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, 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 [

]

 

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. 47,558,423 shares of Class A Common Stock and 14,647,092 shares of Class B Common Stock were outstanding as of August 31, 2007.

 

 


 

 

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,

 

2007 (unaudited) and October 31, 2006

3

 

 

Condensed Consolidated Statements of Operations for the

 

three and nine months ended July 31, 2007 and 2006 (unaudited)

5

 

 

Condensed Consolidated Statement of Stockholders'

 

Equity for the nine months ended July 31, 2007 (unaudited)

6

 

 

Condensed Consolidated Statements of Cash Flows for

 

the nine months ended July 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

27

 

 

Item 3. Quantitative and Qualitative Disclosures

 

About Market Risk

52

 

 

Item 4. Controls and Procedures

53

 

 

PART II. Other Information

 

Item 1. Legal Proceedings

54

 

 

Item 2. Unregistered Sales of Equity Securities and

 

Use of Proceeds

55

 

 

Item 6. Exhibits

55

 

 

Signatures

57

 

 

 


 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Share Amounts)

 

 

 

 

 

July 31, 

2007

 

October 31, 

2006

ASSETS

 

 

 

 

(unaudited)

 

 

Homebuilding:

 

 

 

Cash and cash equivalents

$19,631

 

$43,635

 

 

 

 

Restricted cash

10,995

 

9,479

 

 

 

 

Inventories - at the lower of cost or fair value:

 

 

 

Sold and unsold homes and lots under development

3,445,731

 

3,297,766

 

 

 

 

Land and land options held for future

 

 

 

development or sale

299,154

 

362,760

 

 

 

 

Consolidated inventory not owned:

 

 

 

Specific performance options

15,072

 

20,340

Variable interest entities

173,894

 

208,167

Other options

181,344

 

181,808

 

 

 

 

Total consolidated inventory not owned

370,310

 

410,315

 

 

 

 

Total inventories

4,115,195

 

4,070,841

 

 

 

 

Investments in and advances to unconsolidated

 

 

 

joint ventures

205,249

 

212,581

 

 

 

 

Receivables, deposits, and notes

94,371

 

94,750

 

 

 

 

Property, plant, and equipment – net

110,556

 

110,704

 

 

 

 

Prepaid expenses and other assets

182,865

 

175,603

 

 

 

 

Goodwill

32,658

 

32,658

 

 

 

 

Definite life intangibles

61,665

 

165,053

 

 

 

 

Total homebuilding

4,833,185

 

4,915,304

 

 

 

 

Financial services:

 

 

 

Cash and cash equivalents

9,961

 

10,688

Restricted cash

11,281

 

1,585

Mortgage loans held for sale

162,699

 

281,958

Other assets

6,162

 

10,686

 

 

 

 

Total financial services

190,103

 

304,917

 

 

 

 

Income taxes receivable – including deferred

 

 

 

tax benefits

339,474

 

259,814

 

 

 

 

Total assets

$5,362,762

 

$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)

 

July 31,

2007

 

October 31,

2006

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

Nonrecourse land mortgages

$7,367 

 

$26,088 

 

Accounts payable and other liabilities

439,813 

 

582,393 

 

Customers’ deposits

93,496 

 

184,943 

 

Nonrecourse mortgages secured by operating

 

 

 

 

properties

23,164 

 

23,684 

 

Liabilities from inventory not owned

228,077 

 

205,067 

 

 

 

 

 

 

Total homebuilding

791,917 

 

1,022,175 

 

 

 

 

 

 

Financial services:

 

 

 

 

Accounts payable and other liabilities

18,180 

 

12,158 

 

Mortgage warehouse line of credit

149,990 

 

270,171 

 

 

 

 

 

 

Total financial services

168,170 

 

282,329 

 

 

 

 

 

 

Notes payable:

 

 

 

 

Revolving credit agreements

456,275 

 

 

 

Senior notes

1,650,628 

 

1,649,778 

 

Senior subordinated notes

400,000 

 

400,000 

 

Accrued interest

26,983 

 

51,105 

 

 

 

 

 

 

Total notes payable

2,533,886 

 

2,100,883 

 

 

 

 

 

 

Total liabilities

3,493,973 

 

3,405,387 

 

 

 

 

 

 

Minority interest from inventory not owned

81,679

 

130,221 

 

 

 

 

 

 

Minority interest from consolidated joint ventures

1,376 

 

2,264 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

Preferred stock, $.01 par value-authorized 100,000

 

 

 

 

shares; issued 5,600 shares at July 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 59,251,891 shares at

 

 

 

 

July 31, 2007 and 58,653,723 shares at

 

 

 

 

October 31, 2006 (including 11,694,720 shares

 

 

 

 

at July 31, 2007 and 11,494,720 shares at

 

 

 

 

October 31, 2006 held in Treasury)

593 

 

587 

 

Common stock, Class B, $.01 par value (convertible

 

 

 

 

to Class A at time of sale) authorized

 

 

 

 

30,000,000 shares; issued 15,338,840 shares at

 

 

 

 

