or risks of owning and developing land.

At July 31, 2010, all seven VIEs we were required to consolidate were the result of our options to purchase land or lots from the selling entities.  We have cash deposits to these VIEs totaling $5.8 million.  Our option deposits represent our maximum exposure to loss.  The fair value of the property owned by these VIEs, as of the date of consolidation, was $34.8 million.  Because we do not own an equity interest in any of the unaffiliated VIEs that we must consolidate pursuant to ASC 810, we generally have little or no control or influence over the operations of these entities or their owners.  When our requests for financial information are denied by the land sellers, certain assumptions about the assets and liabilities of such entities are required.  In most cases, we determine the fair value of the assets of the consolidated entities based on the remaining contractual purchase price of the land or lots we are purchasing.  In these cases, it is assumed that the entities funded the acquisition of the property with debt and the only asset recorded is the land or lots we have the option to buy with a related offset for the assumed third party financing of the variable interest entity.  At July 31, 2010, the balance reported in liabilities from inventory not owned related to these VIEs was $29.0 million.  Creditors of these seven VIEs have no recourse against us.

We will continue to control land and lots using options.  Including the deposits with the seven VIEs described above, at July 31, 2010, we had total cash and letters of credit deposits amounting to approximately $37.9 million to purchase land and lots with a total purchase price of $811.2 million.  Not all our deposits are with VIEs.  The maximum exposure to loss is limited to the deposits, although some deposits are refundable at our request or refundable if certain conditions are not met.

See Note 18 for a recent accounting pronouncement which may impact our accounting for VIEs.

17.  We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing returns on capital.  Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct homes that are sold directly to third party homebuyers.  Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties.  The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method.

 
 

 


(Dollars in thousands)
   
July 31, 2010
   
 
Homebuilding
 
Land Development
 
Total
Assets:
         
Cash and cash equivalents
$19,853
 
$410
 
$20,263
Inventories
258,684
 
73,565
 
332,249
Other assets
16,732
 
-
 
16,732
Total assets
$295,269
 
$73,975
 
$369,244
           
Liabilities and equity:
         
Accounts payable and accrued
  liabilities
$22,315
 
$16,495
 
$38,810
Notes payable
165,769
 
37,628
 
203,397
  Total liabilities
188,084
 
54,123
 
$242,207
Equity of:
         
  Hovnanian Enterprises, Inc.
29,873
 
2,738
 
32,611
  Others
77,312
 
17,114
 
94,426
Total equity
107,185
 
19,852
 
127,037
Total liabilities and equity
$295,269
 
$73,975
 
$369,244
Debt to capitalization ratio
61%
 
65%
 
62%

(Dollars in thousands)
   
October 31, 2009
   
 
Homebuilding
 
Land Development
 
Total
Assets:
         
Cash and cash equivalents
$22,502
 
$1,539
 
$24,041
Inventories
281,556
 
83,833
 
365,389
Other assets
25,889
 
87
 
25,976
Total assets
$329,947
 
$85,459
 
$415,406
           
Liabilities and equity:
         
Accounts payable and accrued
  liabilities
$19,236
 
$17,108
 
$36,344
Notes payable
193,567
 
40,051
 
233,618
  Total liabilities
212,803
 
57,159
 
269,962
Equity of:
         
  Hovnanian Enterprises, Inc.
32,183
 
9,068
 
41,251
  Others
84,961
 
19,232
 
104,193
Total equity
117,144
 
28,300
 
145,444
Total liabilities and equity
$329,947
 
$85,459
 
$415,406
Debt to capitalization ratio
62%
 
59%
 
62%

As of both July 31, 2010 and October 31, 2009, we had advances outstanding of approximately $12.1 million to these unconsolidated joint ventures, which were included in the “Accounts payable and accrued liabilities” balances in the table above.  On our Condensed Consolidated Balance Sheets our “Investments in and advances to unconsolidated joint ventures” amounted to $37.6 million and $41.3 million at July 31, 2010 and October 31, 2009, respectively.  In some cases, our net investment in these joint ventures is less than our proportionate share of the equity reflected in the table above because of the differences between asset impairments recorded against our joint venture investments and any impairments recorded in the applicable joint venture.  During the first nine months of fiscal 2010, we did not write down any joint venture investments based on our determination that none of the investments in our joint ventures have sustained an other than temporary impairment during that period.

