UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

[ X ] Quarterly report pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

For quarterly period ended JANUARY 31, 2007 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. 47,330,587 shares of Class A Common Stock and 14,650,193 shares of Class B Common Stock were outstanding as of March 5, 2007.

 

 

---

 

 

HOVNANIAN ENTERPRISES, INC.
FORM 10-Q
INDEX
	PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets as of January 31,
2007 (unaudited) and October 31, 2006	3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 2007 and 2006 (unaudited)	5
Condensed Consolidated Statement of Stockholders'
Equity for the three months ended January 31, 2007 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for
the three months ended January 31, 2007 and 2006 (unaudited)	7
Notes to Condensed Consolidated Financial
Statements (unaudited)	9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk	44
Item 4. Controls and Procedures	45
PART II. Other Information
Item 1. Legal Proceedings	46
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds	48
Item 6. Exhibits	49
Signatures	51

 

 

 

---

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts)
	January 31,  2007		October 31,  2006
ASSETS
	(unaudited)
Homebuilding:
Cash and cash equivalents	$1,005		$43,635
Restricted cash	7,993		9,479
Inventories - at the lower of cost or fair value:
Sold and unsold homes and lots under development	3,316,833		3,297,766
Land and land options held for future
development or sale	379,843		362,760
Consolidated inventory not owned:
Specific performance options	15,068		20,340
Variable interest entities	200,911		208,167
Other options	221,038		181,808
Total consolidated inventory not owned	437,017		410,315
Total inventories	4,133,693		4,070,841
Investments in and advances to unconsolidated
joint ventures	206,180		212,581
Receivables, deposits, and notes	86,398		94,750
Property, plant, and equipment – net	109,176		110,704
Prepaid expenses and other assets	182,329		175,603
Goodwill	32,658		32,658
Definite life intangibles	78,427		165,053
Total homebuilding	4,837,859		4,915,304
Financial services:
Cash and cash equivalents	8,313		10,688
Restricted cash	8,550		1,585
Mortgage loans held for sale	166,409		281,958
Other assets	5,538		10,686
Total financial services	188,810		304,917
Income taxes receivable – including deferred
tax benefits	274,179		259,814
Total assets	$5,300,848		$5,480,035

See notes to condensed consolidated financial statements (unaudited).

 

---

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts)
	January 31, 2007		October 31, 2006
LIABILITIES AND STOCKHOLDERS’ EQUITY	(unaudited)
Homebuilding:
Nonrecourse land mortgages	$35,732		$26,088
Accounts payable and other liabilities	413,669		582,393
Customers’ deposits	142,528		184,943
Nonrecourse mortgages secured by operating
Properties	23,514		23,684
Liabilities from inventory not owned	214,546		205,067
Total homebuilding	829,989		1,022,175
Financial services:
Accounts payable and other liabilities	16,090		12,158
Mortgage warehouse line of credit	153,408		270,171
Total financial services	169,498		282,329
Notes payable:
Revolving credit agreement	225,700
Senior notes	1,650,053		1,649,778
Senior subordinated notes	400,000		400,000
Accrued interest	27,382		51,105
Total notes payable	2,303,135		2,100,883
Total liabilities	3,302,622		3,405,387
Minority interest from inventory not owned	116,772		130,221
Minority interest from consolidated joint ventures	1,633		2,264
Stockholders’ equity:
Preferred stock, $.01 par value-authorized 100,000
shares; issued 5,600 shares at January 31,
2007 and at October 31, 2006 with a
liquidation preference of $140,000	135,299		135,299
Common stock, Class A, $.01 par value-authorized
200,000,000 shares; issued 58,872,396 shares at
January 31, 2007 and 58,653,723 shares at
October 31, 2006 (including 11,694,720 shares
at January 31, 2007 and 11,494,720 shares at
October 31, 2006 held in Treasury)	589		587
Common stock, Class B, $.01 par value (convertible
to Class A at time of sale) authorized
30,000,000 shares; issued 15,343,272 shares at
January 31, 2007 and 15,343,410 shares at
October 31, 2006 (including 691,748 shares at
January 31, 2007 and October 31, 2006 held in
Treasury)	153		153
Paid in capital – common stock	254,504		253,262
Retained earnings	1,604,533		1,661,810
Treasury stock - at cost	(115,257)		(108,948)
Total stockholders’ equity	1,879,821		1,942,163
Total liabilities and stockholders’ equity	$5,300,848		$5,480,035