July 31, 2007 and 15,343,410 shares at

 

 

 

 

October 31, 2006 (including 691,748 shares at

 

 

 

 

July 31, 2007 and October 31, 2006 held in

 

 

 

 

Treasury) 

153 

 

153 

 

Paid in capital – common stock

271,668 

 

253,262 

 

Retained earnings

1,493,278 

 

1,661,810 

 

Treasury stock - at cost

(115,257)

 

(108,948)

 

 

 

 

 

 

Total stockholders’ equity

1,785,734 

 

1,942,163 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

$5,362,762 

 

$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

July 31,

 

Nine Months Ended

July 31,

 

2007

 

2006

 

2007

 

2006

Revenues:

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

 

 

 

Sale of homes

$1,079,226 

 

$1,499,826 

 

$3,273,156 

 

$4,225,571

Land sales and other revenues

34,107 

 

28,032 

 

77,205 

 

113,947

 

 

 

 

 

 

 

 

Total homebuilding

1,113,333 

 

1,527,858 

 

3,350,361 

 

4,339,518

Financial services

17,260 

 

22,661 

 

56,691 

 

63,114

 

 

 

 

 

 

 

 

Total revenues

1,130,593 

 

1,550,519 

 

3,407,052 

 

4,402,632

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

 

 

 

Cost of sales, excluding interest

938,265 

 

1,170,272 

 

2,776,050 

 

3,285,258

Cost of sales interest

29,857 

 

25,601 

 

85,485 

 

62,453

Inventory impairment loss and land

 

 

 

 

 

 

 

option write-offs

108,593 

 

12,274 

 

184,420 

 

20,978

 

 

 

 

 

 

 

 

Total cost of sales

1,076,715 

 

1,208,147 

 

3,045,955 

 

3,368,689

 

 

 

 

 

 

 

 

Selling, general and administrative

132,025 

 

154,050 

 

401,804 

 

441,137

 

 

 

 

 

 

 

 

Total homebuilding

1,208,740 

 

1,362,197 

 

3,447,759 

 

3,809,826

 

 

 

 

 

 

 

 

Financial services

11,179 

 

15,127 

 

35,877 

 

43,174

 

 

 

 

 

 

 

 

Corporate general and administrative

22,128 

 

26,744 

 

64,319 

 

80,377

 

 

 

 

 

 

 

 

Other interest

1,160 

 

649 

 

9,046 

 

2,169

 

 

 

 

 

 

 

 

Other operations

630 

 

8,355 

 

2,888 

 

23,877

 

 

 

 

 

 

 

 

Intangible amortization

10,150 

 

13,331 

 

78,424 

 

38,391

 

 

 

 

 

 

 

 

Total expenses

1,253,987 

 

1,426,403 

 

3,638,313 

 

3,997,814

 

 

 

 

 

 

 

 

(Loss) income from unconsolidated

 

 

 

 

 

 

 

joint ventures

(2,739)

 

(3,239)

 

(2,934)

 

13,833

 

 

 

 

 

 

 

 

(Loss) income before income taxes

(126,133)

 

120,877 

 

(234,195)

 

418,651

 

 

 

 

 

 

 

 

State and federal income tax

 

 

 

 

 

 

 

(benefit)/provision:

 

 

 

 

 

 

 

State

1,370 

 

(3,897)

 

118 

 

7,212

Federal

(49,644)

 

47,727 

 

(73,787)

 

146,647

 

 

 

 

 

 

 

 

Total taxes

(48,274)

 

43,830 

 

(73,669)

 

153,859

 

 

 

 

 

 

 

 

Net (loss) income

(77,859)

 

77,047 

 

(160,526)

 

264,792

Less:  preferred stock dividends

2,668 

 

2,668 

 

8,006 

 

8,006

 

 

 

 

 

 

 

 

Net (loss) income available to common

 

 

 

 

 

 

 

stockholders

$(80,527)

 

$74,379 

 

$(168,532)

 

$256,786

Per share data:

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

(Loss) income per common share

$(1.27)

 

$1.18 

 

$(2.67)

 

$4.09

Weighted average number of common

 

 

 

 

 

 

 

shares outstanding

 63,199

 

62,804 

 

63,036 

 

62,843

Assuming dilution:

 

 

 

 

 

 

 

(Loss) income per common share

$(1.27)

 

$1.15 

 

$(2.67)

 

$3.95

Weighted average number of common

 

 

 

 

 

 

 

shares outstanding

63,199 

 

64,460 

 

63,036 

 

64,989

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 dividends declared  ($1,429.64 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,006)

 

 

 

(8,006)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options amortization 

and issuances, net of tax

408,817

 

4

 

 

 

 

 

 

 

 

 

15,389

 

 

 

 

 

15,393 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock 

amortization, issuances and 

forfeitures, net of tax

184,781

 

2

 

 

 

 

 

 

 

 

 

3,017

 

 

 

 

 

3,019 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class B to 

Class A common stock

4,570

 

 

 

(4,570)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases

(200,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,309)

 

(6,309)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(160,526)

 

 

 

(160,526)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 31, 2007

47,557,171

 

$593

 

14,647,092

 

$153

 

5,600

 

$135,299

 

$271,668

 

$1,493,278

 

$(115,257)

 

$1,785,734 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements (unaudited).