 
 
For the Three Months Ended July 31, 2010
(Dollars in thousands)
Homebuilding
 
Land Development
 
Total
           
Revenues
$45,729 
 
$2,346 
 
$48,075 
Cost of sales and expenses
(49,754)
 
(2,490)
 
(52,244)
Joint venture net loss
$(4,025)
 
$(144)
 
$(4,169)
Our share of net loss
$(553)
 
$(83)
 
$(636)

 
For the Three Months Ended July 31, 2009
(Dollars in thousands)
Homebuilding
 
Land Development
 
Total
           
Revenues
$24,387 
 
$9,120 
 
$33,507 
Cost of sales and expenses
(29,602)
 
(9,303)
 
(38,905)
Joint venture net loss
$(5,215)
 
$(183)
 
$(5,398)
Our share of net loss
$(774)
 
$(214)
 
$(988)

 
For the Nine Months Ended July 31, 2010
(Dollars in thousands)
Homebuilding
 
Land Development
 
Total
           
Revenues
$101,410 
 
$12,606 
 
$114,016 
Cost of sales and expenses
(101,163)
 
(18,641)
 
(119,804)
Joint venture net income (loss)
$247 
 
$(6,035)
 
$(5,788)
Our share of net loss
$(34)
 
$(494)
 
$(528)

 
For the Nine Months Ended July 31, 2009
(Dollars in thousands)
Homebuilding
 
Land Development
 
Total
           
Revenues
$73,314 
 
$12,611 
 
$85,925 
Cost of sales and expenses
(189,967)
 
(13,880)
 
(203,847)
Joint venture net loss
$(116,653)
 
$(1,269)
 
$(117,922)
Our share of net loss
$(19,452)
 
$(674)
 
$(20,126)

Loss from unconsolidated joint ventures is reflected as a separate line in the accompanying Condensed Consolidated Statements of Operations and reflects our proportionate share of the loss of these unconsolidated homebuilding and land development joint ventures.  The difference between our share of the loss from these unconsolidated joint ventures disclosed in the tables above for the three and nine months ended July 31, 2009 compared to the Condensed Consolidated Statements of Operations is due primarily to the write down of our investment in joint ventures where we determined that our investment had an other than temporary impairment.  For the three and nine months ended July 31, 2010, the minor difference is primarily due to one joint venture that had net income for which we do not get any share of the profit because of the cumulative equity position of the joint venture, the reclassification of the intercompany portion of management fee income from certain joint ventures and the deferral of income for lots purchased by us from certain joint ventures.  Our ownership interests in the joint ventures vary but are generally less than or equal to 50%.  In determining whether or not we must consolidate joint ventures where we are the manager of the joint venture, we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture.  In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business.

Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing, however, our more recently established joint ventures have not obtained any financing, therefore all capital is equity.  Generally, the amount of such financing is targeted to be no more than 50% of the joint venture’s total assets.  However, because of impairments realized in the joint ventures the average debt to capitalization ratio of all our joint ventures is currently 62%.  This financing is obtained on a non-recourse basis, with guarantees from us limited only to performance and completion of development, environmental indemnification, standard warranty and representation against fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing.  In some instances, the joint venture entity is considered a VIE under ASC 810 due to the returns being capped to the equity holders; however, in these instances, we are not the primary beneficiary, and therefore we do not consolidate these entities.