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 January 31,
	2007		2006
Revenues:
Homebuilding:
Sale of homes	$1,135,916		$1,246,197
Land sales and other revenues	8,337		12,533
Total homebuilding	1,144,253		1,258,730
Financial services	21,548		19,262
Total revenues	1,165,801		1,277,992
Expenses:
Homebuilding:
Cost of sales, excluding interest	933,975		934,687
Cost of sales interest	26,872		16,569
Inventory impairment loss and land option
write-offs	41,474		3,109
Total cost of sales	1,002,321		954,365
Selling, general and administrative	132,142		135,234
Total homebuilding	1,134,463		1,089,599
Financial services	13,070		13,530
Corporate general and administrative	22,633		27,722
Other interest	1,220		820
Other operations	1,453		7,001
Intangible amortization	61,556		11,669
Total expenses	1,234,395		1,150,341
Income from unconsolidated joint
ventures	1,965		7,575
(Loss) income before income taxes	(66,629)		135,226
State and federal income tax
(benefit)/provision:
State	(2,346)		4,874
Federal	(9,675)		46,256
Total taxes	(12,021)		51,130
Net (loss) income	(54,608)		84,096
Less:  preferred stock dividends	2,669		2,669
Net (loss) income available to common
stockholders	$(57,277)		$81,427
Per share data:
Basic:
(Loss) income per common share	$(0.91)		$1.30
Weighted average number of common
shares outstanding	62,904		62,810
Assuming dilution:
(Loss) income per common share	$(0.91)		$1.25
Weighted average number of common
shares outstanding	62,904		65,403

See notes to condensed consolidated financial statements (unaudited).

 

 

---

 

 

 

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		Retained Earnings		Treasury Stock		Total
Balance, October 31, 2006	47,159,003		$587		14,651,662		$153		5,600		$135,299		$253,262		$1,661,810		$(108,948)		$1,942,163
Preferred dividend declared  ($476.56 per share)															(2,669)				(2,669)
Stock options amortization  and issuances, net of tax	46,037												3,677						3,677
Restricted stock  amortization, issuances and  forfeitures, net of tax	172,498		2										(2,435)						(2,433)
Conversion of Class B to  Class A common stock	138				(138)														-
Treasury stock purchases	(200,000)																(6,309)		(6,309)
Net (loss)															(54,608)				(54,608)
Balance, January 31, 2007	47,177,676		$589		14,651,524		$153		5,600		$135,299		$254,504		$1,604,533		$(115,257)		$1,879,821

See notes to condensed consolidated financial statements (unaudited).

 

 

---

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands - Unaudited)
	Three Months Ended
	January 31,
	2007		2006
Cash flows from operating activities:
Net (loss) income	$(54,608)		$84,096
Adjustments to reconcile net (loss)/income to net cash
used in operating activities:
Depreciation	4,384		3,086
Intangible amortization	61,556		11,669
Compensation from stock options and awards	6,418		7,867
Amortization of bond discounts	275		251
Excess tax benefits from share-based payment	(255)		(3,443)
Loss (gain) on sale and retirement of property
and assets	(76)		74
Income from unconsolidated joint ventures	(1,965)		(7,575)
Distributions from unconsolidated joint ventures	1,284		2,915
Deferred income taxes	(18,383)		(30,701)
Impairment and land option deposit write-offs	41,474		3,109
Decrease (increase) in assets:
Mortgage notes receivable	115,557		58,854
Restricted cash, receivables, prepaids and
other assets	29,040		58,726
Inventories	(70,560)		(446,247)
(Decrease) increase in liabilities:
State and Federal income taxes	4,018		11,974
Customers’ deposits	(36,832)		(10,303)
Interest and other accrued liabilities	(179,270)		(24,275)
Accounts payable	(39,968)		(19,522)
Net cash used in operating activities	(137,911)		(299,445)
Cash flows from investing activities:
Net proceeds from sale of property and assets	243		89
Purchase of property, equipment and other fixed
assets and acquisitions	(24,475)		(9,147)
Investments in and advances to unconsolidated
joint ventures	(6,711)		(7,080)
Distributions from unconsolidated joint ventures	13,811		2,711
Net cash used in investing activities	(17,132)		(13,427)
Cash flows from financing activities:
Proceeds from mortgages and notes	18,798		18,246
Net proceeds (payments) related to revolving
credit agreement	225,700		226,250
Net proceeds (payments) related to mortgage
warehouse line of credit	(29,000)		(61,107)
Payments of issuance costs			(90)
Principal payments on mortgages and notes	(96,953)		(30,828)
Excess tax benefits from share-based payment	255		3,443
Preferred dividends paid	(2,669)		(2,669)
Purchase of treasury stock	(6,309)		(7,301)
Proceeds from sale of stock and employee stock plan	216		1,544
Net cash provided by financing activities	110,038		147,488
Net (decrease) in cash	(45,005)		(165,384)
Cash and cash equivalents balance, beginning
of period	54,323		211,273
Cash and cash equivalents balance, end of period	$9,318		$45,889