 

 


 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands - Unaudited)

 

Nine Months Ended

 

July 31,

 

2007

 

2006

Cash flows from operating activities:

 

 

 

Net (loss) income

$(160,526)

 

$264,792 

Adjustments to reconcile net (loss)/income to net cash

 

 

 

used in operating activities:

 

 

 

Depreciation

13,529 

 

10,587 

Intangible amortization

78,424 

 

38,391 

Compensation from stock options and awards

18,786 

 

21,079 

Amortization of bond discounts

850 

 

771 

Excess tax benefits from share-based payment

(2,417)

 

(4,661)

Loss on sale and retirement of property

 

 

 

and assets

176 

 

297 

Loss(income) from unconsolidated joint ventures

2,934 

 

(13,833)

Distributions from unconsolidated joint ventures

578 

 

15,060 

Deferred income taxes

(45,599)

 

(33,911)

Impairment and land option deposit write-offs

184,420 

 

20,978 

Decrease (increase) in assets:

 

 

 

Mortgage notes receivable

119,277 

 

36,503 

Restricted cash, receivables, prepaids and

 

 

 

other assets

13,798 

 

7,578 

Inventories

(233,453)

 

(1,055,065)

(Decrease) increase in liabilities:

 

 

 

State and federal income taxes

(34,061)

 

(106,981)

Customers’ deposits

(82,906)

 

(53,962)

Interest and other accrued liabilities

(148,344)

 

(2,677)

Accounts payable

(21,042)

 

16,692 

Net cash used in operating activities

(295,576)

 

(838,362)

Cash flows from investing activities:

 

 

 

Net proceeds from sale of property and assets

661 

 

258 

Purchase of property, equipment and other fixed

 

 

 

assets and acquisitions

(35,338)

 

(48,026)

Investments in and advances to unconsolidated

 

 

 

joint ventures

(32,144)

 

(36,726)

Distributions from unconsolidated joint ventures

35,912 

 

5,600 

Net cash used in investing activities

(30,909)

 

(78,894)

Cash flows from financing activities:

 

 

 

Proceeds from mortgages and notes

39,411 

 

63,838 

Net proceeds related to revolving

 

 

 

credit agreement

456,275 

 

273,225 

Net (payments) related to mortgage

 

 

 

warehouse line of credit

(120,181)

 

(31,933)

Proceeds from senior debt

 

 

550,000 

Payments of issuance costs

 

 

(90)

Principal payments on mortgages and notes

(64,806)

 

(77,156)

Excess tax benefits from share-based payment

2,417 

 

4,661 

Preferred dividends paid

(8,006)

 

(8,006)

Purchase of treasury stock

(6,309)

 

(26,627)

Proceeds from sale of stock and employee stock plan

2,953 

 

5,873 

Net cash provided by financing activities

301,754 

 

753,785 

Net (decrease) in cash

(24,731)

 

(163,471)

Cash and cash equivalents balance, beginning

 

 

 

of period

54,323 

 

211,273 

Cash and cash equivalents balance, end of period

$29,592 

 

$47,802 

 

 


 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands - Unaudited)

(Continued)

 

 

Nine Months Ended

 

July 31,

 

2007

 

2006

 

 

 

 

Supplemental disclosures of cash flow:

 

 

 

Cash paid during the period for:

 

 

 

Interest

$120,880 

 

$74,216 

Income taxes

$3,574 

 

$262,563 

Supplemental disclosures of noncash operating

 

 

 

activities:

 

 

 

Consolidated inventory not owned:

 

 

 

Specific performance options

$13,530 

 

$11,699 

Variable interest entities

155,693 

 

336,570 

Other options

181,344 

 

173,456 

Total inventory not owned

$350,567 

 

$521,725 

 

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.

 

The Company’s reportable segments consist of six Homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and the Financial Services segment (see Note 13).

 

2. For the three and nine months ended July 31, 2007, the Company’s total stock-based compensation expense was $6.3 million ($4.3 million net of tax) and $18.8 million ($12.9 million net of tax), respectively. Included in this total stock-based compensation expense was expense for stock options of $3.7 million ($2.5 million net of tax) and $10.1 million ($6.9 million net of tax) for the three and nine months ended July 31, 2007, respectively.

 

 

3. Interest costs incurred, expensed and capitalized were:

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(Dollars in Thousands)

Interest capitalized at

 

 

 

 

 

 

 

 

 

beginning of period (1)

 

 

$138,133 

 

$ 77,048 

 

$102,849 

 

$ 48,366 

Plus interest incurred (2)

 

 

49,487 

 

41,515 

 

148,285 

 

108,569 

Less cost of sales interest

 

 

 

 

 

 

 

 

 

expensed (3)

 

 

(29,857)

 

(25,601)

 

(85,485)

 

(62,453)

Less other interest expensed (4)

 

 

(1,160)

 

(649)

 

(9,046)

 

(2,169)

Interest capitalized at

 

 

 

 

 

 

 

 

 

end of period

 

 

$156,603 

 

$ 92,313 

 

$156,603 

 

$ 92,313 

 

(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) Represents interest on completed homes and land in planning, which does not qualify for

 

capitalization.