18.  Recent Accounting Pronouncements - In December 2007, the FASB issued an update to ASC 810.  The amended guidance contained in ASC 810 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income or loss specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. Our net income or loss attributable to noncontrolling interest is insignificant for all periods presented and therefore reported in “Other operations” in the Condensed Consolidated Statements of Operations.  It also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation.  We implemented this standard effective November 1, 2009, resulting in a change in the classification of noncontrolling interests on the balance sheets and statements of equity.

In June 2009, the FASB issued an update to ASC 810, which amends the existing quantitative guidance used in determining the primary beneficiary of a VIE by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the most significant activities of the VIE and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE and requires enhanced disclosures to provide more information about an enterprise’s involvement in a variable interest entity.  This statement also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity.  This statement is effective for us on November 1, 2010.  We are currently evaluating the impact, if any, that this statement may have on our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires additional disclosures about transfers between Levels 1 and 2 of the fair value hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. This guidance was effective for the Company in our second quarter of fiscal 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, which is related to disclosure only, will not have a material impact on our condensed consolidated financial statements.

19.  ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides a framework for measuring fair value, expands disclosures about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:

Level 1                      Fair value determined based on quoted prices in active markets for identical assets.

Level 2                      Fair value determined using significant other observable inputs.

Level 3                      Fair value determined using significant unobservable inputs.


 
 

 

Our financial instruments measured at fair value on a recurring basis are summarized below:

(In thousands)
 
Fair Value Hierarchy
 
Fair Value at
July 31, 2010
 
Fair Value at
October 31, 2009
             
Mortgage loans held for sale (1)
 
Level 2
 
$59,271 
 
$65,786 
Interest rate lock commitments
 
Level 2
 
453 
 
254 
Forward contracts
 
Level 2
 
(1,410)
 
(702)
       
$58,314 
 
$65,338 

(1)  The aggregate unpaid principal balance was $57.5 million and $64.8 million at July 31, 2010 and October 31, 2009, respectively.

We elected the fair-value option for our loans held for sale for mortgage loans originated subsequent to October 31, 2008 in accordance with ASC 825, “Financial Instruments” (“ASC 825”), which permits us to measure financial instruments at fair value on a contract-by-contract basis.  Management believes that the election of the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions.  In addition, the fair value of servicing rights is included in the Company’s loans held for sale as of July 31, 2010.  Prior to February 1, 2008, the fair value of the servicing rights was not recognized until the related loan was sold.  Fair value of the servicing rights is determined based on values in the Company’s servicing sales contracts.  Fair value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics.

The assets accounted for under ASC 825 are initially measured at fair value.  Gains and losses from initial measurement and subsequent changes in fair value are recognized in the Financial Services segment’s earnings (loss).  The changes in fair values that are included in earnings (loss) are shown, by financial instrument and financial statement line item, below:

   
Three Months Ended July 31, 2010
(In thousands)
 
Loans Held
For Sale
 
Mortgage Loan Commitments
 
Forward Contracts
             
Increase (decrease) in fair value
   included in net (loss) income,
   all reflected in
   financial services revenues
 
$1,088
 
$122
 
$(565)

   
Three Months Ended July 31, 2009
(In thousands)
 
Loans Held
For Sale
 
Mortgage Loan Commitments
 
Forward Contracts
             
Increase (decrease) in fair value
   included in net (loss) income,
   all reflected in
   financial services revenues
 
$822
 
$401
 
$(1,450)

   
Nine Months Ended July 31, 2010
(In thousands)
 
Loans Held
For Sale
 
Mortgage Loan Commitments
 
Forward Contracts
             
Increase (decrease) in fair value
   included in net (loss) income,
   all reflected in
   financial services revenues
 
$783
 
$198
 
$(708)

   
Nine Months Ended July 31, 2009
(In thousands)
 
Loans Held
For Sale
 
Mortgage Loan Commitments
 
Forward Contracts
             
Increase (decrease) in fair value
   included in net (loss) income,
   all reflected in
   financial services revenues
 
$2,348
 
$910
 
$(2,860)

The Financial Services segment had a pipeline of loan applications in process of $240.0 million at July 31, 2010.  Loans in process for which interest rates were committed to the borrowers totaled approximately $84.4 million as of July 31, 2010.  Substantially all of these commitments were for periods of 60 days or less.  Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements.