 

 

---

 

 

 

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

 

	Three Months Ended
	January 31,
	2007		2006
Supplemental disclosures of cash flow:
Cash paid during the period for:
Interest	$53,918		$26,642
Income taxes	$1,941		$38,885
Supplemental disclosures of noncash operating
activities:
Consolidated inventory not owned:
Specific performance options	$13,846		$8,075
Variable interest entities	181,216		227,983
Other options	219,473		137,834
Total inventory not owned	$414,535		$373,892

 

See notes to condensed consolidated financial statements (unaudited).

 

---

 

 

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, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

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

 

2. For the three months ended January 31, 2007 and 2006, the Company’s total stock-based compensation expense was $6.4 million ($5.3 million net of tax) and $7.9 million ($4.9 million net of tax), respectively. Included in this total stock-based compensation expense was expense for stock options of $3.3 million ($2.7 million net of tax) and $3.3 million ($2.1 million net of tax) for the three months ended January 31, 2007 and 2006, respectively.

 

3. Interest costs incurred, expensed and capitalized were:

 

			Three Months Ended
			January 31,
			2007		2006
			(Dollars in Thousands)
Interest capitalized at
Beginning of period(1)			$102,849		$48,366
Plus interest incurred(2)			45,297		30,804
Less cost of sales interest
Expensed(3)			26,872		16,569
Less other interest expensed			1,220		820
Interest capitalized at
end of period			$120,054		$61,781

 

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

property, plant, and equipment.

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

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

interest expense when homes are delivered.

 

4. Accumulated depreciation at January 31, 2007 and October 31, 2006 amounted to $47.5 million and $43.7 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 months ended January 31, 2007 and 2006, these amounts were $46.5 million and $1.6 million, respectively. Of the fiscal 2007 amount, $41.9 million of inventory impairments were for our Fort Myers – Cape Coral (“Fort

 

---

 

Myers”) operations in the Southeast, as a result of a continued decline in sales pace and general market conditions, as well as increased cancellation rates during the quarter. The remaining inventory impairments recorded during the quarter were $1.4 million in the Northeast and $3.2 million in the Midwest. 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 $3.0 million and $1.5 million during the three months ended January 31, 2007 and 2006, respectively. The write-offs of $3 million in the first quarter of fiscal 2007 were offset by $8 million in recovered deposits that had been written off in the prior year as walk-away costs. In certain instances where we walked away from option contracts in the fourth quarter of fiscal 2006, we took legal action to recover our deposits. In two of these cases we were successful and received a portion of our deposit back in the first quarter of fiscal 2007. Residential inventory impairment losses and option write-offs are reported in the Condensed Consolidated Statements of Income as “Homebuilding-inventory impairment loss and land option write-offs”.

 

6. We provide a warranty accrual for repair costs over $1,000, not covered by our general liability insurance, 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 under our general liability insurance deductible as part of selling, general and administrative costs. For fiscal 2007, our deductible is $20 million per occurrence with an aggregate $20 million for premise liability claims and an aggregate $21.5 million for construction defect claims under our general liability insurance. Additions and charges incurred in the warranty accrual and general liability accrual for the three months ended January 31, 2007 and 2006 are as follows:

 

		Three Months Ended
		January 31,
		2007		2006
Balance, beginning of period		$93,516		$86,706
Additions		8,427		7,264
Charges incurred		(10,272)		(6,339)
Balance, end of period		$91,671		$87,631

 

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 $0.8 million and $3.5 million for the three months ended January 31, 2007 and 2006, 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 less than $100,000. We provided the EPA with information in response to its requests. We have since been advised by the Department of Justice ("DOJ") that it will be involved in the review of our storm water discharge practices. We cannot predict the outcome of the review of these practices or estimate the costs that may be involved in resolving the matter. To the extent that the EPA or the DOJ asserts violations of regulatory requirements and requests injunctive relief or penalties, we will defend and attempt to resolve such asserted violations.