 

4. Accumulated depreciation at July 31, 2007 and October 31, 2006 amounted to $54.9 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. As a result of a continued decline in sales pace, sales price and general market conditions, as well as increased cancellation rates during the year, we recorded impairment losses of $87.4 million and $0.8 million for the three months ended July 31, 2007 and 2006, respectively, and $163.7 million and $2.4 million during the nine months ended July 31, 2007 and 2006, respectively. Of the fiscal 2007 amount, inventory impairments recorded during the third quarter were $9.2 million in the Northeast, $3.0 million in the Mid-Atlantic, $2.8 million in the Midwest, $11.5 million in the Southeast (primarily in Fort Myers), $11.1 million in the Southwest, and $49.8 million in the West. For the nine months ended July 31, 2007, inventory impairments recorded were $15.1 million in the Northeast, $3.0 million in the Mid-Atlantic, $8.9 million in the Midwest, $60.9 million in the Southeast (primarily in Fort Myers), $11.3 million in the Southwest, and $64.5 million in the West.

 

In addition, from time to time, we 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 the option. We wrote off such costs in the amount of $21.2 million and $11.4 million during the three months ended July 31, 2007 and 2006, respectively, and $28.7 million and $18.6 million during the nine months ended July 31, 2007 and 2006, respectively. These write-offs in the nine months ended July 31, 2007 were offset by $8.0 million in recovered deposits that had been written off in the prior year as walk-away costs because, 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. Inventory impairment losses and option write-offs are reported in the Condensed Consolidated Statements of Operations as “Homebuilding-inventory impairment loss and land option write-offs”.

 

6. We provide a warranty accrual for repair costs over $1,000 that are 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 homes delivered in fiscal 2007, our deductible under our general liability insurance is $20 million per occurrence with an aggregate $20 million for premise liability claims and an aggregate $21.5 million for construction defect claims. Additions and charges incurred in the warranty accrual and general liability accrual for the three and nine months ended July 31, 2007 and 2006 are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

July 31,

 

July 31,

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$90,731 

 

$91,159 

 

$93,516 

 

$86,706 

Additions

 

7,163 

 

8,105 

 

26,034 

 

27,699 

Company acquisitions during period

 

 

 

 

 

 

 

186 

Charges incurred

 

(8,840)

 

(9,421)

 

(30,496)

 

(24,748)

Balance, end of period

 

$89,054 

 

$89,843 

 

$89,054 

 

$89,843 

 

 

 

 

 

 

 

 

 

 

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 $8.8 million and $(0.1) million for the three months ended July 31, 2007 and 2006, respectively, and $9.6 million and $4.7 million for the nine months ended July 31, 2007 and 2006, respectively, for prior year deliveries. During the three months ended July 31, 2006, the insurance carrier recovered a portion of previously paid amounts.

 

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 Riverside County, 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. After an audit inspection, HUD has recommended that the Company indemnify HUD against any losses that it may sustain with respect to five loans that it alleges were improperly underwritten. The Company has agreed to such indemnification and does not anticipate that any losses with respect to such loans will be material. HUD also recommended that the Company refund a total of five thousand one hundred ninety dollars ($5,190) in connection with seventeen loans; the Company has paid this refund. The Company has also agreed to certain changes recommended by HUD in its quality control plans. In August 2007, HUD informed the Company that it has completed its audit and closed the audit without further recommendations. No further payments or action by the Company is required.

 

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.

 

The Company has been named as a defendant in a purported class action suit filed May 30, 2007 in the United States District Court for the Eastern District of Pennsylvania, Mark W. Mellar et al v. Hovnanian Enterprises, Inc. et al, asserting that the Company’s sales of homes along with the financing of home purchases and the provision of title insurance by affiliated companies violated the Real Estate Settlement Procedures Act. The Company has filed a Motion to Dismiss the complaint.

 

A subsidiary of the Company has been named as defendant in a purported class action suit filed May 30, 2007 in the United States District Court for the Middle District of Florida, Randolph Sewell et al v. D’Allesandro & Woodyard et al, alleging violations of the federal securities acts, among other allegations, in connection with the sale of some of the Company’s subsidiary’s homes in Fort Myers, Florida. The Company’s subsidiary has filed a Motion to Dismiss the complaint.