The Financial Services segment uses investor commitments and forward sales of mandatory mortgage-backed securities (“MBS”) to hedge its mortgage-related interest rate exposure.  These instruments involve, to varying degrees, elements of credit and interest rate risk.  Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit standards.  The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts.  At July 31, 2010, the segment had open commitments amounting to $25.5 million to sell MBS with varying settlement dates through August 19, 2010.

Our financial instruments consist of cash and cash equivalents, restricted cash, receivables, deposits and notes, accounts payable and other liabilities, customer deposits, mortgage loans held for sale, nonrecourse land and operating properties mortgages, letter of credit agreements and facilities, mortgage warehouse line of credit, accrued interest, and the senior secured, senior and senior subordinated notes payable.  The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate.  The fair value of each of the senior secured, senior and senior subordinated notes is estimated based on recent trades for the same or similar issues or the quoted market prices on the current rates offered to us for debt of the same remaining maturities.  The fair value of the senior secured, senior and senior subordinated notes is estimated at $804.0 million, $525.3 million and $111.7 million, respectively, as of July 31, 2010 and $788.2 million, $603.5 million and $113.3 million, respectively, as of October 31, 2009.  The fair value of our other financial instruments approximates their recorded values.

The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs during the three and nine months ended July 31, 2010.  The assets measured at fair value on a nonrecurring basis are all within the Company’s Homebuilding operations and are summarized below:


 
 

 

Non-financial Assets
       
Three Months Ended
       
July 31, 2010
(In thousands)
 
Fair Value Hierarchy
 
Pre-Impairment Amount
 
Total Losses
 
Fair Value
                 
Sold and unsold homes and
  lots under development
 
Level 3
 
$52,787
 
$(27,428)
 
$25,359
Land and land options held
  for future development
  or sale
 
Level 3
 
$29,434
 
$(22,219)
 
$7,215

       
Nine Months Ended
       
July 31, 2010
(In thousands)
 
Fair Value Hierarchy
 
Pre-Impairment Amount
 
Total Losses
 
Fair Value
                 
Sold and unsold homes and
  lots under development
 
Level 3
 
$56,173
 
$(28,817)
 
$27,356
Land and land options held
  for future development
  or sale
 
Level 3
 
$35,063
 
$(25,339)
 
$9,724

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts.  If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value.  We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community.  For the nine months ended July 31, 2010, our discount rates used for the impairments recorded ranged from 17.5% to 20.3%.  Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments.  We recorded inventory impairments, which are presented in the Condensed Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs” and deducted from Inventory of $49.7 million and $94.6 million for the three months ended July 31, 2010 and 2009, respectively, and $54.1 million and $491.4 million for the nine months ended July 31, 2010 and 2009, respectively.

20.  Hovnanian Enterprises, Inc., the parent company (the “Parent”) is the issuer of publicly traded common stock and preferred stock, which is represented by depository shares.  One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the “Subsidiary Issuer”), acts as a finance entity that as of July 31, 2010 had issued and outstanding $797.2 million face value of senior secured notes ($784.2 million, net of discount), $713.2 million face value of senior notes ($711.5 million, net of discount), and $120.2 million of senior subordinated notes.  The senior secured notes, senior notes and senior subordinated notes are fully and unconditionally guaranteed by the Parent.

In addition to the Parent, each of the wholly owned subsidiaries of the Parent other than the Subsidiary Issuer (collectively, the “Guarantor Subsidiaries”), with the exception of certain of our financial service subsidiaries,  joint ventures, subsidiaries holding interests in our joint ventures and our foreign subsidiary (collectively, the “Non-guarantor Subsidiaries”), have guaranteed fully and unconditionally, on a joint and several basis, the obligations of the Subsidiary Issuer to pay principal and interest under the senior secured notes, senior notes and senior subordinated notes.