 

In addition, in November 2005, we received two notices from the California Regional Water Quality Control Board alleging violations in Riverside County, California and El Dorado County, California of certain storm water discharge rules. The Riverside County notice assessed an administrative civil liability of $236,895 and in March 2006, we agreed to make a donation of $118,447 to the County of Riverside, California and paid a fine of $118,448 to the State of California. In October 2006, we agreed to pay a fine of $300,000 to the County of El Dorado, California and have tentatively agreed to a pay a fine of $300,000 to the State of California with respect to the El Dorado notice.

 

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.

 

On September 26, 2006, a stockholder derivative action was filed in the Superior Court of New Jersey, Monmouth County, against certain of our current and former officers and directors, captioned as Michael Crady v. Ara K. Hovnanian et al., Civil Action No. L-4380-06. The complaint alleges, among other things, breach of fiduciary duty in connection with certain of our historical stock option grants. An amended complaint, containing similar allegations, was filed on January 11, 2007. The amended complaint seeks an award of damages, disgorgement of certain stock options and any proceeds of certain stock options, equitable relief and an award of fees and expenses. The parties have agreed to extend the time we have to respond to the amended complaint. We have engaged counsel with respect to the claims.

 

8. As of January 31, 2007 and October 31, 2006, respectively, we are obligated under various performance letters of credit amounting to $421.4 million and $453.4 million.

 

9. Our amended and restated unsecured Revolving Credit Agreement ("Agreement") with a group of lenders provides a revolving credit line and letter of 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 January 31, 2007 and October 31, 2006, the outstanding balance under the Agreement was $225.7

 

---

 

million and zero, excluding letters of credit of $179.3 million and $329.8 million, respectively. We currently are in compliance and intend to maintain compliance with the covenants under the Agreement.

 

On October 11, 2006, (a) we, K. Hovnanian Enterprises, Inc. ("K. Hovnanian") and certain of our subsidiaries as guarantors entered into a Credit Agreement (the "Credit Agreement") with Citicorp USA, Inc., as administrative agent and issuing bank, the lenders from time to time party thereto, and The Bank of New York, as paying agent, and (b) K. Hovnanian entered into an Agreement for Letter of Credit (the "LC Agreement") with Citibank, N.A ("Citibank"). Under the Credit Agreement, K. Hovnanian has the right to borrow and to obtain the issuance, renewal, extension and increase of a letter of credit (the "Security Letter of Credit") up to an aggregate availability of $125 million. On November 14, 2006, per the accordion feature provided for in the Credit Agreement, the aggregate commitments under the Credit Agreement were increased to $250 million. The Security Letter of Credit will serve as security for any letters of credit that may be issued under the LC Agreement. Under the LC Agreement, K. Hovnanian may request Citibank to issue letters of credit up to the aggregate maximum amount of the Security Letter of Credit. Loans under the Credit Agreement will bear interest at various rates based on (1) an alternate base rate determined by reference to the higher of (a) Citibank's base rate and (b) the federal funds rate plus ¹/₂% or (2) a LIBOR-based rate for a one day, one or two week, or one, two, three or six month interest period as selected by K. Hovnanian.

 

The Credit Agreement has covenants that restrict Hovnanian and certain of its subsidiaries', including K. Hovnanian's, ability to grant liens and enter into consolidations, mergers and transfers of all or substantially all of their respective assets. The Credit Agreement contains events of default which would permit the lenders to accelerate the loans if not cured within applicable grace periods, including the failure to make timely payments under the Credit Agreement or other material indebtedness, the failure to satisfy covenants and specified events of bankruptcy and insolvency. Borrowings under the Credit Agreement may be used for general corporate purposes. As of January 31, 2007 and October 31, 2006, the outstanding balance under the Credit Agreement was zero, excluding letters of credit of $242.1 million and $123.6 million, respectively. As of January 31, 2007, we were in compliance with our loan covenants.