 

8. As of July 31, 2007 and October 31, 2006, respectively, we are obligated under various performance letters of credit amounting to $360.1 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 July 31, 2007 and October 31, 2006, the outstanding balance under the Agreement was $455.5 million and zero, excluding letters of credit of $111.1 million and $329.8 million, respectively. The Agreement has covenants that restrict, among other things, the ability of Hovnanian and certain of its subsidiaries, including K. Hovnanian Enterprises, Inc. (“K. Hovnanian”), the borrower, to incur additional indebtedness, pay dividends on common and preferred stock and repurchase capital stock, make other restricted payments, make investments, sell certain assets, incur lines, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. The Agreement also requires the Company to stay within specified financial ratios. The 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 Agreement or other material indebtedness, the failure to satisfy covenants and specified events of bankruptcy and insolvency. As of July 31, 2007, we were in compliance with the covenants under the Agreement.

 

On October 11, 2006, (a) we, K. Hovnanian and certain of our subsidiaries as guarantors entered into a Credit Agreement (the "Revolving and Letter of Credit Facility") 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 Revolving and Letter of Credit Facility, K. Hovnanian had 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 Revolving and Letter of Credit Facility, the aggregate commitments under the Revolving and Letter of Credit Facility were increased to $250 million. The Security Letter of Credit served as security for any letters of credit that were issued under the LC Agreement. Under the LC Agreement, K. Hovnanian could have requested Citibank to issue letters of credit up to the aggregate maximum amount of the Security Letter of Credit. Loans under the Revolving and Letter of Credit Facility bore 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 Revolving and Letter of Credit Facility 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 Revolving and Letter of Credit Facility 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 Revolving and Letter of Credit Facility or other material indebtedness, the failure to satisfy covenants and specified events of bankruptcy and insolvency. Borrowings under the Revolving and Letter of Credit Facility were used for general corporate purposes. As of July 31, 2007 and October 31, 2006, the outstanding balance under the Revolving and Letter of Credit Facility was $0.8 million and zero, excluding letters of credit of $249.0 million and $123.6 million, respectively. As of July 31, 2007, we were in compliance with our loan covenants.

 

On August 8, 2007, we terminated the Revolving and Letter of Credit Facility. The termination resulted in a fee payable to us of $19.1 million in accordance with the termination provision of the agreement, which stated that upon termination we would pay or receive a fee based on the change in our credit default swap rate. This fee will be reported as income in the fourth quarter of fiscal 2007, since we were only entitled to such a fee in the event the facility was terminated.

 

Our amended secured mortgage loan warehouse agreement with a group of banks, which is a short-term borrowing facility, provides up to $150 million through March 13, 2008. Interest is payable monthly at LIBOR plus 0.9%. The loan is repaid when we sell the underlying mortgage loans to permanent investors. We also have a commercial paper facility which was amended May 8, 2007. Pursuant to the amended agreement, the commercial paper amount increased from $150 million to $200 million. The amended facility expires on April 25, 2008 and interest is payable monthly at LIBOR plus 0.40%. We believe that we will be able to extend the facilities beyond their current expiration dates or negotiate replacement facilities, but there can be no assurance of such extension or replacement facilities. As of July 31, 2007 and October 31, 2006, borrowings under both agreements were $150.0 million and $270.2 million, respectively. The agreements require K. Hovnanian American Mortgage, LLC to satisfy and maintain specified financial ratios and other financial condition tests. As of July 31, 2007, we were in compliance with the covenants of these agreements.

 

10. At July 31, 2007, we had $1,655.3 million of outstanding senior notes ($1,650.6 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, 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 and covenant restrictions, may do so from time to time. We may also make open market purchases from time to time depending on market conditions. The indentures governing the senior notes and senior subordinated notes contain restrictive covenants that limit, among other things, the ability of Hovnanian and certain of its subsidiaries, including K. Hovnanian, the issuer of the senior notes and senior subordinated notes, to incur additional indebtedness, pay dividends on common and preferred stock and repurchase capital stock, make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. If our consolidated fixed charge coverage ratio, as defined in the indentures governing our senior notes and senior subordinated notes is less than 2.0 to 1.0, we will be restricted from making certain payments, including dividends on our 7.625% Series A Preferred Stock. The indentures also contain events of default which would permit the holders of the senior notes and senior subordinated notes to declare those notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the notes or other material indebtedness, the failure to satisfy covenants and specified events of bankruptcy and insolvency. As of July 31, 2007, we were in compliance with the covenants of these indentures.

 

In August 2007, we purchased in open market transactions $17.6 million of the 10 1/2 % Senior Notes for $17.5 million. The net amount will be reported as a gain on the extinguishment of debt in the fourth quarter of fiscal 2007. In addition, in August 2007, we satisfied and discharged the remaining principal balance of $122.7 million of the 10 1/2% Senior Notes and our obligations under the indenture under which such notes were issued by depositing the cash required to retire the senior notes in escrow with the trustee under the indenture.