In lieu of providing separate financial statements for the Guarantor Subsidiaries, we have included the accompanying condensed consolidating financial statements.  Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to users of our consolidated financial statements.  Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.

The following condensed consolidating financial statements present the results of operations, financial position and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, (iv) the Non-guarantor Subsidiaries and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis.

 
 

 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 2010
(In Thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non- Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS:
                     
Homebuilding
$13,879 
 
$370,906 
 
$1,236,361 
 
$199,355 
 
$            
 
$1,820,501 
Financial services
       
4,120 
 
85,156 
     
89,276 
Investments in and amounts
  due to and from
  consolidated subsidiaries
(200,612)
 
2,070,587 
 
(2,182,803)
 
124,827 
 
188,001 
 
Total assets
$(186,733)
 
$2,441,493 
 
$(942,322)
 
$409,338 
 
$188,001 
 
$1,909,777 
                       
LIABILITIES AND EQUITY:
                     
Homebuilding
$126 
 
$                
 
$376,615 
 
$2,426 
 
$             
 
$379,167 
Financial services
       
3,941 
 
65,936 
     
69,877 
Notes payable
   
1,648,824 
 
168 
         
1,648,992 
Income taxes payable
21,297 
 
329 
 
(2,464)
 
     
19,167 
Stockholders’ (deficit) equity
(208,156)
 
792,340 
 
(1,320,582)
 
340,241 
 
188,001 
 
(208,156)
Non-controlling interest in
  consolidated joint ventures
           
730 
     
730 
Total liabilities and
  equity
$(186,733)
 
$2,441,493 
 
$(942,322)
 
$409,338 
 
$188,001 
 
$1,909,777 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2009
(In Thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non- Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS:
                     
Homebuilding
$14,752 
 
$449,096
 
$1,285,699 
 
$190,750 
 
$           
 
$1,940,297 
Financial services
       
5,885 
 
78,395 
     
84,280 
Investments in and amounts
  due to and from
  consolidated subsidiaries
(308,706)
 
2,067,571
 
(1,573,827)
 
(209,735)
 
24,697
 
Total assets
$(293,954)
 
$2,516,667
 
$(282,243)
 
$59,410 
 
$24,697
 
$2,024,577 
                       
LIABILITIES AND EQUITY:
                     
Homebuilding
$               
 
$469
 
$454,718 
 
$7,761 
 
$           
 
$462,948 
Financial services
       
5,651 
 
64,713 
     
70,364 
Notes payable
   
1,777,658
 
121 
         
1,777,779 
Income tax payable
55,644 
     
6,710 
         
62,354 
Stockholders’ (deficit) equity
(349,598)
 
738,540
 
(749,443)
 
(13,794)
 
24,697
 
(349,598)
Non-controlling interest in
  consolidated joint ventures
           
730 
     
730 
Total liabilities and
  equity
$(293,954)
 
$2,516,667
 
$(282,243)
 
$59,410 
 
$24,697
 
$2,024,577 


 
 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2010
(In Thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
                     
Homebuilding
$7 
 
$(89)
 
$369,733 
 
$3,435 
 
$(1,239)
 
$371,847 
Financial services
       
1,690 
 
7,063 
     
8,753 
Intercompany charges
   
32,566 
 
(49,356)
 
664 
 
16,126 
 
Total revenues
 
32,477 
 
322,067 
 
11,162 
 
14,887 
 
380,600 
                       
Expenses:
                     
Homebuilding
2,509 
 
38,480 
 
410,146 
 
1,484 
 
6,040 
 
458,659 
Financial services
124 
     
1,397 
 
4,804 
 
(157)
 