 

Our amended secured mortgage loan warehouse agreement with a group of banks, which is a short-term borrowing facility, provides up to $200 million through November 9, 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 commercial paper facility which was amended on September 29, 2006. Pursuant to the amended agreement, the commercial paper facility amount increased from $100 million to $150 million. The facility expires on April 20, 2007 and interest is payable monthly at the LIBOR Rate plus 0.40%. We believe that we will be able to extend this facility beyond April 2007 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. As of January 31, 2007 and October 31, 2006, borrowings under both agreements were $153.4 million and $270.2 million, respectively.

 

10. At January 31, 2007, we had $1,655.3 million of outstanding senior notes ($1,650.1 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 January 31, 2007, 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 2.6 million for the three months ended January 31, 2006. For the three months ended January 31, 2007 there were no incremental shares attributed to non-vested stock and outstanding options to purchase common stock because we had a net loss for the period, and any incremental shares would be anti-dilutive.

 

 

---

 

 

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 January 2007 and 2006, we paid $2.7 million of dividends on the Series A Preferred Stock.

 

13. Operating and Reporting Segments - SFAS 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS 131") defines operating segments as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. The Company has identified its chief operating decision-maker as the Chief Executive Officer. Under the definition, we have more than 70 homebuilding operating segments, and therefore, in accordance with paragraph 24 of SFAS 131, it is impractical to provide segment disclosures for this many segments. As such, we have aggregated the homebuilding operating segments into six reportable segments.

 

The Company’s operating segments are aggregated into reportable segments in accordance with SFAS 131, 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:

 

	Homebuilding:
	(1) Northeast (New Jersey, New York, Pennsylvania)
	(2) Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia,
		Washington D.C.)
	(3) Midwest (Illinois, Kentucky, Michigan, 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 and high-rise condominiums, urban infill and active adult homes in planned residential developments. Operations of the Company’s Financial Services segment include mortgage banking and title services 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.

 

Evaluation of segment performance is based primarily on operating earnings from continuing operations before provision for income taxes. Operating earnings for the Homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings from unconsolidated entities and management fees and other income, net, less the cost of homes and land sold, selling, general and administrative expenses and minority interest expense, net. Operating earnings for the Financial Services segment consist of revenues generated from mortgage banking and title services, less the cost of such services and certain selling, general and administrative 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 January 31,
(In thousands)	2007		2006
Revenues:
Northeast	$214,094		$206,960
Mid-Atlantic	223,742		198,282
Midwest	38,824		27,522
Southeast	219,937		270,045
Southwest	177,012		183,854
West	270,515		369,865
Total homebuilding revenues	1,144,124		1,256,528
Financial services	21,548		19,262
Corporate and unallocated	129		2,202
Total revenues	$1,165,801		$1,277,992
(Loss)/income before income   taxes:
Northeast	$16,460		$35,658
Mid-Atlantic	26,297		36,577
Midwest	(10,532)		(5,343)
Southeast	(87,759)		23,031
Southwest	6,669		13,473
West	(677)		51,354
Homebuilding (loss)/income         before income taxes	(49,542)		154,750
Financial services	8,478		5,732
Corporate and unallocated	(25,565)		(25,256)
(Loss)/income before income           taxes	$(66,629)		$135,226
	January 31,		October 31,
	2007		2006
(In thousands)
Assets
Northeast	$1,222,897		$1,164,801
Mid-Atlantic	699,997		726,777
Midwest	167,919		177,362
Southeast	531,371		647,374
Southwest	607,288		596,391
West	1,410,828		1,399,412
Total homebuilding assets	4,640,300		4,712,117
Financial services	188,810		304,917
Corporate and unallocated	471,738		463,001
Total assets	$5,300,848		$5,480,035

 

14. Variable Interest Entities - In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). A Variable Interest Entity

 

---

 

(“VIE”) is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE.

 

Based on the provisions of FIN 46, we have concluded that whenever we option land or lots from an entity and pay a non-refundable deposit, a VIE is created under condition (ii) (b) and (c) of the previous paragraph. We are deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected theoretical losses if they occur. For each VIE created with a significant nonrefundable option fee (we 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 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 January 31, 2007, all 31 VIEs we were required to consolidate were the result of our options to purchase land or lots from the selling entities. We paid cash or issued letters of credit deposits to these VIEs totaling $29.7 million. Our option deposits represent our maximum exposure to loss. The fair value of the property owned by these VIEs was $200.9 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 January 31, 2007, the balance reported in minority interest from inventory not owned was $116.8 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 31 VIEs described above, at January 31, 2007, we have total cash and letters of credit deposits amounting to approximately $338.0 million to purchase land and lots with a total purchase price of $3.5 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.

 

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

 

			January 31, 2007
	Homebuilding		Land Development		Total
Assets:
Cash and cash equivalents	$23,278		$6,857		$30,135
Inventories	703,180		208,371		911,551
Other assets	85,564		4,540		90,104
Total assets	$812,022		$219,768		$1,031,790
Liabilities and equity:
Accounts payable and accrued
liabilities	$93,179		$18,306		$111,485
Notes payable	322,432		42,483		364,915
Equity of:
Hovnanian Enterprises, Inc.	93,180		95,571		188,751
Others	303,231		63,408		366,639
Total equity	396,411		158,979		555,390
Total liabilities and equity	$812,022		$219,768		$1,031,790
Debt to capitalization ratio	45%		21%		40%
			October 31, 2006
	Homebuilding		Land Development		Total
Assets:
Cash and cash equivalents	$58,632		$7,436		$66,068
Inventories	691,942		215,803		907,745
Other assets	86,826		3,990		90,816
Total assets	$837,400		$227,229		$1,064,629
Liabilities and equity:
Accounts payable and accrued
liabilities	$117,658		$22,415		$140,073
Notes payable	342,068		47,126		389,194
Equity of:
Hovnanian Enterprises, Inc.	88,486		95,163		183,649
Others	289,188		62,525		351,713
Total equity	377,674		157,688		535,362
Total liabilities and equity	$837,400		$227,229		$1,064,629
Debt to capitalization ratio	48%		23%		42%

 

As of January 31, 2007 and October 31, 2006, we had advances outstanding of approximately $17.4 million and $29.1 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 $206.2 million and

 

---

 

$212.6 million at January 31, 2007 and October 31, 2006, respectively. The minor difference between the Hovnanian equity balance plus advances to unconsolidated joint ventures balance disclosed here compared to the Hovnanian Enterprises, Inc. Condensed Consolidated Balance Sheets is due to a different inside basis versus outside basis in certain joint ventures.

 

	For the Three Months Ended January 31, 2007
	Homebuilding		Land Development		Total
Revenues	$115,561		$7,422		$122,983
Cost of sales and expenses	(104,176)		(6,978)		(111,154)
Net income	$11,385		$444		$11,829
Our share of net earnings	$1,698		$172		$1,870
	For the Three Months Ended January 31, 2006
	Homebuilding		Land Development		Total
Revenues	$  216,048		$     8,400		$  224,448
Cost of sales and expenses	(193,332)		(7,648)		(200,980)
Net income	$    22,716		$         752		$    23,468
Our share of net earnings	$     7,296		$         586		$      7,882

 

 

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 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 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, 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 variable interest entity (VIE) under FIN 46 due to the returns being capped to the equity holders; however, in these instances, we are not the primary beneficiary, therefore we do not consolidate these entities.

 

16. Recent Accounting Pronouncements - In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets," which provides an approach to simplify efforts to obtain hedge-like (offset) accounting by allowing the Company the option to carry mortgage servicing rights at fair value. This new Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125," with respect to the accounting for separately recognized servicing assets and

 

---

 

servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity's fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. Since we do not retain the servicing rights when we sell our mortgage loans held for sale, the adoption of SFAS No. 156 did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged provided that the reporting entity has not yet issued financial statements for that fiscal year including financial statements for an interim period within that fiscal year. We are currently evaluating the impact, if any, that SFAS 157 may have on our consolidated financial position, results of operations or cash flows.

 

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires the balance sheet recognition of the funded status of defined benefit pension and other postretirement plans, along with a corresponding after-tax adjustment to stockholders' equity. The recognition of funded status provision of SFAS 158 applies prospectively and is effective for fiscal years ending after December 15, 2006. SFAS 158 also requires measurement of plan assets and benefit obligations at the fiscal year end effective for fiscal years ending after December 15, 2008. We do not expect SFAS 158 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In September 2006, the Securities and Exchange Commission (SEC) Staff issued Staff Accounting Bulletin (SAB) No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," which addresses how the effects of prior year uncorrected financial statement misstatements should be considered in current year financial statements. The SAB requires registrants to quantify misstatements using both balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relative quantitative and qualitative factors. The requirements of SAB No. 108 are effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

On November 29, 2006, the FASB ratified EITF Issue No. 06-8, "Applicability of the Assessment of a Buyer's Continuing Investment Under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums." EITF 06-8 states that the adequacy of the buyer's continuing investment under SFAS 66 should be assessed in determining whether to recognize profit under the percentage-of-completion method on the sale of individual units in a condominium project. This consensus could require that additional deposits be collected by developers of condominium projects that wish to recognize profit during the construction period under the percentage-of-completion method. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. We do not expect EITF No. 06-8 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, 2008. We are in the process of assessing the impact, if any, this will have on our consolidated financial position, results of operations or cash flows.

 

17. 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. In the first quarter of fiscal 2007, we determined that the intangible assets associated with our Fort Myers operations in the Southeast were impaired, and wrote off the intangible asset balance of $76.5

 

---

 

million at January 31, 2007. Of this charge $51.5 million was recorded to intangible amortization on the Condensed Consolidated Statement of Income. The remaining $25 million was recorded against Accrued expenses on the Condensed Consolidated Balance Sheets because at the time of acquisition this was an accrual for contingent purchase price; however, this payment will no longer be made as the operations have not generated the profits necessary to require the payment. Certain of the impairment charges associated with our Fort Myers operations were not deductible for tax purposes and therefore did not provide a tax benefit. As a result, our effective rate for the three months ended January 31, 2007 was 18% compared to 37.8% in the prior year first quarter.

 

We are amortizing the remaining definite life intangibles over their expected useful lives, ranging from three to eight years.

 

18. Acquisitions - On April 17, 2006, we acquired for cash the assets of CraftBuilt Homes, a privately held homebuilder headquartered in Bluffton, South Carolina. The acquisition expanded our operations into the coastal markets of South Carolina and Georgia. CraftBuilt Homes designs, markets and sells single family detached homes. Due to its close proximity to Hilton Head, CraftBuilt Homes focuses on first-time, move-up, empty-nester and retiree homebuyers. This acquisition was accounted for as a purchase with the results of its operations included in our consolidated financial statements as of the date of the acquisition.

 

In connection with the CraftBuilt Homes 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 amortizing 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. These acquisitions were accounted for as purchases with the results of their operations included in our consolidated financial statements as of the date of acquisition.

 

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

 

19. Hovnanian Enterprises, Inc., the parent company (the "Parent"), is the issuer of publicly traded common stock and preferred stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the “Subsidiary Issuer”), acts as a finance entity that as of January 31, 2007 had issued and outstanding $400 million of Senior Subordinated Notes, $1,655.3 million face value of Senior Notes, and $225.7 million drawn on a Revolving Credit Agreement. The Senior Subordinated Notes, Senior Notes, the Revolving Credit Agreement and the Revolving and Letter of Credit Facility described in Note 9 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, the Revolving Credit Agreement, and the Revolving and Letter of Credit Facility described in Note 9.

 

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

 

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

 

 

 

---

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 2007
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations		Consolidated
ASSETS:
Homebuilding	$314		$84,460		$4,481,983		$271,102		$		$4,837,859
Financial services					42		188,768				188,810
Income taxes (payable)
receivable	66,114		(2,977)		211,589		(547)				274,179
Investments in and amounts
due to and from
consolidated subsidiaries	1,813,393		2,735,068		(2,835,789)		(216,649)		(1,496,023)		-
Total assets	$1,879,821		$2,816,551		$1,857,825		$242,674		$(1,496,023)		$5,300,848
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Homebuilding	$		$(67)		$802,937		$27,119		$		$829,989
Financial services					35		169,463				169,498
Notes payable			2,301,389		1,746						2,303,135
Minority interest					116,772		1,633				118,405
Stockholders’
equity	1,879,821		515,229		936,335		44,459		(1,496,023)		1,879,821
Total liabilities and
stockholders’ equity	$1,879,821		$2,816,551		$1,857,825		$242,674		$(1,496,023)		$5,300,848
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2006
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations		Consolidated
ASSETS;
Homebuilding	$273		$93,148		$4,542,365		$279,518		$		$4,915,304
Financial services					47		304,870				304,917
Income taxes (payable)
receivable	71,430		(2,977)		190,974		387				259,814
Investments in and amounts
due to and from consolidated
subsidiaries	1,870,460		2,478,566		(2,570,100)		(231,569)		(1,547,357)		-
Total assets	$1,942,163		$2,568,737		$2,163,286		$353,206		$(1,547,357)		$5,480,035
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Homebuilding	$		$(65)		$994,965		$27,275		$		$1,022,175
Financial services					65		282,264				282,329
Notes payable			2,099,598		1,285						2,100,883
Minority interest					130,221		2,264				132,485
Stockholders’ equity	1,942,163		469,204		1,036,750		41,403		(1,547,357)		1,942,163
Total liabilities and
stockholders’ equity	$1,942,163		$2,568,737		$2,163,286		$353,206		$(1,547,357)		$5,480,035

 

 

 

---

 

 

 

 

---

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2007
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Revenues:
Homebuilding	$		$149		$1,138,035		$6,090		$		$1,144,253
Financial services					1,057		20,491				21,548
Intercompany charges			71,552		71,182				(142,734)
Equity in pretax income
of consolidated
subsidiaries	(66,629)								66,629
Total revenues	(66,629)		71,701		1,210,274		26,560		(76,105)		1,165,801
Expenses:
Homebuilding			519		1,260,028		5,344		(44,566)		1,221,325
Financial services					483		12,658		(71)		13,070
Total expenses			519		1,260,511		18,002		(44,637)		1,234,395
Income from
unconsolidated joint
ventures					1,965						1,965
Income (loss) before   income taxes	(66,629)		71,182		(48,272)		8,558		(31,468)		(66,629)
State and federal income
(benefit)/taxes	(12,021)		23,535		(4,447)		3,225		(22,313)		(12,021)
Net income (loss)	$(54,608)		$47,647		$(43,825)		$5,333		$(9,155)		$(54,608)

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2006
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Revenues:
Homebuilding	$		$      153		$1,256,427		$    2,150		$		$1,258,730
Financial services					2,255		17,007				19,262
Intercompany charges			66,758		66,703				(133,461)		-
Equity in pretax income
of consolidated
subsidiaries	135,226								(135,226)		-
Total revenues	135,226		66,911		1,325,385		19,157		(268,687)		1,277,992
Expenses:
Homebuilding			208		1,165,341		1,455		(30,193)		1,136,811
Financial services					883		12,892		(245)		13,530
Total expenses			208		1,166,224		14,347		(30,438)		1,150,341
Income from   unconsolidated joint   ventures					7,575						7,575
Income (loss) before   income taxes	135,226		66,703		166,736		4,810		(238,249)		135,226
State and federal income
(benefit)/taxes	51,130		23,411		61,864		1,912		(87,187)		51,130
Net income (loss)	$   84,096		$  43,292		$   104,872		$     2,898		$ (151,062)		$    84,096

 

 

---

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2007
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Cash flows from operating   activities:
Net income (loss)	$(54,608)		$47,647		$(43,825)		$5,333		$(9,155)		$(54,608)
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities	(17,196)		(24,067)		(178,724)		127,529		9,155		(83,303)
Net cash provided by (used in)
operating activities	(71,804)		23,580		(222,549)		132,862		-		$(137,911)
Net cash (used in)
investing activities					(13,926)		(3,206)				(17,132)
Net cash provided by (used in)
financing activities	14,737		225,700		(13,459)		(116,940)				110,038
Intercompany investing and   financing activities – net	57,067		(256,502)		214,355		(14,920)				-
Net increase (decrease) in cash	-		(7,222)		(35,579)		(2,204)				(45,005)
Cash and cash equivalents
balance, beginning of period	16		59,529		(16,122)		10,900				54,323
Cash and cash equivalents   balance, end of period	$16		$52,307		$(51,701)		$8,696		$		$9,318
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2006
(Dollars in Thousands)
	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Cash flows from operating   activities:
Net income	$  84,096		$  43,292		$  104,872		$   2,898		$(151,062)		$ 84,096
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities	2,815		(6,934)		(416,755)		(113,729)		151,062		(383,541)
Net cash provided by (used in)   operating activities	86,911		36,358		(311,883)		(110,831)				(299,445)
Net cash (used in) investing   activities					(8,023)		(5,404)				(13,427)
Net cash provided by (used in)
financing activities	4,166		226,250		(26,149)		(56,779)				147,488
Intercompany investing and   financing activities – net	(91,077)		(481,263)		396,005		176,335
Net increase (decrease) in cash			(218,655)		49,950		3,321