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, 2006 or

 

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

 

Commission file number 1-8551

 

Hovnanian Enterprises, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		22-1851059
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)			Identification No.)

 

110 West Front Street, P.O. Box 500, Red Bank, NJ 07701

(Address of Principal Executive Offices)

(Zip Code)

 

732-747-7800

(Registrant's Telephone Number, Including Area Code)

 

Same (Former Name, Former Address and Former Fiscal Year, if Changed

Since Last Report)

 

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes

[ X ]

No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer [ X ] Accelerated Filer [			]
Non-Accelerated Filer [	]

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 47,125,974 shares of Class A Common Stock and 14,652,552 shares of Class B Common Stock were outstanding as of September 1, 2006.

 

 

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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,
2006 (unaudited) and October 31, 2005	3
Condensed Consolidated Statements of Income for the
three and nine months ended July 31, 2006 and 2005 (unaudited)	5
Condensed Consolidated Statement of Stockholders'
Equity for the nine months ended July 31, 2006 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for
the nine months ended July 31, 2006 and 2005 (unaudited)	7
Notes to Condensed Consolidated Financial
Statements (unaudited)	9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk	41
Item 4. Controls and Procedures	42
PART II. Other Information
Item 1. Legal Proceedings	43
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds	44
Item 6. Exhibits	45
Signatures	48

 

 

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts)
	July 31,  2006		October 31,  2005
ASSETS
	(unaudited)
Homebuilding:
Cash and cash equivalents	$    36,787		$   201,641
Restricted cash	9,500		17,189
Inventories - At the lower of cost or fair value:
Sold and unsold homes and lots under development	3,589,248		2,459,431
Land and land options held for future
development or sale	501,059		595,806
Consolidated inventory not owned:
Specific performance options	12,872		9,289
Variable interest entities	369,705		242,825
Other options	175,021		129,269
Total consolidated inventory not owned	557,598		381,383
Total Inventories	4,647,905		3,436,620
Investments in and advances to unconsolidated
joint ventures	217,153		187,205
Receivables, deposits, and notes	103,102		125,388
Property, plant, and equipment – net	111,542		96,891
Prepaid expenses and other assets	182,964		131,845
Goodwill	32,658		32,658
Definite life intangibles	200,525		249,506
Total homebuilding	5,542,136		4,478,943
Financial services:
Cash and cash equivalents	11,015		9,632
Restricted cash	1,285		1,037
Mortgage loans held for sale	174,747		211,248
Other assets	8,722		15,375
Total financial services	195,769		237,292
Income taxes receivable – including deferred
tax benefits	150,795		9,903
Total assets	$  5,888,700		$  4,726,138

See notes to condensed consolidated financial statements (unaudited).

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts)
	July 31, 2006		October 31, 2005
LIABILITIES AND STOCKHOLDERS’ EQUITY	(unaudited)
Homebuilding:
Nonrecourse land mortgages	$      33,046		$    48,673
Accounts payable and other liabilities	546,668		510,529
Customers’ deposits	205,721		259,930
Nonrecourse mortgages secured by operating
properties	23,852		24,339
Liabilities from inventory not owned	283,905		177,014
Total homebuilding	1,093,192		1,020,485
Financial services:
Accounts payable and other liabilities	8,666		8,461
Mortgage warehouse line of credit	166,923		198,856
Total financial services	175,589		207,317
Notes payable:
Revolving credit agreement	273,225
Senior notes	1,649,510		1,098,739
Senior subordinated notes	400,000		400,000
Accrued interest	30,762		26,991
Total notes payable	2,353,497		1,525,730
Total liabilities	3,622,278		2,753,532
Minority interest from inventory not owned	208,542		180,170
Minority interest from consolidated joint ventures	3,563		1,079
Stockholders’ equity:
Preferred stock, $.01 par value-authorized 100,000
shares; issued 5,600 shares at July 31,
2006 and at October 31, 2005 with a
liquidation preference of $140,000	135,299		135,389
Common stock, Class A, $.01 par value-authorized
200,000,000 shares; issued 58,593,879 shares at
July 31, 2006 and 57,976,455 shares at
October 31, 2005 (including 11,494,720 shares
at July 31, 2006 and 10,995,656 shares at
October 31, 2005 held in Treasury)	586		580
Common stock, Class B, $.01 par value (convertible
to Class A at time of sale) authorized
30,000,000 shares; issued 15,360,360 shares at
July 31, 2006 and 15,370,250 shares at
October 31, 2005  (including 691,748 shares at
July 31, 2006 and October 31, 2005 held in
Treasury)	154		154
Paid in capital – common stock	247,488		236,001
Retained earnings	1,779,738		1,522,952
Deferred compensation			(19,648)
Treasury stock - at cost	(108,948)		(84,071)
Total stockholders’ equity	2,054,317		1,791,357
Total liabilities and stockholders’ equity	$ 5,888,700		$ 4,726,138

See notes to condensed consolidated financial statements (unaudited).