6,168 
Total expenses
2,633 
 
38,480 
 
411,543 
 
6,288 
 
5,883 
 
464,827 
Gain on extinguishment
                     
  of debt
   
5,256 
             
5,256 
Loss from
                     
  unconsolidated joint
                     
  ventures
       
(420)
 
(451)
     
(871)
(Loss) income before
  income taxes
(2,626)
 
(747)
 
(89,896)
 
4,423 
 
9,004 
 
(79,842)
State and federal income tax
                     
  (benefit) provision
(14,735)
 
(1,774)
 
305,583 
 
(1,534)
 
(294,528)
 
(6,988)
Equity in income (loss)
                     
  of consolidated
                     
  subsidiaries
(84,963)
             
84,963 
 
Net (loss) income
$(72,854)
 
$1,027 
 
$(395,479)
 
$5,957 
 
$388,495 
 
$(72,854)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2009
(In Thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
                     
Homebuilding
$13 
 
$321 
 
$378,854 
 
$240 
 
$(1,243)
 
$378,185 
Financial services
       
2,117 
 
6,812 
     
8,929 
Intercompany charges
   
44,691 
 
(61,433)
 
(208)
 
16,950 
 
Total revenues
13 
 
45,012 
 
319,538 
 
6,844 
 
15,707 
 
387,114 
                       
Expenses:
                     
Homebuilding
1,994 
 
45,143 
 
508,726 
 
543 
 
3,871 
 
560,277 
Financial services
122 
     
1,588 
 
4,806 
 
(171)
 
6,345 
Total expenses
2,116 
 
45,143 
 
510,314 
 
5,349 
 
3,700 
 
566,622 
Gain on extinguishment
                     
  of debt
   
37,041 
 
(25)
         
37,016 
Loss from
                     
  unconsolidated joint
                     
  ventures
       
(290)
 
(5,247)
     
(5,537)
(Loss) income before
  income taxes
(2,103)
 
36,910 
 
(191,091)
 
(3,752)
 
12,007 
 
(148,029)
State and federal
                     
  income tax
                     
  provision (benefit)
20,883 
 
12,918 
 
2,727 
 
1,772 
 
(17,417)
 
20,883 
Equity in income (loss)
                     
  of consolidated
                     
  subsidiaries
(145,926)
             
145,926 
 
Net (loss) income
$(168,912)
 
$23,992 
 
$(193,818)
 
$(5,524)
 
$175,350 
 
$(168,912)
                       


 
 

 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2010
(In Thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
                     
Homebuilding
$15 
 
$(252)
 
$995,608 
 
$3,761 
 
$(3,720)
 
$995,412 
Financial services
       
4,596 
 
18,822 
     
23,418 
Intercompany charges
   
97,125 
 
(139,260)
 
(208)
 
42,343 
 
Total revenues
15
 
96,873 
 
860,944 
 
22,375 
 
38,623 
 
1,018,830 
                       
Expenses:
                     
Homebuilding
6,865 
 
117,599 
 
1,049,760 
 
377 
 
14,019 
 
1,188,620 
Financial services
384 
     
4,188 
 
13,131 
 
(509)
 
17,194 
Total expenses
7,249 
 
117,599 
 
1,053,948 
 
13,508 
 
13,510 
 
1,205,814 
Gain on extinguishment
                     
  of debt
   
25,047 
             
25,047 
(Loss) income from
                     
  unconsolidated joint
                     
  ventures
       
(1,088)
 
235 
     
(853)
(Loss) income before
  income taxes
(7,234)
 
4,321 
 
(194,092)
 
9,102 
 
25,113 
 
(162,790)
State and federal income
                     
  tax (benefit) provision
(305,238)
     
7,743 
 
     
(297,491)
Equity in income (loss)
                     
  of consolidated
                     
  subsidiaries
(163,303)
             
163,303 
 
Net (loss) income
$134,701 
 
$4,321 
 
$(201,835)
 