 

 


 

 

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 2.1 million for the three and nine months ended July 31, 2006, respectively. For the three and nine months ended July 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 not be 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 1/1000th of a share of Series A Preferred Stock. The depositary shares are listed on the Nasdaq Global Market under the symbol “HOVNP”. In each of the first, second and third quarters of 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 income from continuing operations before provision for income taxes. Operating income for the Homebuilding segments consist of revenues generated from sales of homes and land, equity in income 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 income 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

July 31,

Nine Months Ended

July 31,

 

 

 

 

 

(In thousands)

2007

 

2006

 

2007

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northeast

$  242,773 

 

$ 248,503 

 

$  645,098 

 

$ 658,681 

 

Mid-Atlantic

216,047 

 

242,509 

 

657,692 

 

692,297 

 

Midwest

65,624 

 

42,524 

 

146,389 

 

110,959 

 

Southeast

171,588 

 

397,680 

 

601,328 

 

986,570 

 

Southwest

198,356 

 

220,515 

 

576,758 

 

639,197 

 

West

218,842 

 

375,802 

 

722,748 

 

1,251,239 

 

Total homebuilding revenues

1,113,230 

 

1,527,533 

 

3,350,013

 

4,338,943 

 

 

 

 

 

 

 

 

 

 

Financial services

17,260 

 

22,661 

 

56,691 

 

63,114 

 

Corporate and unallocated

103 

 

325 

 

348 

 

575 

 

Total revenues

$1,130,593 

 

$1,550,519 

 

$3,407,052 

 

$4,402,632 

 

(Loss)/income before income
  taxes:

 

 

 

 

 

 

 

 

Northeast

$     (5,838)

 

$ 37,123 

 

$       5,552 

 

$ 101,066 

 

Mid-Atlantic

15,613 

 

28,625 

 

73,343 

 

105,123 

 

Midwest

(9,413)

 

(7,630)

 

(31,909)

 

(16,166)

 

Southeast

(25,759)

 

31,240 

 

(128,034)

 

80,886 

 

Southwest

1,599 

 

19,469 

 

17,960 

 

55,367 

 

West

(89,427)

 

36,108 

 

(127,021)

 

156,779 

 

Total homebuilding
        (loss)/income
         before income taxes

(113,225)

 

144,935 

 

(190,109)

 

483,055 

 

Financial services

6,081 

 

7,534 

 

20,814 

 

19,940 

 

Corporate and unallocated

(18,989)

 

(31,592)

 

(64,900)

 

(84,344)

 

(Loss)/income before income
          taxes

$(126,133)

 

$ 120,877 

 

$ (234,195)

 

$ 418,651 

 

 

 

 

 

 

 

 

 

 

 

July 31,

 

October 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Northeast

$1,286,626

 

$1,164,801 

 

 

Mid-Atlantic

710,334

 

726,777 

 

 

Midwest

182,032

 

177,362 

 

 

Southeast

494,862

 

647,374 

 

 

Southwest

621,529

 

596,391 

 

 

West

1,369,325

 

1,399,412 

 

 

Total homebuilding assets

4,664,708

 

4,712,117 

 

 

Financial services

190,103

 

304,917 

 

 

Corporate and unallocated

507,951

 

463,001 

 

 

Total assets

$5,362,762

 

$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 VIEs 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 July 31, 2007, all 28 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 $23.7 million. These option deposits and any pre-development costs represent our maximum exposure to loss. The fair value of the property owned by these VIEs was $173.9 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 July 31, 2007, the balance reported in minority interest from inventory not owned was $81.7 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 28 VIEs described above, at July 31, 2007, we had total cash and letters of credit deposits amounting to approximately $275.1 million to purchase land and lots with a total purchase price of $2,994.8 million. The maximum exposure to loss is limited to the deposits and pre-development costs, 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.

 

 

 

 

July 31, 2007

 

 

 

Homebuilding

 

Land Development

 

Total

Assets:

 

 

 

 

 

Cash and cash equivalents

$  36,324

 

$    7,704

 

$     44,028

Inventories

700,206

 

190,303

 

890,509

Other assets

79,303

 

5,170

 

84,473

Total assets

$815,833

 

$203,177

 

$1,019,010

 

 

 

 

 

 

Liabilities and equity:

 

 

 

 

 

Accounts payable and accrued

 

 

 

 

 

liabilities

$ 70,256

 

$ 16,469

 

$    86,725

Notes payable

342,126

 

44,269

 

386,395

Equity of:

 

 

 

 

 

Hovnanian Enterprises, Inc.

97,024

 

86,638

 

183,662

Others

306,427

 

55,801

 

362,228

Total equity

403,451

 

142,439

 

545,890

Total liabilities and equity

$815,833

 

$203,177

 

$1,019,010

Debt to capitalization ratio

46%

 

24%

 

41%

 

 

 

 

 

 

 

 

 

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 July 31, 2007 and October 31, 2006, we had advances outstanding of approximately $21.5 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 $205.2 million and $212.6 million at July 31, 2007 and October 31, 2006, respectively. The minor difference between the Hovnanian equity balance disclosed in the tables above plus advances to unconsolidated joint ventures balance 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 July 31, 2007

 

Homebuilding

 

Land Development

 

Total

 

 

 

 

 

 

Revenues

$  118,651 

 

$   5,260 

 

$  123,911 

Cost of sales and expenses

(134,315)

 

(5,103)

 

(139,418)

Net (loss) income

$   (15,664)

 

$      157 

 

$   (15,507)