 

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (Unaudited)
	Three Months Ended July 31,				Nine Months Ended July 31,
	2006		2005		2006		2005
Revenues:
Homebuilding:
Sale of homes	$1,499,826		$1,289,373		$4,225,571		$3,495,014
Land sales and other revenues	28,032		4,820		113,947		32,747
Total homebuilding	1,527,858		1,294,193		4,339,518		3,527,761
Financial services	22,661		18,533		63,114		48,995
Total revenues	1,550,519		1,312,726		4,402,632		3,576,756
Expenses:
Homebuilding:
Cost of sales, excluding interest	1,170,272		940,202		3,285,258		2,588,285
Cost of sales interest	25,601		22,332		62,453		58,563
Total cost of sales	1,195,873		962,534		3,347,711		2,646,848
Selling, general and administrative	154,050		116,388		441,137		319,680
Inventory impairment and land option       deposit write-offs	12,274		1,354		20,978		3,352
Total homebuilding	1,362,197		1,080,276		3,809,826		2,969,880
Financial services	15,127		12,296		43,174		33,683
Corporate general and administrative	26,744		18,884		80,377		49,678
Other interest	649		1,149		2,169		1,843
Other operations	8,355		7,356		23,877		10,575
Intangible amortization	13,331		11,781		38,391		32,255
Total expenses	1,426,403		1,131,742		3,997,814		3,097,914
Income (loss) from unconsolidated joint
ventures	(3,239)		13,907		13,833		22,482
Income before income taxes	120,877		194,891		418,651		501,324
State and federal income taxes:
State	(3,897)		10,535		7,212		26,299
Federal	47,727		68,262		146,647		171,313
Total taxes	43,830		78,797		153,859		197,612
Net income	77,047		116,094		264,792		303,712
Less:  preferred stock dividends	2,668				8,006
Net income available to common
stockholders	$  74,379		$  116,094		$  256,786		$  303,712
Per share data:
Basic:
Income per common share	$     1.18		$     1.85		$     4.09		$     4.87
Weighted average number of common
shares outstanding	62,804		62,754		62,843		62,412
Assuming dilution:
Income per common share	$     1.15		$     1.76		$     3.95		$     4.63
Weighted average number of common
shares outstanding	64,460		65,796		64,989		65,574

 

See notes to condensed consolidated financial statements (unaudited).

 

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ 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 - Common Stock		Retained Earnings		Deferred Comp		Treasury Stock		Total
Balance, October 31, 2005	46,980,799		$   580		14,678,502		$  154		5,600		$  135,389		$236,001		$1,522,952		$(19,648)		$(84,071)		$1,791,357
Stock issuances for company acquisitions	175,936		1										4,188						1,750		5,939
Issuance costs											(90)										(90)
Preferred dividend declared  ($476.56 per share)															(8,006)						(8,006)
Stock options amortization  and issuances, net of tax	215,596		2										14,536								14,538
Restricted stock  amortization, issuances and  forfeitures, net of tax	391,938		3										12,411								12,414
Reclass due to SFAS 123R  implementation   (See Note 2)													(19,648)				19,648				-
Conversion of Class B to  Class A common stock	9,890				(9,890)																-
Treasury stock purchases	(675,000)																		(26,627)		(26,627)
Net income															264,792						264,792
Balance, July 31, 2006	47,099,159		$586		14,668,612		$154		5,600		$135,299		$247,488		$1,779,738		$        --		$(108,948)		$2,054,317

See notes to condensed consolidated financial statements (unaudited).

 

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands - Unaudited)
	Nine Months Ended
	July 31,
	2006		2005
Cash flows from operating activities:
Net Income	$  264,792		$  303,712
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation	10,587		5,912
Intangible amortization	38,391		32,255
Compensation from stock options and awards	21,079		4,293
Amortization of bond discounts	771		470
Excess tax benefits from share-based payment	(4,661)
Loss (gain) on sale and retirement of property
and assets	297		(3,479)
Equity earnings in unconsolidated entities	(13,833)		(22,482)
Distributions from unconsolidated entities	15,060		15,241
Deferred income taxes	(33,911)		(14,287)
Impairment and land option deposit write-offs	20,978		3,352
Decrease (increase) in assets:
Mortgage notes receivable	36,503		27,357
Restricted cash, receivables, prepaids and
other assets	7,578		(30,286)
Inventories	(1,055,065)		(434,634)
(Decrease) increase in liabilities:
State and Federal income taxes	(106,981)		(82,413)
Customers’ deposits	(53,962)		25,252
Interest and other accrued liabilities	(2,677)		12,554
Accounts payable	16,692		12,312
Net cash used in operating activities	(838,362)		(144,871)
Cash flows from investing activities:
Net proceeds from sale of property and assets	258		8,040
Purchase of property, equipment and other fixed
assets and acquisitions	(48,026)		(131,872)
Investments in and advances to unconsolidated
Entities	(36,726)		(105,975)
Distributions from unconsolidated entities	5,600		239
Net cash used in investing activities	(78,894)		(229,568)
Cash flows from financing activities:
Proceeds from mortgages and notes	63,838		77,417
Net proceeds (payments) related to revolving
credit agreement	273,225		(71,950)
Net payments related to mortgage
warehouse line of credit	(31,933)		(21,242)
Proceeds from senior debt	550,000		200,000
Proceeds from senior subordinated debt			100,000
Payments of issuance costs	(90)
Proceeds from preferred stock			135,720
Principal payments on mortgages and notes	(77,156)		(62,358)
Excess tax benefits from share-based payment	4,661
Preferred dividends paid	(8,006)
Purchase of treasury stock	(26,627)		(22,095)
Proceeds from sale of stock and employee stock plan	5,873		14,750
Net cash provided by financing activities	753,785		350,242
Net (decrease) in cash	(163,471)		(24,197)
Cash and cash equivalents balance, beginning
Of period	211,273		60,959
Cash and cash equivalents balance, end of period	$   47,802		$  36,762

 

 

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

 

	Nine Months Ended
	July 31,
	2006		2005
Supplemental disclosures of cash flow:
Cash paid during the period for:
Interest	$   74,216		$   66,724
Income taxes	$ 262,563		$ 279,686
Supplemental disclosures of noncash operating
activities:
Consolidated inventory not owned:
Specific performance options	$   11,699		$     5,415
Variable interest entities	336,570		121,989
Other options	173,456		118,405
Total inventory not owned	$  521,725		$  245,809

 

Supplemental disclosure of noncash investing and financing activities:

 

In 2006, the Company acquired substantially all of the assets of two mechanical contracting businesses by issuing 175,936 Class A common shares with a fair value of $5.9 million on the date of the transaction.

 

See notes to condensed consolidated financial statements (unaudited).

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 

1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of our consolidated financial position, results of operations, and changes in cash flows. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for interim periods are not necessarily indicative of the results which might be expected for a full year. The balance sheet at October 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

The Company is in the process of responding to the SEC with respect to its segment reporting. Based on this correspondence, the Company believes it will have to file an amended Form 10-K for the fiscal year ended October 31, 2005, as well as an amended Form 10-Q for each of its fiscal quarters of 2006. These amendments will be filed as soon as the correspondence with the SEC is resolved. These amendments will expand the reporting segment footnote disclosures related to our homebuilding operations. The amendment will have no impact on our Consolidated Balance Sheets, Consolidated Income Statements, Consolidated Cash Flows, or Consolidated Statements of Stockholders Equity for any period presented.

 

2. Effective November 1, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based Payments”, which revises SFAS 123, “Accounting for Stock-Based Compensation”. Prior to fiscal year 2006, the Company accounted for stock awards granted to employees under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. As a result, the recognition of stock-based compensation expense was generally limited to the expense attributed to nonvested stock awards, as well as the amortization of certain acquisition-related deferred compensation.

 

SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after the required effective date, as well as to the unvested portion of awards outstanding as of the required effective date. The Company uses the Black-Scholes model to value its new stock option grants under SFAS 123R, applying the “modified prospective method” for existing grants which requires the Company to value stock options prior to its adoption of SFAS 123R under the fair value method and expense the unvested portion over the remaining vesting period. The fair value for options is established at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for July 31, 2006: risk-free interest rate of 4.30%; dividend yield of zero; volatility factor of the expected market price of our common stock of 0.44; and a weighted average expected life of the option of 5.7 years. SFAS 123R also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation (estimated at 2% for fiscal 2006 and fiscal 2005, respectively,) and requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as both a financing cash inflow and an operating cash outflow upon adoption.

 

Compensation cost arising from nonvested stock granted to employees and from non-employee stock awards is recognized as expense using the straight-line method over the vesting period. Unearned compensation was included in deferred compensation in stockholders’ equity beginning in the first quarter of fiscal 2004. Upon adoption of SFAS 123R, deferred compensation is no longer recorded for non vested stock awards, therefore deferred compensation was reclassified to paid in capital.

 

 

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For the three months and nine months ended July 31, 2006, the Company’s total stock-based compensation expense was $6.0 million ($3.8 million net of tax) and $21.1 million ($13.3 million net of tax), respectively. Included in this total stock-based compensation expense was incremental expense for stock options of $3.0 million ($1.9 million net of tax) and $10.4 million ($6.6 million net of tax) for the three and nine months ended July 31, 2006, respectively.

 

The following table illustrates the effect (in thousands, except per share amounts) on net income and earnings per share for the three and nine months ended July 31, 2005 as if the Company’s stock-based compensation had been determined based on the fair value at the grant dates for awards made prior to fiscal 2006, under those plans and consistent with SFAS 123R:

 

	Three Months Ended		Nine Months Ended
	July 31, 2005		July 31, 2005
Net income as reported	$116,094		$303,712
Deduct: total stock-based employee
compensation expense determined
using Black-Scholes fair value
based method for all awards	1,689		4,531
Pro forma net income	$114,405		$299,181
Pro forma basic earnings per share	$      1.82		$      4.79
Basic earnings per share as reported	$      1.85		$      4.87
Pro forma diluted earnings per
share	$      1.74		$      4.56
Diluted earnings per share as reported	$      1.76		$      4.63

 

Pro forma information regarding net income and earnings per share is calculated as if we had accounted for our stock-based compensation under the fair value method of SFAS 123R. The fair value for options is established at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for July 31, 2005: risk-free interest rate of 4.18%, dividend yield of zero; volatility factor of the expected market price of our common stock of 0.44; and a weighted average expected life of the option of 4.9 years.

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, management believes the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.

 

On November 10, 2005, the FASB issued FASB Staff Position No. SFAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (FSP 123R-3). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R. The Company has until November 2006 to make a one-time election to adopt the transition method described in FSP 123R-3. The Company is currently evaluating FSP 123R-3; however, if the Company were to make the one-time election, it is not expected to affect operating income or net income.

 

 

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                3. Interest costs incurred, expensed and capitalized were:

 

			Three Months Ended				Nine Months Ended
			July 31,				July 31,
			2006		2005		2006		2005
			(Dollars in Thousands)
Interest capitalized at
beginning of period(1)			$ 77,048		$ 44,488		$ 48,366		$ 37,465
Plus interest incurred(2)			41,515		27,991		108,569		71,939
Less cost of sales interest
expensed(3)			25,601		22,332		62,453		58,563
Less other interest expensed			649		1,149		2,169		1,843
Interest capitalized at
end of period			$ 92,313		$ 48,998		$ 92,313		$ 48,998

 

(1) Beginning balance for 2006 does not include interest incurred of $2.3 million which is capitalized in property,

plant, and equipment.

(2) Data does not include interest incurred by our mortgage and finance subsidiaries.

(3) Represents interest on borrowings for construction, land and development costs, which are charged to interest

expense when homes are delivered.

 

4. Accumulated depreciation at July 31, 2006 and October 31, 2005 amounted to $39.7 million and $30.5 million, respectively, for our homebuilding assets.