$9,098 
 
$188,416 
 
$134,701 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2009
(In Thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
                     
Homebuilding
$13 
 
$3,287 
 
$1,131,675 
 
$1,366 
 
$(3,719)
 
$1,132,622 
Financial services
       
5,938 
 
20,337 
     
26,275 
Intercompany charges
   
170,658 
 
(202,290)
 
(725)
 
32,357 
 
Total revenues
13 
 
173,945 
 
935,323 
 
20,978 
 
28,638 
 
1,158,897 
                       
Expenses:
                     
Homebuilding
22,852 
 
148,323 
 
1,785,051 
 
2,233 
 
(6,332)
 
1,952,127 
Financial services
496 
     
4,971 
 
14,474 
 
(373)
 
19,568 
Total expenses
23,348 
 
148,323 
 
1,790,022 
 
16,707 
 
(6,705)
 
1,971,695 
Gain on extinguishment
                     
  of debt
   
427,598 
 
206 
         
427,804 
Loss from
                     
  unconsolidated joint
                     
  ventures
       
(32,435)
 
(5,785)
     
(38,220)
(Loss) income before
  income taxes
(23,335)
 
453,220
 
(886,928)
 
(1,514)
 
35,343 
 
(423,214)
State and federal income
                     
  tax provision (benefit)
42,729 
 
158,627 
 
(120,906)
 
806 
 
(38,527)
 
42,729 
Equity in income (loss)
                     
  of consolidated
                     
  subsidiaries
(399,879)
             
399,879 
 
Net (loss) income
$(465,943)
 
$294,593 
 
$(766,022)
 
$(2,320)
 
$473,749 
 
$(465,943)
                       


 
 

 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2010
(In Thousands)
 
Parent
 
Subsidiary Issuer
 
 Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating
  activities:
                     
Net income (loss)
$134,701 
 
$3,992 
 
$(201,506)
 
$9,098 
 
$188,416 
 
$134,701 
Adjustments to reconcile net
                     
  income (loss) to net cash
                     
  provided by (used in)
                     
  operating activities
(26,607)
 
69,277 
 
(59,209)
 
162,195 
 
(188,416)
 
(42,760)
Net cash provided by (used in)
                     
  operating activities
108,094 
 
73,269 
 
(260,715)
 
171,293 
 
 
91,941 
Net cash (used in) provided by
                     
  investing activities
       
(1,008)
 
895 
     
(113)
Net cash (used in) provided by
                     
  financing activities
   
(113,178)
 
4,793 
 
101 
     
(108,284)
Intercompany investing and
  financing activities – net
(108,094)
 
(3,016)
 
445,672 
 
(334,562)
     
Net (decrease) increase in cash
 
(42,925)
 
188,742 
 
(162,273)
 
 
(16,456)
Cash and cash equivalents
                     
  balance, beginning of period
10 
 
292,407 
 
(15,584)
 
149,859 
     
426,692 
Cash and cash equivalents
  balance, end of period
$10 
 
$249,482 
 
$173,158 
 
$(12,414)
 
$        - 
 
$410,236 


HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2009
(In Thousands)
 
Parent
 
Subsidiary Issuer
 
 Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating
  activities:
                     
Net (loss) income
$(465,943)
 
$294,593 
 
$(766,022)
 
$(2,320)
 
$473,749 
 
$(465,943)
Adjustments to reconcile net
                     
  (loss) income to net cash
                     
  (used in) provided by
                     
  operating activities
(241,775)
 
(235,596)
 
1,472,503 
 
(825)
 
(473,749)
 
520,558 
Net cash (used in) provided by
                     
  operating activities
(707,718)
 
58,997 
 
706,481 
 
(3,145)
 
 
54,615 
Net cash provided by (used in)
                     
  investing activities
       
253 
 
(4,837)
     
(4,584)
Net cash used in
                     
  financing activities
   
(310,123)
 
(1,864)
 
(34,971)