Our share of net (loss) earnings

$     (3,106)

 

$      119 

 

$     (2,987)

 

 

 

 

 

 

 

For the Three Months Ended July 31, 2006

 

Homebuilding

 

Land Development

 

Total

 

 

 

 

 

 

Revenues

$   192,918 

 

$      7,447 

 

$   200,365 

Cost of sales and expenses

(209,541)

 

(7,259)

 

(216,800)

Net (loss) income

$    (16,623)

 

$         188 

 

$    (16,435)

Our share of net loss

$      (3,397)

 

$        (145)

 

$      (3,542)

 

 

 

 

 

 

 

 

For the Nine Months Ended July 31, 2007

 

Homebuilding

 

Land Development

 

Total

 

 

 

 

 

 

Revenues

$  340,097 

 

$   29,481 

 

$  369,578 

Cost of sales and expenses

(353,496)

 

(29,208)

 

(382,704)

Net (loss) income

$   (13,399)

 

$        273 

 

$   (13,126)

Our share of net (loss) earnings

$     (3,540)

 

$        104 

 

$     (3,436)

 

 

 

 

 

 

 

For the Nine Months Ended July 31, 2006

 

Homebuilding

 

Land Development

 

Total

 

 

 

 

 

 

Revenues

$  657,086 

 

$    19,878 

 

$  676,964 

Cost of sales and expenses

(614,741)

 

(19,501)

 

(634,242)

Net income

$    42,345 

 

$         377 

 

$    42,722 

Our share of net earnings (loss)

$    13,644 

 

$         (19)

 

$    13,625 

 

 

 

 

 

 

 

(Loss) income from unconsolidated joint ventures is reflected as a separate line in the Condensed Consolidated Statements of Operations and reflects our proportionate share of the income or loss of these unconsolidated homebuilding and land development joint ventures. The minor difference this fiscal year between our share of the income or loss from these unconsolidated joint ventures disclosed in the tables above compared to the Hovnanian Enterprises, Inc. Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2007 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 limited only to completion of development, environmental indemnification and standard indemnification for fraud and misrepresentation including voluntary bankruptcy. 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," (“SFAS 156”) which provides an approach to simplify efforts to obtain hedge-like (offset) accounting by allowing a company the option to carry mortgage servicing rights at fair value. This 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 156 became 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 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. Since we do not have defined benefit plans, SFAS 158 will not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). The statement permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective as of the beginning of an entity’s fiscal year that begins after November 15, 2007. We are currently evaluating the impact, if any, that SFAS 159 may have 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. This resulted in a charge of $51.5 million to intangible amortization on the Condensed Consolidated Statements of Operations. The remaining $25 million which had been recorded against Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets was reversed because 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 nine months ended July 31, 2007 was 31.5% compared to 36.8% in the prior year. Also, in the third quarter of fiscal 2007, we wrote-off an intangible asset of $3.2 million to intangible amortization related to the tradename associated with the 2002 purchase of a California homebuilder, as we terminated use of the acquisition tradename in certain communities in the third quarter.

 

We are amortizing the remaining definite life intangibles over their expected useful lives, ranging from three to five years. Given the current weakened condition in certain of our markets, we have evaluated goodwill and definite life intangible assets in these negatively impacted markets at July 31, 2007, and determined that no impairments exist at this time.

 

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.

 

In connection with the two mechanical contracting business acquisitions, we have definite life intangible assets equal to the excess purchase price over the fair value of net tangible assets of $4.0 million in the aggregate. We are amortizing the definite life intangibles over their estimated lives.

 

 


 

 

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 July 31, 2007 had issued and outstanding $400 million of Senior Subordinated Notes, $1,655.3 million face value of Senior Notes, $455.5 million drawn under the Revolving Credit Agreement described in Note 9 and $0.8 million (excluding letters of credit of $249.0 million) drawn under the Revolving and Letter of Credit Facility. The Senior Subordinated Notes, Senior Notes, the Revolving Credit Agreement and the Revolving and Letter of Credit Facility are fully and unconditionally guaranteed by the Parent. In August 2007, we terminated the Revolving and Letter of Credit Facility and discharged our obligations with respect to the 10 1/2% Senior Notes due 2007 (See Notes 9 and 10).

 

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.

 

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

JULY 31, 2007

(Dollars in Thousands)

 

Parent

 

Subsidiary Issuer

 

Guarantor Subsidiaries

 

Non- Guarantor Subsidiaries

 

Eliminations

 

Consolidated

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Homebuilding

$         274 

 

$   56,666 

 

$4,512,822 

 

$263,423 

 

$                

 

$4,833,185 

Financial services

 

 

 

 

139 

 

189,964 

 

 

 

190,103 

Income taxes (payable)

 

 

 

 

 

 

 

 

 

 

 

receivable

107,597 

 

42,048 

 

189,998 

 

(169)

 

 

 

339,474 

Investments in and amounts

 

 

 

 

 

 

 

 

 

 

 

due to and from

 

 

 

 

 

 

 

 

 

 