 

5. In accordance with Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment of or Disposal of Long Lived Assets”, we record impairment losses on inventories related to communities under development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. For the three and nine months ended July 31, 2006 and 2005, these amounts were $0.8 million and zero respectively, and $2.4 million and zero, respectively. In addition, from time to time, we will write off certain residential land options including approval and engineering costs for land we decided not to purchase at the earlier of the option expiration or the decision to terminate. We wrote off such costs in the amount of $11.4 million and $1.4 million during the three months ended July 31, 2006 and 2005, respectively, and $18.6 million and $3.3 million during the nine months ended July 31, 2006 and 2005, respectively. Residential inventory impairment losses and option write-offs are reported in the Condensed Consolidated Statements of Income as “Homebuilding-Inventory impairment and land option deposit write-offs”.

 

 

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6. We provide a warranty accrual for repair costs over $1,000 to homes, community amenities, and land development infrastructure. We accrue for warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer. In addition, we accrue warranty costs under our general liability insurance deductible as part of selling, general and administrative costs. For fiscal 2006, our deductible is $20 million per occurrence with an aggregate $20 million for premise liability claims and an aggregate $20 million for construction defect claims under our general liability insurance. Once our $20 million aggregate deductible is reached for construction defect claims, a $250,000 per occurrence deductible is required on any additional claims. Additions and charges incurred in the warranty accrual and general liability accrual for the three and nine months ended July 31, 2006 and 2005 are as follows:

 

		Three Months Ended				Nine Months Ended
		July 31,				July 31,
		2006		2005		2006		2005
				(Dollars in Thousands)
Balance, beginning of period		$ 91,159		$ 81,122		$ 86,706		$ 64,922
Company acquisitions during period						186
Additions		8,105		15,329		27,699		41,246
Charges incurred		(9,421)		(8,841)		(24,748)		(18,558)
Balance, end of period		$ 89,843		$ 87,610		$ 89,843		$ 87,610

 

Warranty accruals are based upon historical experience. We engage a third party actuary that uses our historical warranty data to 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 $4.7 million and $7.9 million for the nine months ended July 31, 2006 and 2005, respectively, for prior year deliveries.

 

7. We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations and we are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.

 

We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation, and/or other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas.

 

In March 2005, we received two requests for information pursuant to Section 308 of the Clean Water Act from Region 3 of the Environmental Protection Agency (the “EPA”). These requests sought information concerning storm water discharge practices in connection with completed, ongoing and planned homebuilding projects by subsidiaries in the states and district that comprise EPA Region 3. We also received a notice of violations for one project in Pennsylvania and requests for sampling plan implementation in two projects in Pennsylvania. The amount requested by the EPA to settle the asserted violations at the one project was not material. We provided the EPA with information in response to its requests. We have since been advised by the Department of Justice (“DOJ”) that it will be involved in the review of our storm water discharge practices. We cannot predict the outcome of the review of these practices or estimate the costs that may be involved in resolving the matter. To the extent that the EPA or the DOJ asserts violations of regulatory requirements and requests injunctive relief or penalties, we will defend and attempt to resolve such asserted violations.

 

 

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In addition, in November 2005, we received two notices from the California Regional Water Quality Control Board alleging violations of certain storm water discharge rules and assessing an administrative civil liability of $0.2 million and $0.3 million. We do not consider these assessments to be material and are considering our response to the notices.

 

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

 

Our sales and customer financing processes are subject to the jurisdiction of the U. S. Department of Housing and Urban Development (“HUD”). In connection with the Real Estate Settlement Procedures Act, HUD has inquired about our process of referring business to our affiliated mortgage company and has separately requested documents related to customer financing. We have responded to HUD’s inquiries. In connection with these inquiries, the Inspector General of HUD has recommended to the Secretary of HUD that we indemnify HUD for any losses that it may sustain in connection with nine loans that it alleges were improperly underwritten. We cannot predict the outcome of HUD’s inquiry or estimate the costs that may be involved in resolving the matter. We do not expect the ultimate cost to be material.

 

In August 2006, the Company canceled a purchase contract for a property located in Southern California based on the seller’s failure to perform certain obligations, and requested return of its $16.5 million contract deposit. Refund of the deposit is currently in dispute with the seller and the Company anticipates that arbitration proceedings will commence during the fourth quarter of 2006 to resolve the dispute. At this time, the Company can not predict the outcome of this dispute.

 

8. As of July 31, 2006 and October 31, 2005, respectively, we are obligated under various performance letters of credit amounting to $457.6 million and $330.8 million.

 

9. Our amended and restated unsecured Revolving Credit Agreement (“Agreement”) with a group of lenders provides a revolving credit line of $1.5 billion through May 2011. The facility contains an accordion feature under which the aggregate commitment can be increased to $2.0 billion subject to the availability of additional commitments. Loans under the Agreement bear interest at various rates based on (1) a base rate determined by reference to the higher of (a) PNC Bank, National Association’s prime rate and (b) the federal funds rate plus 1/2% or (2) a margin ranging from 0.65% to 1.50% per annum, depending on our Leverage Ratio, as defined in the Agreement, and our debt ratings plus a LIBOR-based rate for a one, two, three, or six month interest period as selected by us. In addition, we pay a fee ranging from 0.15% to 0.25% per annum on the unused portion of the revolving credit line depending on our Leverage Ratio and our debt ratings and the average percentage unused portion of the revolving credit line. As of July 31, 2006 and October 31, 2005, the outstanding balance under the Agreement was $273.2 million and zero, respectively.

 

We and each of our significant subsidiaries, except for K. Hovnanian Enterprises, Inc., the borrower, and various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a subsidiary formerly engaged in homebuilding activity in Poland, our financial services subsidiaries, joint ventures, and certain other subsidiaries, is a guarantor under the Agreement.

 

Our amended secured mortgage loan warehouse agreement with a group of banks, which is a short-term borrowing facility, provides up to $250 million through May 18, 2007. Interest is payable monthly at the LIBOR Rate plus 1.0%. The loan is repaid when we sell the underlying mortgage loans to permanent investors. We also have a $100 million commercial paper facility. The facility expires on April 20, 2007 and interest is payable monthly at the LIBOR Rate plus 0.65%. As of July 31, 2006 and October 31, 2005, borrowings under both agreements were $166.9 million and $198.9 million, respectively.

 

 

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10. On November 30, 2004, we issued $200 million of 6 1/4% Senior Notes due 2015 and $100 million of 6% Senior Subordinated Notes due 2010. The net proceeds of the issuance were used to repay the outstanding balance on our revolving credit facility as of November 30, 2004 and for general corporate purposes.

 

On August 8, 2005, we issued $300 million of 6 1/4% Senior Notes due 2016. The notes were issued at a discount to yield 6.46% and have been reflected net of the unamortized discount in the Condensed Consolidated Balance Sheets. The notes are redeemable in whole or in part at our option at 100% of their principal amount plus the payment of a make-whole amount. The net proceeds of the issuance were used to repay the outstanding balance under our revolving credit facility as of August 8, 2005, and for general corporate purposes, including acquisitions.

 

On February 27, 2006, we issued $300 million of 7 1/2% Senior Notes due 2016. The notes are redeemable in whole or in part at our option at 100% of their principal amount plus the payment of a make-whole amount. The net proceeds of the issuance were used to repay a portion of the outstanding balance under our revolving credit facility as of February 27, 2006.

 

On June 12, 2006, we issued $250 million of 8 5/8% Senior Notes due 2017. The notes are redeemable in whole or in part at our option at 100% of their principal amount plus the payment of a make-whole amount. The net proceeds of the issuance were used to repay a portion of the outstanding balance under our revolving credit facility as of June 12, 2006.

 

At July 31, 2006, we had $1,655.3 million of outstanding senior notes ($1,649.5 million, net of discount), comprised of $140.3 million 10 1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215 million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due 2014, $200 million 6 1/4% Senior Notes due 2015, $300 million 6 1/4% Senior Notes due 2016, $300 million 7 1/2% Senior Notes due 2016, and $250 million 8 5/8% Senior Notes due 2017. At July 31, 2006, we had $400.0 million of outstanding senior subordinated notes, comprised of $150 million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior Subordinated Notes due 2013, and $100 million 6% Senior Subordinated Notes due 2010.

 

Under the terms of the indentures governing our debt securities, we have the right to make certain redemptions and depending on market conditions, may do so from time to time.

 

11. Per Share Calculations - Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to non-vested stock and outstanding options to purchase common stock, of 1.7 million and 3.0 million for the three months ended July 31, 2006 and 2005, respectively, and approximately 2.1 million and 3.2 million for the nine months ended July 31, 2006 and 2005, respectively.

 

12. On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000 per share for net proceeds of $135 million. Dividends on the Series A Preferred Stock are not cumulative and are paid at an annual rate of 7.625%. The Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares beginning on the fifth anniversary of their issuance. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000^th of a share of Series A Preferred Stock. The depositary shares are listed on the Nasdaq Global Market under the symbol “HOVNP”. The net proceeds from the offering, reflected in Preferred Stock in the Condensed Consolidated Balance Sheets, were used for the partial repayment of the outstanding balance under our revolving credit facility as of July 12, 2005. In October 2005, we paid $2.8 million of dividends on the Series A Preferred Stock. In each completed quarter of fiscal 2006, we paid $2.7 million of dividends.

 

13. Variable Interest Entities - In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). A Variable Interest Entity (“VIE”) is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a

 

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VIE pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE.

 

Based on the provisions of FIN 46, we have concluded that whenever we option land or lots from an entity and pay a non-refundable deposit, a VIE is created under condition (ii) (b) and (c) of the previous paragraph. We are deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected theoretical losses if they occur. For each VIE created with a significant nonrefundable option fee (we 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 FIN 46. If we are deemed to be the primary beneficiary of the VIE, we consolidate it on our balance sheet. The fair value of the VIE’s inventory 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 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 who is the responsible party (seller or buyer) for funding the approval process and development work that will take place prior to the decision to exercise the option.

 

Management believes FIN 46 was not clearly thought out for application in the homebuilding industry for land and lot options. Under FIN 46, we can have an option and put down a small deposit as a percentage of the purchase price and still have to consolidate the entity. Our exposure to loss as a result of our involvement with the VIE is only the deposit, not its total assets consolidated on the balance sheet. In certain cases, we will have to place inventory the VIE has optioned to other developers on our balance sheet. In addition, if the VIE has creditors, its debt will be placed on our balance sheet even though the creditors have no recourse against us. Based on these observations, we believe consolidating VIEs based on land and lot option deposits does not reflect the economic realities or risks of owning and developing land.

 

At July 31, 2006, all 37 VIEs we were required to consolidate were the result of our options to purchase land or lots from the selling entities. We paid cash or issued letters of credit deposits to these VIEs totaling $44.8 million. Our option deposits represent our maximum exposure to loss. The fair value of the property owned by these VIEs was $369.7 million. Since we do not own an equity interest in any of the unaffiliated variable interest entities that we must consolidate pursuant to FIN 46, we generally have little or no control or influence over the operations of these entities or their owners. When our requests for financial information are denied by the land sellers, certain assumptions about the assets and liabilities of such entities are required. In most cases, 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 have no debt obligations and the only asset recorded is the land or lots we have the option to buy with a related offset to minority interest for the assumed third party investment in the variable interest equity. At July 31, 2006, the balance reported in minority interest from inventory not owned was $208.5 million. Creditors of these VIEs have no recourse against us.

 

We will continue to control land and lots using options. Not all of our deposits are with VIEs. Including the deposits with the 37 VIEs described above, at July 31, 2006, we have total cash and letters of credit deposits amounting to approximately $189.0 million and $264.5 million to purchase land and lots with a total purchase price of $5.1 billion. The maximum exposure to loss is limited to the deposits, although some deposits are refundable at our request or refundable if certain conditions are not met.

 

14. Investments in Unconsolidated Homebuilding and Land Development Joint Ventures - We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base, and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with third party investors to develop land and construct homes that are sold directly to third party homebuyers. Our land development joint ventures include those entered into with developers,other homebuilders, and financial investors to develop finished lots for sale to the joint venture’s members or other third parties. As of July 31, 2006, we have

 

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investments in ten homebuilding joint ventures and nine land development joint ventures. The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method.

 

			July 31, 2006
	Homebuilding		Land Development		Total
Assets:
Cash and cash equivalents	$     40,233		$        5,958		$      46,191
Inventories	741,354		205,194		946,548
Other assets	88,982		4,968		93,950
Total assets	$   870,569		$   216,120		$ 1,086,689
Liabilities and equity:
Accounts payable and accrued liabilities	$   148,515		$    27,804		$   176,319
Notes payable	355,528		51,839		407,367
Equity of:
Hovnanian Enterprises, Inc.	88,976		92,624		181,600
Others	277,550		43,853		321,403
Total equity	366,526		136,477		503,003
Total liabilities and equity	$   870,569		$   216,120		$ 1,086,689
Debt to capitalization ratio	49%		28%		45%
			October 31, 2005
	Homebuilding		Land Development		Total
Assets:
Cash and cash equivalents	$     46,200		$       5,012		$       51,212
Inventories	694,408		198,267		892,675
Other assets	166,974		295		167,269
Total assets	$   907,582		$   203,574		$  1,111,156
Liabilities and equity:
Accounts payable and accrued liabilities	$   228,264		$    21,523		$   249,787
Notes payable	316,532		59,131		375,663
Equity of:
Hovnanian Enterprises, Inc.	75,349		86,593		161,942
Others	287,437		36,327		323,764
Total equity	362,786		122,920		485,706
Total liabilities and equity	$   907,582		$   203,574		$ 1,111,156
Debt to capitalization ratio	47%		32%		44%

 

As of July 31, 2006 and October 31, 2005, we had advances outstanding of approximately $35.6 million and $23.7 million, respectively, to these unconsolidated joint ventures, which were included in the accounts payable and accrued liabilities balances in the table above. On our Hovnanian Enterprises, Inc. Condensed Consolidated Balance Sheets our “Investments in and advances to unconsolidated joint ventures” amounted to $217.2 million and $187.2 million at July 31, 2006 and October 31, 2005, respectively. The minor difference between the Hovnanian equity balance plus advances to unconsolidated joint ventures balance disclosed here compared to the Hovnanian

 

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Enterprises, Inc. Condensed Consolidated Balance Sheets is due to a different inside basis versus outside basis in certain joint ventures.

 

	For the Three Months Ended July 31,2006
	Homebuilding		Land Development		Total
Revenues	$  192,918		$    7,447		$  200,365
Cost of sales and expenses (1)	(209,541)		(7,259)		(216,800)
Net income (loss)	$   (16,623)		$       188		$   (16,435)
Our share of net losses	$     (3,397)		$      (145)		$     (3,542)
	For the Three Months Ended July 31,2005
	Homebuilding		Land Development		Total
Revenues	$  196,340		$    13,124		$  209,464
Cost of sales and expenses	(171,374)		(12,746)		(184,120)
Net income	$    24,966		$         378		$    25,344
Our share of net earnings	$    13,781		$         125		$    13,906
	For the Nine Months Ended July 31,2006
	Homebuilding		Land Development		Total
Revenues	$  657,086		$    19,878		$  676,964
Cost of sales and expenses (1)	(614,741)		(19,501)		(634,242)
Net income	$    42,345		$        377		$    42,722
Our share of net earnings (losses)	$    13,644		$         (19)		$    13,625
	For the Nine Months Ended July 31,2005
	Homebuilding		Land Development		Total
Revenues	$  332,005		$    21,334		$  353,339
Cost of sales and expenses	(288,149)		(22,219)		(310,368)
Net income (loss)	$    43,856		$        (885)		$    42,971
Our share of net earnings (losses)	$    22,733		$          (89)		$    22,644

 

(1) Expenses in the third quarter of 2006 include the $27 million write-off of the Town & Country

Homes trade name intangible in Florida by our joint venture with affiliates of Blackstone Real Estate Advisors.

 

 

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Income (loss) from unconsolidated joint ventures is reflected as a separate line in the accompanying Condensed Consolidated Financial Statements and reflects our proportionate share of the income or loss of these unconsolidated homebuilding and land development joint ventures. The minor difference between our share of the income or loss from these unconsolidated joint ventures disclosed here compared to the Hovnanian Enterprises, Inc. Condensed Consolidated Income Statements is due to the reclass of the intercompany portion of management fee income from certain joint ventures. Our ownership interests in the joint ventures vary but are generally less than or equal to 50 percent. In determining whether or not we must consolidate joint ventures where we are the manager of the joint venture, we consider the guidance in EITF 04-5 in assessing whether the other partners have specific rights to overcome the presumption of control by us 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 for each venture. Generally, the amount of such financing is limited to no more than 50% of the joint venture’s total assets, and such financing is obtained on a non-recourse basis, with guarantees from us limited only to performance and completion guarantees and limited environmental indemnifications.

 

15. Recent Accounting Pronouncements – In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections”. This statement, which replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In June 2005, the Emerging Issues Task Force (“EITF”) released Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 creates a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate the partnership. EITF 04-5 states that the presumption of general partner control would be overcome only when the limited partners have certain specific rights as outlined in EITF 04-5. EITF 04-5 is effective immediately for all newly formed limited partnerships and for existing limited partnership agreements that are modified. For general partners in all other limited partnerships, EITF 04-5 is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. Implementation of EITF 04-5 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting to Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for the Company’s first quarter ending January 31, 2007. We are in the process of assessing the impact, if any, this will have on our financial statements.

 

16. Intangible Assets – The intangible assets recorded on our balance sheet are goodwill, which has an indefinite life, and definite life intangibles, including tradenames, architectural designs, distribution processes, and contractual agreements resulting from our acquisitions. We no longer amortize goodwill, but instead assess it periodically for impairment. We are amortizing the definite life intangibles over their expected useful lives, ranging from three to eight years.

 

17. Acquisitions - On August 3, 2005, we acquired substantially all of the homebuilding assets of Oster Homes, a privately held Ohio homebuilder, headquartered in Lorain, Ohio.

 

 

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On August 8, 2005, we acquired substantially all of the assets of First Home Builders of Florida, a privately held homebuilder and provider of related financial services headquartered in Cape Coral, Florida.

 

In connection with the First Home Builders of Florida and Oster Homes acquisitions, based on an appraisal of acquisition intangibles, we have definite life intangible assets equal to the excess purchase price over the fair value of net tangible assets of $121 million in the aggregate. We are amortizing the definite life intangibles over their estimated lives.

 

On April 17, 2006, we acquired for cash the assets of CraftBuilt Homes, a privately held homebuilder headquartered in Bluffton, South Carolina. In connection with the acquisition, we have definite life intangible assets equal to the excess purchase price over the fair value of net tangible assets of $4.5 million in the aggregate. We are awaiting the appraisal from this acquisition. Until the appraisal is received, we are estimating the intangible value for amortization calculations. We expect to have the final appraisal by the end of the second quarter of fiscal 2007. We expect to amortize the definite life intangibles over their estimated lives.

 

On May 1, 2006, we acquired through the issuance of 175,936 shares of Class A common stock substantially all of the assets of two mechanical contracting businesses.

 

All fiscal 2006 and 2005 acquisitions provide for other payments to be made, generally dependent upon achievement of certain future operating and return objectives.

 

18. Hovnanian Enterprises, Inc., the parent company (the "Parent"), is the issuer of publicly traded common stock and preferred stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the “Subsidiary Issuer”), acts as a finance entity that as of July 31, 2006 had issued and outstanding $400 million of Senior Subordinated Notes, $1,655.3 million face value of Senior Notes, and $273.2 million drawn on a Revolving Credit Agreement. The Senior Subordinated Notes, Senior Notes and the Revolving Credit Agreement are fully and unconditionally guaranteed by the Parent.

 

In addition to the Parent, each of the wholly owned subsidiaries of the Parent other than the Subsidiary Issuer (collectively, the “Guarantor Subsidiaries”), with the exception of various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, our mortgage lending subsidiaries, a subsidiary formerly engaged in homebuilding activity in Poland, our title insurance subsidiaries, joint ventures, and certain other subsidiaries (collectively, the “Non-guarantor Subsidiaries”), have guaranteed fully and unconditionally, on a joint and several basis, the obligations of the Subsidiary Issuer to pay principal and interest under the Senior Notes, Senior Subordinated Notes, and the Revolving Credit Agreement.

 

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

 

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

 

 

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 2006
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations		Consolidated
ASSETS:
Homebuilding	$        242		$  130,042		$5,125,510		$  286,342		$		$5,542,136
Financial services					106		195,663				195,769
Income taxes (payable)   receivable	53,149				96,671		975				150,795
Investments in and amounts   due to and from   consolidated subsidiaries	2,000,926		2,588,249		(2,665,652)		(241,476)		(1,682,047)		-
Total assets	$2,054,317		$2,718,291		$2,556,635		$  241,504		$(1,682,047)		$5,888,700
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Homebuilding	$		$		$1,064,700		$    28,492		$		$1,093,192
Financial services					72		175,517				175,589
Notes payable			2,352,379		1,118						2,353,497
Minority interest					208,542		3,563				212,105
Stockholders’ equity	2,054,317		365,912		1,282,203		33,932		(1,682,047)		2,054,317
Total liabilities and   stockholders’ equity	$2,054,317		$2,718,291		$2,556,635		$  241,504		$(1,682,047)		$5,888,700
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2005
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations		Consolidated
ASSETS;
Homebuilding	$    1,192		$  332,180		$3,931,333		$    214,238				$4,478,943
Financial services					200		237,092				237,292
Income taxes (payable)   receivable	(22,704)				32,970		(363)				9,903
Investments in and   amounts due to and from   consolidated subsidiaries	1,812,869		1,413,666		(1,617,271)		(189,626)		(1,419,638)		-
Total assets	$1,791,357		$1,745,846		$2,347,232		$    261,341		$(1,419,638)		$4,726,138
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Homebuilding	$		$   20,431		$  996,428		$      3,626		$		$1,020,485
Financial services					81		207,236				207,317
Notes payable			1,504,922		(3,531)		24,339				1,525,730
Minority interest					180,170		1,079				181,249
Stockholders’ equity	1,791,357		220,493		1,174,084		25,061		(1,419,638)		1,791,357
Total liabilities and   stockholders’ equity	$1,791,357		$1,745,846		$2,347,232		$    261,341		$(1,419,638)		$4,726,138

 

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2006
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Revenues:
Homebuilding	$		$      119		$1,512,360		$    15,379		$		$1,527,858
Financial services					2,240		20,421				22,661
Intercompany charges			81,758		81,317				(163,075)		-
Equity in pretax income   of consolidated   subsidiaries	120,877								(120,877)		-
Total revenues	120,877		81,877		1,595,917		35,800		(283,952)		1,550,519
Expenses:
Homebuilding			560		1,444,103		8,039		(41,426)		1,411,276
Financial services					1,263		13,864				15,127
Total expenses			560		1,445,366		21,903		(41,426)		1,426,403
Income from   unconsolidated joint   ventures					(3,239)						(3,239)
Income (loss) before   income taxes	120,877		81,317		147,312		13,897		(242,526)		120,877
State and federal income   taxes	43,830		31,191		50,247		4,971		(86,409)		43,830
Net income (loss)	$   77,047		$  50,126		$    97,065		$     8,926		$ (156,117)		$    77,047
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2005
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Revenues:
Homebuilding	$		$   60		$1,293,968		$       165		$		$1,294,193
Financial services					1,009		17,524				18,533
Intercompany charges			53,685		54,559				(108,244)		-
Equity in pretax income   of consolidated   subsidiaries	194,891								(194,891)		-
Total revenues	194,891		53,745		1,349,536		17,689		(303,135)		1,312,726
Expenses:
Homebuilding			(814)		1,136,550		881		(17,171)		1,119,446
Financial services					315		12,895		(914)		12,296
Total expenses			(814)		1,136,865		13,776		(18,085)		1,131,742
Income from   unconsolidated joint   ventures					13,907						13,907
Income (loss) before   income taxes	194,891		54,559		226,578		3,913		(285,050)		194,891
State and federal income   taxes	78,797		31,571		129,114		3,078		(163,763)		78,797
Net income (loss)	$ 116,094		$  22,988		$   97,464		$     835		$ (121,287)		$  116,094

 

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2006
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiries		Eliminations		Consolidated
Revenues:
Homebuilding	$		$     370		$  4,310,378		$     28,770		$		$4,339,518
Financial services					6,516		56,598				63,114
Intercompany charges			224,600		223,705				(448,305)		-
Equity in pretax income of   consolidated subsidiaries	418,651								(418,651)		-
Total revenues	418,651		224,970		4,540,599		85,368		(866,956)		4,402,632
Expenses:
Homebuilding			1,265		4,045,861		15,180		(107,666)		3,954,640
Financial services					3,442		39,977		(245)		43,174
Total expenses			1,265		4,049,303		55,157		(107,911)		3,997,814
Income from   unconsolidated joint   ventures					13,833						13,833
Income (loss) before   income taxes	418,651		223,705		505,129		30,211		(759,045)		418,651
State and federal income   taxes	153,859		79,239		181,997		11,762		(272,998)		153,859
Net income (loss)	$  264,792		$ 144,466		$   323,132		$  18,449		$   (486,047)		$   264,792
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2005
(Dollars in Thousands)
			Subsidiary		Guarantor		Non-Guarantor
	Parent		Issuer		Subsidiaries		Subsidiaries		Eliminations		Consolidated
Revenues:
Homebuilding	$		$     161		$3,526,539		$ 1,061		$		$3,527,761
Financial services					3,983		45,012				48,995
Intercompany charges			154,345		156,408				(310,753)		-
Equity in pretax income of   consolidated subsidiaries	501,324								(501,324)		-
Total revenues	501,324		154,506		3,686,930		46,073		(812,077)		3,576,756
Expenses:
Homebuilding			(1,902)		3,133,308		2,909		(70,084)		3,064,231
Financial services					2,087		34,388		(2,792)		33,683
Total expenses			(1,902)		3,135,395		37,297		(72,876)		3,097,914
Income from   unconsolidated joint   ventures					22,482						22,482
Income (loss) before   income taxes	501,324		156,408		574,017		8,776		(739,201)		501,324
State and federal income   taxes	197,612		54,743		221,741		4,384		(280,868)		197,612
Net income (loss)	$303,712		$ 101,665		$  352,276		$ 4,392		$ (458,333)		$  303,712

 

 

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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2006
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Cash flows from operating   activities:
Net income	$ 264,792		$ 144,466		$    323,132		$  18,449		$ (486,047)		$    264,792
Adjustments to reconcile net   income to net cash provided by   (used in) operating activities	(76,641)		(7,698)		(1,401,483)		(103,379)		486,047		(1,103,154)
Net cash provided by (used in)   investing activities	188,151		136,768		(1,078,351)		(84,930)				(838,362)
Net cash (used in)
investing activities					(67,692)		(11,202)				(78,894)
Net cash provided by (used in)   financing activities	(94)		823,225		(105,042)		35,696				753,785
Intercompany investing and   financing activities – net	(188,057)		(1,174,583)		1,310,790		51,850				-
Net increase (decrease) in cash	-		(214,590)		59,705		(8,586)				(163,471)
Cash and cash equivalents   balance, beginning of period	16		298,596		(97,024)		9,685				211,273
Cash and cash equivalents   balance, end of period	$           16		$   84,006		$    (37,319)		$   1,099		$             -		$     47,802