 

consolidated subsidiaries

1,677,863 

 

3,105,435 

 

(3,198,053)

 

(196,649)

 

(1,388,596)

 

- 

Total assets

$1,785,734 

 

$3,204,149 

 

$1,504,906 

 

$256,569 

 

$(1,388,596)

 

$5,362,762 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

Homebuilding

$               

 

$      1,471 

 

$  766,036 

 

$24,410 

 

$                  

 

$  791,917 

Financial services

 

 

 

 

107 

 

168,063 

 

 

 

168,170 

Notes payable

 

 

2,533,591 

 

295 

 

 

 

 

 

2,533,886 

Minority interest

 

 

 

 

81,679 

 

1,376 

 

 

 

83,055 

Stockholders’ equity

1,785,734 

 

669,087 

 

656,789 

 

62,720 

 

(1,388,596)

 

1,785,734 

Total liabilities and

 

 

 

 

 

 

 

 

 

 

 

stockholders’ equity

$1,785,734 

 

$3,204,149 

 

$1,504,906 

 

$256,569 

 

$(1,388,596)

 

$5,362,762 

 

 

 

 

 

 

 

 

 

 

 

 

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 JULY 31, 2007

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

Subsidiary Issuer

 

Guarantor Subsidiaries

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Consolidated

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Homebuilding

$         

 

$     100 

 

$1,113,239 

 

$              (5)

 

$          (1)

 

$1,113,333 

Financial services

 

 

 

 

1,194 

 

16,066 

 

 

 

17,260 

Intercompany charges

 

 

76,689 

 

76,206 

 

 

 

(152,895)

 

-

Equity in pretax income

 

 

 

 

 

 

 

 

 

 

 

of consolidated

 

 

 

 

 

 

 

 

 

 

 

subsidiaries

(126,133)

 

 

 

 

 

 

 

126,133 

 

-

Total revenues

(126,133)

 

76,789 

 

1,190,639 

 

16,061 

 

(26,763)

 

1,130,593 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Homebuilding

 

 

582 

 

1,292,057 

 

57 

 

(49,888)

 

1,242,808 

Financial services

 

 

 

 

353 

 

10,826 

 

 

 

11,179 

Total expenses

 

 

582 

 

1,292,410 

 

10,883 

 

(49,888)

 

1,253,987 

Income (loss) from

 

 

 

 

 

 

 

 

 

 

 

unconsolidated joint

 

 

 

 

 

 

 

 

 

 

 

ventures

 

 

 

 

(2,739)

 

 

 

 

 

(2,739)

Income (loss) before
  income taxes

(126,133)

 

76,207 

 

(104,510)

 

5,178 

 

23,125 

 

(126,133)

State and federal income

 

 

 

 

 

 

 

 

 

 

 

(benefit)/taxes

(48,274)

 

26,672 

 

(39,317)

 

424 

 

12,221 

 

(48,274)

Net income (loss)

$(77,859)

 

$49,535 

 

$(65,193)

 

$      4,754 

 

$  10,904 

 

$    (77,859)

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (loss) 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

 

 

 

 

 

 

 

 

 

 

 

(benefit)/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

NINE MONTHS ENDED JULY 31, 2007

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

Subsidiary Issuer

 

Guarantor Subsidiaries

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Consolidated

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Homebuilding

$

 

$       338 

 

$3,341,138 

 

$    8,886 

 

$         (1)

 

$3,350,361 

Financial services

 

 

 

 

2,732 

 

53,959 

 

 

 

56,691 

Intercompany charges

 

 

219,911 

 

218,566 

 

 

 

(438,477)

 

-

Equity in pretax income

 

 

 

 

 

 

 

 

 

 

 

of consolidated

 

 

 

 

 

 

 

 

 

 

 

subsidiaries

(234,195)

 

 

 

 

 

 

 

234,195 

 

-

Total revenues

(234,195)

 

220,249 

 

3,562,436 

 

62,845 

 

(204,283)

 

3,407,052 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Homebuilding

 

 

1,682 

 

3,734,484 

 

8,157 

 

(141,887)

 

3,602,436 

Financial services

 

 

 

 

912 

 

35,036 

 

(71)

 

35,877 

Total expenses

 

 

1,682 

 

3,735,396 

 

43,193 

 

(141,958)

 

3,638,313 

Income (loss) from

 

 

 

 

 

 

 

 

 

 

 

unconsolidated joint

 

 

 

 

 

 

 

 

 

 

 

ventures

 

 

 

 

(2,934)

 

 

 

 

 

(2,934)

Income (loss) before
  income taxes

(234,195)

 

218,567 

 

(175,894)

 

19,652 

 

(62,325)

 

(234,195)

State and federal income

 

 

 

 

 

 

 

 

 

 

 

(benefit)/taxes

(73,669)

 

76,498 

 

(52,440)

 

6,055 

 

(30,113)

 

(73,669)

Net income (loss)

$(160,526)

 

$142,069 

 

$   (123,454)

 

$13,597 

 

$(32,212)

 

$   (160,526)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Subsidiaries

 

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: