Hovnanian Enterprises, Inc.
Annual Report 2012
Hovnanian Enterprises, Inc.
Communities
Arizona
California
Delaware
Florida
Georgia
Illinois
Maryland
Minnesota
New Jersey
North Carolina
Ohio
Pennsylvania
South Carolina
Texas
Virginia/DC
West Virginia
Total
Active
10
12
5
14
1
3
7
6
15
1
12
1
3
74
8
-
172
Proposed
1
34
3
18
1
4
12
3
22
6
10
1
3
29
10
2
159
Financial Highlights
REVENUES AND INCOME
(Dollars in Millions)
Total Revenues
Loss Before Income Taxes Excluding Land-Related
Charges, Expenses Associated with the Debt Exchange
Offer, Intangible Impairments and Loss (Gain) on
Extinguishment of Debt (1)
Loss Before Income Taxes
Net (Loss) Income
ASSETS, DEBT AND EQUITY
(Dollars in Millions)
Total Assets
Total Recourse Debt
Total (Deficit) Equity
INCOME PER COMMON SHARE
(Shares in Thousands)
Years Ended October 31,
2012
2011
2010
2009
2008
$
1,485.4
$
1,134.9
$
1,371.8
$
1,596.3
$
3,308.1
$
$
$
(55.0)
(101.2)
(66.2)
$
$
$
(194.1)
(291.6)
(286.1)
$
$
$
(184.6)
(295.3)
2.6
$
$
$
(379.1)
(672.0)
(716.7)
$
$
$
(391.3)
(1,168.0)
(1,124.6)
$
$
$
1,684.3
1,542.2
(485.3)
$
$
$
1,602.2
1,602.8
(496.6)
$
$
$
1,817.6
1,616.3
(337.9)
$
$
$
2,024.6
1,751.7
(348.9)
$
$
$
3,637.3
2,505.8
330.3
Assuming Dilution:
(Loss) Income Per Common Share
Weighted Average Number of Common Shares Outstanding
$
(0.52)
126,350
$
(2.85)
100,444
$
0.03
79,683
$
(9.16)
78,238
$
(16.04)
70,131
(1) Loss Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer, Intangible Impairments and Loss (Gain) on
Extinguishment of Debt is a non-GAAP financial measure. See page 5 of this Annual Report for a reconciliation to Loss Before Income Taxes, the most directly
comparable GAAP financial measure.
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.
To our shareholders and associates
After the most severe and prolonged downturn that the
normalized 20% to 21% range. Assuming home prices
U.S. homebuilding industry has ever experienced, the
keep pace with any cost increases for labor or materials,
industry is finally in a period of modest recovery.
we expect to achieve this margin improvement as we
Preliminary data for 2012 annual U.S. housing starts of
continue to deliver more homes in communities recently
780,000 represent a 28.1% increase over the previous year.
purchased at land prices near the bottom of this real estate
Record low interest rates, attractive home prices, and a
cycle.
lower supply of existing homes for sale, combined with
modest economic improvements, are all helping drive the
The cumulative result of all of these positive trends is that
housing recovery.
we significantly reduced our pre-tax loss in fiscal 2012.
For the fourth quarter of 2012, we reported our first
Throughout fiscal 2012, our operating performance
quarterly profit before taxes, land-related charges and
improved steadily. After five consecutive years of
debt-related charges since the first quarter of 2007.
revenue declines, we reported a 30.9% increase in total
revenues to $1.5 billion for fiscal 2012 compared to $1.1
The improvements in our operating results are partially a
billion for fiscal 2011. Home deliveries, including
result of an increasing sales pace. The number of net
unconsolidated joint ventures, were up 27.0% in fiscal
contracts,
including unconsolidated
joint ventures,
2012, to 5,356 homes compared with 4,216 homes during
increased 30.1% to 5,838 homes during fiscal 2012
2011. At the same time, we reported a year-over-year 220
compared with 4,488 homes during fiscal 2011. For the
basis point improvement in homebuilding gross margin
full fiscal 2012 year, net contracts per active selling
percentage to 17.8%.
community increased to 28.1, a 31.9% increase over the
prior year. The improvement in sales pace has led to a
The combination of increased home deliveries and higher
34.4% year-over-year increase in the dollar amount of
average home prices generated top line revenue growth,
contract backlog to $742.2 million at the end of fiscal
which allowed us to leverage the fixed costs of our
2012, which assuming stable market conditions, should
operating platform. As a result, during 2012 we reduced
lead to quarterly revenue growth in each quarter of fiscal
both our total SG&A costs and interest expenses as a
2013 compared to the same quarter of fiscal 2012.
percent of total revenues compared to 2011 from 18.6% to
12.8% and from 15.1% to 10.3%, respectively. The
In order to maintain a level of sustainable profitability, it
significant improvements in these metrics puts us on a
is imperative for us to continue to grow the top line. This
pathway to return to sustained profitability.
can come from increased deliveries per community,
increased average home prices, increased community
The fourth quarter of 2012 was our sixth sequential
count or a combination thereof. We continue to look for
quarterly improvement in homebuilding gross margin
new land parcels that meet our underwriting criteria in
percentage. Over this time, homebuilding gross margin
each of our markets. Since January of 2009, we have
percentage increased by 350 basis points. We expect our
controlled 21,900 new lots, including 4,200 additional lots
gross margin percentage to gradually improve to a
during the second half of 2012. We remain committed to
1
our disciplined underwriting methodology that targets a
combine our cash balance with the additional liquidity
25% or higher internal rate of return based on then current
provided by our
recently
increased
land banking
home prices and sales paces.
arrangement with GSO, we believe that we will be able to
evaluate and actively pursue attractive land deals in our
We continue to pursue land acquisition strategies that
markets. If we find sufficient new land parcels that meet
minimize our capital investment and reduce the risks of
our underwriting criteria, we are comfortable managing
owning land. During 2012, we were pleased to announce
our cash at the lower end of our cash target range.
that we entered into a land banking arrangement with
GSO Capital Partners, LP,
the credit arm of
the
As we look forward, the long-term demographics remain
Blackstone Group, for up to $250 million of total
encouraging. The U.S. population and in turn household
acquisition and future development costs. We have
formations are expected to increase over the short to
already filled roughly half of our $250 million land
intermediate term. We are optimistic that we will be able
banking arrangement with GSO and expect to fill the
to capitalize on these trends.
remainder during fiscal 2013.
2012 was a year of significant progress for our Company,
At the end of fiscal 2012, we refinanced $797 million of
which would not have been possible without
the
secured debt at a lower interest rate, which reduces our
commitment of our associates. While the downturn was
annual cash interest expense by about $17 million. The
painful, the improvements we made in so many facets of
refinancing also extended the maturity of $577 million of
our business are paying off. Even more importantly, we
the refinanced debt from 2016 until fiscal 2020 and
are optimistic about 2013 and beyond, as we are focused
extended the maturity of the remaining $220 million of
on returning our Company to profitability. With the
the refinanced debt from 2016 until fiscal 2021.
continued support of our associates and stakeholders, we
continue our pursuit of becoming the best homebuilder in
Since the end of fiscal 2008, we have reduced the
the nation.
principal amount of our debt by more than $960 million.
We remain confident that we can either refinance or pay
off at maturity our indebtedness maturing between 2014
and 2017 while simultaneously maintaining sufficient
liquidity to invest in new land parcels for future growth.
We feel good about our current liquidity. After spending
$363.8 million on land and land development during
fiscal 2012, we ended fiscal 2012 with $289.0 million in
homebuilding cash, including $30.7 million of cash used
to collateralize letters of credit. Our cash position of
$289.0 million at the end of the year exceeds our cash
target range of $170 million to $245 million. When you
Ara K. Hovnanian
Chairman of the Board, President and Chief Executive
Officer
2
Communities Under Development
(Dollars In Thousands Except Average Price)
Net Contracts(1)
Deliveries
Contract Backlog
Twelve Months Ended October 31,
October 31,
2012
2011 % Change
2012
2011 % Change
2012
2011 % Change
(Unaudited)
Northeast
Home
Dollars
Avg. Price
Mid-Atlantic
Home
Dollars
Avg. Price
Midwest
Home
Dollars
Avg. Price
Southeast
Home
Dollars
Avg. Price
Southwest
Home
Dollars
Avg. Price
West
Home
Dollars
Avg. Price
Consolidated Total
Home
Dollars
Avg. Price
463
225,168
486,324
590
250,350
424,322
678
157,385
232,132
593
145,963
246,143
2,178
590,208
270,986
635
228,624
360,038
5,137
1,597,698
311,018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Unconsolidated Joint Ventures
Home
Dollars
Avg. Price
Total
Home
Dollars
Avg. Price
701
318,409
454,221
5,838
1,916,107
328,213
$
$
$
$
449
191,270
425,991
616
238,143
386,596
364
74,988
206,011
381
88,061
231,131
1,720
404,715
235,299
493
132,608
268,982
4,023
1,129,785
280,831
465
201,817
434,015
4,488
1,331,602
296,703
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3.1%
17.7%
14.2%
(4.2)%
5.1%
9.8%
86.3%
109.9%
12.7%
55.6%
65.8%
6.5%
26.6%
45.8%
15.2%
28.8%
72.4%
33.9%
27.7%
41.4%
10.7%
50.8%
57.8%
4.7%
30.1%
43.9%
10.6%
505
218,396
432,467
649
268,880
414,299
477
106,539
223,352
482
113,347
235,160
2,003
515,757
257,492
560
182,661
326,180
4,676
1,405,580
300,595
680
320,657
471,554
5,356
1,726,237
322,300
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
399
179,866
450,792
524
199,061
379,887
360
70,465
195,736
339
79,146
233,469
1,726
418,631
242,544
484
125,305
258,895
3,832
1,072,474
279,873
384
172,343
448,810
4,216
1,244,817
295,260
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
26.6%
21.4%
(4.1)%
23.9%
35.1%
9.1%
32.5%
51.2%
14.1%
42.2%
43.2%
0.7%
16.0%
23.2%
6.2%
15.7%
45.8%
26.0%
22.0%
31.1%
7.4%
77.1%
86.1%
5.1%
27.0%
38.7%
9.2%
264
115,416
437,182
266
118,773
446,515
427
95,716
224,159
235
62,696
266,791
506
160,840
317,866
191
78,877
412,969
1,889
632,318
334,737
256
109,905
429,316
2,145
742,223
346,025
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
265
108,645
409,981
325
137,303
422,471
226
44,870
198,540
124
30,080
242,581
331
86,388
260,991
116
32,914
283,741
1,387
440,200
317,376
276
112,154
406,355
1,663
552,354
332,143
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(0.4)%
6.2%
6.6%
(18.2)%
(13.5)%
5.7%
88.9%
113.3%
12.9%
89.5%
108.4%
10.0%
52.9%
86.2%
21.8%
64.7%
139.6%
45.5%
36.2%
43.6%
5.5%
(7.2)%
(2.0)%
5.7%
29.0%
34.4%
4.2%
DELIVERIES INCLUDE EXTRAS
Note:
(1) Net contracts are defined as new contracts signed during the period for the purchase of homes, less cancellations of prior contracts.
Note: All statements in this Annual Report that are not historical facts should be considered as "forward-looking statements" within the meaning of the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause
actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the
forward-looking statements. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward looking statements are reasonable,
we can give no assurance that such plans, intentions, or expectations will be achieved. Such risks, uncertainties and other factors include, but are not limited to, (1)
changes in general and local economic and industry and business conditions and impacts of the sustained homebuilding downturn, (2) adverse weather and other
environmental conditions and natural disasters, (3) changes in market conditions and seasonality of the Company’s business, (4) changes in home prices and sales activity
in the markets where the Company builds homes, (5) government regulation, including regulations concerning development of land, the home building, sales and
customer financing processes, tax laws, and the environment, (6) fluctuations in interest rates and the availability of mortgage financing, (7) shortages in, and price
fluctuations of, raw materials and labor, (8) the availability and cost of suitable land and improved lots, (9) levels of competition, (10) availability of financing to the
Company, (11) utility shortages and outages or rate fluctuations, (12) levels of indebtedness and restrictions on the Company’s operations and activities imposed by the
agreements governing the Company’s outstanding indebtedness, (13) the Company's sources of liquidity, (14) changes in credit ratings, (15) availability of net operating
loss carryforwards, (16) operations through joint ventures with third parties, (17) product liability litigation, warranty claims and claims by mortgage investors, (18)
successful identification and integration of acquisitions, (19) significant influence of the Company’s controlling stockholders, (20) changes in tax laws affecting the after-
tax costs of owning a home, (21) geopolitical risks, terrorist acts and other acts of war, and (22) other factors described in detail in the Company’s Annual Report on Form
10-K for the fiscal year ended October 31, 2012. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
3 Five-Year Financial Review
(In Thousands Except Number of Homes and Per-Share Data)
Statement of Operations Data:
Total Revenues
Inventory Impairment Loss and Land Option Write-Offs
Income (Loss) from Unconsolidated Joint Ventures
Loss Before Income Taxes Excluding Land-Related Charges, Expenses
Associated with the Debt Exchange Offer, Intangible Impairments
and Loss (Gain) on Extinguishment of Debt (1)
Loss Before Income Taxes
Net (Loss) Income
Net (Loss) Income Per Common Share:
Diluted
Weighted Average Number of Common Shares Outstanding
Balance Sheet Data:
Cash and Restricted Cash
Total Inventories
Total Assets
Total Recourse Debt
Total Non-Recourse Debt
Total (Deficit) Equity
Supplemental Financial Data:
Adjusted EBIT (2)
Adjusted EBITDA (2)
Net Cash (Used in) Provided by Operating Activities
Interest Incurred
Adjusted EBITDA/Interest Incurred
Financial Statistics:
Average Net Debt/Capitalization (3)
Homebuilding Inventory Turnover (4)
Homebuilding Gross Margin (5)
Adjusted EBITDA Margin (6)
Operating Statistics:
Net Sales Contracts – Homes
Net Sales Contracts – Dollars
Deliveries – Homes
Deliveries – Dollars
Backlog – Homes
Backlog – Dollars
2012
2011
2010
2009
2008
Years Ended October 31,
$
$
$
1,485,353
12,530
5,401
$
$
$
1,134,907
101,749
(8,958)
$
$
$
1,371,842
135,699
956
$
$
$
1,596,290
659,475
(46,041)
$
$
$
3,308,111
710,120
(36,600)
$
(54,958)
$
(194,078)
$
(184,630)
$
(379,118)
$
(391,323)
$
$
(101,248)
(66,197)
$
$
(291,588)
(286,087)
$
$
(295,282)
2,588
$
$
(672,019)
(716,712)
$
$
(1,168,048)
(1,124,590)
$
(0.52)
126,350
$
(2.85)
100,444
$
0.03
79,683
$
(9.16)
78,238
$
(16.04)
70,131
$
$
$
$
$
$
337,434
981,466
1,684,250
1,542,196
57,077
(485,345)
$
$
$
$
$
$
328,358
968,112
1,602,180
1,602,770
45,869
(496,602)
$
$
$
$
$
$
480,185
1,001,940
1,817,560
1,616,347
24,970
(337,938)
$
$
$
$
$
$
584,020
1,109,913
2,024,577
1,751,701
21,507
(348,868)
$
$
$
$
$
$
856,385
2,159,082
3,637,322
2,505,805
23,122
330,264
$
$
$
$
97,475
107,411
(66,998)
147,048
0.73x
$
$
$
$
(25,522)
(12,204)
(207,415)
156,998
N/A
$
$
$
$
(2,271)
13,615
32,487
154,307
0.09x
$
$
$
$
(222,260)
(197,757)
(29,728)
194,702
N/A
$
$
$
$
(281,592)
(222,320)
462,066
190,801
N/A
156.9%
1.3x
17.8%
7.2%
143.4%
1.0x
15.6%
N/A
121.7%
1.2x
16.8%
1.0%
98.5%
1.0x
9.2%
N/A
68.9%
1.2x
6.7%
N/A
$
$
5,137
1,597,698
4,676
1,405,580
1,889
632,318
$
$
$
4,023
1,129,785
3,832
1,072,474
1,387
440,200
$
$
$
4,206
1,117,792
4,729
1,327,499
1,249
370,779
$
$
$
5,227
1,428,307
5,362
1,522,469
1,772
559,553
$
$
$
6,546
1,873,795
10,577
3,177,853
1,907
646,187
$
(1) Loss Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer, Intangible Impairments and Loss (Gain ) on Extinguishment of Debt is not a
financial measure calculated in accordance with generally accepted accounting principals (GAAP). The most directly comparable GAAP financial measure is Loss Before Income Taxes. The
reconciliation of Loss Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer, Intangible Impairments and Loss (Gain) on Extinguishment of
Debt to Loss Before Income Taxes is presented on page 5 of this Annual Report. Loss Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer,
Intangible Impairments and Loss (Gain) on Extinguishment of Debt should be considered in addition to, but not as a substitute for, Loss Before Income Taxes, Net (Loss) Income and other
measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the Company's reports filed with the Securities and Exchange
Commission (SEC). Additionally, the Company's calculation of Loss Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer, Intangible
Impairments and Loss (Gain) on Extinguishment of Debt may be different than the calculation used by other companies, and, therefore, comparability may be affected.
(2) Adjusted EBIT and Adjusted EBITDA are non-GAAP financial measures. The most directly comparable GAAP financial measure is Net (Loss) Income. The reconciliation of Adjusted EBIT
and Adjusted EBITDA to Net (Loss) Income is presented on page 5 of this Annual Report. Adjusted EBIT and Adjusted EBITDA should be considered in addition to, but not as a substitute for,
(Loss) Income Before Income Taxes, Net (Loss) Income, Cash Flow (Used In) Provided By Operating Activities and other measures of financial performance and liquidity prepared in accordance
with GAAP that are presented on the financial statements included in the Company's reports filed with the SEC. Additionally, the Company's calculation of Adjusted EBIT and Adjusted EBITDA
may be different than the calculation used by other companies, and, therefore, comparability may be affected.
(3) Debt excludes CMOs, mortgage warehouse debt and non-recourse debt and is net of cash balances. Capitalization includes debt, as previously defined, and total (deficit) equity. Calculated based
on a five quarter average.
(4) Derived by dividing total home and land cost of sales by the two-year average homebuilding inventory, excluding inventory not owned.
(5) Excludes interest related to homes sold.
(6) Adjusted EBITDA Margin is derived by dividing Adjusted EBITDA by Total Revenues.
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.
4 Reconciliation of Loss Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer, Intangible Impairments and Loss
(Gain) on Extinguishment of Debt to Loss Before Income Taxes:
(Dollars In Thousands)
Loss Before Income Taxes
Inventory Impairment Loss and Land Option Write-Offs
Expenses Associated with the Debt Exchange Offer
Goodwill and Definite Life Intangible Impairments
Unconsolidated Joint Venture Investment, Intangible and
Land-Related Charges
Loss (Gain) on Extinguishment of Debt
Loss Before Income Taxes Excluding Land-Related Charges, Expenses
Associated with the Debt Exchange Offer, Intangible Impairments and
Loss (Gain) on Extinguishment of Debt
Reconciliation of Adjusted EBIT and Adjusted EBITDA to Net (Loss) Income:
Years Ended October 31,
$
2012
(101,248)
12,530
4,694
–
$
2011
(291,588)
101,749
–
–
$
2010
(295,282)
135,699
–
–
$
2009
(672,019)
659,475
–
–
$
2008
(1,168,048)
710,120
–
35,363
–
29,066
3,289
(7,528)
–
(25,047)
43,611
(410,185)
31,242
–
$
(54,958)
$
(194,078)
$
(184,630)
$
(379,118)
$
(391,323)
Years Ended October 31,
(Dollars In Thousands)
Net (Loss) Income
Income Tax (Benefit) Provision
Interest Expense
EBIT
Inventory Impairment Loss and Land Option Write-offs
Expenses Associated with the Debt Exchange Offer
Loss (Gain) on Extinguishment of Debt
Adjusted EBIT
EBIT
Depreciation
Amortization of Debt Costs
Amortization and Impairment of Intangibles and Goodwill
EBITDA
Inventory Impairment Loss and Land Option Write-offs
Expenses Associated with the Debt Exchange Offer
Loss (Gain) on Extinguishment of Debt
Adjusted EBITDA
$
$
$
$
$
$
$
$
$
$
$
$
$
2012
(66,197)
(35,051)
152,433
51,185
12,530
4,694
29,066
97,475
51,185
6,223
3,713
–
61,121
12,530
4,694
29,066
107,411
2011
(286,087)
(5,501)
171,845
(119,743)
101,749
–
(7,528)
(25,522)
(119,743)
9,340
3,978
–
(106,425)
101,749
–
(7,528)
(12,204)
2010
2,588
(297,870)
182,359
(112,923)
135,699
–
(25,047)
(2,271)
(112,923)
12,576
3,310
–
(97,037)
135,699
–
(25,047)
13,615
2009
(716,712)
44,693
200,469
(471,550)
659,475
–
(410,185)
(222,260)
(471,550)
18,527
5,976
–
(447,047)
659,475
–
(410,185)
(197,757)
$
$
2008
(1,124,590)
(43,458)
176,336
(991,712)
710,120
–
–
(281,592)
(991,712)
18,426
3,963
36,883
(932,440)
710,120
–
–
(222,320)
$
$
$
$
$
5 (This page has been left blank intentionally.)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended OCTOBER 31, 2012
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-8551
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
110 West Front Street, P.O. Box 500, Red Bank, N.J.
(Address of Principal Executive Offices)
22-1851059
(I.R.S. Employer Identification No.)
07701
(Zip Code)
732-747-7800
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Class A Common Stock, $.01 par value per share
7.25% Tangible Equity Units
Preferred Stock Purchase Rights
Depositary Shares, each representing 1/1,000th of a share of
7.625% Series A Preferred Stock
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of
1933. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller
reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer NonAccelerated Filer Smaller Reporting Company
(Do Not Check if a smaller reporting Company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the voting and nonvoting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid and asked price of such common equity as of April 30, 2012 (the
last business day of the registrant’s most recently completed second fiscal quarter) was $200,205,968.
As of the close of business on December 14, 2012, there were outstanding 119,833,294 shares of the Registrant’s Class A
Common Stock and 14,658,353 shares of its Class B Common Stock.
HOVNANIAN ENTERPRISES, INC.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III — Those portions of the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A in
connection with registrant’s annual meeting of stockholders to be held on March 12, 2013, which are responsive to those
parts of Part III, Items 10, 11, 12, 13, and 14 as identified herein.
FORM 10-K
TABLE OF CONTENTS
Item
1
1A
1B
2
3
4
5
6
7
7A
8
9
9A
9B
10
11
12
13
14
15
PART I ...........................................................................................................................................
Page
1
1
Business .........................................................................................................................................................
Risk Factors ...................................................................................................................................................
9
Unresolved Staff Comments .......................................................................................................................... 18
Properties ....................................................................................................................................................... 18
Legal Proceedings ......................................................................................................................................... 19
Mine Safety Disclosures ................................................................................................................................ 19
Executive Officers of the Registrant .............................................................................................................. 19
PART II ..........................................................................................................................................
20
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ....................................................................................................................................................... 20
Selected Financial Data ................................................................................................................................. 21
Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................ 22
Quantitative and Qualitative Disclosures About Market Risk ....................................................................... 52
Financial Statements and Supplementary Data ............................................................................................. 52
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 52
Controls and Procedures ................................................................................................................................ 52
Other Information .......................................................................................................................................... 54
PART III ........................................................................................................................................
55
Directors, Executive Officers and Corporate Governance ............................................................................ 55
Executive Compensation ............................................................................................................................... 56
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...... 57
Certain Relationships and Related Transactions, and Director Independence .............................................. 57
Principal Accountant Fees and Services ........................................................................................................ 58
PART IV ........................................................................................................................................
58
Exhibits and Financial Statement Schedules ................................................................................................. 58
Signatures ...................................................................................................................................................... 63
i
(This page has been left blank intentionally.)
Part I
ITEM 1
BUSINESS
Business Overview
We design, construct, market, and sell single-family detached homes, attached
townhomes and
condominiums, urban infill and active adult homes in planned residential developments and are one of the nation’s
largest builders of residential homes. Founded in 1959 by Kevork Hovnanian, Hovnanian Enterprises, Inc. (the
“Company”, “we”, “us” or “our”) was incorporated in New Jersey in 1967 and reincorporated in Delaware in 1983.
Since the incorporation of our predecessor company and including unconsolidated joint ventures, we have delivered in
excess of 300,000 homes, including 5,356 homes in fiscal 2012. The Company consists of two distinct operations:
homebuilding and financial services. Our homebuilding operations consist of six segments: Northeast, Mid-Atlantic,
Midwest, Southeast, Southwest and West. Our financial services operations provide mortgage loans and title services to
the customers of our homebuilding operations.
We are currently, excluding unconsolidated joint ventures, offering homes for sale in 172 communities in 37
markets in 16 states throughout the United States. We market and build homes for first-time buyers, first-time and
second-time move-up buyers, luxury buyers, active adult buyers, and empty nesters. We offer a variety of home styles at
base prices ranging from $68,652 (low income housing) to $1,067,000 with an average sales price, including options, of
$301,000 nationwide in fiscal 2012.
Our operations span all significant aspects of the home-buying process – from design, construction, and sale, to
mortgage origination and title services.
The following is a summary of our growth history:
1959 - Founded by Kevork Hovnanian as a New Jersey homebuilder.
1983 - Completed initial public offering.
1986 - Entered the North Carolina market through the investment in New Fortis Homes.
1992 - Entered the greater Washington, D.C. market.
1994 - Entered the Coastal Southern California market.
1998 - Expanded in the greater Washington, D.C. market through the acquisition of P.C. Homes.
1999 - Entered the Dallas, Texas market through our acquisition of Goodman Homes. Further diversified and
strengthened our position as New Jersey’s largest homebuilder through the acquisition of Matzel & Mumford.
2001 - Continued expansion in the greater Washington D.C. and North Carolina markets through the acquisition
of Washington Homes. This acquisition further strengthened our operations in each of these markets.
2002 - Entered the Central Valley market in Northern California and Inland Empire region of Southern
California through the acquisition of Forecast Homes.
2003 - Expanded operations in Texas and entered the Houston market through the acquisition of Parkside
Homes and Brighton Homes. Entered the greater Ohio market through our acquisition of Summit Homes and
entered the greater metro Phoenix market through our acquisition of Great Western Homes.
2004 - Entered the greater Tampa, Florida market through the acquisition of Windward Homes and started
operations in the Minneapolis/St. Paul, Minnesota market.
1
2005 - Entered the Orlando, Florida market through our acquisition of Cambridge Homes and entered the
greater Chicago, Illinois market and expanded our position in Florida and Minnesota through the acquisition of
the operations of Town & Country Homes, which occurred concurrently with our entering into a joint venture
with affiliates of Blackstone Real Estate Advisors to own and develop Town & Country’s existing residential
communities. We also entered the Fort Myers market through the acquisition of First Home Builders of Florida,
and the Cleveland, Ohio market through the acquisition of Oster Homes.
2006 - Entered the coastal markets of South Carolina and Georgia through the acquisition of Craftbuilt Homes.
Geographic Breakdown of Markets by Segment
Hovnanian markets and builds homes that are constructed in 18 of the nation’s top 50 housing markets. We
segregate our homebuilding operations geographically into the following six segments:
Northeast: New Jersey and Pennsylvania
Mid-Atlantic: Delaware, Maryland, Virginia, West Virginia, and Washington, D.C.
Midwest: Illinois, Minnesota, and Ohio
Southeast: Florida, Georgia, North Carolina, and South Carolina
Southwest: Arizona and Texas
West: California
For financial information about our segments, see Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and Note 11 to the Consolidated Financial Statements.
Employees
We employed approximately 1,565 full-time employees (whom we refer to as associates) as of October 31,
2012.
Corporate Offices and Available Information
Our corporate offices are located at 110 West Front Street, P.O. Box 500, Red Bank, New Jersey 07701, our
telephone number is 732-747-7800, and our Internet web site address is www.khov.com. Information available on or
through our web site is not a part of this Form 10-K. We make available through our web site our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished
pursuant to Section 13(d) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed with, or
furnished to, the Securities and Exchange Commission (SEC). Copies of the Company’s Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to these reports are available free of charge upon
request. Any materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at
100 F Street, NE, Washington, DC, 20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding issuers that file electronically with the SEC.
Business Strategies
Although new home demand remains at historically low levels, during fiscal 2012, we began to see the
homebuilding market improve resulting in our higher revenues and gross margins, as well as increased contracts and
deliveries. Prior to fiscal 2012, the homebuilding market had been in a prolonged downturn. Consequently, our primary
focus while market conditions have been weak over the past several years has been to strengthen our financial condition
by reducing inventories of homes and land, controlling and reducing construction and overhead costs, maximizing cash
flows, reducing outstanding debt, and maintaining strong liquidity. A few years into the downturn, in 2009, we began to
see opportunities to purchase land at prices and terms that made economic sense in light of our sales prices and sales
paces. As a result, since early 2009 we have been more active in purchasing or putting under option new properties that
2
meet or exceed our internal rate of return investment requirements. In order to return to profitability, we will need to
continue purchasing new land that will generate good investment returns and drive greater operating efficiencies, as well
as control expenses commensurate with our level of deliveries.
In addition to our current focus on maintaining strong liquidity and evaluating new investment opportunities,
we will continue to focus on our historic key business strategies. We believe that these strategies separate us from our
competitors in the residential homebuilding industry and the adoption, implementation, and adherence to these principles
will continue to benefit our business.
Our goal is to become a significant builder in each of the selected markets in which we operate, which will
enable us to achieve powers and economies of scale and differentiate ourselves from most of our competitors.
We offer a broad product array to provide housing to a wide range of customers. Our customers consist of first-
time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers, and empty nesters. Our
diverse product array includes single-family detached homes, attached townhomes and condominiums, urban infill, and
active adult homes.
We are committed to customer satisfaction and quality in the homes that we build. We recognize that our future
success rests in the ability to deliver quality homes to satisfied customers. We seek to expand our commitment to
customer service through a variety of quality initiatives. In addition, our focus remains on attracting and developing
quality associates. We use several leadership development and mentoring programs to identify key individuals and
prepare them for positions of greater responsibility within our Company.
We focus on achieving high return on invested capital. Each new community is evaluated based on its ability to
meet or exceed internal rate of return requirements. Our belief is that the best way to create lasting value for our
shareholders is through a strong focus on return on invested capital.
We prefer to use a risk-averse land strategy. We attempt to acquire land with a minimum cash investment and
negotiate takedown options, thereby limiting the financial exposure to the amounts invested in property and
predevelopment costs. This approach significantly reduces our risk and generally allows us to obtain necessary
development approvals before acquisition of the land.
We enter into homebuilding and land development joint ventures from time to time as a means of controlling
lot positions, expanding our market opportunities, establishing strategic alliances, reducing our risk profile, leveraging
our capital base, and enhancing our 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 homebuyers. Our land development
joint ventures include those with developers and other homebuilders, as well as financial investors to develop finished
lots for sale to the joint venture’s members or other third parties.
We manage our financial services operations to better serve all of our homebuyers. Our current mortgage
financing and title service operations enhance our contact with customers and allow us to coordinate the home-buying
experience from beginning to end.
Operating Policies and Procedures
We attempt to reduce the effect of certain risks inherent in the housing industry through the following policies
and procedures:
Training - Our training is designed to provide our associates with the knowledge, attitudes, skills, and habits
necessary to succeed in their jobs. Our training department regularly conducts online or webinar training in sales,
construction, administration, and managerial skills.
Land Acquisition, Planning, and Development - Before entering into a contract to acquire land, we complete
extensive comparative studies and analyses which assist us in evaluating the economic feasibility of such land
acquisition. We generally follow a policy of acquiring options to purchase land for future community developments.
Where possible, we acquire land for future development through the use of land options which need not be
exercised before the completion of the regulatory approval process. We attempt to structure these options
3
with flexible takedown schedules rather than with an obligation to take down the entire parcel upon
receiving regulatory approval. If we are unable to negotiate flexible takedown schedules, we will buy
parcels in a single bulk purchase. Additionally, we purchase improved lots in certain markets by acquiring
a small number of improved lots with an option on additional lots. This allows us to minimize the
economic costs and risks of carrying a large land inventory, while maintaining our ability to commence
new developments during favorable market periods.
Our option and purchase agreements are typically subject to numerous conditions, including, but not
limited to, our ability to obtain necessary governmental approvals for the proposed community. Generally,
the deposit on the agreement will be returned to us if all approvals are not obtained, although
predevelopment costs may not be recoverable. By paying an additional and nonrefundable deposit, we have
the right to extend a significant number of our options for varying periods of time. In most instances, we
have the right to cancel any of our land option agreements by forfeiture of our deposit on the agreement. In
fiscal 2012, 2011 and 2010, rather than purchase additional lots in underperforming communities, we took
advantage of this right and walked away from 2,134 lots, 6,983 lots, and 3,102 lots, respectively, out of
13,552 total lots, 16,896 total lots, and 17,481 total lots, respectively, under option, resulting in pretax
charges of $2.7 million, $24.3 million, and $13.2 million, respectively.
Design - Our residential communities are generally located in suburban areas easily accessible through public
and/or personal transportation. Our communities are designed as neighborhoods that fit existing land characteristics. We
strive to create diversity within the overall planned community by offering a mix of homes with differing architecture,
textures, and colors. Recreational amenities such as swimming pools, tennis courts, clubhouses, open areas, and tot lots
are frequently included.
Construction - We design and supervise the development and building of our communities. Our homes are
constructed according to standardized prototypes which are designed and engineered to provide innovative product
design while attempting to minimize costs of construction. We generally employ subcontractors for the installation of
site improvements and construction of homes. Agreements with subcontractors are generally short term and provide for a
fixed price for labor and materials. We rigorously control costs through the use of computerized monitoring systems.
Because of the risks involved in speculative building, our general policy is to construct an attached
condominium or townhouse building only after signing contracts for the sale of at least 50% of the homes in that
building. A majority of our single family detached homes are constructed after the signing of a sales contract and
mortgage approval has been obtained. This limits the buildup of inventory of unsold homes and the costs of maintaining
and carrying that inventory.
Materials and Subcontractors - We attempt to maintain efficient operations by utilizing standardized materials
available from a variety of sources. In addition, we generally contract with subcontractors to construct our homes. We
have reduced construction and administrative costs by consolidating the number of vendors serving certain markets and
by executing national purchasing contracts with select vendors. In recent years, we have experienced no significant
construction delays due to shortage of materials or labor; however, we cannot predict the extent to which shortages in
necessary materials or labor may occur in the future.
Marketing and Sales - Our residential communities are sold principally through on-site sales offices. In order to
respond to our customers’ needs and trends in housing design, we rely upon our internal market research group to
analyze information gathered from, among other sources, buyer profiles, exit interviews at model sites, focus groups, and
demographic databases. We make use of newspaper, radio, television, internet, magazine, our web site, billboard, video
and direct mail advertising, special and promotional events, illustrated brochures, and full-sized and scale model homes
in our comprehensive marketing program. In addition, we have home design galleries in our Florida, Illinois, New
Jersey, North Carolina and Virginia markets, which offer a wide range of customer options to satisfy individual customer
tastes.
Customer Service and Quality Control - In many of our markets, associates are responsible for customer service
and pre-closing quality control inspections as well as responding to post-closing customer needs. Prior to closing, each
home is inspected and any necessary completion work is undertaken by us. Our homes are enrolled in a standard limited
warranty program which, in general, provides a homebuyer with a one-year warranty for the home’s materials and
workmanship, a two-year warranty for the home’s heating, cooling, ventilating, electrical, and plumbing systems, and a
4
10 year warranty for major structural defects. All of the warranties contain standard exceptions, including, but not
limited to, damage caused by the customer.
Customer Financing - We sell our homes to customers who generally finance their purchases through
mortgages. Our financial services segment provides our customers with competitive financing and coordinates and
expedites the loan origination transaction through the steps of loan application, loan approval, and closing and title
services. We originate loans in Arizona, California, Delaware, Florida, Georgia, Illinois, Maryland, Minnesota, New
Jersey, North Carolina, Pennsylvania, South Carolina, Texas, Virginia and Washington, D.C. We believe that our ability
to offer financing to customers on competitive terms as a part of the sales process is an important factor in completing
sales.
During the year ended October 31, 2012, for the markets in which our mortgage subsidiaries originated loans,
14.6% of our homebuyers paid in cash and 75.9% of our noncash homebuyers obtained mortgages from our mortgage
banking subsidiary. The loans we originated in fiscal 2012 were 41.7% Federal Housing Administration/Veterans
Affairs (FHA/VA), 55.3% prime, and 3.0% United States Department of Agriculture.
We customarily sell virtually all of the loans and loan-servicing rights that we originate within a short period of
time. Loans are sold either individually or against forward commitments to institutional investors, including banks,
mortgage banking firms, and savings and loan associations.
Residential Development Activities
Our residential development activities include site planning and engineering, obtaining environmental and other
regulatory approvals and constructing roads, sewer, water, and drainage facilities, recreational facilities and other
amenities and marketing and selling homes. These activities are performed by our associates, together with independent
architects, consultants, and contractors. Our associates also carry out long-term planning of communities. A residential
development generally includes single-family detached homes and/or a number of residential buildings containing from
two to 24 individual homes per building, together with amenities such as club houses, swimming pools, tennis courts, tot
lots, and open areas.
Current base prices for our homes in contract backlog at October 31, 2012, range from $68,652 (low income
housing) to $1,067,000 in the Northeast, from $174,990 to $1,032,195 in the Mid-Atlantic, from $89,000 to $547,650 in
the Midwest, from $74,900 to $749,700 in the Southeast, from $101,625 to $800,990 in the Southwest, and from
$104,294 to $835,000 in the West. Closings generally occur and are typically reflected in revenues within 12 months of
when sales contracts are signed.
Information on homes delivered by segment for the year ended October 31, 2012, is set forth below:
(Housing revenue in thousands)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures
Total including unconsolidated joint ventures
Housing
Revenues
Homes
Delivered
$
218,396
268,880
106,539
113,347
515,757
182,661
$ 1,405,580
320,657
$ 1,726,237
505 $
649
477
482
2,003
560
4,676 $
680
5,356 $
Average
Price
432,467
414,299
223,352
235,160
257,492
326,180
300,595
471,554
322,300
The value of our net sales contracts, excluding unconsolidated joint ventures, increased to $1.6 billion from
$1.1 billion for the years ended October 31, 2012 and 2011, respectively. The number of homes contracted increased to
5,137 in 2012 from 4,023 in 2011. The increase in the number of homes contracted occurred despite the number of open-
for-sale communities decreasing from 192 to 172. We contracted an average of 28.1 homes per average active selling
community in 2012 compared to 21.3 homes per active selling community in 2011, demonstrating an increase in sales
pace as the homebuilding market has shown signs of improvement.
5
Information on the value of net sales contracts by segment for the years ended October 31, 2012 and 2011 is
set forth below. As a result of the purchase of our partner's interest in one of our unconsolidated joint ventures during
fiscal 2012, $18.7 million of net sales contract dollars have been reclassified from the unconsolidated joint venture total
to the Northeast segment total.
(Value of net sales contracts in thousands)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures
Total including unconsolidated joint ventures
$
2012
2011
225,168 $ 191,270
238,143
250,350
74,988
157,385
88,061
145,963
404,715
590,208
132,608
228,624
$ 1,597,698 $ 1,129,785
201,817
$ 1,916,107 $ 1,331,602
318,409
Percentage
of
Change
17.7%
5.1%
109.9%
65.8%
45.8%
72.4%
41.4%
57.8%
43.9%
The following table summarizes our active selling communities under development as of October 31, 2012. The
contracted not delivered and remaining homes available in our active selling communities are included in the
consolidated total home sites under the total residential real estate chart in Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Active Selling Communities
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Communities
16
20
21
19
84
12
172
4,774
3,984
3,694
2,004
11,783
2,796
29,035
Approved
Homes
Homes
Delivered
Contracted
Not
Delivered(1)
264
266
427
235
506
191
1,889
3,163
1,759
1,435
1,156
7,603
1,038
16,154
Remaining
Homes
Available(2)
1,347
1,959
1,832
613
3,674
1,567
10,992
(1) Includes 216 home sites under option.
(2) Of the total remaining homes available, 722 were under construction or completed (including 73 models and sales
offices) and 5,816 were under option.
Backlog
At October 31, 2012 and 2011, including unconsolidated joint ventures, we had a backlog of signed contracts
for 2,145 homes and 1,663 homes, respectively, with sales values aggregating $742.2 million and $552.4 million,
respectively. The majority of our backlog at October 31, 2012 is expected to be completed and closed within the next 12
months. At November 30, 2012 and 2011, our backlog of signed contracts, including unconsolidated joint ventures, was
2,138 homes and 1,714 homes, respectively, with sales values aggregating $745.8 million and $567.9 million,
respectively.
Sales of our homes typically are made pursuant to a standard sales contract that provides the customer with a
statutorily mandated right of rescission for a period ranging up to 15 days after execution. This contract requires a
nominal customer deposit at the time of signing. In addition, in the Northeast, and some sections of the Mid-Atlantic and
Midwest, we typically obtain an additional 5% to 10% down payment due within 30 to 60 days after signing. The
contract may include a financing contingency, which permits customers to cancel their obligation in the event mortgage
financing at prevailing interest rates (including financing arranged or provided by us) is unobtainable within the period
specified in the contract. This contingency period typically is four to eight weeks following the date of execution of the
contract. When housing values decline in certain markets, some customers cancel their contracts and forfeit their
6
deposits. Cancellation rates are discussed further in Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Sales contracts are included in backlog once the sales contract is signed by the
customer, which in some cases includes contracts that are in the rescission or cancellation periods. However, revenues
from sales of homes are recognized in the Consolidated Statement of Operations, when title to the home is conveyed to
the buyer, adequate initial and continuing investment have been received and there is no continued involvement.
Residential Land Inventory in Planning
It is our objective to control a supply of land, primarily through options, whenever possible, consistent with
anticipated homebuilding requirements in each of our housing markets. Controlled land (land owned and under option)
as of October 31, 2012, exclusive of communities under development described above under “Active Selling
Communities” and excluding unconsolidated joint ventures, is summarized in the following table. The proposed
developable home sites in communities in planning are included in the 28,019 consolidated total home sites under the
total residential real estate table in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” on page 22.
Communities in Planning
(Dollars in thousands)
Northeast:
Under option(1)
Owned
Total
Mid-Atlantic:
Under option(1)
Owned
Total
Midwest:
Under option(1)
Owned
Total
Southeast:
Under option(1)
Owned
Total
Southwest:
Under option(1)
Owned
Total
West:
Under option(1)
Owned
Total
Totals:
Under option(1)
Owned
Combined total
Number
of Proposed
Communities
Proposed
Developable
Home Sites
10
13
23
12
15
27
14
3
17
11
17
28
27
3
30
1
33
34
1,699 $
1,053
2,752
891 $
2,762
3,653
712 $
233
945
675 $
656
1,331
1,379 $
194
1,573
30 $
4,854
4,884
Total
Land
Option
Price
94,733 $
83,776
29,383
28,338
99,747
12,036
Book
Value
5,834
106,005
111,839
3,325
38,062
41,387
1,234
1,075
2,309
11,705
5,393
17,098
11,661
3,646
15,307
1,265
29,791
31,056
75
84
159
5,386 $ 348,013
9,752
15,138
35,024
183,972
$ 218,996
(1) Properties under option also include costs incurred on properties not under option but which are under evaluation.
For properties under option, as of October 31, 2012, option fees and deposits aggregated approximately $29.8
million. As of October 31, 2012, we spent an additional $5.2 million in nonrefundable predevelopment costs on such
properties.
7
We either option or acquire improved or unimproved home sites from land developers or other sellers. Under a
typical agreement with the land developer, we purchase a minimal number of home sites. The balance of the home sites
to be purchased is covered under an option agreement or a nonrecourse purchase agreement. During the declining
homebuilding market, we decided to mothball (or stop development on) certain communities where we determined that
current market conditions did not justify further investment at that time. When we decide to mothball a community, the
inventory is reclassified on our Consolidated Balance Sheet from Sold and unsold homes and lots under development to
Land and land options held for future development or sale. See Note 3 to the Consolidated Financial Statements for
further discussion on mothballed communities. For additional financial information regarding our homebuilding
segments, see Note 11 to the Consolidated Financial Statements.
Raw Materials
The homebuilding industry has from time to time experienced raw material and labor shortages. In particular,
shortages and fluctuations in the price of lumber or in other important raw materials could result in delays in the start or
completion of or increase the cost of, developing one or more of our residential communities. We attempt to maintain
efficient operations by utilizing standardized materials available from a variety of sources. In addition, we generally
contract with subcontractors to construct our homes. We have reduced construction and administrative costs by
consolidating the number of vendors serving certain markets and by executing national purchasing contracts with select
vendors.
Seasonality
Our business is seasonal in nature and, historically, weather-related problems, typically in the fall, late winter
and early spring, can delay starts or closings and increase costs.
Competition
Our homebuilding operations are highly competitive. We are among the top 10 homebuilders in the United
States in both homebuilding revenues and home deliveries. We compete with numerous real estate developers in each of
the geographic areas in which we operate. Our competition ranges from small local builders to larger regional builders to
publicly owned builders and developers, some of which have greater sales and financial resources than we do.
Previously owned homes and the availability of rental housing provide additional competition. We compete primarily on
the basis of reputation, price, location, design, quality, service, and amenities.
Regulation and Environmental Matters
We are subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning,
building design, construction, and similar matters, including local regulations which impose restrictive zoning and
density requirements in order to limit the number of homes that can eventually be built within the boundaries of a
particular locality. In addition, we are subject to registration and filing requirements in connection with the construction,
advertisement, and sale of our communities in certain states and localities in which we operate even if all necessary
government approvals have been obtained. We may also be subject to periodic delays or may be precluded entirely from
developing communities due to building moratoriums that could be implemented in the future in the states in which we
operate. Generally, such moratoriums relate to insufficient water or sewerage facilities or inadequate road capacity.
In addition, some state and local governments in markets where we operate have approved, and others may
approve, slow-growth or no-growth initiatives that could negatively affect the availability of land and building
opportunities within those areas. Approval of these initiatives could adversely affect our ability to build and sell homes
in the affected markets and/or could require the satisfaction of additional administrative and regulatory requirements,
which could result in slowing the progress or increasing the costs of our homebuilding operations in these markets. Any
such delays or costs could have a negative effect on our future revenues and earnings.
We are also subject to a variety of local, state, federal, and foreign laws and regulations concerning protection
of health and the environment (“environmental laws”). 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 prohibit or severely restrict development and homebuilding activity. See Item 3
“Legal Proceedings” and Note 18 to the Consolidated Financial Statements.
8
Despite our past ability to obtain necessary permits and approvals for our communities, we anticipate that
increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot
predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in
substantial expenditures, which could cause delays and increase our cost of operations. In addition, the continued
effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which
are beyond our control, such as changes in policies, rules, and regulations and their interpretation and application.
ITEM 1A
RISK FACTORS
You should carefully consider the following risks in addition to the other information included in this Annual
Report on Form 10-K, including the Consolidated Financial Statements and the notes thereto.
The homebuilding industry is significantly affected by changes in general and local economic conditions, real
estate markets, and weather and other environmental conditions, which could affect our ability to build homes at prices
our customers are willing or able to pay, could reduce profits that may not be recaptured, could result in cancellation of
sales contracts, and could affect our liquidity.
The homebuilding industry is cyclical, has from time to time experienced significant difficulties, and is
significantly affected by changes in general and local economic conditions such as:
Employment levels and job growth;
Availability of financing for home buyers;
Interest rates;
Foreclosure rates;
Inflation;
Adverse changes in tax laws;
Consumer confidence;
Housing demand;
Population growth; and
Availability of water supply in locations in which we operate.
Turmoil in the financial markets could affect our liquidity, and we could also be adversely affected by the
negative economic impact resulting from the combination of federal income tax increases and government spending
restrictions potentially occurring at the end of calendar year 2012 in the U.S. (commonly referred to as the “fiscal cliff”).
In addition, our cash balances are primarily invested in short-term government-backed instruments. The remaining cash
balances are held at numerous financial institutions and may, at times, exceed insurable amounts. We seek to mitigate
this risk by depositing our cash in major financial institutions and diversifying our investments. In addition, our
homebuilding operations often require us to obtain letters of credit. We do not have a revolving credit facility. We have
certain stand alone letter of credit facilities and agreements pursuant to which our letters of credit are issued. However,
we may need additional letters of credit above the amounts provided under these letter of credit facilities and
agreements. If we are unable to obtain such additional letters of credit as needed to operate our business, we may be
adversely affected.
Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods,
droughts, fires and other environmental conditions can harm the local homebuilding business. For example, our business
in Florida was adversely affected in late 2005 and into 2006 due to the effects of Hurricane Wilma on materials and
labor availability and pricing. Conversely, Hurricane Ike, which hit Houston in September 2008, did not have an effect
9
on materials and labor availability or pricing, but did affect the volume of home sales in subsequent weeks. In August
2011 and October 2012, Hurricane Irene and Hurricane Sandy, respectively, caused widespread flooding and disruptions
on the Atlantic seaboard, which impacted our sales and construction activity in affected markets during that month.
The difficulties described above could cause us to take longer and incur more costs to build our homes. We may
not be able to recapture increased costs by raising prices in many cases because we fix our prices up to 12 months in
advance of delivery by signing home sales contracts. In addition, some home buyers may cancel or not honor their home
sales contracts altogether.
The homebuilding industry has experienced a significant and sustained downturn which has, and could continue to,
materially and adversely affect our business, liquidity, and results of operations.
The homebuilding industry experienced a significant and sustained downturn over the past several years. An
industry-wide softening of demand for new homes resulted from a lack of consumer confidence, decreased availability
of mortgage financing, and large supplies of resale and new home inventories, among other factors. In addition, an
oversupply of alternatives to new homes, such as rental properties, resale homes, and foreclosures, depressed prices and
reduced margins for the sale of new homes. Industry conditions had a material adverse effect on our business and results
of operations in fiscal years 2007 through 2011 and may continue to materially adversely affect our business and results
of operations in future years. Further, we substantially increased our inventory through fiscal 2006, which required
significant cash outlays and which has increased our price and margin exposure as we work through this inventory.
General economic conditions in the U.S. remain weak. Several challenges such as persistently high
unemployment levels, national and global economic weakness and uncertainty, the restrictive mortgage lending
environment and the potential for more foreclosures continue to threaten a recovery in the housing market. In addition,
both national new home sales and our home sales remain below historical levels. Until there is a more robust U.S.
economic recovery, we expect national demand for new homes to remain at historically low levels, with uneven
improvement across our operating markets. Looking forward, although we have begun to see improvements, given
instability in the housing market, it may continue to be difficult to generate positive cash flow especially as we invest in
land to fund future homebuilding. Market volatility has been unprecedented and extraordinary in the last several years,
and the resulting economic turmoil may continue to exacerbate industry conditions or have other unforeseen
consequences, leading to uncertainty about future conditions in the homebuilding industry. Continuation or worsening of
the downturn or general economic conditions would continue to have a material adverse effect on our business, liquidity,
and results of operations.
In addition, an increase in the default rate on the mortgages we originate may adversely affect our ability to sell
mortgages or the pricing we receive upon the sale of mortgages. Although substantially all of the mortgage loans we
originate are sold in the secondary mortgage market on a servicing released, non-recourse basis, we remain liable for
certain limited representations, such as fraud, and warranties related to loan sales. As default rates rise, this may
increase our potential exposure regarding mortgage loan sales because investors may seek to have us buy back or make
whole investors for mortgages we previously sold. To date, we have not made significant payments related to our
mortgage loans but because of the uncertainties inherent to these matters, actual future payments could differ
significantly from our currently estimated amounts.
During the industry downturn, the housing market benefited from a number of government programs,
including:
Tax credits for home buyers provided by the federal government and certain state governments, including
California; and
Support of the mortgage market, including through purchases of mortgage-backed securities by The
Federal Reserve Bank and the underwriting of a substantial amount of new mortgages by the Federal
Housing Administration (“FHA”) and other governmental agencies.
These programs are expected to wind down over time; for example, the California tax credit ended in the fourth
quarter of fiscal 2009 and the federal tax credit expired in April 2010. In addition, in fiscal 2010, the U.S. Department of
Housing and Urban Development (“HUD”) tightened FHA underwriting standards. The maximum size of mortgage
loans that are treated as conforming by Fannie Mae and Freddie Mac was reduced on October 1, 2011, which could
further weaken home sales in general as mortgages may become more expensive and, if conforming loan limits are
10
further reduced, it could have a material adverse effect on the Company. Housing markets may further decline as these
programs are modified or terminated.
Our leverage places burdens on our ability to comply with the terms of our indebtedness, may restrict our ability to
operate, may prevent us from fulfilling our obligations, and may adversely affect our financial condition.
We have a significant amount of debt.
Our debt (excluding nonrecourse secured debt and debt of our financial subsidiaries), as of October 31,
2012, including the debt of the subsidiaries that guarantee our debt, was $1,558.7 million ($1,542.2 million
net of discount); and
Our debt service payments for the 12-month period ended October 31, 2012 were $141.9 million,
substantially all of which represented interest incurred and the remainder of which represented payments
on the principal of our senior subordinated amortizing notes, and do not include principal and interest on
nonrecourse secured debt, debt of our financial subsidiaries and fees under our letter of credit facilities and
agreements.
In addition, as of October 31, 2012, we had $29.5 million in aggregate outstanding face amount of letters of
credit issued under various letter of credit facilities and agreements, which were collateralized by $30.7 million of cash.
Our fees for these letters of credit for the 12 months ended October 31, 2012, which are based on both the used and
unused portion of the facilities and agreements, were $0.4 million. We also had substantial contractual commitments
and contingent obligations, including approximately $252.0 million of performance bonds as of October 31, 2012. See
Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual
Obligations.”
Our significant amount of debt could have important consequences. For example, it could:
Limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt
service requirements, or other requirements;
Require us to dedicate a substantial portion of our cash flow from operations to the payment of our debt
and reduce our ability to use our cash flow for other purposes;
Limit our flexibility in planning for, or reacting to, changes in our business;
Place us at a competitive disadvantage because we have more debt than some of our competitors; and
Make us more vulnerable to downturns in our business and general economic conditions.
Our ability to meet our debt service and other obligations will depend upon our future performance. We are
engaged in businesses that are substantially affected by changes in economic cycles. Our revenues and earnings vary
with the level of general economic activity in the markets we serve. Our businesses are also affected by customer
sentiment and financial, political, business, and other factors, many of which are beyond our control. The factors that
affect our ability to generate cash can also affect our ability to raise additional funds for these purposes through the sale
of equity securities, the refinancing of debt, or the sale of assets. Changes in prevailing interest rates may affect our
ability to meet our debt service obligations to the extent we have any floating rate indebtedness. A higher interest rate on
our debt service obligations could result in lower earnings or increased losses.
Our sources of liquidity are limited and may not be sufficient to meet our needs.
Because we do not have a revolving credit facility, we are dependent on our current cash balance and future
cash flows from operations (which may not be positive) to enable us to service our indebtedness, to cover our operating
expenses, and/or to fund our other liquidity needs. We used $67.0 million of cash in operating activities in the fiscal year
ended October 31, 2012, and expect to continue to generate negative cash flow, after taking into account land purchases.
If the homebuilding industry does not experience improved conditions over the next several years, our cash flows could
be insufficient to fund our obligations and support land purchases; if we cannot buy additional land we would ultimately
be unable to generate future revenues from the sale of houses. In addition, we may need to further refinance all or a
11
portion of our debt on or before maturity, which we may not be able to do on favorable terms or at all. If our cash flows
and capital resources are insufficient to fund our debt service obligations or we are unable to refinance our indebtedness,
we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital, or
restructure our indebtedness. These alternative measures may not be successful or, if successful, made on desirable terms
and may not permit us to meet our debt service obligations. We have also entered into certain cash collateralized letter of
credit agreements and facilities that require us to maintain specified amounts of cash in segregated accounts as collateral
to support our letters of credit issued thereunder, which will affect the amount of cash we have available for other uses.
If our available cash and capital resources are insufficient to meet our debt service and other obligations, we could face
substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service
and other obligations. We may not be able to consummate those dispositions or the proceeds from the dispositions may
not be adequate to meet any debt service obligations then due. For additional information about capital resources and
liquidity, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Capital Resources and Liquidity.”
Restrictive covenants in our debt instruments may restrict our and certain of our subsidiaries’ ability to operate and if
our financial performance worsens, we may not be able to undertake transactions within the restrictions of our debt
instruments.
The indentures governing our outstanding debt securities impose certain restrictions on our and certain of our
subsidiaries’ operations and activities. The most significant restrictions relate to debt incurrence, creating liens, sales of
assets, cash distributions, including paying dividends on common and preferred stock, capital stock and debt
repurchases, and investments by us and certain of our subsidiaries. Because of these restrictions, we are currently
prohibited from paying dividends on our common and preferred stock and anticipate that we will remain prohibited for
the foreseeable future.
The restrictions in our debt instruments could prohibit or restrict our and certain of our subsidiaries’ activities
such as undertaking capital raising or restructuring activities or entering into other transactions. In such a situation, we
may be unable to amend the instrument or obtain a waiver. In addition, if we fail to make timely payments on this debt
and other material indebtedness, our debt under these debt instruments could become due and payable prior to maturity.
In such a situation, there can be no assurance that we would be able to obtain alternative financing. Either situation could
have a material adverse effect on the solvency of the Company.
The terms of our debt instruments allow us to incur additional indebtedness.
Under the terms of our indebtedness under our indentures, we have the ability, subject to our debt covenants, to
incur additional amounts of debt. The incurrence of additional indebtedness could magnify the risks described above. In
addition, certain obligations such as standby letters of credit and performance bonds issued in the ordinary course of
business, including those issued under our stand-alone letter of credit agreements and facilities, are not considered
indebtedness under our indentures (and may be secured), and therefore, are not subject to limits in our debt covenants.
We could be adversely affected by a negative change in our credit rating.
Our ability to access capital on favorable terms is a key factor in our ability to service our indebtedness to cover
our operating expenses, and to fund our other liquidity needs. For example, during fiscal 2011 and thereafter, credit
agencies took a series of negative actions, including downgrades, with respect to their credit ratings of us and our
debt. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity
and Capital Resources.” Downgrades may make it more difficult and costly for us to access capital. Therefore, any
further downgrade by any of the principal credit agencies may exacerbate these difficulties. Although certain of our
credit ratings have recently been upgraded, there can be no assurances that our credit ratings will not be further
downgraded in the future, whether as a result of deteriorating general economic conditions, a more protracted downturn
in the housing industry, failure to successfully implement our operating strategy, the adverse impact on our results of
operations or liquidity position of any of the above, or otherwise.
Our business is seasonal in nature and our quarterly operating results can fluctuate.
Our quarterly operating results generally fluctuate by season. The construction of a customer’s home typically
begins after signing the agreement of sale and can take 12 months or more to complete. Weather-related problems,
typically in the fall, winter and early spring, can delay starts or closings and increase costs and thus reduce profitability.
12
In addition, delays in opening communities could have an adverse effect on our sales and revenues. Due to these factors,
our quarterly operating results will likely continue to fluctuate.
Our success depends on the availability of suitable undeveloped land and improved lots at acceptable prices and our
having sufficient liquidity to fund such investments.
Our success in developing land and in building and selling homes depends in part upon the continued
availability of suitable undeveloped land and improved lots at acceptable prices. The availability of undeveloped land
and improved lots for purchase at favorable prices depends on a number of factors outside of our control, including the
risk of competitive over-bidding on land and lots and restrictive governmental regulation. Should suitable land
opportunities become less available, the number of homes we may be able to build and sell would be reduced, which
would reduce revenue and profits. In addition, our ability to make land purchases will depend upon us having sufficient
liquidity to fund such purchases. We may be at a disadvantage in competing for land due to our significant debt
obligations, which require substantial cash resources.
Raw material and labor shortages and price fluctuations could delay or increase the cost of home construction and
adversely affect our operating results.
The homebuilding industry has from time to time experienced raw material and labor shortages. In particular,
shortages and fluctuations in the price of lumber or in other important raw materials could result in delays in the start or
completion of, or increase the cost of, developing one or more of our residential communities. For example,
manufacturers have increased the price of drywall in 2012 by approximately 12% as compared to the prior year, and
there is a potential for significant future price increases. In addition, we contract with subcontractors to construct our
homes. Therefore, the timing and quality of our construction depends on the availability, skill, and cost of our
subcontractors. Delays or cost increases caused by shortages and price fluctuations could harm our operating results, the
impact of which may be further affected depending on our ability to raise sales prices to offset increased costs.
Changes in economic and market conditions could result in the sale of homes at a loss or holding land in inventory
longer than planned, the cost of which can be significant.
Land inventory risk can be substantial for homebuilders. We must continuously seek and make acquisitions of
land for expansion into new markets and for replacement and expansion of land inventory within our current markets.
The market value of undeveloped land, buildable lots, and housing inventories can fluctuate significantly as a result of
changing economic and market conditions. In the event of significant changes in economic or market conditions, we may
have to sell homes at a loss or hold land in inventory longer than planned. In the case of land options, we could choose
not to exercise them, in which case we would write off the value of these options. Inventory carrying costs can be
significant and can result in losses in a poorly performing project or market. The assessment of communities for
indication of impairment is performed quarterly. While we consider available information to determine what we believe
to be our best estimates as of the reporting period, these estimates are subject to change in future reporting periods as
facts and circumstances change. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results
of Operation—Critical Accounting Policies.” For example, during fiscal 2012, 2011 and 2010, we decided not to
exercise many option contracts and walked away from land option deposits and predevelopment costs, which resulted in
land option write-offs of $2.7 million, $24.3 million and $13.2 million, respectively. Also, in fiscal 2012, 2011 and 2010,
as a result of the difficult market conditions, we recorded inventory impairment losses on owned property of
$9.8 million, $77.5 million and $122.5 million, respectively. If market conditions worsen, additional inventory
impairment losses and land option write-offs will likely be necessary.
Home prices and sales activities in the Arizona, California, New Jersey and Texas markets have a large impact on our
results of operations because we conduct a significant portion of our business in these markets.
We presently conduct a significant portion of our business in the Arizona, California, New Jersey and Texas
markets. Home prices and sales activities in these markets and in most of the other markets in which we operate have
declined from time to time, particularly as a result of slow economic growth. In particular, market conditions in
California and New Jersey have declined significantly since the end of 2006. Furthermore, precarious economic and
budget situations at the state government level may adversely affect the market for our homes in those affected areas. If
home prices and sales activity decline in one or more of the markets in which we operate, our costs may not decline at all
or at the same rate and may negatively impact our results of operations.
13
Because almost all of our customers require mortgage financing, increases in interest rates or the decreased availability
of mortgage financing could impair the affordability of our homes, lower demand for our products, limit our marketing
effectiveness, and limit our ability to fully realize our backlog.
Virtually all of our customers finance their acquisitions through lenders providing mortgage financing.
Increases in interest rates or decreases in availability of mortgage financing could lower demand for new homes because
of the increased monthly mortgage costs to potential home buyers. Even if potential customers do not need financing,
changes in interest rates and mortgage availability could make it harder for them to sell their existing homes to potential
buyers who need financing. This could prevent or limit our ability to attract new customers as well as our ability to fully
realize our backlog because our sales contracts generally include a financing contingency. Financing contingencies
permit the customer to cancel its obligation in the event mortgage financing at prevailing interest rates, including
financing arranged or provided by us, is unobtainable within the period specified in the contract. This contingency period
is typically four to eight weeks following the date of execution of the sales contract.
Starting in 2007, many lenders have been significantly tightening their underwriting standards, and subprime
and other alternative mortgage products are no longer being made available in the marketplace. If these trends continue
and mortgage loans continue to be difficult to obtain, the ability and willingness of prospective buyers to finance home
purchases or to sell their existing homes will be adversely affected, which will adversely affect our operating results. In
addition, we believe that the availability of mortgage financing, including Federal National Mortgage Association,
Federal Home Loan Mortgage Corp, and FHA/VA financing, is an important factor in marketing many of our homes.
The maximum size of mortgage loans that are treated as conforming by Fannie Mae and Freddie Mac was reduced on
October 1, 2011, which could further weaken home sales in general as mortgages may become more expensive and, if
conforming loan limits are further reduced, it could have a material adverse effect on the Company. In addition, HUD
continues to tighten FHA underwriting standards. Any limitations or restrictions on the availability of those types of
financing could reduce our sales.
Increases in the after-tax costs of owning a home could prevent potential customers from buying our homes and
adversely affect our business or financial results.
Significant expenses of owning a home, including mortgage interest expenses and real estate taxes, generally
are deductible expenses for an individual’s federal, and in some cases state, income taxes, subject to limitations under
current tax law and policy. If the federal government or a state government were to change its income tax laws to
eliminate or substantially limit these income tax deductions, as has been discussed from time to time, the after-tax cost of
owning a new home would increase for many of our potential customers. The loss or reduction of these homeowner tax
deductions, if such tax law changes were enacted without any offsetting legislation, would adversely impact demand for
and sales prices of new homes, including ours. In addition, increases in property tax rates or fees on developers by local
governmental authorities, as experienced in response to reduced federal and state funding or to fund local initiatives such
as funding schools or road improvements, can adversely affect the ability of potential customers to obtain financing or
their desire to purchase new homes, and can have an adverse impact on our business and financial results.
We conduct certain of our operations through unconsolidated joint ventures with independent third parties in which we
do not have a controlling interest. These investments involve risks and are highly illiquid.
We currently operate through a number of unconsolidated homebuilding and land development joint ventures
with independent third parties in which we do not have a controlling interest. At October 31, 2012, we had invested an
aggregate of $61.1 million in these joint ventures, including advances to these joint ventures of approximately $15.0
million. In addition, as part of our strategy, we intend to continue to evaluate additional joint venture opportunities.
These investments involve risks and are highly illiquid. There are a limited number of sources willing to
provide acquisition, development, and construction financing to land development and homebuilding joint ventures, and
as market conditions become more challenging, it may be difficult or impossible to obtain financing for our joint
ventures on commercially reasonable terms. Over the past few years, we have been unable to obtain financing for newly
created joint ventures. In addition, we lack a controlling interest in these joint ventures and, therefore, are usually unable
to require that our joint ventures sell assets or return invested capital, make additional capital contributions, or take any
other action without the vote of at least one of our venture partners. Therefore, absent partner agreement, we will be
unable to liquidate our joint venture investments to generate cash.
14
Homebuilders are subject to a number of federal, local, state, and foreign laws and regulations concerning the
development of land, the homebuilding, sales and customer financing processes and the protection of the environment,
which can cause us to incur delays and costs associated with compliance and which can prohibit or restrict our activity
in some regions or areas.
We are subject to extensive and complex laws and regulations that affect the development of land and home
building, sales and customer financing processes, including zoning, density, building standards and mortgage financing.
These laws and regulations often provide broad discretion to the administering governmental authorities. This can delay
or increase the cost of development or homebuilding. In light of recent developments in the home building industry and
the financial markets, federal, state, or local governments may seek to adopt regulations that limit or prohibit
homebuilders from providing mortgage financing to their customers. If adopted, any such regulations could adversely
affect future revenues and earnings. In addition, some state and local governments in markets where we operate have
approved, and others may approve, slow-growth or no-growth initiatives that could negatively impact the availability of
land and building opportunities within those areas. Approval of these initiatives could adversely affect our ability to
build and sell homes in the affected markets and/or could require the satisfaction of additional administrative and
regulatory requirements, which could result in slowing the progress or increasing the costs of our homebuilding
operations in these markets. Any such delays or costs could have a negative effect on our future revenues and earnings.
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 and regulations that apply to any given community vary
greatly according to the community site, the site’s environmental conditions and the present and former uses of the site.
These environmental laws and regulations 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.
For example, the Company engaged in discussions with the U.S. Environmental Protection Agency (“EPA”)
and the U.S. Department of Justice (“DOJ”) regarding alleged violations of storm water discharge requirements. In
resolution of this matter, in April 2010 we agreed to the terms of a consent decree with the EPA, DOJ and the states of
Virginia, Maryland, West Virginia and the District of Columbia (collectively, the “States”). The consent decree was
approved by the federal district court in August 2010. Under the terms of the consent decree, we paid a fine of $1.0
million collectively to the United States and the States named above and have agreed to perform under the terms of the
consent decree for a minimum of three years, which includes implementing certain operational and training measures
nationwide to facilitate ongoing compliance with storm water regulations. We received in October 2012 a notice from
Region III of the EPA concerning stipulated penalties, totaling approximately $120,000, based on the extent to which we
reportedly did not meet certain compliance performance the consent decree specifies, which we have since paid as
assessed. Until terminated by court order, which can occur no sooner than three years from the date of its entry, the
consent decree remains in effect and could give rise to additional assessments of stipulated penalties. In October 2012,
we also received notices from Region III of the EPA concerning alleged violations of stormwater discharge permits,
issued in 2010 pursuant to the federal Clean Water Act, at two projects in Maryland; we are negotiating with the EPA a
resolution of these more recent administrative proceedings that would involve our paying a penalty and agreeing to
certain measures in order to comply with those permits.
We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the
future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive
compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In
addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted
to us or approvals already obtained by us is dependent upon many factors, some of which are beyond our control, such as
changes in policies, rules, laws and regulations, and changes in their interpretation and application.
Several other homebuilders have received inquiries from regulatory agencies regarding the potential for
homebuilders using contractors to be deemed employers of the employees of their contractors under certain
circumstances. Contractors are independent of the homebuilders that contract with them under normal management
practices and the terms of trade contracts and subcontracts within the industry; however, if regulatory agencies reclassify
the employees of contractors as employees of homebuilders, homebuilders using contractors could be responsible for
wage, hour and other employment-related liabilities of their contractors.
15
Product liability litigation and warranty claims that arise in the ordinary course of business may be costly.
As a homebuilder, we are subject to construction defect and home warranty claims arising in the ordinary
course of business. Such claims are common in the homebuilding industry and can be costly. In addition, the amount and
scope of coverage offered by insurance companies is currently limited, and this coverage may be further restricted and
become more costly. If we are not able to obtain adequate insurance against such claims, we may experience losses that
could hurt our financial results. Our financial results could also be adversely affected if we were to experience an
unusually high number of claims or unusually severe claims. We have received construction defect and home warranty
claims associated with allegedly defective drywall manufactured in China (“Chinese Drywall”) that may be responsible
for noxious smells and accelerated corrosion of certain metals in certain homes we have developed. We have remediated
certain such homes and have received claims or notices regarding 2 additional homes with Chinese Drywall that may
require remediation. In addition, we were involved, among a number of other defendants, in a multidistrict litigation
(which has been settled) in which 61 homes located in our Florida and Houston markets were alleged to have Chinese
Drywall requiring remediation. If additional homes are identified to have the Chinese Drywall issue, or our actual costs
to remediate differ from our current estimated costs, we may be required to revise our construction defect and home
warranty reserves.
Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on mortgages we have
sold based on claims that we breached our limited representations or warranties.
Our Financial Services segment originates mortgages, primarily for our homebuilding customers. Substantially
all of the mortgage loans originated are sold within a short period of time in the secondary mortgage market on a
servicing released, nonrecourse basis, although we remain liable for certain limited representations, such as fraud, and
warranties related to loan sales. Accordingly, mortgage investors have in the past and could in the future seek to have us
buy back loans or compensate them for losses incurred on mortgages we have sold based on claims that we breached our
limited representations or warranties. We believe there continues to be an industry-wide issue with the number of
purchaser claims in which purchasers purport to have found inaccuracies related to sellers’ representations and
warranties in particular loan sale agreements. We have established reserves for potential losses, however there can be no
assurance that we will not have significant liabilities in respect of such claims in the future, which could exceed our
reserves, or that the impact of such claims on our results of operations will not be material.
We compete on several levels with homebuilders that may have greater sales and financial resources, which could hurt
future earnings.
We compete not only for home buyers but also for desirable properties, financing, raw materials, and skilled
labor often within larger subdivisions designed, planned, and developed by other homebuilders. Our competitors include
other local, regional, and national homebuilders, some of which have greater sales and financial resources.
The competitive conditions in the homebuilding industry together with current market conditions have, and
could continue to, result in:
difficulty in acquiring suitable land at acceptable prices;
increased selling incentives;
lower sales; or
delays in construction.
Any of these problems could increase costs and/or lower profit margins.
We may have difficulty in obtaining the additional financing required to operate and develop our business.
Our operations require significant amounts of cash, and we may be required to seek additional capital, whether
from sales of debt or equity securities or borrowing additional money, for the future growth and development of our
business. The terms or availability of additional capital is uncertain. Moreover, the indentures for our outstanding debt
securities contain provisions that restrict the debt we may incur in the future and our ability to pay dividends on equity.
If we are not successful in obtaining sufficient capital, it could reduce our sales and may hinder our future growth and
16
results of operations. In addition, pledging substantially all of our assets to support our senior secured notes may make it
more difficult to raise additional financing in the future.
Our future growth may include additional acquisitions of companies that may not be successfully integrated and may not
achieve expected benefits.
Acquisitions of companies have contributed to our historical growth and may again be a component of our
growth strategy in the future. In the future, we may acquire businesses, some of which may be significant. As a result of
acquisitions of companies, we may need to seek additional financing and integrate product lines, dispersed operations,
and distinct corporate cultures. These integration efforts may not succeed or may distract our management from
operating our existing business. Additionally, we may not be able to enhance our earnings as a result of acquisitions. Our
failure to successfully identify and manage future acquisitions could harm our operating results.
Our controlling stockholders are able to exercise significant influence over us.
Members of the Hovnanian family, including Ara K. Hovnanian, our chairman of the board, president and chief
executive officer, have voting control, through personal holdings, the limited partnership established for members of Mr.
Hovnanian's family, family trusts and shares held by the estate of our former chairman, Kevork S. Hovnanian, of Class A
and Class B common stock that enables them to cast approximately 56.3% of the votes that may be cast by the holders of
our outstanding Class A and Class B common stock combined. Their combined stock ownership enables them to exert
significant control over us, including power to control the election of the Board and to approve matters presented to our
stockholders. This concentration of ownership may also make some transactions, including mergers or other changes in
control, more difficult or impossible without their support. Also, because of their combined voting power, circumstances
may occur in which their interests could be in conflict with the interests of other stakeholders.
Our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in
the Internal Revenue Code.
Based on recent impairments and our current financial performance, we generated a federal net operating loss
carryforward of $1.5 billion through the fiscal year ended October 31, 2012, and we may generate net operating loss
carryforwards in future years.
Section 382 of the Internal Revenue Code (the “Code”) contains rules that limit the ability of a company that
undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-
year period, to utilize its net operating loss carryforwards and certain built-in losses recognized in years after the
ownership change. These rules generally operate by focusing on ownership shifts among stockholders owning directly or
indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by
the company.
If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our
stock, including purchases or sales of stock between 5% shareholders, our ability to use our net operating loss
carryforwards and to recognize certain built-in losses would be subject to the limitations of Section 382. Depending on
the resulting limitation, a significant portion of our net operating loss carryforwards could expire before we would be
able to use them. A limitation imposed under Section 382 on our ability to utilize our net operating loss carryforwards
could have a negative impact on our financial position and results of operations.
In August 2008, we announced that the Board adopted a shareholder rights plan (the “Rights Plan”) designed to
preserve shareholder value and the value of certain tax assets primarily associated with net loss carryforwards and built-
in losses under Section 382 of the Code, and on December 5, 2008, our stockholders approved the Board’s decision to
adopt the Rights Plan. The Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of
our outstanding Class A common stock (any such person an “Acquiring Person”), without the approval of the
Company’s board of directors. Subject to the terms, provisions and conditions of the Rights Plan, if and when they
become exercisable, each right would entitle its holder to purchase from the Company one ten-thousandth of a share of
the Company’s Series B Junior Preferred Stock for a purchase price of $35.00 per share (the “purchase price”). The
rights will not be exercisable until the earlier of (i) 10 business days after a public announcement by us that a person or
group has become an Acquiring Person and (ii) 10 business days after the commencement of a tender or exchange offer
by a person or group for 4.9% of the Class A common stock (the “distribution date”). If issued, each fractional share of
Series B Junior Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation
17
rights as does one share of the Company’s Class A common stock. However, prior to exercise, a right does not give its
holder any rights as a stockholder of the Company, including without limitation any dividend, voting or liquidation
rights. After the Distribution Date, each holder of a right, other than rights beneficially owned by the Acquiring Person
(which will thereupon become void), will thereafter have the right to receive upon exercise of a right and payment of the
Purchase Price, that number of shares of Class A Common Stock or Class B Common Stock, as the case may be, having
a market value of two times the Purchase Price. After the Distribution Date, our board of directors may exchange the
rights (other than rights owned by an Acquiring Person which will have become void), in whole or in part, at an
exchange ratio of one share of Common Stock, or a fractional share of Series B Preferred Stock (or of a share of a
similar class or series of Hovnanian's preferred stock having similar rights, preferences and privileges) of equivalent
value, per right (subject to adjustment).
In addition, on December 5, 2008, our stockholders approved an amendment to our Certificate of Incorporation
to restrict certain transfers of our common stock in order to preserve the tax treatment of our net operating loss
carryforwards and built-in losses under Section 382 of the Code. Subject to certain exceptions pertaining to pre-existing
5% stockholders and Class B stockholders, the transfer restrictions in the amended Certificate of Incorporation generally
restrict any direct or indirect transfer (such as transfers of the Company’s stock that result from the transfer of interests
in other entities that own the Company’s stock) if the effect would be to: (i) increase the direct or indirect ownership of
the Company’s stock by any person (or public group) from less than 5% to 5% or more of the Company’s stock; (ii)
increase the percentage of the Company’s stock owned directly or indirectly by a person (or public group) owning or
deemed to own 5% or more of the Company’s stock; or (iii) create a new “public group” (as defined in the applicable
Treasury regulations).
Utility shortages and outages or rate fluctuations could have an adverse effect on our operations.
In prior years, the areas in which we operate in California have experienced power shortages, including periods
without electrical power, as well as significant fluctuations in utility costs. We may incur additional costs and may not be
able to complete construction on a timely basis if such power shortages/outages and utility rate fluctuations continue.
Furthermore, power shortages and outages and rate fluctuations may adversely affect the regional economies in which
we operate, which may reduce demand for our homes. Our operations may be adversely affected if further rate
fluctuations and/or power shortages and outages occur in California, the Northeast, or in our other markets.
Geopolitical risks and market disruption could adversely affect our operating results and financial condition.
Geopolitical events, such as the aftermath of the war with Iraq and the continuing involvement in Afghanistan,
may have a substantial impact on the economy and the housing market. The terrorist attacks on the World Trade Center
and the Pentagon on September 11, 2001 had an impact on our business and the occurrence of similar events in the
future cannot be ruled out. The war and the continuing involvement in Afghanistan, terrorism, and related geopolitical
risks have created many economic and political uncertainties, some of which may have additional material adverse
effects on the U.S. economy, and our customers and, in turn, our results of operations and financial condition.
ITEM 1B
UNRESOLVED STAFF COMMENTS
None.
ITEM 2
PROPERTIES
We own a 69,000 square-foot office complex located in the Northeast that serves as our corporate headquarters.
We own 215,000 square feet of office and warehouse space throughout the Midwest. We lease approximately 506,000
square feet of space for our segments located in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest, and
West. Included in this amount is 88,000 square feet of abandoned lease space.
18
ITEM 3
LEGAL PROCEEDINGS
We are involved in litigation arising in the ordinary course of business, none of which is expected to have a
material adverse effect on our financial position or results of operations, and we are subject to extensive and complex
regulations that affect the development and home building, sales and customer financing processes, including zoning,
density, building standards and mortgage financing. These regulations often provide broad discretion to the
administering governmental authorities. This can delay or increase the cost of development or homebuilding.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of
health and the environment. The particular environmental laws that apply to any given community vary greatly
according to the community site, the site’s environmental conditions and the present and former uses of the site. These
environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs,
and can prohibit or severely restrict development and homebuilding activity.
We received in October 2012 a notice from Region III of the EPA concerning stipulated penalties, totaling
approximately $120,000, based on the extent to which we reportedly did not meet certain compliance performance
specified in the previously reported consent decree entered into in August 2010; we have since paid the stipulated
penalties as assessed. Until terminated by court order, which can occur no sooner than three years from the date of its
entry, the consent decree remains in effect and could give rise to additional assessments of stipulated penalties. In
October 2012, we also received notices from Region III of EPA concerning alleged violations of stormwater discharge
permits, issued in 2010 pursuant to the federal Clean Water Act, at two projects in Maryland; we are negotiating with the
EPA a resolution of these more recent administrative proceedings that would involve our paying a penalty and agreeing
to certain measures in order to comply with those permits. We do not expect the impact on us to be material.
We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the
future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive
compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In
addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many
factors, some of which are beyond our control, such as changes in policies, rules, and regulations and their
interpretations and application.
The Company is also involved in the following litigation:
Hovnanian Enterprises, Inc. and K. Hovnanian Venture I, L.L.C. have been named as defendants in a class
action suit. The action was filed by Mike D’Andrea and Tracy D’Andrea, on behalf of themselves and all others
similarly situated in the Superior Court of New Jersey, Gloucester County. The action was initially filed on May 8, 2006
alleging that the HVAC systems installed in certain of the Company’s homes are in violation of applicable New Jersey
building codes and are a potential safety issue. On December 14, 2011, the Superior Court granted class certification; the
potential class is 1,065 homes. We filed a request to take an interlocutory appeal regarding the class certification
decision. The Appellate Division denied the request, and we filed a request for interlocutory review by the New Jersey
Supreme Court, which remanded the case back to the Appellate Division for a review on the merits of the appeal on May
8, 2012. The plaintiff seeks unspecified damages as well as treble damages pursuant to the NJ Consumer Fraud
Act. The Company believes there is insurance coverage available to it for this action. While we have determined that a
loss related to this case is not probable, it is not possible to estimate a loss or range of loss related to this matter at this
time given the class certification is still in review by the Appellate Division. On December 19, 2011, certain subsidiaries
of the Company filed a separate action seeking indemnification against the various manufactures and subcontractors
implicated by the class action.
ITEM 4
MINE SAFETY DISCLOSURES
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
Information on executive officers of the registrant is incorporated herein from Part III, Item 10.
19
Part II
ITEM 5
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A Common Stock is traded on the New York Stock Exchange under the symbol “HOV” and was
held by 529 stockholders of record at December 14, 2012. There is no established public trading market for our Class B
Common Stock, which was held by 250 stockholders of record at December 14, 2012. In order to trade Class B Common
Stock, the shares must be converted into Class A Common Stock on a one-for-one basis. The high and low closing sales
prices for our Class A Common Stock were as follows for each fiscal quarter during the years ended October 31, 2012
and 2011:
Quarter
First
Second
Third
Fourth
Oct. 31, 2012
Oct. 31, 2011
High
$2.67
$3.24
$2.94
$4.44
Low
$1.23
$1.88
$1.61
$2.25
High
$4.96
$4.67
$3.04
$1.94
Low
$3.54
$3.21
$1.90
$1.03
Certain debt instruments to which we are a party contain restrictions on the payment of cash dividends. As a
result of the most restrictive of these provisions, we are not currently able to pay any cash dividends. We have never paid
a cash dividend to common stockholders.
Recent Sales of Unregistered Equity Securities
None.
Issuer Purchases of Equity Securities
No shares of our Class A Common Stock or Class B Common Stock were purchased by or on behalf of the
Company or any affiliated purchaser during the fiscal fourth quarter of 2012. The maximum number of shares that may
yet be purchased under the Company’s repurchase plans or programs is 0.5 million.
20
ITEM 6
SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data and should be read in conjunction with
Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended
Summary Consolidated Statements of
Operations Data
(In thousands, Except Per Share Data)
Revenues
Expenses
Inventory impairment loss and land option
write-offs
October
31, 2012
October
31, 2008
$ 1,485,353 $ 1,134,907 $ 1,371,842 $ 1,596,290 $ 3,308,111
1,550,406 1,323,316 1,557,428 1,972,978 3,692,556
October
31, 2010
October
31, 2011
October
31, 2009
12,530
101,749
135,699
659,475
710,120
Goodwill and intangible amortization and
impairment
(Loss) gain on extinguishment of debt
Gain (loss) from unconsolidated joint ventures
Loss before income taxes
State and federal (benefit) income tax provision
Net (loss) income
Less: preferred stock dividends
Net (loss) income available to common
-
(29,066)
5,401
(101,248)
(35,051)
(66,197)
-
-
7,528
(8,958)
(291,588)
(5,501)
(286,087)
-
-
25,047
956
(295,282)
(297,870)
2,588
-
36,883
-
-
410,185
(36,600)
(46,041)
(672,019) (1,168,048)
(43,458)
(716,712) (1,124,590)
-
44,693
-
stockholders
Per share data:
Basic:
$
(66,197) $ (286,087) $
2,588 $ (716,712) $(1,124,590)
(Loss) income per common share
Weighted-average number of common shares
$
outstanding
Assuming dilution:
(Loss) income per common share
Weighted-average number of common shares
$
(0.52) $
(2.85) $
0.03 $
(9.16) $
(16.04)
126,350
100,444
78,691
78,238
70,131
(0.52) $
(2.85) $
0.03 $
(9.16) $
(16.04)
outstanding
126,350
100,444
79,683
78,238
70,131
Summary Consolidated Balance Sheet Data
(In thousands)
Total assets
Mortgages, term loans, revolving credit
agreements, and notes payable
Senior secured notes, senior notes, senior
amortizing notes, senior exchangeable notes
and TEU senior subordinated amortizing
notes (net of discount)
Total equity (deficit)
October 31,
October 31,
October 31,
2008
$ 1,684,250 $ 1,602,180 $ 1,817,560 $ 2,024,577 $ 3,637,322
October 31,
October 31,
2010
2009
2012
2011
$
164,562 $
95,598 $
98,613 $
77,364 $
107,913
$ 1,542,196 $ 1,602,770 $ 1,616,347 $ 1,751,701 $ 2,505,805
330,264
$ (485,345) $ (496,602) $ (337,938) $ (348,868) $
21
Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends
For purposes of computing the ratio of earnings to fixed charges and the ratio of earnings to combined fixed
charges and preferred stock dividends, earnings consist of earnings from continuing operations before income taxes and
income or loss from equity investees, plus fixed charges and distributed income of equity investees, less interest
capitalized. Fixed charges consist of all interest incurred, plus that portion of operating lease rental expense (33%)
deemed to be representative of interest, plus the amortization of debt issuance costs and bond discounts. Combined fixed
charges and preferred stock dividends consist of fixed charges and preferred stock dividends declared. Due to covenant
restrictions, we have been prohibited from paying preferred stock dividends beginning with the first quarter of fiscal
2008. The following table sets forth the ratios of earnings to fixed charges and the ratios of earnings to combined fixed
charges and preferred stock dividends for each of the periods indicated:
Ratio of earnings to fixed charges
Ratio of earnings to combined fixed charges and preferred stock dividends
Years Ended October 31,
2012 2011 2010 2009 2008
(a)
(a)
(b)
(b)
(a)
(b)
(a)
(b)
(a)
(b)
(a) Earnings for the years ended October 31, 2012, 2011, 2010, 2009 and 2008 were insufficient to cover fixed charges
for such period by $105.1 million, $272.9 million, $273.8 million, $628.3 million and $1,153.5 million, respectively.
(b) Earnings for the years ended October 31, 2012, 2011, 2010, 2009 and 2008 were insufficient to cover fixed charges
and preferred stock dividends for such period by $105.1 million, $272.9 million, $273.8 million, $628.3 million and
$1,153.5 million, respectively. Due to restrictions in our indentures for our senior and senior secured notes, we are
currently prohibited from paying dividends on our preferred stock and did not make any dividend payments in fiscal
2012, 2011, 2010, 2009, and 2008.
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
During fiscal 2012, the housing market began to improve and, as a result, we began to see positive operating
trends, including year over year improvements for the year ended October 31, 2012 compared to the year ended October
31, 2011, such as: contract growth of 27.7%, an increase in gross margin percentage from 15.6% to 17.8% and a
decrease in selling, general and administrative costs (including corporate general and administrative expenses) as a
percentage of total revenue from 18.6% to 12.8%. In addition, our contract cancellation rate of 23% in the fourth quarter
of fiscal 2012, was more typical of what we believe to be a normalized level. Active selling communities decreased to
172 at October 31, 2012 compared to 192 in the same period a year ago, as net contracts per average active selling
community increased to 28.1 for the year ended October 31, 2012 compared to 21.3 in the same period in the prior
year. While we are encouraged by the positive operating trends of fiscal 2012, several challenges such as persistently
high unemployment levels, national and global economic weakness and uncertainty, the restrictive mortgage lending
environment and the potential for more foreclosures continue to threaten a recovery in the housing market. Our recent
operating results and other national data indicate that the overall demand for new homes during fiscal 2012 has improved
from the prior year. However, both national new home sales and our home sales remain below historical levels. Until
there is a more robust U.S. economic recovery, we expect national demand for new homes to remain at historically low
levels, with uneven improvement across our operating markets.
During the prolonged downturn of the housing market, we adjusted our approach to land acquisition and
construction practices and shortened our land pipeline, reduced production volumes, and balanced home price and
profitability with sales pace. We delayed and cancelled planned land purchases, renegotiated land prices and
significantly reduced our total number of controlled lots owned and under option. Additionally, we significantly reduced
our total number of speculative homes put into production. Since January 2009, however, we began to see more
opportunities to purchase land at prices that made economic sense in light of our sales prices and sales paces and plan to
continue pursuing such land acquisitions. New land purchases at pricing that we believe will generate appropriate
investment returns and drive greater operating efficiencies are needed to return to sustained profitability. During fiscal
2012, we opened 61 new communities, purchased approximately 3,600 lots within 163 newly identified communities
(which we define as communities that were controlled subsequent to January 31, 2009) and optioned approximately
6,600 lots in 222 newly identified communities. Also during fiscal 2012, we sold 828 of our owned lots to GSO Capital
Partners LP (“GSO”), for proceeds of $49.8 million, net of transaction costs of $1.1 million, with the option to purchase
22
back finished lots on a quarterly basis. From October 31, 2011 through October 31, 2012, our active community
count decreased by 20 communities as a result of increased sales pace. We continue to consider and make new land
acquisitions to replenish our community count. We have also continued to closely evaluate and make reductions in
selling, general and administrative expenses, including corporate general and administrative expenses, reducing these
expenses $21.1 million from $211.4 million for fiscal 2011 to $190.3 million for fiscal 2012 due to the continued
tightening of variable spending across all of our operating segments. Given the persistence of these difficult market
conditions, improving the efficiency of our selling, general and administrative expenses will continue to be a significant
area of focus. For the year ended October 31, 2012, homebuilding selling, general and administrative costs
declined 12.0% to $142.1 million compared to the year ended October 31, 2011.
Critical Accounting Policies
Management believes that the following critical accounting policies require its most significant judgments and
estimates used in the preparation of the consolidated financial statements:
Income Recognition from Home and Land Sales - We are primarily engaged in the development, construction,
marketing and sale of residential single-family and multi-family homes where the planned construction cycle is less than
12 months. For these homes, in accordance with ASC 360-20, “Property, Plant and Equipment - Real Estate Sales”
(“ASC 360-20”), revenue is recognized when title is conveyed to the buyer, adequate initial and continuing investments
have been received, and there is no continued involvement. In situations where the buyer’s financing is originated by our
mortgage subsidiary and the buyer has not made an adequate initial investment or continuing investment as prescribed
by ASC 360-20, the profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor
has been completed.
Income Recognition from Mortgage Loans - Our Financial Services segment originates mortgages, primarily for
our homebuilding customers. We use mandatory investor commitments and forward sales of mortgage-backed securities
(“MBS”) to hedge our mortgage-related interest rate exposure on agency and government loans.
We elected the fair value option for our mortgage loans held for sale in accordance with ASC 825, “Financial
Instruments”, which permits us to measure our loans held for sale at fair value. Management believes that the election of
the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings
caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without
having to apply complex hedge accounting provisions.
Substantially all of the mortgage loans originated are sold within a short period of time in the secondary
mortgage market on a servicing released, nonrecourse basis, although the Company remains liable for certain limited
representations, such as fraud, and warranties related to loan sales. Mortgage investors could seek to have us buy back
loans or compensate them for losses incurred on mortgages we have sold based on claims that we breached our limited
representations and warranties. We believe there continues to be an industry-wide issue with the number of purchaser
claims in which purchasers purport to have found inaccuracies related to the sellers’ representations and warranties in
particular loan sale agreements. We have established reserves for probable losses.
Inventories - Inventories consist of land, land development, home construction costs, capitalized interest and
construction overhead and property taxes. Construction costs are accumulated during the period of construction and
charged to cost of sales under specific identification methods. Land, land development, and common facility costs are
allocated based on buildable acres to product types within each community, then charged to cost of sales equally based
upon the number of homes to be constructed in each product type.
We record inventories in our consolidated balance sheets at cost unless the inventory is determined to be
impaired, in which case the inventory is written down to its fair value. Our inventories consist of the following three
components: (1) sold and unsold homes and lots under development, which includes all construction, land, capitalized
interest, and land development costs related to started homes and land under development in our active communities;
(2) land and land options held for future development or sale, which includes all costs related to land in our communities
in planning or mothballed communities; and (3) consolidated inventory not owned, which includes all costs related to
specific performance options, variable interest entities, and other options, which consists primarily of model homes
financed with an investor and inventory related to land banking arrangements.
23
We decide to mothball (or stop development on) certain communities when we determine that current market
conditions do not justify further investment at that time. When we decide to mothball a community, the inventory is
reclassified on our consolidated balance sheets from "Sold and unsold homes and lots under development" to "Land and
land options held for future development or sale". As of October 31, 2012, the net book value associated with our 53
mothballed communities was $124.2 million, net of impairment charges of $467.8 million. We regularly review
communities to determine if mothballing is appropriate. During fiscal 2012, we mothballed one community previously
held for sale, re-activated two communities and sold five communities which were previously mothballed.
During fiscal 2012, we entered into certain model sale leaseback financing arrangements, whereby we sold and
leased back certain of our model homes with the right to participate in the potential profit when each home is sold to a
third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes, these
sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our
Consolidated Balance Sheet, the inventory of $33.7 million was reclassified to consolidated inventory not owned, with a
$32.9 million liability from inventory not owned for the amount of net cash received.
During fiscal 2012, we entered into a land banking arrangement with GSO Capital Partners LP (“GSO”). We
sold a portfolio of our land parcels to GSO, and GSO provided us an option to purchase back finished lots on a quarterly
basis. Because of our option to repurchase these parcels, for accounting purposes, this transaction is considered a
financing rather than a sale. For purposes of our Consolidated Balance Sheet, the inventory of $56.9 million was
reclassified to consolidated inventory not owned, with a $44.8 million liability from inventory not owned recorded for
the amount of net cash received.
The recoverability of inventories and other long-lived assets is assessed in accordance with the provisions of
ASC 360-10, “Property, Plant and Equipment - Overall” (“ASC 360-10”). ASC 360-10 requires long-lived assets,
including inventories, held for development to be evaluated for impairment based on undiscounted future cash flows of
the assets at the lowest level for which there are identifiable cash flows. As such, we evaluate inventories for impairment
at the individual community level, the lowest level of discrete cash flows that we measure.
We evaluate inventories of communities under development and held for future development for impairment
when indicators of potential impairment are present. Indicators of impairment include, but are not limited to, decreases
in local housing market values, decreases in gross margins or sales absorption rates, decreases in net sales prices (base
sales price net of sales incentives), or actual or projected operating or cash flow losses. The assessment of communities
for indication of impairment is performed quarterly. As part of this process, we prepare detailed budgets for all of our
communities at least semi-annually and identify those communities with a projected operating loss. For those
communities with projected losses, we estimate the remaining undiscounted future cash flows and compare those to the
carrying value of the community, to determine if the carrying value of the asset is recoverable.
The projected operating profits, losses, or cash flows of each community can be significantly impacted by our
estimates of the following:
future base selling prices;
future home sales incentives;
future home construction and land development costs; and
future sales absorption pace and cancellation rates.
These estimates are dependent upon specific market conditions for each community. While we consider
available information to determine what we believe to be our best estimates as of the end of a quarterly reporting period,
these estimates are subject to change in future reporting periods as facts and circumstances change. Local market-
specific conditions that may impact our estimates for a community include:
the intensity of competition within a market, including available home sales prices and home sales
incentives offered by our competitors;
the current sales absorption pace for both our communities and competitor communities;
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community specific attributes, such as location, availability of lots in the market, desirability and
uniqueness of our community, and the size and style of homes currently being offered;
potential for alternative product offerings to respond to local market conditions;
changes by management in the sales strategy of the community;
current local market economic and demographic conditions and related trends of forecasts; and
existing home inventory supplies, including foreclosures and short sales.
These and other local market-specific conditions that may be present are considered by management in
preparing projection assumptions for each community. The sales objectives can differ between our communities, even
within a given market. For example, facts and circumstances in a given community may lead us to price our homes with
the objective of yielding a higher sales absorption pace, while facts and circumstances in another community may lead
us to price our homes to minimize deterioration in our gross margins, although it may result in a slower sales absorption
pace. In addition, the key assumptions included in our estimate of future undiscounted cash flows may be interrelated.
For example, a decrease in estimated base sales price or an increase in homes sales incentives may result in a
corresponding increase in sales absorption pace. Additionally, a decrease in the average sales price of homes to be sold
and closed in future reporting periods for one community that has not been generating what management believes to be
an adequate sales absorption pace may impact the estimated cash flow assumptions of a nearby community. Changes in
our key assumptions, including estimated construction and development costs, absorption pace and selling strategies,
could materially impact future cash flow and fair-value estimates. Due to the number of possible scenarios that would
result from various changes in these factors, we do not believe it is possible to develop a sensitivity analysis with a level
of precision that would be meaningful.
If the undiscounted cash flows are more than the carrying value of the community, then the carrying amount is
recoverable, and no impairment adjustment is required. However, if the undiscounted cash flows are less than the
carrying amount, then the community is deemed impaired and is written-down to its fair value. We determine the
estimated fair value of each community by determining the present value of its estimated future cash flows at a discount
rate commensurate with the risk of the respective community, or in limited circumstances, prices for land in recent
comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for
the land (other than in a forced liquidation sale), and recent bona fide offers received from outside third parties. Our
discount rates used for all impairments recorded from October 31, 2010 to October 31, 2012 ranged from 16.8% to
20.3%. The estimated future cash flow assumptions are virtually the same for both our recoverability and fair value
assessments. Should the estimates or expectations used in determining estimated cash flows or fair value, including
discount rates, decrease or differ from current estimates in the future, we may be required to recognize additional
impairments related to current and future communities. The impairment of a community is allocated to each lot on a
relative fair value basis.
From time to time, we write off deposits and approval, engineering and capitalized interest costs when we
determine that it is no longer probable that we will exercise options to buy land in specific locations or when we redesign
communities and/or abandon certain engineering costs. In deciding not to exercise a land option, we take into
consideration changes in market conditions, the timing of required land takedowns, the willingness of land sellers to
modify terms of the land option contract (including timing of land takedowns), and the availability and best use of our
capital, among other factors. The write-off is recorded in the period it is deemed not probable that the optioned property
will be acquired. In certain instances, we have been able to recover deposits and other pre-acquisition costs that were
previously written off. These recoveries have not been significant in comparison to the total costs written off.
Inventories held for sale are land parcels ready for sale in their current condition, where we have decided not to
build homes but are instead actively marketing for sale. These land parcels represented $4.4 million of our total
inventories at October 31, 2012, and are reported at the lower of carrying amount or fair value less costs to sell. In
determining fair value for land held for sale, management considers, among other things, prices for land in recent
comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for
the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.
Insurance Deductible Reserves - For homes delivered in fiscal 2012 and 2011, our deductible under our
general liability insurance is $20 million per occurrence for construction defect and warranty claims. For bodily injury
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claims, our deductible per occurrence in fiscal 2012 and 2011 is $0.1 million up to a $5 million limit. Our aggregate
retention in 2012 and 2011 is $21 million for construction defect, warranty and bodily injury claims. We do not have a
deductible on our worker's compensation insurance. Reserves for estimated losses for construction defects, warranty,
bodily injury and worker’s compensation claims have been established using the assistance of a third-party actuary. We
engage a third-party actuary that uses our historical warranty and construction defect data and worker's compensation
data to assist our management in estimating 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 worker's compensation programs. The
estimates include provisions for inflation, claims handling and legal fees. These estimates are subject to a high degree of
variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of
products we build, claim settlement patterns, insurance industry practices, and legal interpretations, among others.
Because of the high degree of judgment required in determining these estimated liability amounts, actual future costs
could differ significantly from our currently estimated amounts.
Land Options - Deposits on options to acquire improved or unimproved home sites and pre-development costs
incurred on this land under option are capitalized. Such amounts are either included as part of the purchase price if the
land is acquired or charged to operations if we determine we will not exercise the option. If the options are with variable
interest entities and we are the primary beneficiary, we record the land under option on the Consolidated Balance Sheets
under “Consolidated inventory not owned” with an offset under “Liabilities from inventory not owned”. The evaluation
of whether or not we are the primary beneficiary can require significant judgment. Similarly, if the option obligation is
to purchase under specific performance or has terms that require us to record it as financing, then we record the option
on the Condensed Consolidated Balance Sheets under “Consolidated inventory not owned” with an offset under
“Liabilities from inventory not owned”. We record costs associated with other options on the Consolidated Balance
Sheets under “Land and land options held for future development or sale”.
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated
homebuilding and land development joint ventures are accounted for under the equity method of accounting. Under the
equity method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery
of lots or homes to third parties. Our ownership interest in joint ventures varies but our voting interests are generally less
than or equal to 50%. In determining whether or not we must consolidate joint ventures where we are the managing
member of the joint venture, we assess whether the other partners have specific rights to overcome the presumption of
control by us as the manager of the joint venture. In most cases, the presumption is overcome because the joint venture
agreements require that both partners agree on establishing the significant operating and capital decisions of the
partnership, including budgets, in the ordinary course of business. The evaluation of whether or not we control a venture
can require significant judgment. In accordance with ASC 323-10, “Investments - Equity Method and Joint Ventures -
Overall” (“ASC 323-10”), we assess our investments in unconsolidated joint ventures for recoverability, and if it is
determined that a loss in value of the investment below its carrying amount is other than temporary, we write down the
investment to its fair value. We evaluate our equity investments for impairment based on the joint venture’s projected
cash flows. This process requires significant management judgment and estimates. During fiscal 2011 and fiscal 2012,
there were no write-downs of our joint venture investments.
Post-Development Completion and Warranty Costs - In those instances where a development is substantially
completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover
the cost of such work. In addition, we estimate and accrue warranty costs as part of cost of sales for repair costs under
$5,000 per occurrence to homes, community amenities and land development infrastructure. We also accrue for warranty
costs over $5,000 per occurrence as part of our general liability insurance deductible expensed as selling, general, and
administrative costs. Warranty accruals require our management to make significant estimates about the cost of future
claims. Both of these liabilities are recorded in “Accounts payable and other liabilities” on the Consolidated Balance
Sheets.
Income Taxes - Deferred income taxes or income tax benefits are provided for temporary differences between
amounts recorded for financial reporting and for income tax purposes. If the combination of future years’ income (or
loss) combined with the reversal of the timing differences results in a loss, such losses can be carried back to prior years
or carried forward to future years to recover the deferred tax assets. In accordance with ASC 740-10, “Income Taxes -
Overall” (“ASC 740-10”), we evaluate our deferred tax assets quarterly to determine if valuation allowances are
required. ASC 740-10 requires that companies assess whether valuation allowances should be established based on the
consideration of all available evidence using a “more-likely-than-not” standard. See “Total Taxes” below under “Results
of Operations” for further discussion of the valuation allowances.
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In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in
accordance with ASC 740-10, for more likely than not exposures. We re-evaluate the exposures associated with our tax
positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in
tax law, new audit activity, and effectively settled issues. Determining whether an uncertain tax position is effectively
settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit
or an additional charge to the tax provision. A number of years may elapse before a particular matter for which we have
established a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and
income tax provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations
expires for the relevant taxing authority to examine the tax position or when more information becomes available. Due to
the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different
from our current estimate. Any such changes will be reflected as increases or decreases to income tax expense in the
period in which they are determined.
Recent Accounting Pronouncements
See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-
K. There have been no accounting pronouncements that have been issued but not yet implemented that we believe will
materially impact our financial statements.
Capital Resources and Liquidity
Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey,
Pennsylvania), the Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia, Washington D.C.), the Midwest
(Illinois, Minnesota, Ohio), the Southeast (Florida, Georgia, North Carolina, South Carolina), the Southwest (Arizona,
Texas), and the West (California). In addition, we provide certain financial services to our homebuilding customers.
We have historically funded our homebuilding and financial services operations with cash flows from operating
activities, borrowings under our bank credit facilities (when we had such facilities for our homebuilding operations) and
the issuance of new debt and equity securities. During the prolonged housing market downturn that began in late 2006,
we had been operating with a primary focus to generate cash flows from operations through reductions in assets during
fiscal 2007 through fiscal 2009. The generation of cash flow, together with debt repurchases and exchanges at prices
below par, allowed us to reduce net debt (notes payable, excluding accrued interest, less homebuilding cash and cash
equivalents) during fiscal 2008 and 2009 by approximately $773 million. Since the latter half of fiscal 2009, we have
seen more opportunities to purchase land at prices that make economic sense given the then-current home sales prices
and sales paces. As such, since that time, despite acquiring new land at higher levels than in the previous few years
we have been able to further reduce our net debt by approximately $48 million.
Our net income (loss) historically does not approximate cash flow from operating activities. The difference
between net income (loss) and cash flow from operating activities is primarily caused by changes in inventory levels
together with changes in receivables, prepaid and other assets, mortgage loans held for sale, interest and other accrued
liabilities, deferred income taxes, accounts payable and other liabilities, and noncash charges relating to depreciation,
amortization of computer software costs, stock compensation awards and impairment losses for inventory. When we are
expanding our operations, inventory levels, prepaids, and other assets increase causing cash flow from operating
activities to decrease. Certain liabilities also increase as operations expand and partially offset the negative effect on cash
flow from operations caused by the increase in inventory levels, prepaids and other assets. Similarly, as our mortgage
operations expand, net income from these operations increases, but for cash flow purposes net income is offset by the net
change in mortgage assets and liabilities. The opposite is true as our investment in new land purchases and development
of new communities decrease, which is what happened during the last half of fiscal 2007 through fiscal 2009, allowing
us to generate positive cash flow from operations during this period. Since the latter part of fiscal 2009 cumulative
through October 31, 2012, as a result of the new land purchases and land development we have used cash in operations
as we add new communities. Looking forward, given the unstable housing market, it will continue to be difficult to
generate positive cash flow from operations until we return to sustained profitability. However, we will continue to make
adjustments to our structure and our business plans in order to maximize our liquidity while also taking steps to return to
sustained profitability, including through land acquisitions.
Our homebuilding cash balance at October 31, 2012 increased by $14.0 million from October 31, 2011. The
significant uses of cash during fiscal 2012 were primarily due to spending approximately $363.8 million on land and
land development, and for repurchases of certain of our senior and senior secured notes. Through the third quarter of
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fiscal 2012, we spent $75.4 million for principal payments and debt repurchases of certain of our senior and senior
secured notes and $22.1 million for the November 2011 debt exchange discussed below. In the fourth quarter of fiscal
2012, we issued $797.0 million of new senior secured notes and $100.0 million of senior exchangeable notes units, and
used the proceeds for the tender offer and redemption of $797.0 million of then existing senior secured notes at a
premium, resulting in net cash paid of $22.8 million. These cash uses were partially offset by $47.3 million of proceeds
received through the April 2012 common stock issuance, $32.9 million of net proceeds from model sale leaseback
financing programs, $44.8 million of net proceeds from a new land banking arrangement and a $31.8 million reduction
of homebuilding restricted cash. Most of this restricted cash became unrestricted as the letters of credit the cash
collateralized were released during fiscal 2012. The remaining change in cash came from normal operations.
Our cash uses during fiscal 2012 and 2011 were for operating expenses, land purchases, land deposits, land
development, construction spending, debt payments, repurchases, state income taxes, interest payments and investments
in joint ventures. During these periods, we funded our cash requirements from available cash on hand, debt and equity
issuances, housing and land sales, model sale leasebacks, land banking deals, financial service revenues, and other
revenues. We believe that these sources of cash will be sufficient through fiscal 2013 to finance our working capital
requirements and other needs. However, if necessary, potential additional sources to generate cash could include
entering into additional joint ventures or land banking deals, issuing equity for cash or debt, selling excess land, entering
into additional model sale leasebacks, limiting started unsold homes, delaying or reducing land purchases and take-
downs or reducing land development spending.
On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million
shares of Class A Common Stock. During fiscal 2012, we repurchased 0.1 million shares under this program, but we did
not repurchase any shares under this program during fiscal 2011 or 2010. As of October 31, 2012, 3.5 million shares of
Class A Common Stock have been purchased under this program (See Part II, Item 5 for information on equity
purchases).
On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of
$25,000. Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%. The
Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at
our option at the liquidation preference of the shares beginning on the fifth anniversary of their issuance. The Series A
Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of Series A
Preferred Stock. The depositary shares are listed on the NASDAQ Global Market under the symbol “HOVNP”. In fiscal
2012, 2011, and 2010, we did not make any dividend payments on the Series A Preferred Stock as a result of covenant
restrictions in our debt instruments. We anticipate that we will continue to be restricted from paying dividends, which
are not cumulative, for the foreseeable future.
On October 20, 2009, K. Hovnanian Enterprises, Inc. (“K. Hovnanian”) issued $785.0 million ($770.9 million
net of discount) of 10.625% Senior Secured Notes due October 15, 2016. The notes are secured, subject to permitted
liens and other exceptions, by a first-priority lien on substantially all of the assets owned by us, K. Hovnanian and the
guarantors. The net proceeds from this issuance, together with cash on hand, were used to fund certain cash tender offers
and consent solicitations for our then outstanding 11.5% Senior Secured Notes due 2013 and 18.0% Senior Secured
Notes due 2017 and certain series of our unsecured notes. In May 2011, we issued $12.0 million of additional 10.625%
Senior Secured Notes due 2016 as discussed below. The 10.625% Senior Secured Notes due 2016 were the subject of a
tender offer in October 2012, and the notes that were not tendered in the tender offer were redeemed, as discussed below.
On January 15, 2010, the remaining $13.6 million principal amount of our 6.0% Senior Subordinated Notes due
2010 matured and was paid. During the year ended October 31, 2010, we repurchased in open market transactions $27.0
million principal amount of 6.5% Senior Notes due 2014, $54.5 million principal amount of 6.375% Senior Notes due
2014, $29.5 million principal amount of 6.25% Senior Notes due 2015, $1.4 million principal amount of 8.875% Senior
Subordinated Notes due 2012, and $11.1 million principal amount of 7.75% Senior Subordinated Notes due 2013. The
aggregate purchase price for these repurchases was $97.9 million, plus accrued and unpaid interest. These repurchases
resulted in a gain on extinguishment of debt of $25.0 million for the year ended October 31, 2010, net of the write-off of
unamortized discounts and fees.
On February 9, 2011, we issued 13,512,500 shares of our Class A Common Stock, including 1,762,500 shares
issued pursuant to the over-allotment option granted to the underwriters, at a price of $4.30 per share.
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On February 9, 2011, we issued an aggregate of 3,000,000 7.25% Tangible Equity Units (the “Units”), and on
February 14, 2011, we issued an additional 450,000 Units pursuant to the over-allotment option granted to the
underwriters. Each Unit initially consists of (i) a prepaid stock purchase contract (each a “Purchase Contract”) and (ii) a
senior subordinated amortizing note due February 15, 2014 (each, a “Senior Subordinated Amortizing Note”). As of
October 31, 2012 and 2011, we had an aggregate principal amount of $6.1 million and $13.3 million, respectively,
of Senior Subordinated Amortizing Notes outstanding. On each February 15, May 15, August 15 and November 15, K.
Hovnanian will pay holders of Senior Subordinated Amortizing Notes equal quarterly cash installments of $0.453125
per Senior Subordinated Amortizing Note, which cash payments in the aggregate will be equivalent to 7.25% per year
with respect to each $25 stated amount of Units. Each installment constitutes a payment of interest (at a rate of 12.072%
per annum) and a partial repayment of principal on the Senior Subordinated Amortizing Notes, allocated as set forth in
the amortization schedule provided in the indenture under which the Senior Subordinated Amortizing Notes were
issued. The Senior Subordinated Amortizing Notes have a scheduled final installment payment date of February 15,
2014. If we elect to settle the Purchase Contracts early, holders of the Senior Subordinated Amortizing Notes will have
the right to require K. Hovnanian to repurchase such holders’ Senior Subordinated Amortizing Notes, except in certain
circumstances as described in the indenture governing Senior Subordinated Amortizing Notes.
Unless settled earlier, on February 15, 2014 (subject to postponement under certain circumstances), each
Purchase Contract will automatically settle and we will deliver a number of shares of Class A Common Stock based on
the applicable market value, as defined in the purchase contract agreement, which will be between 4.7655 shares and
5.8140 shares per Purchase Contract (subject to adjustment). Each Unit may be separated into its constituent Purchase
Contract and Senior Subordinated Amortizing Note after the initial issuance date of the Units, and the separate
components may be combined to create a Unit. The Senior Subordinated Amortizing Note component of the Units is
recorded as debt, and the Purchase Contract component of the Units is recorded in equity as additional paid in
capital. We have recorded $68.1 million, the initial fair value of the Purchase Contracts, as additional paid in
capital. As of October 31, 2012, 1.6 million Purchase Contracts have been converted into 7.7 million shares of our Class
A Common Stock.
During the second quarter of fiscal 2012, we exchanged pursuant to agreements with bondholders
approximately $3.1 million aggregate principal amount of our Senior Subordinated Amortizing Notes for shares of our
Class A Common Stock, as discussed in Note 3 to the Consolidated Financial Statements. These transactions resulted in
a gain on extinguishment of debt of $0.2 million for the year ended October 31, 2012.
On February 14, 2011, K. Hovnanian issued $155.0 million aggregate principal amount of 11.875% Senior
Notes due 2015, which are guaranteed by us and substantially all of our subsidiaries. These notes were the subject of a
November 2011 exchange offer discussed below. The net proceeds from the issuances of the 11.875% Senior Notes due
2015, Class A Common Stock described above, and Units were approximately $286.2 million, a portion of which were
used to fund the purchase through tender offers, on February 14, 2011, of the following series of K. Hovnanian’s senior
and senior subordinated notes: approximately $24.6 million aggregate principal amount of 8.0% Senior Notes due 2012,
$44.1 million aggregate principal amount of 8.875% Senior Subordinated Notes due 2012 and $29.2 million aggregate
principal amount of 7.75% Senior Subordinated Notes due 2013. On February 14, 2011, K. Hovnanian called for
redemption on March 15, 2011 all outstanding notes of such series that were not tendered in the tender offers for an
aggregate redemption price of approximately $60.1 million. Such redemptions were funded with proceeds from the
offerings of the Class A Common Stock, the Units and the 11.875% Senior Notes due 2015. In both, the tender offers
and redemptions, we paid a premium, incurred fees, and wrote off discounts and prepaid costs that we were amortizing
over the term of notes.
On May 4, 2011, K. Hovnanian issued $12.0 million of additional 10.625% Senior Secured Notes due 2016
resulting in net proceeds of approximately $11.6 million. On June 3, 2011, we used these net proceeds together with cash
on hand, to fund the redemption of the remaining outstanding principal amount ($0.5 million) of our 11.5% Senior
Secured Notes due 2013 and the remaining outstanding principal amount ($11.7 million) of our 18.0% Senior Secured
Notes due 2017. These transactions, along with the tender offers and redemptions in February and March 2011 discussed
above, resulted in a loss of $3.1 million during the year ended October 31, 2011.
On November 1, 2011, we issued $141.8 million aggregate principal amount of 5.0% Senior Secured Notes
due 2021 (the “5.0% 2021 Notes”) and $53.2 million aggregate principal amount of 2.0% Senior Secured Notes due
2021 (the “2.0% 2021 Notes”, and together with the 5.0% 2021 Notes the “2021 Notes”) in exchange for $195.0 million
of certain of our unsecured senior notes with maturities ranging from 2014 through 2017. Holders of the senior notes due
2014 and 2015 that were exchanged in the exchange offer also received an aggregate of approximately $14.2 million in
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cash payments and all holders of senior notes that were exchanged in the exchange offer received accrued and unpaid
interest (in the aggregate amount of approximately $3.3 million). Costs associated with this transaction were $4.7
million. The 5.0% 2021 Notes and the 2.0% 2021 Notes were issued as separate series under an indenture, but have
substantially the same terms other than with respect to interest rate and related redemption provisions, and vote together
as a single class. The accounting for the debt exchange was treated as a troubled debt restructuring. Under this
accounting, the Company did not recognize any gain or loss on extinguishment of debt and the costs associated with the
debt exchange were expensed as incurred as shown in “Other operations” in the Consolidated Statement of
Operations. See Note 9 to the Consolidated Financial Statements for further discussion.
On October 2, 2012, K. Hovnanian issued $577.0 million aggregate principal amount of 7.25% senior secured
first lien notes due 2020 (the "First Lien Notes") and $220.0 million aggregate principal amount of 9.125% senior
secured second lien notes due 2020 (the "Second Lien Notes" and, together with the First Lien Notes, the "2020 Secured
Notes") in a private placement (the "2020 Secured Notes Offering"). The net proceeds from the 2020 Secured Notes
Offering, together with the net proceeds of the Units offering discussed below, and cash on hand, were used to fund the
tender offer and consent solicitation with respect to the Company’s then outstanding 10.625% Senior Secured Notes due
2016 and the redemption of the remaining notes that were not purchased in the tender offer as described below.
The First Lien Notes are secured by a first-priority lien and the Second Lien Notes are secured by a second-
priority lien, in each case, subject to permitted liens and other exceptions, on substantially all the assets owned by us, K.
Hovnanian and the guarantors of such notes. At October 31, 2012, the aggregate book value of the real property that
would constitute collateral securing the 2020 Secured Notes was approximately $572.4 million, which does not include
the impact of inventory investments, home deliveries, or impairments thereafter and which may differ from the value if it
were appraised. In addition, cash collateral that would secure the 2020 Secured Notes was $236.8 million as of October
31, 2012, which includes $30.7 million of restricted cash collateralizing certain letters of credit. Subsequent to such date,
cash uses include general business operations and real estate and other investments.
The First Lien Notes are redeemable in whole or in part at our option at any time prior to October 15, 2015 at
100% of the principal amount plus an applicable “Make-Whole Amount.” We may also redeem some of all of the First
Lien Notes at 105.438% of principal commencing October 15, 2015, at 103.625% of principal commencing October 15,
2016, at 101.813% of principal commencing October 15, 2017 and 100% of principal commencing October 15, 2018. In
addition, we may redeem up to 35% of the aggregate principal amount of the First Lien Notes prior to October 15, 2015
with the net cash proceeds from certain equity offerings at 107.25% of principal.
The Second Lien Notes are redeemable in whole or in part at our option at any time prior to November 15, 2015
at 100% of the principal amount plus an applicable “Make-Whole Amount.” We may also redeem some or all of the
Second Lien Notes at 106.844% of principal commencing November 15, 2015, at 104.563% of principal commencing
November 15, 2016, at 102.281% of principal commencing November 15, 2017 and 100% of principal commencing
November 15, 2018. In addition, we may redeem up to 35% of the aggregate principal amount of the Second Lien Notes
prior to November 15, 2015 with the net cash proceeds from certain equity offerings at 109.125% of principal.
Also on October 2, 2012, the Company and K. Hovnanian issued $100,000,000 aggregate stated amount of
6.0% Exchangeable Note Units (the “Units”) (equivalent to 100,000 Units). Each $1,000 stated amount of Units initially
consists of (1) a zero coupon senior exchangeable note due December 1, 2017 (the “Exchangeable Note”) issued by K.
Hovnanian, which bears no cash interest and has an initial principal amount of $768.51 per Exchangeable Note, and that
will accrete to $1,000 at maturity and (2) a senior amortizing note due December 1, 2017 (the “Senior Amortizing
Note”) issued by K. Hovnanian, which has an initial principal amount of $231.49 per Senior Amortizing Note, bears
interest at a rate of 11.0% per annum, and has a final installment payment date of December 1, 2017. Each Unit may be
separated into its constituent Exchangeable Note and Senior Amortizing Note after the initial issuance date of the Units,
and the separate components may be combined to create a Unit.
Each Exchangeable Note had an initial principal amount of $768.51 (which will accrete to $1,000 over the term
of the Exchangeable Note at an annual rate of 5.17% from the date of issuance, calculated on a semi-annual bond
equivalent yield basis). Holders may exchange their Exchangeable Notes at their option at any time prior to 5:00 p.m.,
New York City time, on the business day immediately preceding December 1, 2017. Each Exchangeable Note will be
exchangeable for shares of Class A Common Stock at an initial exchange rate of 185.5288 shares of Class A Common
Stock per Exchangeable Note (equivalent to an initial exchange price, based on $1,000 principal amount at maturity, of
approximately $5.39 per share of Class A Common Stock). The exchange rate will be subject to adjustment in certain
events. If certain corporate events occur prior to the maturity date, the Company will increase the applicable exchange
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rate for any holder who elects to exchange its Exchangeable Notes in connection with such corporate event. In addition,
holders of Exchangeable Notes will also have the right to require K. Hovnanian to repurchase such holders’
Exchangeable Notes upon the occurrence of certain of these corporate events.
On each June 1 and December 1 commencing on June 1, 2013 (each, an “installment payment date”) K.
Hovnanian will pay holders of Senior Amortizing Notes equal semi-annual cash installments of $30.00 per Senior
Amortizing Note (except for the June 1, 2013 installment payment, which will be $39.83 per Senior Amortizing Note),
which cash payment in the aggregate will be equivalent to 6.0% per year with respect to each $1,000 stated amount of
Units. Each installment will constitute a payment of interest (at a rate of 11.0% per annum) and a partial repayment of
principal on the Senior Amortizing Note. If certain corporate events occur prior to the maturity date, holders of the
Senior Amortizing Notes will have the right to require K. Hovnanian to repurchase such holders’ Senior Amortizing
Notes.
The net proceeds of the Units Offering, along with the net proceeds from the 2020 Secured Notes Offering
previously discussed, and cash on hand, were used to fund the tender offer and consent solicitation with respect to the
Company’s then outstanding 10.625% Senior Secured Notes due 2016 and redemption of the remaining notes that were
not purchased in the tender offer as described below.
On October 2, 2012, pursuant to a cash tender offer and consent solicitation, we purchased in a fixed-price
tender offer approximately $637.2 million aggregate principal amount of 10.625% Senior Secured Notes due 2016 for
approximately $691.3 million, plus accrued and unpaid interest. Subsequently, all 10.625% Senior Secured Notes due
2016 that were not tendered in the tender offer (approximately $159.8 million) were redeemed for an aggregate
redemption price of approximately $181.8 million. The tender offer and redemption resulted in a loss on extinguishment
of debt of $87.0 million, including the write-off of unamortized discounts and fees.
During the year ended October 31, 2012, we repurchased for cash in the open market and privately negotiated
transactions $21.0 million principal amount of our 6.25% Senior Notes due 2016, $61.1 million principal amount of our
7.5% Senior Notes due 2016, $37.4 million principal amount of our 8.625% Senior Notes due 2017 and $2.0 million
principal amount of our 11.875% Senior Notes due 2015. No such repurchases were made during the quarter ended
October 31, 2012. The aggregate purchase price for these repurchases was $72.2 million plus accrued and unpaid
interest. These repurchases resulted in a gain on extinguishment of debt of $48.4 million for the year ended October 31,
2012, net of the write-off of unamortized discounts and fees. The gain is included in the Consolidated Statement of
Operations as “(Loss) gain on extinguishment of debt.” Certain of these repurchases were funded with the proceeds from
our April 11, 2012 issuance of 25,000,000 shares of our Class A Common Stock (see Note 3 to the Consolidated
Financial Statements).
In addition, during the year ended October 31, 2012, pursuant to agreements with bondholders we exchanged
$7.8 million principal amount of our 6.25% Senior Notes due 2016, $4.0 million principal amount of our 7.5% Senior
Notes due 2016 and $18.3 million of our outstanding 8.625% Senior Notes due 2017 for shares of our Class A Common
Stock, as discussed in Note 3 to the Consolidated Financial Statements. These transactions were treated as a substantial
modification of debt, resulting in a gain on extinguishment of debt of $9.3 million for the year ended October 31,
2012. No such exchanges were made during the quarter ended October 31, 2012. The gain is included in the
Consolidated Statement of Operations as “(Loss) gain on extinguishment of debt.”
As of October 31, 2012, we had $992.0 million of outstanding senior secured notes ($977.4 million, net of
discount), comprised of $53.2 million 2.0% Senior Secured Notes due 2021, $141.8 million 5.0% Senior Secured Notes
due 2021, $577.0 million 7.25% Senior Secured First Lien Notes due 2020 and $220.0 million 9.125% Senior Secured
Second Lien Notes due 2020. As of October 31, 2012, we also had $460.6 million of outstanding senior notes ($458.7
million, net of discount), comprised of $36.7 million 6.5% Senior Notes due 2014, $3.0 million 6.375% Senior Notes
due 2014, $21.4 million 6.25% Senior Notes due 2015, $131.2 million 6.25% Senior Notes due 2016, $86.5 million
7.5% Senior Notes due 2016, $121.0 million 8.625% Senior Notes due 2017 and $60.8 million 11.875% Senior
Notes due 2015. In addition, as of October 31, 2012, we had outstanding $6.1 million Senior Subordinated Amortizing
Notes due 2014, $76.9 million Senior Exchangeable Notes due 2017 and $23.1 million 11.0% Senior Amortizing Notes
due 2017.
Except for K. Hovnanian, the issuer of the notes, our home mortgage subsidiaries, joint ventures and
subsidiaries holding interests in our joint ventures, certain of our title insurance subsidiaries and our foreign subsidiary,
we and each of our subsidiaries are guarantors of the senior secured, senior, senior amortizing, senior exchangeable and
31
senior subordinated amortizing notes outstanding at October 31, 2012 (see Note 22 to the Consolidated Financial
Statements). In addition, the 5.0% Senior Secured Notes due 2021 and the 2.0% Senior Secured Notes due 2021 are
guaranteed by K. Hovnanian JV Holdings, L.L.C and its subsidiaries except for certain joint ventures and joint venture
holding companies (collectively, the “Secured Group”). Members of the Secured Group do not guarantee K.
Hovnanian's other indebtedness.
The indentures governing the notes do not contain any financial maintenance covenants, but do contain
restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries,
including K. Hovnanian, to incur additional indebtedness (other than certain permitted indebtedness, refinancing
indebtedness and non-recourse indebtedness), pay dividends and make distributions on common and preferred stock,
repurchase subordinated indebtedness with respect to certain of the senior secured notes, make other restricted payments,
make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all
assets and enter into certain transactions with affiliates. The indentures also contain events of default which would
permit the holders of the notes to declare the notes to be immediately due and payable if not cured within applicable
grace periods, including the failure to make timely payments on the notes or other material indebtedness, the failure to
comply with agreements and covenants and specified events of bankruptcy, and insolvency and, with respect to the
indentures governing the senior secured notes, the failure of the documents granting security for the senior secured notes
to be in full force and effect and the failure of the liens on any material portion of the collateral securing the senior
secured notes to be valid and perfected. As of October 31, 2012, we believe we were in compliance with the covenants
of the indentures governing our outstanding notes.
Under the terms of the indentures, we have the right to make certain redemptions and, depending on market
conditions and covenant restrictions, may do so from time to time. We also continue to evaluate our capital structure and
may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers,
open market purchases, private transactions, or otherwise or seek to raise additional debt or equity capital, depending on
market conditions and covenant restrictions.
If our consolidated fixed charge coverage ratio, as defined in the indentures governing our senior secured and
senior notes (other than the senior exchangeable notes) is less than 2.0 to 1.0, we are restricted from making certain
payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing
indebtedness, and non-recourse indebtedness. As a result of this restriction, we are currently restricted from paying
dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. If current market trends continue or
worsen, we will continue to be restricted from paying dividends for the foreseeable future. Our inability to pay
dividends is in accordance with covenant restrictions and will not result in a default under our bond indentures or
otherwise affect compliance with any of the covenants contained in the bond indentures.
We do not have a revolving credit facility but have certain stand alone cash collateralized letter of credit
agreements and facilities under which there were a total of $29.5 million and $54.1 million of letters of credit
outstanding as of October 31, 2012 and October 31, 2011, respectively. These agreements and facilities require us to
maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder,
which will affect the amount of cash we have available for other uses. As of October 31, 2012 and October 31, 2011, the
amount of cash collateral in these segregated accounts was $30.7 million and $57.7 million, respectively, which is
reflected in “Restricted cash” on the Consolidated Balance Sheets.
Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian
Mortgage”), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing
rights are sold in the secondary mortgage market within a short period of time. Our secured Master Repurchase
Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”) is a short-term borrowing
facility that provides up to $75.0 million through November 16, 2012 and thereafter up to $50.0 million through March
28, 2013. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to
permanent investors. Interest is payable monthly on outstanding advances at the current LIBOR subject to a floor of
1.625% plus the applicable margin ranging from 2.5% to 3.0% based on the takeout investor and type of loan. As of
October 31, 2012, the aggregate principal amount of all borrowings under the Chase Master Repurchase Agreement was
$58.8 million.
On May 29, 2012, K. Hovnanian Mortgage entered into another secured Master Repurchase Agreement with
Customers Bank (“Customers Master Repurchase Agreement”), which is a short-term borrowing facility that provides up
to $37.5 million through May 28, 2013. The loan is secured by the mortgages held for sale and is repaid when we sell
32
the underlying mortgage loans to permanent investors. Interest is payable daily or as loans are sold to permanent
investors on outstanding advances at the current LIBOR subject to a floor of 3.5% plus the applicable margin ranging
from 3.0% to 5.5% based on the takeout investor and type of loan. As of October 31, 2012, the aggregate principal
amount of all borrowings under the Customers Master Repurchase Agreement was $22.9 million.
On June 29, 2012, K. Hovnanian Mortgage entered into a third secured Master Repurchase Agreement with
Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse Master Repurchase Agreement”), which is a short-
term borrowing facility that provides up to $50.0 million through June 28, 2013. The loan is secured by the mortgages
held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable
monthly on outstanding advances at the Credit Suisse Cost of Funds, which was 0.63% at October 31, 2012, plus the
applicable margin ranging from 3.75% to 4.0% based on the takeout investor and type of loan. As of October 31, 2012,
the aggregate principal amount of all borrowings under the Credit Suisse Master Repurchase Agreement was $25.8
million.
The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Credit Suisse Master
Repurchase Agreement (together, the “Master Repurchase Agreements”) require K. Hovnanian Mortgage to satisfy and
maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time
mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few
weeks), the immateriality to us on a consolidated basis of the size of the Master Repurchase Agreements, the levels
required by these financial covenants, our ability based on our immediately available resources to contribute sufficient
capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the
terms of the agreement, we do not consider any of these covenants to be substantive or material. As of October 31,
2012, we believe we were in compliance with the covenants under the Master Repurchase Agreements.
During fiscal 2011 and 2012, Fitch Ratings (“Fitch”), Moody’s Investor Services (“Moody’s”) and Standard
and Poor’s (“S&P”), took certain rating actions as follows:
On June 28, 2011, S&P downgraded our corporate credit rating from CCC+ to CCC.
On September 8, 2011, Moody’s downgraded our corporate family and probability of default ratings to Caa2
from Caa1. Moody’s also lowered the rating on our 10.625% senior secured notes to B2 from B1 and our senior
unsecured notes to Caa3 from Caa2. The rating on our preferred stock was affirmed at Ca, and our speculative
grade liquidity assessment remained SGL-3.
On October 5, 2011, S&P downgraded our corporate credit ratings and its ratings on our 10.625% senior
secured notes to “CC” from “CCC”. S&P also lowered the rating on our senior unsecured notes to C from CC.
On October 20, 2011, Moody’s changed our probability of default ratings to Caa2/LD from Caa2 and also
lowered the rating on our 10.625% senior secured notes to B3 from B2 and assigned a rating of B3 to our 2.0%
and 5.0% senior secured notes (issued in November 2011). Subsequently, on October 25, 2011, the LD
designation on our probability of default ratings was removed.
On October 29, 2011, S&P lowered our corporate credit rating to Selective Default (“SD”) from CC and
lowered our rating on our senior unsecured notes from C to D. Subsequently, on November 3, 2011, S&P
raised the Company’s corporate credit rating to CCC- from SD. S&P also raised our ratings on our 10.625%
senior secured notes to CCC- from CC and our senior unsecured notes to CC from D.
On November 2, 2011, Fitch lowered our Issuer Default Rating (“IDR”) to Restricted Default (“RD”) from
CCC. Subsequently, on November 14, 2011, Fitch raised our IDR from RD back to CCC.
On July 27, 2012, S&P revised its outlook on the Company to positive from negative. At the same time, it
affirmed its ratings on the Company, including the “CCC-” corporate credit rating.
On November 5, 2012, S&P raised our corporate credit rating to CCC+ from CCC- and removed us from
CreditWatch positive. On the same date, S&P also raised the ratings on our senior secured notes to CCC from
CC and on our unsecured notes to CCC- from CC, as well as removed them from CreditWatch positive.
33
Downgrades in our credit ratings do not accelerate the scheduled maturity dates of our debt or affect the interest
rates charged on any of our debt issues or our debt covenant requirements or cause any other operating issue. A
potential risk from negative changes in our credit ratings is that they may make it more difficult or costly for us to access
capital. However, due to our available cash resources, the downgrades and revisions to our credit ratings in 2011
discussed above have not impacted management’s operating plans, or our financial condition, results of operations or
liquidity.
Total inventory, excluding consolidated inventory not owned, decreased $74.8 million during the year ended
October 31, 2012. Total inventory, excluding consolidated inventory not owned, increased in the Midwest $12.0 million
and in the Southwest by $17.9 million. This increase was offset by decreases in the Northeast of $20.5 million, in the
Mid-Atlantic by $43.3 million, in the Southeast by $3.8 million and in the West of $37.1 million. The decreases were
primarily attributable to inventory that was reclassified to consolidated inventory not owned during the period as
discussed below and to delivering homes at a faster pace than replenishing with new land, as noted by the decrease in
our community count from October 31, 2011 to October 31, 2012. There were also land sales in several of our segments
throughout fiscal 2012, contributing to the decrease in inventory. These decreases were partially offset by the
acquisition of new land parcels and consolidation of a community that was previously held in one of our unconsolidated
joint ventures. During the year ended October 31, 2012, we incurred $9.8 million in impairments, which primarily
related to a property that is held for sale in the Northeast, a community in the Midwest, several communities in the
Southeast and two communities in the West in fringe markets in these areas that continue to see weakening market
conditions. In addition, we wrote-off costs in the amount of $2.7 million during the year ended October 31, 2012 related
to land options that expired or that we terminated, as the communities’ forecasted profitability was not projected to
produce adequate returns on investment commensurate with the risk. In the last few years, we have been able to acquire
new land parcels at prices that we believe will generate reasonable returns under current homebuilding market
conditions. There can be no assurances that this trend will continue in the near term. Substantially all homes under
construction or completed and included in inventory at October 31, 2012 are expected to be closed during the next 12
months.
The total inventory decrease discussed above excluded the increase in consolidated inventory not owned of
$88.2 million. Consolidated inventory not owned consists of specific performance options and other options that were
added to our balance sheet in accordance with accounting principles generally accepted in the United States. The
increase from October 31, 2011 to October 31, 2012, was due to sale and leaseback of certain model homes and land
banking transactions during fiscal 2012. During fiscal 2012, we sold and leased back certain of our model homes with
the right to participate in the potential profit when each home is sold to a third party at the end of the respective
lease. As a result of our continued involvement for accounting purposes, these sale and leaseback transactions are
considered a financing rather than a sale for accounting purposes. Therefore, for purposes of our Consolidated Balance
Sheet, the inventory of $33.7 million was reclassified to consolidated inventory not owned, with a $32.9 million liability
from inventory not owned for the amount of net cash received. In addition, we entered into a land banking arrangement
in fiscal 2012 with GSO whereby we sold a portfolio of our land parcels to GSO, and GSO provided us an option to
purchase back finished lots on a quarterly basis. Because of our option to repurchase these parcels, for accounting
purposes this transaction is considered a financing rather than a sale. For purposes of our Consolidated Balance Sheet,
the inventory of $56.9 million was reclassified to consolidated inventory not owned, with a $44.8 million liability from
inventory not owned recorded for the amount of net cash received. Offsetting the increase in consolidated inventory not
owned was a decrease due to the purchase of properties in the Southwest and West during the period, which had specific
performance obligations.
When possible, we option property for development prior to acquisition. By optioning property, we are only
subject to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result,
our commitment for major land acquisitions is reduced. The costs associated with optioned properties are included in
“Land and land options held for future development or sale inventory”. Also included in "Land and land options held for
future development or sale inventory" are amounts associated with inventory in mothballed communities. We mothball
(or stop development on) certain communities when we determine the current performance does not justify further
investment at this time. That is, we believe we will generate higher returns if we decide against spending money to
improve land today and save the raw land until such times as the markets improve or we determine to sell the
property. As of October 31, 2012, we have mothballed land in 53 communities. The book value associated with these
communities at October 31, 2012 was $124.2 million, net of impairment write-downs of $467.8 million. We continually
review communities to determine if mothballing is appropriate. During the fiscal 2012, we mothballed one community
previously held for sale, re-activated two communities and sold five communities which were previously mothballed.
Our inventory representing “Land and land options held for future development or sale” at October 31, 2012, on the
34
Consolidated Balance Sheets, decreased by $26.5 million compared to October 31, 2011. The decrease was due to the
movement of certain of our communities from held for future development to sold and unsold homes and lots under
development during the period, combined with land sales in the Northeast and Southeast and additional
impairments taken in the Northeast, Midwest, Southeast and West during fiscal 2012, offset by an increase due to the
acquisition of new land in all segments during fiscal 2012.
The following table summarizes home sites included in our total residential real estate. The decrease in total
home sites available in 2012 compared to 2011 is attributable to the delivery of homes during fiscal 2012, offset by new
lots controlled via option or purchase during 2012.
Total
Home
Contracted
Not
Sites
Delivered
Remaining
Home
Sites
Available
4,363
5,878
3,204
2,179
5,753
6,642
28,019
1,774
29,793
16,427
11,418
174
28,019
1,774
29,793
4,739
5,592
2,099
2,846
5,527
7,502
28,305
2,731
31,036
18,277
9,913
115
28,305
2,731
31,036
264
266
427
235
506
191
1,889
256
2,145
1,499
216
174
1,889
256
2,145
265
325
226
124
331
116
1,387
276
1,663
1,141
131
115
1,387
276
1,663
4,099
5,612
2,777
1,944
5,247
6,451
26,130
1,518
27,648
14,928
11,202
-
26,130
1,518
27,648
4,474
5,267
1,873
2,722
5,196
7,386
26,918
2,455
29,373
17,136
9,782
-
26,918
2,455
29,373
October 31, 2012:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures
Total including unconsolidated joint ventures
Owned
Optioned
Construction to permanent financing lots
Consolidated total
Lots controlled by unconsolidated joint ventures
Total including unconsolidated joint ventures
October 31, 2011:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures
Total including unconsolidated joint ventures
Owned
Optioned
Construction to permanent financing lots
Consolidated total
Lots controlled by unconsolidated joint ventures
Total including unconsolidated joint ventures
35
The following table summarizes our started or completed unsold homes and models, excluding unconsolidated
joint ventures, in active and substantially completed communities:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Started or completed unsold
homes and models per active
selling communities(1)
October 31, 2012
Unsold
Homes Models
9
7
22
10
19
6
73
116
65
19
55
355
39
649
October 31, 2011
Unsold
Homes Models
18
30
38
30
81
52
249
86
73
45
58
431
118
811
Total
125
72
41
65
374
45
722
Total
104
103
83
88
512
170
1,060
3.8
0.4
4.2
4.2
1.3
5.5
(1) Active selling communities, which are communities that are open for sale with 10 or more home sites available,
were 172 and 192 at October 31, 2012, and 2011, respectively.
Unsold homes at October 31, 2012 decreased compared to the prior year, as the market improved and the sales
pace per community increased in 2012. Models owned decreased as a result of the sale and leaseback transactions in
fiscal 2012, as previously discussed.
Restricted cash and cash equivalents decreased $31.8 million to $41.7 million at October 31, 3012 compared to
October 31, 2011. The decrease was primarily related to the release of cash securitizing letters of credit due to a
reduction in our outstanding letters of credit. The largest reduction related to a land sale in the Northeast in the fourth
quarter of fiscal 2011, whereby a letter of credit obligation was released in early fiscal 2012 in conjunction with the sale.
In addition, there was a reduction in our surety bond escrow cash requirements during fiscal 2012.
Investments in and advances to unconsolidated joint ventures increased $3.3 million during the fiscal year
ended October 31, 2012. The increase is primarily due to the timing of advances at October 31, 2012 as compared to
October 31, 2011. As of October 31, 2012, we had investments in seven homebuilding joint ventures and two land
development joint ventures. We have no guarantees associated with our unconsolidated joint ventures, other than
guarantees limited only to performance and completion of development, environmental indemnification and standard
warranty and representation against fraud misrepresentation and similar actions, including a voluntary bankruptcy.
Receivables, deposits and notes increased $9.5 million since October 31, 2011 to $61.8 million at October 31,
2012. The increase was due to an increase in receivables for home closings as a result of cash in transit from various title
companies at the end of the respective periods, as well as receivables from our insurance carriers for certain warranty
claims.
Property, plant and equipment decreased $4.7 million during the twelve months ended October 31, 2012
primarily due to depreciation and a small amount of disposals, which were offset by minor additions for leasehold
improvements during the period.
Prepaid expenses and other assets were as follows as of:
October 31,
(In thousands)
Prepaid insurance
Prepaid project costs
Senior residential rental properties
Other prepaids
Other assets
Total
$
$
36
2012
1,729 $
24,008
5,430
26,086
9,441
66,694 $
October 31,
2011
1,808 $
27,206
7,374
21,699
9,611
67,698 $
Dollar
Change
(79)
(3,198)
(1,944)
4,387
(170)
(1,004)
Prepaid project costs consist of community specific expenditures that are used over the life of the
community. Such prepaids are expensed as homes are delivered. Prepaid project costs decreased for homes delivered
and were not fully offset by prepaid spending for new communities. Senior residential rental properties decreased due to
the sale of one of our properties during fiscal 2012. Other prepaids increased mainly due to capitalization of new
prepaid costs associated with the issuance of our senior secured notes in October 2012, offset by the write-off of prepaid
costs associated with our senior secured notes that were repurchased and redeemed in 2012, along with the amortization
of our remaining prepaid debt costs.
Financial Services - Restricted cash increased $18.4 million to $22.5 million at October 31, 2012. The increase
primarily related to an increase in the volume and timing of home closings at the end of fiscal 2012 compared to the end
of fiscal 2011.
Financial Services - Mortgage loans held for sale consist primarily of residential mortgages receivable held for
sale, of which $115.0 million and $71.2 million at October 31, 2012 and October 31, 2011, respectively, were being
temporarily warehoused and are awaiting sale in the secondary mortgage market. The increase in mortgage loans held
for sale from October 31, 2011 was primarily related to an increase in the volume of loans originated during fourth
quarter of fiscal 2012 compared to the fourth quarter of fiscal 2011, along with an increase in the average loan
value. Also included in “Mortgage loans held for sale” are $2.0 million and $1.0 million residential mortgages receivable
held for sale in October 31, 2012 and October 31, 2011, respectively, which represent loans that cannot currently be sold
at reasonable terms in the secondary mortgage market. We may incur losses with respect to mortgages that were
previously sold that are delinquent and which had underwriting defects, but only to the extent the losses are not covered
by mortgage insurance or the resale value of the house.
Nonrecourse land mortgages were $38.3 million at October 31, 2012 and $26.1 million at October 31, 2011.
The increase is primarily due to a mortgage on a community that was previously owned by one of our unconsolidated
joint ventures and was consolidated during fiscal 2012.
Accounts payable and other liabilities are as follows as of:
(In thousands)
Accounts payable
Reserves
Accrued expenses
Accrued compensation
Other liabilities
Total
October 31,
October 31,
2012
89,310 $
129,025
29,969
26,625
21,581
296,510 $
2011
85,415 $
141,496
43,151
23,432
10,139
303,633 $
$
$
Dollar
Change
3,895
(12,471)
(13,182)
3,193
11,442
(7,123)
The increase in accounts payable was primarily due to the higher volume of deliveries in the fourth quarter of
fiscal 2012 compared to the fourth quarter of fiscal 2011. The decrease in reserves is primarily related to various legal
settlements during fiscal 2012. The decrease in accrued expenses is primarily due to decreases in property tax and
payroll accruals due to timing of the payments and amortization of abandoned lease space accruals. The increase in
accrued compensation is primarily due to the increased bonus accruals as profitability increased in certain of our markets
in fiscal 2012. Other liabilities increased primarily due to a payable to a former joint venture partner for the buy-out of
their share of the joint venture during fiscal 2012.
Customer deposits increased to $23.8 million at October 31, 2012 from $16.7 million at October 31, 2011. This
increase is primarily attributable to the increase in backlog as of October 31, 2012.
Financial Services - Mortgage warehouse line of credit increased $57.8 million from $49.7 million at October
31, 2011, to $107.5 million at October 31, 2012. The increase correlates to the increase in the volume of mortgage loans
held for sale during the period. In connection with the increase in loan volume, we entered into two new secured master
repurchase agreements during fiscal 2012, thereby increasing our available lines of credit at October 31, 2012 as
compared to October 31, 2011.
Financial Services - Accounts payable and other liabilities increased $23.1 million to $37.6 million at October
31, 2012. The increase primarily relates to the increase in Financial Services restricted cash during the period, due to an
37
increase in the volume and timing of home closings during the fourth quarter of fiscal 2012 compared to the fourth
quarter of fiscal 2011.
Liabilities from inventory not owned increased $75.4 million to $77.8 million at October 31, 2012 from $2.4
million at October 31, 2011.The increase is primarily due to the land banking and model home financing programs,
described with the change in inventory not owned discussion under “Capital Resources and Liquidity”. Offsetting the
increase was a decrease due to the take-down of properties in the Southwest and West during the period, which had a
specific performance purchase obligation.
Income taxes payable of $41.8 million at October 31, 2011 decreased $34.9 million during the year ended
October 31, 2012 to $6.9 million primarily due to the elimination of certain state tax reserves for uncertain tax positions
consistent with past practices and precedents of the relevant taxing authorities in their dealings with the Company.
Results of Operations
Total Revenues
Compared to the prior period, revenues increased (decreased) as follows:
(Dollars in thousands)
Homebuilding:
Sale of homes
Land sales
Other revenues
Financial services
Total change
Total revenues percent change
Homebuilding
October 31,
2012
Year Ended
October 31,
2011
October 31,
2010
$
$
$
333,106
5,043
3,043
9,254
350,446
$
30.9%
$
(255,025)
19,925
657
(2,492)
(236,935)
$
(17.3)%
(194,970)
(20,430)
(5,471)
(3,577)
(224,448)
(14.1)%
Sale of homes revenues increased $333.1 million, or 31.1%, for the year ended October 31, 2012, decreased
$255.0 million, or 19.2%, for the year ended October 31, 2011 and decreased $195.0 million or 12.8%, for the year
ended October 31, 2010. The increased revenues in 2012 were primarily due to the number of home deliveries increasing
22.0% and the average price per home increasing to $300,595 from $279,873 in 2011. The decreased revenues in 2011
and 2010 were primarily due to the number of home deliveries declining 19.0%, and 11.8%, respectively. Average price
per home also decreased to $279,873 in 2011 from $280,715 in 2010. The fluctuations in average prices were a result of
the geographic and community mix of our deliveries, as well as price increases in certain of our individual
communities. During fiscal 2012, we were able to raise prices in a number of our communities.
38
Information on homes delivered by segment is set forth below:
(Housing Revenue in thousands)
Northeast:
Housing revenues
Homes delivered
Average price
Mid-Atlantic:
Housing revenues
Homes delivered
Average price
Midwest:
Housing revenues
Homes delivered
Average price
Southeast:
Housing revenues
Homes delivered
Average price
Southwest:
Housing revenues
Homes delivered
Average price
West:
Housing revenues
Homes delivered
Average price
Consolidated total:
Housing revenues
Homes delivered
Average price
Unconsolidated joint ventures:
Housing revenues
Homes delivered
Average price
Total including unconsolidated joint ventures:
Housing revenues
Homes delivered
Average price
October 31,
2012
Year Ended
October 31,
2011
October 31,
2010
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
218,396
505
432,467
268,880
649
414,299
106,539
477
223,352
113,347
482
235,160
515,757
2,003
257,492
182,661
560
326,180
1,405,580
4,676
300,595
320,657
680
471,554
1,726,237
5,356
322,300
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
179,866 $
399
450,792 $
199,061 $
524
379,887 $
70,465 $
360
195,736 $
79,146 $
339
233,469 $
418,631 $
1,726
242,544 $
125,305 $
484
258,895 $
296,449
718
412,882
280,132
753
372,021
91,260
439
207,882
92,712
384
241,438
391,807
1,767
221,736
175,139
668
262,184
1,072,474 $
3,832
279,873 $
1,327,499
4,729
280,715
172,343 $
384
448,810 $
124,149
280
443,389
1,244,817 $
4,216
295,260 $
1,451,648
5,009
289,808
The overall increase in housing revenues and deliveries during year ended October 31, 2012, as compared to
year ended October 31, 2011, was primarily attributed to market improvement demonstrated by an increase in sales pace
per community from 21.3 to 28.1 for fiscal 2011 and 2012, respectively. Housing revenues and average sales prices in
2012 increased in all of our homebuilding segments combined by 31.1% and 7.4%, respectively. In our homebuilding
segments, homes delivered increased in fiscal 2012 as compared to fiscal 2011 by 26.6%, 23.9%, 32.5%, 42.2%, 16.0%
and 15.7% in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West, respectively.
The decrease in housing revenues during the years ended October 31, 2011 and October 31, 2010 was primarily
due to the continued weak market conditions in most of our markets at that time. Housing revenues and average sales
prices in 2011 decreased in all of our homebuilding segments combined by 19.2% and 0.3%, respectively. In our
homebuilding segments, homes delivered decreased in fiscal 2011 as compared to fiscal 2010 by 44.4%, 30.4%, 18.0%,
11.7%, 2.3% and 27.5% in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West, respectively.
39
Quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the
years ending October 31, 2012, 2011 and 2010 are set forth below:
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Quarter Ended
July 31,
2012
63,811
75,075
28,213
24,432
139,407
40,543
371,481
54,575
55,399
43,100
38,562
166,120
65,640
423,396
$
$
$
$
April 30,
2012
January 31,
2012
49,834 $
64,432
23,590
21,462
114,284
38,892
312,494 $
54,887 $
82,121
45,431
39,305
166,529
61,670
449,943 $
33,077
53,113
18,157
20,125
91,153
36,705
252,330
28,198
49,622
28,408
24,471
103,860
30,206
264,765
Quarter Ended
July 31,
2011
43,443
57,104
17,716
17,894
107,861
32,461
276,479
56,427
73,986
21,273
28,301
113,370
38,950
332,307
$
$
$
$
April 30,
2011
January 31,
2011
36,126 $
46,643
17,466
16,684
97,339
32,716
246,974 $
57,394 $
55,874
20,521
23,345
104,010
32,423
293,567 $
43,284
46,263
14,034
15,504
87,227
29,573
235,885
37,435
52,013
12,331
15,640
85,787
22,282
225,488
Quarter Ended
July 31,
2010
91,740
72,767
22,650
28,522
103,065
49,333
368,077
43,314
50,845
16,526
15,264
88,360
33,313
247,622
$
$
$
$
April 30,
2010
January 31,
2010
56,955 $
67,634
16,029
22,041
103,428
44,406
310,493 $
52,208 $
73,704
27,289
25,334
114,166
43,857
336,558 $
68,714
66,076
23,404
24,677
82,124
44,358
309,353
55,379
46,949
16,421
17,236
79,656
36,041
251,682
October 31,
2012
71,675
76,259
36,579
47,328
170,913
66,521
469,275
68,779
63,208
40,446
43,624
153,700
71,108
440,865
October 31,
2011
57,014
49,050
21,249
29,064
126,204
30,555
313,136
40,014
56,269
20,863
20,775
101,549
38,953
278,423
October 31,
2010
79,040
73,654
29,177
17,472
103,190
37,043
339,576
42,925
64,597
12,111
18,965
111,760
31,571
281,929
40
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Contracts per average active selling community in 2012 were 28.1 compared to fiscal 2011 of 21.3. Our
reported level of sales contracts (net of cancellations) has been impacted by the increase in the pace of sales in all of the
Company’s segments, due to improved market conditions and lower interest rates on mortgages during fiscal
2012. Cancellation rates represent the number of cancelled contracts in the quarter divided by the number of gross sales
contracts executed in the quarter. For comparison, the following are historical cancellation rates, excluding
unconsolidated joint ventures.
Quarter
First
Second
Third
Fourth
2012
2011
21%
16%
20%
23%
22%
20%
18%
21%
2010
21%
17%
23%
24%
2009
31%
24%
23%
24%
2008
38%
29%
32%
42%
Another common and meaningful way to analyze our cancellation trends is to compare the number of contract
cancellations as a percentage of the beginning backlog. The following table provides this historical comparison,
excluding unconsolidated joint ventures.
Quarter
First
Second
Third
Fourth
2012
2011
18%
21%
18%
18%
18%
22%
20%
18%
2010
13%
17%
15%
25%
2009
22%
31%
23%
20%
2008
16%
24%
20%
30%
Historically, most cancellations occur within the legal rescission period, which varies by state but is generally
less than two weeks after the signing of the contract. Cancellations also occur as a result of a buyer's failure to qualify
for a mortgage, which generally occurs during the first few weeks after signing. However, beginning in fiscal 2007, we
started experiencing higher than normal numbers of cancellations later in the construction process. These cancellations
were related primarily to falling prices, sometimes due to new discounts offered by us and other builders, leading the
buyer to lose confidence in their contract price and due to tighter mortgage underwriting criteria leading to some
customers’ inability to be approved for a mortgage loan. In some cases, the buyer will walk away from a significant
nonrefundable deposit that we recognize as other revenues. Our cancellation rate based both on gross sales contracts and
as a percentage of beginning backlog for the fourth quarter of 2012 was more typical of what we believe to be
normalized levels. However, it is difficult to predict if the trends shown in the tables above will continue.
An important indicator of our future results is recently signed contracts and our home contract backlog for
future deliveries. Our consolidated contract backlog, excluding unconsolidated joint ventures, using base sales prices by
segment is set forth below:
(Dollars In thousands)
Northeast:
Total contract backlog
Number of homes
Mid-Atlantic:
Total contract backlog
Number of homes
Midwest:
Total contract backlog
Number of homes
Southeast:
Total contract backlog
Number of homes
Southwest:
Total contract backlog
Number of homes
West:
Total contract backlog
Number of homes
Totals:
Total consolidated contract backlog
Number of homes
41
October 31,
October 31,
2012
2011
October 31,
2010
$
$
$
$
$
$
$
115,416 $
264
108,645 $
265
94,363
236
118,773 $
266
137,303 $
325
106,589
262
95,716 $
427
44,870 $
226
62,696 $
235
30,080 $
124
160,840 $
506
86,388 $
331
78,877 $
191
32,914 $
116
34,188
222
20,212
82
88,123
337
27,304
110
632,318 $
1,889
440,200 $
1,387
370,779
1,249
Our net contracts for the full years of fiscal 2012 and 2011, excluding unconsolidated joint ventures, increased
27.7% and decreased 4.4%, respectively, as compared to the prior fiscal year. In the month of November 2012,
excluding unconsolidated joint ventures, we signed an additional 347 net contracts amounting to $111.2 million in
contract value.
Total cost of sales on our Consolidated Statements of Operations includes expenses for consolidated housing
and land and lot sales, including inventory impairment loss and land option write-offs (defined as “land charges” in the
tables below). A breakout of such expenses for housing sales and housing gross margin is set forth below:
(Dollars In thousands)
Sale of homes
Cost of sales, net of impairment reversals and excluding interest expense
Homebuilding gross margin, before cost of sales interest expense and land charges
Cost of sales interest expense, excluding land sales interest expense
Homebuilding gross margin, after cost of sales interest expense, before land charges
Land charges
Homebuilding gross margin, after cost of sales interest expense and land charges
Gross margin percentage, before cost of sales interest expense and land charges
Gross margin percentage, after cost of sales interest expense, before land charges
Gross margin percentage after cost of sales interest expense and land charges
October 31,
2012
$ 1,405,580
1,155,643
249,937
48,843
201,094
12,530
188,564
$
$
17.8%
14.3%
13.4%
Year Ended
October 31,
2011
$ 1,072,474
905,253
167,221
57,016
110,205
101,749
8,456
$
15.6%
10.3%
0.8%
October 31,
2010
$ 1,327,499
1,103,872
223,627
79,095
144,532
135,699
8,833
16.8%
10.9%
0.7%
Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:
Sale of homes
Cost of sales, net of impairment reversals and excluding interest:
Housing, land and development costs
Commissions
Financing concessions
Overheads
Total cost of sales, before interest expense and land charges
Gross margin percentage, before cost of sales interest expense and land charges
Cost of sales interest
Gross margin percentage, after cost of sales interest expense and before land charges
October 31,
2012
100%
Year Ended
October 31,
2011
100%
October 31,
2010
100%
71.1%
3.4%
1.7%
6.0%
82.2%
17.8%
3.5%
14.3%
71.9%
3.5%
2.0%
7.0%
84.4%
15.6%
5.3%
10.3%
69.9%
3.3%
2.2%
7.8%
83.2%
16.8%
5.9%
10.9%
We sell a variety of home types in various communities, each yielding a different gross margin. As a result,
depending on the mix of communities delivering homes, consolidated gross margin may fluctuate up or down. Total
homebuilding gross margins, before interest expense and land impairment and option write off charges increased to
17.8% for the year ended October 31, 2012 compared to 15.6% for the same period last year. The increase in gross
margin percentage is primarily due to the mix of higher margin homes delivered during the fiscal year ended October 31,
2012 compared to the same period of the prior year. During fiscal 2012, we continued to see an increase in the pace of
sales in some of our markets and, as a result, in many communities we have been able to increase base prices and
increase lot premiums, without adversely impacting the sales pace. In addition, we are currently delivering more homes
in communities where we acquired the land more recently at lower costs than land acquired before the housing
downturn. The declining pace of sales in our markets during fiscal 2010 and 2011 led to intense competition in many of
our specific community locations. In order to attempt to maintain a reasonable pace of absorption, we increased
incentives, reduced lot location premiums, and lowered some base prices, all of which significantly impacted our
margins and resulted in significant inventory impairments in prior years.
Reflected as inventory impairment loss and land option write-offs in cost of sales (“land charges”), we have
written-off or written-down certain inventories totaling $12.5 million, $101.7 million, and $135.7 million during the
years ended October 31, 2012, 2011, and 2010, respectively, to their estimated fair value. See “Note 13 to the
Consolidated Financial Statements” for an additional discussion. During the years ended October 31, 2012, 2011, and
2010, we wrote-off residential land options and approval and engineering costs totaling $2.7 million, $24.3 million, and
$13.2 million, respectively, which are included in the total land charges mentioned above. When a community is
redesigned or abandoned, engineering costs are written-off. Option, approval and engineering costs are written-off when
42
a community’s pro forma profitability is not projected to produce adequate returns on the investment commensurate with
the risk and when we believe it is probable we will cancel the option. Such write-offs were located in all of our
segments. The inventory impairments amounted to $9.8 million, $77.5 million, and $122.5 million for the years ending
October 31, 2012, 2011 and 2010, respectively. In 2012, inventory impairments were lower than they had been in
several years as we began to see some stabilization in the prices and sales pace in some of our segments as reflected by
the overall improvement of the housing industry. In 2011 and 2010, the majority of the impairments were in the
Northeast and West segments. Impairments in the Northeast were primarily due to increased weakness in the market,
primarily in Northern New Jersey and communities now classified as held for sale or sold and thus adjusted to fair
value. In the West, where we had significant competition from foreclosures, we had reduced prices in order to maintain
sales pace. This is especially true in some of the more fringe markets in our West segment. It is difficult to predict if
this trend will continue, and should it become necessary to further lower prices, or should the estimates or expectations
used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may
need to recognize additional impairments.
Below is a breakdown of our lot option walk-aways and impairments by segment for fiscal 2012. In 2012, we
walked away from 15.7% of all the lots we controlled under option contracts. The remaining 84.3% of our option lots are
in communities that we believe remain economically feasible.
The following table represents lot option walk-aways by segment for the year ended October 31, 2012:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Amount
of Walk
Number of
Walk-
Away
Away
0.7
0.6
0.2
0.7
0.4
0.1
2.7
$
$
Lots
309
459
208
763
395
-
2,134
% of
Walk-
Away
Lots
14.5%
21.5%
9.7%
35.8%
18.5%
0%
100.0%
Walk-
Away
Lots as a
% of Total
Option
Lots
13.9%
14.9%
15.5%
43.0%
9.3%
0%
15.7%
Total
Option
Lots(1)
2,228
3,072
1,346
1,774
4,269
863
13,552
(1) Includes lots optioned at October 31, 2012 and lots optioned that the Company walked away from in the year ended
October 31, 2012.
The following table represents impairments by segment for the year ended October 31, 2012:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Amount of
Impairment
2.8
$
0.4
1.6
2.8
-
2.2
9.8
$
% of
Impairments
Pre-
Impairment
Value
19.6
0.8
4.5
8.3
-
4.9
38.1
% of Pre-
Impairment
Value
14.3%
50.0%
35.6%
33.7%
0%
44.9%
25.7%
28.6% $
4.1%
16.3%
28.6%
0%
22.4%
100.0% $
43
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set
forth below:
(In thousands)
Land and lot sales
Cost of sales, net of impairment reversals and excluding interest
Land and lot sales gross margin, excluding interest
Land sales interest expense
Land and lot sales gross margin, including interest
2012
31,788 $
24,158
7,630
5,695
1,935 $
$
$
2011
26,745 $
8,648
18,097
17,660
437 $
October 31,
2010
6,820
177
6,643
5,345
1,298
October 31,
Year Ended
October 31,
Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future
but may significantly fluctuate up or down. Revenue from land sales for the year ended October 31, 2012 increased $5.0
million compared to the year ended October 31, 2011. Although we budget land sales, they are often dependent upon
receiving approvals and entitlements, the timing of which can be uncertain. As a result, projecting the amount and timing
of land sales is difficult. There were a few larger land sales in fiscal 2012 compared to the prior year, which resulted in
the increase in land sales revenue.
Land sales and other revenues increased $8.1 million and $20.6 million for the years ended October 31, 2012
and October 31, 2011, respectively. Other revenues include income from contract cancellations, where the deposit has
been forfeited due to contract terminations, interest income, cash discounts, buyer walk-aways and miscellaneous one-
time receipts. In fiscal 2012, the primary reason for the increase in other revenue is the increase in land sales revenue
mentioned above, along with a $1.0 million increase in interest income recognized from a note receivable. The
remaining increase relates to minor fluctuations among the various components of other revenue. In fiscal 2011, the
primary reason for the increase in other revenue by $0.7 million was due to the payoff of a note receivable owed to us
from which we recognized interest income.
Homebuilding Selling, General and Administrative
Homebuilding selling, general and administrative (“SGA”) expenses decreased $19.4 million to $142.1 million
for the twelve months ended October 31, 2012 as compared to the twelve months ended October 31, 2011. This
decrease was a result of the continued efforts to reduce SGA expenses through administration consolidation and other
cost saving measures. In addition, SGA expenses as a percentage of homebuilding revenues improved to 9.8% for
the twelve months ended October 31, 2012 compared to 14.6% for the twelve months ended October 31, 2011. SGA
decreased to $161.5 million for the year ended October 31, 2011 from $178.3 million for the year ended October 31,
2010. These decreases in SGA expenses were the result of reduced costs through headcount reduction, administrative
consolidation and other cost saving measures.
44
Homebuilding Operations by Segment
Financial information relating to the Company’s operations was as follows:
Segment Analysis (Dollars in thousands, except average sales price)
Years Ended October 31,
Variance
2012
Compared
to 2011
2012
Variance
2011
Compared
to 2010
2011
2010
Northeast
Homebuilding revenue
Loss before income taxes
Homes delivered
Average sales price
Contract cancellation rate
Mid-Atlantic
Homebuilding revenue
Income (loss) before income taxes
Homes delivered
Average sales price
Contract cancellation rate
Midwest
Homebuilding revenue
Income (loss) before income taxes
Homes delivered
Average sales price
Contract cancellation rate
Southeast
Homebuilding revenue
Loss before income taxes
Homes delivered
Average sales price
Contract cancellation rate
Southwest
Homebuilding revenue
Income before income taxes
Homes delivered
Average sales price
Contract cancellation rate
West
Homebuilding revenue
Loss before income taxes
Homes delivered
Average sales price
Contract cancellation rate
Homebuilding Results by Segment
$ 233,326 $
(4,683) $
$
505
$ 432,467 $
26%
$ 273,080 $
17,262 $
$
649
$ 414,299 $
28%
$ 106,719 $
253 $
$
477
$ 223,352 $
18%
$ 128,684 $
(4,828) $
$
482
$ 235,160 $
19%
$ 518,931 $
42,178 $
$
2,003
$ 257,492 $
17%
$ 185,851 $
(3,177) $
$
560
$ 326,180 $
20%
31,342
94,593
106
$ 201,984 $
(99,276) $
$
399
(18,325) $ 450,792 $
18%
8%
(96,729)
(6,671)
(319)
37,910
$ 298,713
(92,605)
$
718
$ 412,882
23%
(5)%
73,364
34,548
125
34,412
$ 199,716 $
(17,286) $
$
524
$ 379,887 $
26%
(82,336)
(12,524)
(229)
7,866
$ 282,052
(4,762)
$
753
$ 372,021
26%
0%
2%
36,152
9,230
117
27,616
$
$
70,567 $
(8,977) $
360
$ 195,736 $
15%
3%
(22,791)
4,249
(79)
(12,146)
$
$
93,358
(13,226)
439
$ 207,882
20%
(5)%
49,231
7,046
143
1,691
$
$
79,453 $
(11,874) $
339
$ 233,469 $
20%
(14,040)
(655)
(45)
(7,969)
$
$
93,493
(11,219)
384
$ 241,438
14%
6%
(1)%
93,779
12,862
277
14,948
$ 425,152 $
29,316 $
$
1,726
$ 242,544 $
22%
31,513
6,124
(41)
20,808
$ 393,639
23,192
$
1,767
$ 221,736
21%
1%
(5)%
57,193
37,422
76
67,285
$ 128,658 $
(40,599) $
$
484
$ 258,895 $
17%
3%
(49,822)
21,170
(184)
(3,289)
$ 178,480
(61,769)
$
668
$ 262,184
18%
(1)%
Northeast – Homebuilding revenues increased 15.5% in 2012 compared to 2011 primarily due to a 26.6%
increase in homes delivered offset by a 4.1% decrease in average selling price. The decrease in average sales prices was
the result of the mix of communities delivering in fiscal 2012 compared to 2011. Loss before income taxes decreased
$94.6 million to a loss of $4.7 million, which was mainly due to a decrease of $64.8 million in inventory impairment and
land option write-offs. In addition, selling, general and administrative costs decreased $7.1 million due to decreased
salaries from headcount reductions and other overhead cost savings, as well as the increase in gross margin percentage
before interest expense for fiscal 2012 compared to fiscal 2011.
45
Homebuilding revenues decreased 32.4% in 2011 compared to 2010 primarily due to a 44.4% decrease in
homes delivered offset by a 9.2% increase in average selling price. The increase in average sales prices was the result of
the mix of communities delivering in fiscal 2011 compared to 2010. Loss before income taxes increased $6.7 million to
a loss of $99.3 million, which was mainly due to our share of losses on two of our joint ventures in 2011.
Mid-Atlantic –Homebuilding revenues increased 36.7% in 2012 compared to 2011 primarily due to a 23.9%
increase in homes delivered, a 9.1% increase in average selling price and a $3.5 million increase in land sales and other
revenue. The increase in average sales price is due to the mix of communities that delivered in 2012 compared to 2011.
Loss before income taxes decreased $34.6 million to a profit of $17.3 million, due mainly to a decrease of $8.5 million
in inventory impairment and land option write-offs and a $5.4 million decrease in selling, general and administrative
costs. Additionally, the gross margin percentage before interest expense was relatively flat for the fiscal year 2012
compared to fiscal year 2011.
Homebuilding revenues decreased 29.2% in 2011 compared to 2010 primarily due to a 30.4% decrease in
homes delivered and offset by a 2.1% increase in average selling price due to increased incentives and the mix of
communities that delivered in 2011 compared to 2010. Loss before income taxes increased $12.5 million to a loss of
$17.3 million, due mainly to our share of losses on a new joint venture started in fiscal 2011. Additionally, the segment
also had a decrease in gross margin percentage before interest expense.
Midwest – Homebuilding revenues increased 51.2% in 2012 compared to 2011. The increase was primarily due
to a 32.5% increase in homes delivered and a 14.1% increase in average sales price. Loss before income taxes decreased
$9.2 million to a profit of $0.3 million. The decrease in the loss was primarily due to the increase in homebuilding
revenues discussed above and an increase in gross margin percentage before interest expense.
Homebuilding revenues decreased 24.4% in 2011 compared to 2010. The decrease was primarily due to a
18.0% decrease in homes delivered, and a 5.8% decrease in average sales price. Loss before income taxes decreased
$4.2 million to a loss of $9.0 million. The decrease in the loss was primarily due to a decrease of $3.1 million in
inventory impairment and land option write-offs in 2011 and a decrease of $2.0 million in selling, general and
administrative costs. In addition, there was a small increase in gross margin percentage before interest expense.
Southeast – Homebuilding revenues increased 62.0% in 2012 compared to 2011. The increase was primarily
due to a 42.2% increase in homes delivered, a 0.7% increase in average sales price and a $15.0 million increase in land
sales and other revenue. Loss before income taxes decreased by $7.1 million to a loss of $4.8 million due to the increase
in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense.
Homebuilding revenues decreased 15.0% in 2011 compared to 2010. The decrease was primarily due to a
11.7% decrease in homes delivered and a 3.3% decrease in average sales price. Loss before income taxes increased by
$0.7 million to a loss of $11.9 million due to the increase of $0.8 million in inventory impairment losses and land option
write-offs in 2011. In addition, there was a small decrease in gross margin percentage before interest expense.
Southwest – Homebuilding revenues increased 22.1% in 2012 compared to 2011 primarily due to a 16.0%
increase in homes delivered and a 6.2% increase in average sales price. The increase in average sales price is due to the
mix of communities that delivered in 2012 compared to 2011. Income before income taxes increased $12.9 million
to $42.2 million in 2012 mainly due to the increase in revenues previously mentioned. Gross margin percentage before
interest expense for fiscal year 2012 was relatively flat compared to fiscal year 2011.
Homebuilding revenues increased 8.0% in 2011 compared to 2010 primarily due to a 9.4% increase in average
sales price. Income before income taxes increased $6.1 million to $29.3 million in 2011 mainly due to the increase in
revenues previously mentioned, along with a $1.8 million decrease in selling, general and administrative costs.
West – Homebuilding revenues increased 44.5% in 2012 compared to 2011 primarily due to a 15.7% increase in
homes delivered and a 26.0% increase in average sales price, due to the different mix of communities delivered in fiscal
2012 compared to fiscal 2011. Loss before income taxes decreased $37.4 million to a loss of $3.2 million in 2012 due
mainly to a $17.3 million decrease in inventory impairment and land option write offs, additional gross margin dollars
from the increased revenues and a $6.3 million decrease in selling, general and administrative costs. In addition, there
was an increase in gross margin percentage before interest expense.
46
Homebuilding revenues decreased 27.9% in 2011 compared to 2010 primarily due to a 27.5% decrease in
homes delivered as a result of increased competition in the market. Loss before income taxes decreased $21.2 million to
a loss of $40.6 million in 2011 due mainly to a $19.7 million decrease in inventory impairment losses and land option
write offs. In addition, there was a decrease of gross margin percentage before interest expense.
Financial Services
Financial services consist primarily of originating mortgages from our homebuyers, selling such mortgages in
the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of
mortgage-backed securities (“MBS”) to hedge our mortgage-related interest rate exposure on agency and government
loans. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with
MBS forward commitments and loan sales transactions is managed by limiting our counterparties to investment banks,
federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by
the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. In an effort
to reduce our exposure to the marketability and disposal of nonagency and nongovernmental loans, we no longer
originate Alt-A or sub-prime loans. As Alt-A and sub-prime originations were eliminated, we have seen a relative
increase
loan
origination. For the years ended October 31, 2012, 2011 and 2010, FHA/VA loans represented 41.7%, 47.2%, and
49.3%, respectively, of our total loans. Profits and losses relating to the sale of mortgage loans are recognized when legal
control passes to the buyer of the mortgage and the sales price is collected.
level of Federal Housing Administration and Veterans Administration (“FHA/VA”)
in our
During the years ended October 31, 2012, 2011, and 2010, financial services provided a $15.1 million, $8.1
million and $8.9 million pretax profit, respectively. In fiscal 2012, financial services revenues increased $9.3 million to
$38.7 million compared to fiscal 2011 due to the increase in the number of mortgage settlements and average price of the
loans settled. In fiscal 2011, financial services revenue decreased $2.5 million to $29.5 million compared to fiscal 2010
due to the decrease in the number of mortgage settlements and a decrease in the average price of loans settled. In fiscal
2010, financial services revenue decreased $3.6 million to $32.0 million compared to fiscal 2009 due to a decrease in the
number of mortgage settlements offset by a slight increase in the average price of the loans settled. In the market areas
served by our wholly owned mortgage banking subsidiaries, approximately 76%, 77%, and 82% of our noncash
homebuyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2012, 2011, and
2010, respectively. Servicing rights on new mortgages originated by us are sold with the loans.
Corporate General and Administrative
Corporate general and administrative expenses include the operations at our headquarters in Red Bank, New
Jersey. These expenses include payroll, stock compensation, facility and other costs associated with our executive
offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit,
construction services, and administration of insurance, quality, and safety. Corporate general and administrative
expenses declined $1.7 million for the year ended October 31, 2012 compared to the year ended October 31, 2011, and
declined $10.0 million for the year ended October 31, 2011 compared to the year ended October 31, 2010. The decrease
in expense for fiscal 2012 was due to the decrease in depreciation expense from capitalized software costs becoming
fully depreciated coupled with no new significant additions of depreciable assets. Also contributing to the decrease was
our continued tightening of variable spending. The decrease in expenses in fiscal 2011 was due to a combination of a
decrease in depreciation expense from capitalized software costs becoming fully depreciated coupled with no new
significant additions of depreciable assets, the benefit in the reduction of an accrual for self-insured medical claims
based on recent claim data, and a continued effort to tighten variable spending and reduce outside service costs.
Other Interest
Other interest increased $0.7 million to $97.9 million for the year ended October 31, 2012 compared to October
31, 2011. For fiscal 2011, other interest decreased $0.8 million to $97.2 million compared to October 31, 2010. Our
assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore a portion
of interest not covered by qualifying assets must be directly expensed. For the last three fiscal years, other interest has
remained relatively flat.
47
Other Operations
Other operations consist primarily of miscellaneous residential housing operations expenses, senior rental
residential property operations, rent expense for commercial office space, amortization of prepaid bond fees, minority
interest relating to consolidated joint ventures, and corporate owned life insurance. Compared to the previous year, other
operations decreased $0.6 million to $4.2 million for the year ended October 31, 2012, and decreased $4.9 million to
$4.8 million for the year ended October 31, 2011. The decrease in expenses from October 31, 2012 compared to October
31, 2011 was due mainly to the gain recognized from the sale of one of our senior rental residential properties offset by
the $4.7 million of costs incurred from the debt exchange completed on November 1, 2011 discussed above under “-
Capital Resources and Liquidity”. This debt exchange was accounted for as troubled debt restructuring, which requires
any cost incurred associated with the exchange to be expensed as incurred. The decrease in other operations from
October 31, 2010 to October 31, 2011 was primarily due to the write-off in 2010 of costs associated with an investment
that we decided not to pursue and the write-off of old receivables in the prior year that were deemed uncollectible.
(Loss) Gain on Extinguishment of Debt
During year ended October 31, 2012, our loss on extinguishment of debt was $29.1 million. During the three
months ended January 31, 2012, we repurchased for cash in the open market a total of $44.0 million principal amount of
various issues of our unsecured senior notes due 2016 for an aggregate purchase price of $19.0 million, plus accrued and
unpaid interest. We recognized a gain of $24.7 million net of the write-off of unamortized discounts and fees related to
these purchases, which represents the difference between the aggregate principal amounts of the notes purchased and the
total purchase price. During the three months ended April 30, 2012, we repurchased for cash in the open market and
privately negotiated transactions a total of $75.4 million principal amount of various issues of our unsecured notes due
2016 and 2017 for an aggregate purchase price of $51.7 million, plus accrued and unpaid interest. We recognized a gain
of $23.3 million net of the write-off of unamortized discounts and fees related to these purchases, which represents the
difference between the aggregate principal amounts of the notes purchased and the total purchase price. In addition,
during the second quarter of fiscal 2012, we exchanged $9.1 million aggregate principal amount of our outstanding
8.625% Senior Notes due 2017 and $3.1 million aggregate principal amount of our 12.072% Senior Subordinated
Amortizing Notes for Class A Common Stock. These transactions resulted in a gain on extinguishment of debt of $3.7
million for the three months ended April 30, 2012. During the three months ended July 31, 2012, we repurchased for
cash in the open market $2.0 million principal amount of our 11.875% Senior Notes due 2015 for an aggregate purchase
price of $1.5 million, plus accrued and unpaid interest. We recognized a gain of $0.4 million net of the write-off of
unamortized discounts and fees related to these purchases, which represents the difference between the aggregate
principal amounts of the notes purchased and the total purchase price. In addition, during the third quarter of fiscal 2012,
we exchanged $9.2 million aggregate principal amount of our outstanding 8.625% Senior Notes due 2017, $7.8 million
aggregate principal amount of our 6.25% Senior Notes due 2016 and $4.0 million aggregate principal amount of our
7.5% Senior Notes due 2016 for Class A Common Stock. These transactions resulted in a gain on extinguishment of debt
of $5.8 million for the three months ended July 31, 2012. In October of 2012, we repurchased in a tender offer our
10.625% senior secured notes due 2016 and satisfied and discharged the indenture under which such notes were issued
(calling the remaining notes for redemption). We paid a premium, incurred fees and wrote off discounts and prepaid
costs that were amortizing over the terms of the 10.625% senior secured notes, resulting in a loss on extinguishment of
debt of $87.0 million.
During the year ended October 31, 2011, our gain on extinguishment of debt was $7.5 million compared to
$25.0 million for the year ended October 31, 2010. In February of 2011, we purchased a portion of our subordinated
notes ($97.9 million face for $98.6 million cash in a tender offer), and redeemed early the remainder of those notes
($57.8 million in debt for $58.1 million cash). In both transactions, we paid a premium, incurred fees, and wrote off
discounts and prepaid costs that we were amortizing over the term of notes. On June 3, 2011, we redeemed early the
remainder of certain of our senior secured notes. These transactions resulted in a loss of $3.1 million during the year
ended October 31, 2011. Offsetting this loss was a gain of $10.6 million on open market repurchases during the fourth
quarter of fiscal 2011. In the fourth quarter of fiscal 2011, we repurchased in the open market a total of $25.6 million
principal amount of various issues of our unsecured senior notes due 2014 through 2015 for an aggregate purchase price
of $14.0 million, plus accrued and unpaid interest. The net gain of $7.5 million for the year ended October 31, 2011, is
net of the write-offs of unamortized discounts and fees, related to these purchases, which represents the difference
between the aggregate principal amounts of the notes purchased and the total purchase price.
During the year ended October 31, 2010, we repurchased in the open market a total of $123.5 million principal
amount of various issues of our unsecured senior and senior subordinated notes due 2010 through 2017 for an aggregate
48
purchase price of $97.9 million, plus accrued and unpaid interest. We recognized a gain of $25.0 million net of the
write-off of unamortized discounts and fees related to these purchases, which represents the difference between the
aggregate principal amounts of the notes purchased and the total purchase price.
Income (Loss) From Unconsolidated Joint Ventures
Income (loss) from unconsolidated joint ventures consists of our share of the earnings or losses of the joint
ventures. Income from unconsolidated joint ventures increased $14.4 million for the year ended October 31,
2012. Income was $5.4 million for the year ended October 31, 2012, compared to a loss of $9.0 million for the year
ended October 31, 2011. The decrease in the loss to income was due to five of our homebuilding joint ventures, which
had reported losses in fiscal 2011, delivering more homes and reporting profits, or a decreased loss, in fiscal 2012. In
addition, we recognized profit from one of our land development joint ventures during fiscal 2012, which did not have
any activity in the prior year. Income from unconsolidated joint ventures decreased $9.9 million to a loss of $9.0 million
for the year ended October 31, 2011 compared to the year ended October 31, 2010. The loss was mainly due to the costs
incurred with the start-up of a new joint venture in fiscal 2011, as well as our share of the losses from an inventory
impairment on one of our joint ventures. Loss from unconsolidated joint ventures decreased $47.0 million to income of
$1.0 million for the year ended October 31, 2010 compared to the year ended October 31, 2009. The income in 2010 was
mainly due to two joint ventures, both of which began in late 2009, that delivered homes and reported profits during
fiscal 2010. We also recognized income from one of our land development joint ventures that sold a parcel of land for a
profit during fiscal 2010.
Total Taxes
The total income tax benefit was $35.1 million for the twelve months ended October 31, 2012 primarily due to
the elimination of reserves for uncertain state tax positions consistent with past practices and precedents of the relevant
taxing authorities in their dealings with the Company, offset slightly by state tax expenses. The total income tax benefit
was $5.5 million for the year ended October 31, 2011 primarily due to a decrease in tax reserves for uncertain tax
positions. For the year ended October 31, 2010, the total income tax benefit was $297.9 million primarily due to the
benefit recognized for a federal net operating loss carryback from the Worker, Homeownership and Business Assistance
Act of 2009, under which the Company was able to carryback its 2009 net operating loss to previously profitable years
that were not available for carryback prior to the new tax legislation. We recorded the impact of the carryback of $291.3
million in the three months ended January 31, 2010. We received $274.1 million in the second quarter of fiscal 2010 and
the remaining $17.2 million in the three months ended January 31, 2011.
Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from
temporary differences between book and tax income which will be recognized in future years as an offset against future
taxable income. If the combination of future years’ income (or loss) and the reversal of the timing differences results in a
loss, such losses can be carried forward to future years. In accordance with ASC 740, we evaluate our deferred tax assets
quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation
allowances should be established based on the consideration of all available evidence using a “more likely than not”
standard. Because of the downturn in the homebuilding industry during 2010 and 2011, resulting in significant
inventory and intangible impairments, we are in a three-year cumulative loss position as of October 31, 2012. According
to ASC 740, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are
realizable. Our valuation allowance for deferred taxes amounted to $937.9 million and $899.4 million at October 31,
2012 and October 31, 2011, respectively. The valuation allowance increased during the twelve months ended October
31, 2012 primarily due to additional valuation allowance recorded for the federal and state tax benefits related to the
losses incurred during the period.
Off-Balance Sheet Financing
In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land
or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal
capital investment and substantially reduce the risks associated with land ownership and development. At October 31,
2012, we had $57.5 million in option deposits in cash and letters of credit to purchase land and lots with a total purchase
price of $743.2 million. Our liability is generally limited to forfeiture of the nonrefundable deposits, letters of credit and
other nonrefundable amounts incurred. We have no material third-party guarantees.
49
Contractual Obligations
The following summarizes our aggregate contractual commitments at October 31, 2012. There were no specific
performance option contracts as of October 31, 2012.
Payments Due by Period (1)
(In thousands)
Long term debt(2)(3)
Operating leases
Total
Less than
Total
$ 2,294,731 $
41,979
$ 2,336,710 $
1 year
106,683 $
11,164
117,847 $
1-3 years
347,816 $
17,972
365,788 $
3-5 years
More than
5 years
520,814 $ 1,319,418
1,615
532,042 $ 1,321,033
11,228
(1) Total contractual obligations exclude our accrual for uncertain tax positions of $10.3 million recorded for financial
reporting purposes as of October 31, 2012 because we were unable to make reasonable estimates as to the period of
cash settlement with the respective taxing authorities.
(2) Represents our senior secured, senior, senior amortizing, senior exchangeable and senior subordinated amortizing
notes and other notes payable and related interest payments for the life of such debt of $717.2 million. Interest on
variable rate obligations is based on rates effective as of October 31, 2012.
(3) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. See“-
Capital Resources and Liquidity”.
We had outstanding letters of credit and performance bonds of approximately $29.5 million and $252.0 million,
respectively, at October 31, 2012, related principally to our obligations to local governments to construct roads and other
improvements in various developments. We do not believe that any such letters of credit or bonds are likely to be drawn
upon.
Inflation
Inflation has a long-term effect, because increasing costs of land, materials, and labor result in increasing sale
prices of our homes. In general, these price increases have been commensurate with the general rate of inflation in our
housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the
housing industry generally is that rising house construction costs, including land and interest costs, will substantially
outpace increases in the income of potential purchasers.
Inflation has a lesser short-term effect, because we generally negotiate fixed price contracts with many, but not
all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable
for a specified number of residential buildings or for a time period of between three to twelve months. Construction costs
for residential buildings represent approximately 56.4% of our homebuilding cost of sales.
Safe Harbor Statement
All statements in this Annual Report on Form 10-K that are not historical facts should be considered as
“Forward- Looking Statements” within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause
actual results, performance or achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements. Although we believe that our
plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can
give no assurance that such plans, intentions, or expectations will be achieved. Such risks, uncertainties and other factors
include, but are not limited to:
Changes in general and local economic and industry and business conditions and impacts of the sustained
homebuilding downturn;
Adverse weather and other environmental conditions and natural disasters;
Changes in market conditions and seasonality of the Company’s business;
50
Changes in home prices and sales activity in the markets where the Company builds homes;
Government regulation, including regulations concerning development of land, the home building, sales
and customer financing processes, tax laws, and the environment;
Fluctuations in interest rates and the availability of mortgage financing;
Shortages in, and price fluctuations of, raw materials and labor;
The availability and cost of suitable land and improved lots;
Levels of competition;
Availability of financing to the Company;
Utility shortages and outages or rate fluctuations;
Levels of indebtedness and restrictions on the Company’s operations and activities imposed by the
agreements governing the Company’s outstanding indebtedness;
The Company's sources of liquidity;
Changes in credit ratings;
Availability of net operating loss carryforwards;
Operations through joint ventures with third parties;
Product liability litigation, warranty claims and claims made by mortgage investors;
Successful identification and integration of acquisitions;
Changes in tax laws affecting the after-tax costs of owning a home;
Significant influence of the Company’s controlling stockholders; and
Geopolitical risks, terrorist acts and other acts of war.
Certain risks, uncertainties, and other factors are described in detail in Part I, Item 1 “Business” and Part I, Item
1A “Risk Factors” in this Annual Report on Form 10-K. Except as otherwise required by applicable securities laws, we
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, changed circumstances, or any other reason after the date of this Annual Report on Form 10-
K.
51
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A primary market risk facing us is interest rate risk on our long term debt. In connection with our mortgage
operations, mortgage loans held for sale, and the associated mortgage warehouse lines of credit under our Master
Repurchase Agreements are subject to interest rate risk; however, such obligations reprice frequently and are short-term
in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from
private investors. Accordingly, the interest rate risk from mortgage loans is not material. We do not use financial
instruments to hedge interest rate risk except with respect to mortgage loans. We are also subject to foreign currency risk
but we do not believe this risk is material. The following tables set forth as of October 31, 2012 and 2011, our long-term
debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair value
(“FV”).
Long-Term Debt Tables
Long-Term Debt as of October 31, 2012 by Fiscal Year of Debt Maturity
2016
$43,283 $39,916 $86,462 $218,974
(Dollars in thousands) 2013 2014 2015
Long term debt(1):
Fixed rate
Weighted average
interest rate
6.55% 10.22%
6.95%
2017
Thereafter
$ 122,412 $ 1,104,778
FV at
10/31/12
$1,615,825 $1,615,840
Total
6.75%
8.61%
7.07%
7.30%
(1) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements.
Long-Term Debt as of October 31, 2011 by Fiscal Year of Debt Maturity
2013
$ 6,514
2014
$57,479
2015
2016 Thereafter
$213,535 $1,143,770 $ 210,064
FV at
10/31/11
$1,663,315 $1,062,848
Total
2012
$31,953
(Dollars in thousands)
Long term debt(1):
Fixed rate
Weighted average
interest rate
8.05% 7.18%
6.55%
9.71%
9.49%
8.52%
9.25%
(1) Does not include the mortgage warehouse line of credit made under our Chase Master Repurchase Agreement.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its consolidated subsidiaries are set forth herein
beginning on page 66.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to the Company’s management, including its chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. The Company’s management, with the participation of the Company’s chief executive officer and
chief financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls
and procedures as of October 31, 2012. Based upon that evaluation and subject to the foregoing, the Company’s chief
52
executive officer and chief financial officer concluded that the design and operation of the Company’s disclosure
controls and procedures are effective to accomplish their objectives.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the quarter
ended October 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f).
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation.
Under the supervision and with the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over financial reporting was effective as of
October 31, 2012.
The effectiveness of the Company’s internal control over financial reporting as of October 31, 2012 has been
audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm, as stated in their
report below.
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Hovnanian Enterprises, Inc.
We have audited the internal control over financial reporting of Hovnanian Enterprises, Inc. and subsidiaries (the
"Company") as of October 31, 2012, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected by
the company's board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended October 31, 2012 of the Company and our
report dated December 20, 2012 expressed an unqualified opinion on those financial statements.
/s/DELOITTE & TOUCHE LLP
Parsippany, NJ
December 20, 2012
ITEM 9B
OTHER INFORMATION
None.
54
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information called for by Item 10, except as set forth in this Item 10, is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A in connection with our annual meeting of
shareholders to be held on March 12, 2013, which will involve the election of directors.
Executive Officers of the Registrant
Our executive officers are listed below and brief summaries of their business experience and certain other
information with respect to them are set forth following the table. Each executive officer holds such office for a one-
year term.
Name
Ara K. Hovnanian
Age Position
55 Chairman of the Board, Chief Executive Officer, President, and Director of the
Company
Year
Started
With
Company
1979
Thomas J. Pellerito
J. Larry Sorsby
Brad G. O’Connor
David G. Valiaveedan
65 Chief Operating Officer
57 Executive Vice President, Chief Financial Officer and Director of the Company
42 Vice President, Chief Accounting Officer and Corporate Controller
45 Vice President Finance and Treasurer
2001
1988
2004
2005
Mr. Hovnanian has been Chief Executive Officer since July 1997 after being appointed President in 1988 and
Executive Vice President in 1983. Mr. Hovnanian joined the Company in 1979 and has been a Director of the Company
since 1981 and was Vice Chairman from 1998 through November 2009. In November 2009, he was elected Chairman of
the Board following the death of Kevork S. Hovnanian, the chairman and founder of the Company and the father of Mr.
Hovnanian.
Mr. Pellerito was appointed Chief Operating Officer of the Company in January 2010. Since joining the
Company in connection with the Company's acquisition of Washington Homes, Inc. in 2001, Mr. Pellerito has served as
a Group President overseeing homebuilding operations in certain of the Company's Mid-Atlantic and Southeast
segments (excluding Florida). Before joining the Company, Mr. Pellerito was the President of homebuilding operations
and Chief Operating Officer of Washington Homes, Inc.
Mr. Sorsby has been Chief Financial Officer of Hovnanian Enterprises, Inc. since 1996, and Executive Vice
President since November 2000. Mr. Sorsby was also Senior Vice President from March 1991 to November 2000 and
was elected as a Director of the Company in 1997. He is Chairman of the Board of Visitors for Urology at The
Children’s Hospital of Philadelphia (“CHOP”) and also serves on the Institutional Advancement Committee at CHOP.
Mr. O’Connor joined the Company in April 2004 as Vice President and Associate Corporate Controller. In
December 2007, he was promoted to Vice President, Corporate Controller and then in May 2011, he also became Vice
President, Chief Accounting Officer. Prior to joining the Company, Mr. O’Connor was the Corporate Controller for
Amershem Biosciences, and prior to that a Senior Manager in the audit practice of PricewaterhouseCoopers LLP.
Mr. Valiaveedan joined the Company as Vice President - Finance in September 2005. In August 2008, he was
named as an executive officer of the Company and, in December 2009, he was also named Treasurer. Prior to joining the
Company, Mr. Valiaveedan served as Vice President - Finance for AIG Global Real Estate Investment Corp.
55
Code of Ethics and Corporate Governance Guidelines
In more than 50 years of doing business, we have been committed to enhancing our shareholders’ investment
through conduct that is in accordance with the highest levels of integrity. Our Code of Ethics is a set of guidelines and
policies that govern broad principles of ethical conduct and integrity embraced by our Company. Our Code of Ethics
applies to our principal executive officer, principal financial officer, chief accounting officer, and all other associates of
our Company, including our directors and other officers.
We also remain committed to fostering sound corporate governance principles. The Company’s Corporate
Governance Guidelines” assist the Board of Directors of the Company (the “Board”) in fulfilling its responsibilities
related to corporate governance conduct. These guidelines serve as a framework, addressing the function, structure, and
operations of the Board, for purposes of promoting consistency of the Board’s role in overseeing the work of
management.
We have posted our Code of Ethics on our web site at www.khov.com under “Investor Relations/Corporate
Governance”. We have also posted our Corporate Governance Guidelines on our web site at www.khov.com under
“Investor Relations/Corporate Governance”. A printed copy of the Code of Ethics and Guidelines is also available to the
public at no charge by writing to: Hovnanian Enterprises, Inc., Attn: Human Resources Department, 110 West Front
Street, P.O. Box 500, Red Bank, N.J. 07701 or calling corporate headquarters at 732-747-7800. We will post
amendments to or waivers from our Code of Ethics that are required to be disclosed by the rules of either the SEC or the
New York Stock Exchange (the “NYSE”) on our web site at www.khov.com under “Investor Relations/Corporate
Governance.”
Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee Charters
We have adopted charters that apply to the Company’s Audit Committee, Compensation Committee and
Corporate Governance and Nominating Committee. We have posted the text of these charters on our web site at
www.khov.com under “Investor Relations/Corporate Governance.” A printed copy of each charter is available at no
charge to any shareholder who requests it by writing to: Hovnanian Enterprises, Inc., Attn: Human Resources
Department, 110 West Front Street, P.O. Box 500, Red Bank, N.J. 07701 or calling corporate headquarters at 732-747-
7800.
ITEM 11
EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to our definitive proxy statement to be
filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 12, 2013.
56
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information called for by Item 12, except as set forth in this Item 12, is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A in connection with our annual meeting of
shareholders to be held on March 12, 2013.
The following table provides information as of October 31, 2012, with respect to compensation plans (including
individual compensation arrangements) under which our equity securities are authorized for issuance.
Equity Compensation Plan Information
Number of Class
A Common Stock
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (in
thousands)(2)
Number of Class
B Common Stock
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (in
thousands)(2)
Weighted
average
exercise
price of
outstanding
Class A
Common Stock
options,
warrants and
rights(3)
Weighted
average
exercise
price of
outstanding
Class B
Common Stock
options,
warrants and
rights(4)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
columns (a)) (in
thousands)(1)
(a)
(a)
(b)
(b)
(c)
6,211
4,165
$7.66
$3.48
3,622
6,211
4,165
$7.66
$3.48
3,622
Plan Category
Equity compensation
plans approved by
security holders:
Equity compensation
plans not approved by
security holders:
Total
(1) Under the Company’s equity compensation plans, securities may be issued in either Class A Common Stock or
Class B Common Stock.
(2) Includes the maximum number of shares that are potentially issuable under the share portion of performance-based
long term incentive program awards made to certain associates.
(3) Does not take into account 2,438 shares that may be issued upon the vesting of restricted stock and performance-
based awards discussed in (2) above, nor 192 shares of restricted stock vested and deferred at the associates'
election, because they have no exercise price.
(4) Does not take into account 1,386 shares that may be issued upon the vesting of the performance-based awards
discussed in (2) above, nor 342 shares of restricted stock vested and deferred at the associates' election, because
they have no exercise price.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information called for in Item 13 is incorporated herein by reference to our definitive proxy statement to be
filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 12, 2013.
57
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for in Item 14 is incorporated herein by reference to our definitive proxy statement to be
filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 12, 2013.
PART IV
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS:
Index to Consolidated Financial Statements ...............................................................................................................
Report of Independent Registered Public Accounting Firm .......................................................................................
Consolidated Balance Sheets at October 31, 2012 and 2011 ......................................................................................
Consolidated Statements of Operations for the years ended October 31, 2012, 2011, and 2010 ................................
Consolidated Statements of Equity for the years ended October 31, 2012, 2011, and 2010 .......................................
Consolidated Statements of Cash Flows for the years ended October 31, 2012, 2011, and 2010 ...............................
Notes to Consolidated Financial Statements ...............................................................................................................
Page
64
65
66
68
69
70
72
No schedules have been prepared because the required information of such schedules is not present, is not present in
amounts sufficient to require submission of the schedule, or because the required information is included in the financial
statements and notes thereto.
Exhibits:
3(a)
3(b)
3(c)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
Certificate of Incorporation of the Registrant.(1)
Certificate of Amendment of Certificate of Incorporation of the Registrant.(5)
Restated Bylaws of the Registrant.(24)
Specimen Class A Common Stock Certificate.(13)
Specimen Class B Common Stock Certificate.(13)
Certificate of Designations, Powers, Preferences and Rights of the 7.625% Series A Preferred Stock of
Hovnanian Enterprises, Inc., dated July 12, 2005.(11)
Certificate of Designations of the Series B Junior Preferred Stock of Hovnanian Enterprises, Inc., dated
August 14, 2008.(1)
Rights Agreement, dated as of August 14, 2008, between Hovnanian Enterprises, Inc. and National City
Bank, as Rights Agent, which includes the Form of Certificate of Designation as Exhibit A, Form of Right
Certificate as Exhibit B and the Summary of Rights as Exhibit C.(22)
Indenture dated as of November 3, 2003, among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc. and Deutsche Bank Trust Company (as successor trustee), as Trustee.(2)
First Supplemental Indenture, dated as of November 3, 2003, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc., the other Guarantors named therein and Deutsche Bank Trust Company (as
successor trustee), as Trustee, including form of 6.5% Senior Notes due January 15, 2014.(2)
Second Supplemental Indenture, dated as of March 18, 2004, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc., the other Guarantors named therein and Deutsche Bank Trust Company (as
successor trustee), as Trustee.(18)
Third Supplemental Indenture, dated as of July 15, 2004, among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc., the other Guarantors named therein and Deutsche Bank Trust Company (as successor
trustee), as Trustee.(18)
Fourth Supplemental Indenture, dated as of April 19, 2005, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc., the other Guarantors named therein and Deutsche Bank Trust Company (as
successor trustee), as Trustee.(18)
Fifth Supplemental Indenture, dated as of September 6, 2005, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc., the other Guarantors named therein and Deutsche Bank Trust Company (as
successor trustee), as Trustee.(18)
58
4(l)
4(m)
4(n)
4(o)
4(p)
4(q)
4(r)
4(s)
4(t)
4(u)
4(v)
4(w)
4(x)
4(y)
4(z)
4(aa)
4(bb)
4(cc)
Sixth Supplemental Indenture, dated as of February 27, 2006, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc., the other Guarantors named therein and Deutsche Bank Trust Company (as
successor trustee), as Trustee (including form of 7.5% Senior Notes due 2016).(19)
Seventh Supplemental Indenture, dated as of June 12, 2006, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc., the other Guarantors named therein and Deutsche Bank Trust Company (as
successor trustee), as Trustee (including form of 8.625% Senior Notes due 2017).(20)
Indenture dated as of March 18, 2004, relating to 6.375% Senior Notes, among K. Hovnanian
Enterprises, Inc., the Guarantors named therein and Deutsche Bank Trust Company (as successor trustee),
as Trustee, including form of 6.375% Senior Notes due 2014.(15)
Indenture dated as of November 30, 2004, relating to 6.25% Senior Notes, among K. Hovnanian
Enterprises, Inc., the Guarantors named therein and Deutsche Bank Trust Company (as successor trustee),
as Trustee, including form of 6.25% Senior Notes due 2015.(6)
Indenture dated as of August 8, 2005, relating to 6.25% Senior Notes due 2016, among K. Hovnanian
Enterprises, Inc., the Guarantors named therein and Deutsche Bank Trust Company (as successor trustee),
as Trustee including form of 6.25% Senior Notes due 2016.(7)
Indenture dated as of October 2, 2012, relating to the 7.25% Senior Secured First Lien Notes due 2020,
among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors named therein and
Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of 7.25%
Senior Secured First Lien Note due 2020.(14)
Indenture, dated as of February 14, 2011, relating to Senior Debt Securities, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc. and Wilmington Trust Company, as Trustee.(12)
Senior Notes Supplemental Indenture, dated as of February 14, 2011, among K. Hovnanian Enterprises,
Inc., Hovnanian Enterprises, Inc. and the other guarantors named therein with Wilmington Trust Company,
as Trustee, including form of Senior Note.(10)
Indenture, dated as of February 9, 2011, relating to Senior Subordinated Debt Securities, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and Wilmington Trust Company, as Trustee.(12)
Amortizing Notes Supplemental Indenture, dated as of February 9, 2011, among K. Hovnanian Enterprises,
Inc., Hovnanian Enterprises, Inc. and the other guarantors named therein and Wilmington Trust Company,
as Trustee, including form of Amortizing Note.(10)
Purchase Contract Agreement, dated as of February 9, 2011, among Hovnanian Enterprises, Inc., K.
Hovnanian Enterprises, Inc. and Wilmington Trust Company, as Trustee under the Amortizing Notes
Indenture, as Purchase Contract Agent and as attorney-in-fact for the holders of the Purchase Contracts from
time to time, including form of Unit and form of Purchase Contract.(10)
Indenture dated as of October 2, 2012, relating to the 9.125% Senior Secured Second Lien Notes due 2020,
among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors named therein and
Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of 9.125%
Senior Secured Second Lien Note due 2020.(14)
2017 Notes Supplemental Indenture dated as of April 21, 2011, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc. and the other guarantors named therein and Deutsche Bank National Trust
Company, as trustee.(9)
Secured Notes Indenture dated as of November 1, 2011 relating to the 5.0% Senior Secured Notes due 2021
and 2.0% Senior Secured Notes due 2021, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises,
Inc., the other guarantors named therein and Wilmington Trust, National Association, as Trustee and
Collateral Agent, including the forms of 5.0% Senior Secured Notes due 2021 and 2.0% Senior Secured
Notes due 2021.(4)
Supplemental Indenture dated as of November 1, 2011, relating to the 11⅞% Senior Notes due 2015, among
K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., as guarantor, the other guarantors named
therein and Wilmington Trust Company, as Trustee.(4)
Units Agreement, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and Wilmington
Trust Company, as Units Agent, including form of Unit, component amortizing notes and component
exchangeable notes.(14)
Amortizing Notes Indenture, dated as of October 2, 2012, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc. and the other guarantors named therein and Wilmington Trust Company, as
Trustee, including the form of Amortizing Note. (14)
Exchangeable Notes Indenture, dated as of October 2, 2012, among K. Hovnanian Enterprises, Inc.,
Hovnanian Enterprises, Inc. and the other guarantors named therein and Wilmington Trust Company, as
Trustee, including the form of Exchangeable Note.(14)
59
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)*
10(k)*
10(l)*
10(m)*
10(n)
10(o)
10(p)*
10(q)*
10(r)*
10(s)*
10(t)*
10(u)*
10(v)*
10(w)*
10(x)*
10(y)*
10(z)*
10(aa)*
10(bb)*
10(cc)*
10(dd)*
10(ee)*
10(ff)*
10(gg)*
10(hh)*
10(ii)*
First Lien Pledge Agreement, dated as of October 2, 2012, relating to the 7.25% Senior Secured First Lien
Notes due 2020.(14)
Second Lien Pledge Agreement, dated as of October 2, 2012, relating to the 9.125% Senior Secured Second
Lien Notes due 2020.(14)
First Lien Security Agreement, dated as of October 2, 2012, relating to the 7.25% Senior Secured First Lien
Notes due 2020.(14)
Second Lien Security Agreement, dated as of October 2, 2012, relating to the 9.125% Senior Secured
Second Lien Notes due 2020.(14)
Form of First Lien Intellectual Property Security Agreement, dated as of October 2, 2012, relating to the
7.25% Senior Secured First Lien Notes due 2020.(14)
Form of Second Lien Intellectual Property Security Agreement, dated as of October 2, 2012, relating to the
9.125% Senior Secured Second Lien Notes due 2020.(14)
Intercreditor Agreement, dated October 2, 2012, among Hovnanian Enterprises, Inc., K. Hovnanian
Enterprises, Inc., the other guarantors party thereto, Wilmington Trust, National Association, as trustee and
collateral agent under the Senior Noteholder Documents as defined therein, Wilmington Trust, National
Association, as collateral agent for the Mortgage Tax Collateral as defined therein, and Wilmington Trust,
National Association, as trustee and collateral agent under the Junior Noteholder Documents as defined
therein.(14)
First Lien Pledge Agreement, dated as of November 1, 2011, relating to the 5.0% Senior Secured Notes due
2021 and the 2.0% Senior Secured Notes due 2021.(4)
First Lien Security Agreement, dated as of November 1, 2011, relating to the 5.0% Senior Secured Notes
due 2021 and the 2.0% Senior Secured Notes due 2021.(4)
Form of Non-Qualified Stock Option Agreement (2012) for Ara K. Hovnanian.(32)
Form of Nonqualified Stock Option Agreement (Class A shares).(25)
Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan.(16)
1983 Stock Option Plan (as amended and restated).(17)
Management Agreement dated August 12, 1983, for the management of properties by K. Hovnanian
Investment Properties, Inc.(3)
Management Agreement dated December 15, 1985, for the management of properties by K. Hovnanian
Investment Properties, Inc.(21)
Executive Deferred Compensation Plan as amended and restated on May 24, 2012. (32)
Amended and Restated Senior Executive Short-Term Incentive Plan.(26)
Death and Disability Agreement between the Registrant and Ara K. Hovnanian, dated February 2, 2006.
(28)
Form of Hovnanian Deferred Share Policy for Senior Executives.(8)
Form of Hovnanian Deferred Share Policy.(8)
Form of Nonqualified Stock Option Agreement (Class B shares).(8)
Form of Incentive Stock Option Agreement.(8)
Form of Stock Option Agreement for Directors.(8)
Form of Restricted Share Unit Agreement.(8)
Form of Incentive Stock Option Agreement.(27)
Form of Restricted Share Unit Agreement.(27)
Form of Performance Vesting Incentive Stock Option Agreement.(27)
Form of Performance Vesting Nonqualified Stock Option Agreement.(27)
Form of Restricted Share Unit Agreement for Directors.(25)
Form of Long Term Incentive Program Award Agreement (Class A Shares).(23)
Form of Long Term Incentive Program Award Agreement (Class B Shares).(23)
Form of Change in Control Severance Protection Agreement entered into with each of Brad G. O’Connor
and David G. Valiaveedan.(29)
2012 Hovnanian Enterprises, Inc. Stock Incentive Plan. (30)
Form of Amendment to Outstanding Stock Option Grants.(31)
Form of Amendment to 2011 Restricted Share Unit Agreement for Ara K. Hovnanian and J. Larry Sorsby.
(31)
Form of Amendment to 2011 Non-Qualified Stock Option Agreement for Ara K. Hovnanian.(31)
Form of Amendment to 2011 Incentive Stock Option Agreement for J. Larry Sorsby.(31)
Form of Incentive Stock Option Agreement (2012).(32)
10(jj)*
10(kk)*
10(ll)*
10(mm)* Form of Restricted Share Unit Agreement (2012).(32)
10(nn)*
Form of Stock Option Agreement (2012) for Directors.(32)
60
10(oo)*
12
21
23
31(a)
31(b)
32(a)
32(b)
101**
Form of Restricted Share Unit Agreement (2012) for Directors.(32)
Statements re Computation of Ratios.
Subsidiaries of the Registrant.
Consent of Deloitte & Touche LLP.
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
The following financial information from our Annual Report on Form 10-K for the year ended October 31,
2012, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets
at October 31, 2012 and October 31, 2011, (ii) the Consolidated Statements of Operations for the years
ended October 31, 2012, 2011 and 2010, (iii) the Consolidated Statements of Equity for years ended
October 31, 2012, 2011 and 2010 (iv) the Consolidated Statements of Cash Flows for the years ended
October 31, 2012, 2011 and 2010, and (v) the Notes to Consolidated Financial Statements.
*
**XBRL
Management contracts or compensatory plans or arrangements.
Information is furnished and not filed or a part of a registration statement or prospectus for purposes of
sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of
the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these
sections.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2008
(No. 001-08551) of the Registrant.
Incorporated by reference to Exhibits to Current Report of the Registrant on Form 8-K (No. 001-08551) filed on
November 7, 2003.
Incorporated by reference to Exhibits to Registration Statement (No. 2-85198) on Form S-1 of the Registrant.
Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on
November 7, 2011.
Incorporated by reference to Exhibits to Current Report of the Registrant on Form 8-K (No. 001-08551) filed
December 9, 2008.
Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2004 (No.
001-08551) of the Registrant.
Incorporated by reference to Exhibits to Registration Statement (No. 333-127806) on Form S-4 of the
Registrant.
Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2008 (No.
001-08551) of the Registrant.
Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on
May 5, 2011.
Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551) filed
February 15, 2011.
Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on
July 13, 2005.
(12)
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31,
2011 (No. 001-08551) of the Registrant.
(13)
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31,
2009 (No. 001-08551).
61
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on
October 2, 2012.
Incorporated by reference to Exhibits to Registration Statement (No. 333-115742) on Form S-4 of the
Registrant.
Incorporated by reference to definitive Proxy Statement on Schedule 14A of the Registrant filed on February 1,
2010.
Incorporated by reference to Appendix C of the definitive Proxy Statement of the Registration on Schedule 14A
filed on February 19, 2008.
Incorporated by reference to Exhibits to Registration Statement (No. 333-131982) on Form S-3 of the
Registrant.
Incorporated by reference to Exhibits to Current Report of the Registrant on Form 8-K (No. 001-08551) filed on
February 27, 2006.
Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551) filed on
June 15, 2006.
Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2003 (No.
001-08551), of the Registrant.
Incorporated by reference to Exhibits to the Registration Statement (No. 001-08551) on Form 8-A of the
Registrant filed August 14, 2008
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2010
(No. 001-08551), of the Registrant.
Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551), filed
December 21, 2009.
Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2009 (No.
001-08551), of the Registrant.
Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on
March 22, 2010.
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2009 (No. 001-
08551), of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31,
2006 (No. 001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31,
2012 (No. 001-08551) of the Registrant.
Incorporated by reference to Appendix A to the definitive Proxy Statement on Schedule 14A of the Registrant
filed on February 14, 2012.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended April 30, 2012
(No. 001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2012
(No. 001-08551) of the Registrant.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
By:
/s/ ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman of the Board, Chief Executive Officer, and President
December 20, 2012
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant on December 20, 2012, and in the capacities indicated.
/s/ ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman of the Board, Chief Executive Officer, President and Director
(Principal Executive Officer)
/s/ BRAD G. O’CONNOR
Brad G. O’Connor
Vice President - Chief Accounting Officer and Corporate Controller
(Principal Accounting Officer)
/s/ EDWARD A. KANGAS
Edward A. Kangas
Chairman of Audit Committee and Director
/s/ J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President, Chief Financial Officer andDirector
(Principal Financial Officer)
/s/ STEPHEN D. WEINROTH
Stephen D. Weinroth
Chairman of Compensation Committee and Director
63
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm .......................................................................................
Consolidated Balance Sheets as of October 31, 2012 and 2011 .................................................................................
Consolidated Statements of Operations for the Years Ended October 31, 2012, 2011, and 2010 ..............................
Consolidated Statements of Equity for the Years Ended October 31, 2012, 2011, and 2010 .....................................
Consolidated Statements of Cash Flows for the Years Ended October 31, 2012, 2011, and 2010 .............................
Notes to Consolidated Financial Statements ...............................................................................................................
Page
65
66
68
69
70
72
No schedules have been prepared because the required information of such schedules is not present, is not present in
amounts sufficient to require submission of the schedule, or because the required information is included in the financial
statements and notes thereto.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Hovnanian Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Hovnanian Enterprises, Inc. and subsidiaries (the
"Company") as of October 31, 2012 and 2011, and the related consolidated statements of operations, equity, and cash
flows for each of the three years in the period ended October 31, 2012. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Hovnanian Enterprises, Inc. and subsidiaries as of October 31, 2012 and 2011, and the results of their operations and
their cash flows for each of the three years in the period ended October 31, 2012, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of October 31, 2012, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated December 20, 2012, expressed an unqualified opinion on the Company's internal
control over financial reporting.
/s/DELOITTE & TOUCHE LLP
Parsippany, NJ
December 20, 2012
65
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Homebuilding:
Cash and cash equivalents
Restricted cash and cash equivalents
Inventories:
Sold and unsold homes and lots under development
Land and land options held for future development or sale
Consolidated inventory not owned:
Specific performance options
Other options
Total consolidated inventory not owned
Total inventories
Investments in and advances to unconsolidated joint ventures
Receivables, deposits, and notes
Property, plant, and equipment - net
Prepaid expenses and other assets
Total homebuilding
Financial services:
Cash and cash equivalents
Restricted cash
Mortgage loans held for sale
Other assets
Total financial services
Total assets
See notes to consolidated financial statements.
October 31,
2012
October 31,
2011
$
258,323 $
41,732
671,851
218,996
-
90,619
90,619
981,466
61,083
61,794
48,524
66,694
1,519,616
14,909
22,470
117,024
10,231
164,634
1,684,250 $
$
244,356
73,539
720,149
245,529
2,434
-
2,434
968,112
57,826
52,277
53,266
67,698
1,517,074
6,384
4,079
72,172
2,471
85,106
1,602,180
66
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
LIABILITIES AND EQUITY
Homebuilding:
Nonrecourse land mortgages
Accounts payable and other liabilities
Customers’ deposits
Nonrecourse mortgages secured by operating properties
Liabilities from inventory not owned
Total homebuilding
Financial services:
Accounts payable and other liabilities
Mortgage warehouse line of credit
Total financial services
Notes payable:
Senior secured notes
Senior notes
Senior amortizing notes
Senior exchangeable notes
TEU senior subordinated amortizing notes
Accrued interest
Total notes payable
Income taxes payable
Total liabilities
Equity:
Hovnanian Enterprises, Inc. stockholders' equity deficit:
$
October 31,
2012
October 31,
2011
38,302 $
296,510
23,846
18,775
77,791
455,224
37,609
107,485
145,094
977,369
458,736
23,149
76,851
6,091
20,199
1,562,395
6,882
2,169,595
26,121
303,633
16,670
19,748
2,434
368,606
14,517
49,729
64,246
786,585
802,862
-
-
13,323
21,331
1,624,101
41,829
2,098,782
Preferred stock, $.01 par value - authorized 100,000 shares; issued 5,600 shares
with a liquidation preference of $140,000 at October 31, 2012 and 2011
135,299
135,299
Common stock, Class A, $.01 par value - authorized 200,000,000 shares; issued
and outstanding 130,055,304 shares at October 31, 2012 and 92,141,492
shares at October 31, 2011 (including 11,760,763 shares and 11,694,720
shares at October 31, 2012 and 2011, respectively, held in Treasury)
Common stock, Class B, $.01 par value (convertible to Class A at time of sale) -
authorized 30,000,000 shares; issued and outstanding 15,350,101 shares at
October 31, 2012 and 15,252,212 shares at October 31, 2011 (including
691,748 shares at October 31, 2012 and 2011 held in Treasury)
Paid in capital - common stock
Accumulated deficit
Treasury stock - at cost
Total Hovnanian Enterprises, Inc. stockholders' equity deficit
Noncontrolling interest in consolidated joint ventures
Total equity deficit
Total liabilities and equity
See notes to consolidated financial statements.
1,300
921
154
668,735
(1,175,703)
(115,360)
(485,575)
230
(485,345)
1,684,250 $
153
591,696
(1,109,506)
(115,257)
(496,694)
92
(496,602)
1,602,180
$
67
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Revenues:
Homebuilding:
Sale of homes
Land sales and other revenues
Total homebuilding
Financial services
Total revenues
Expenses:
Homebuilding:
Cost of sales, excluding interest
Cost of sales interest
Inventory impairment loss and land option write-offs
Total cost of sales
Selling, general and administrative
Total homebuilding expenses
Financial services
Corporate general and administrative
Other interest
Other operations
Total expenses
(Loss) gain on extinguishment of debt
Income (loss) from unconsolidated joint ventures
Loss before income taxes
State and federal income tax (benefit) provision:
State
Federal
Total income taxes
Net (loss) income
Per share data:
Basic:
(Loss) income per common share
Weighted-average number of common shares outstanding
Assuming dilution:
(Loss) income per common share
Weighted-average number of common shares outstanding
See notes to consolidated financial statements.
October 31,
2012
Year Ended
October 31,
2011
October 31,
2010
$
1,405,580 $
41,038
1,446,618
38,735
1,485,353
1,072,474 $
32,952
1,105,426
29,481
1,134,907
1,327,499
12,370
1,339,869
31,973
1,371,842
1,179,801
54,538
12,530
1,246,869
142,087
1,388,956
23,648
48,232
97,895
4,205
1,562,936
(29,066)
5,401
(101,248)
913,901
74,676
101,749
1,090,326
161,456
1,251,782
21,371
49,938
97,169
4,805
1,425,065
7,528
(8,958 )
(291,588 )
1,104,049
84,440
135,699
1,324,188
178,331
1,502,519
23,074
59,900
97,919
9,715
1,693,127
25,047
956
(295,282)
(35,328)
277
(35,051)
(66,197) $
(3,924 )
(1,577 )
(5,501 )
(286,087 ) $
(6,536)
(291,334)
(297,870)
2,588
(0.52) $
126,350
(2.85 ) $
100,444
(0.52) $
126,350
(2.85 ) $
100,444
0.03
78,691
0.03
79,683
$
$
$
68
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
A Common Stock
B Common Stock
Shares
Issued and
Shares
Issued and
Outstanding Amount
Outstanding Amount
Preferred Stock
Shares
Issued and
Outstanding
Amount
Paid-In
Capital
Accumulated
Treasury
Deficit
Stock
Non
Controlling
Interest
Total
62,682,226 $
744 14,573,319 $
153
5,600
$ 135,299 $ 455,470
$
(826,007) $ (115,257) $
730
$ (348,868)
152,590
1
271,623
3
8,524
(8,524)
5,094
3,344
5,095
3,347
63,114,963
748 14,564,795
153
5,600
135,299
463,908
(823,419) (115,257)
630
(337,938)
2,588
(100)
(100)
2,588
(Dollars In
thousands)
Balance, November
1, 2009
Stock options,
amortization and
issuances
Restricted stock
amortization,
issuances and
forfeitures
Conversion of Class
B to Class A
common stock
Changes in
noncontrolling
interest in
consolidated joint
ventures
Net income
Balance, November
1, 2010
Stock options,
amortization and
issuances
Restricted stock
amortization,
issuances and
forfeitures
Stock Issuance
Issuance of prepaid
common stock
purchase contracts
414,320
13,512,500
4
135
Settlement of prepaid
common stock
purchase contracts
3,400,658
34
4,377
589
54,764
68,092
(34)
4,377
593
54,899
68,092
4,331
(4,331)
80,446,772
921 14,560,464
153
5,600
135,299
591,696
(1,109,506) (115,257)
92
(496,602)
(286,087)
(538)
(538)
(286,087)
Conversion of Class
B to Class A
common stock
Changes in
noncontrolling
interest in
consolidated joint
ventures
Net loss
Balance, November
1, 2011
Stock options,
amortization and
issuances
Restricted stock
amortization,
issuances and
forfeitures
Stock issuance
Issuance of shares for
6,250
172,941
25,000,000
2
250
117,399
1
debt
8,443,713
84
Settlement of prepaid
common stock
purchase contracts
Conversion of Class
B to Class A
common stock
Changes in
noncontrolling
interest in
consolidated joint
ventures
Treasury stock
purchases
Net loss
Balance, October 31,
4,271,398
43
19,510
(19,510)
(66,043)
4,078
2,763
47,074
23,167
(43)
4,078
2,766
47,324
23,251
138
138
(103)
(66,197)
(103)
(66,197)
2012
118,294,541 $
1,300 14,658,353 $
154
5,600 $ 135,299 $ 668,735
$ (1,175,703) $ (115,360) $
230
$ (485,345)
See notes to consolidated financial statements.
69
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Year Ended
October 31, 2012 October 31, 2011 October 31, 2010
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided
$
(66,197) $
(286,087) $
2,588
by operating activities:
Depreciation
Compensation from stock options and awards
Amortization of bond discounts and deferred financing costs
Gain on sale and retirement of property and assets
(Income) loss from unconsolidated joint ventures
Distributions of earnings from unconsolidated joint ventures
Loss (gain) on extinguishment of debt
Expenses related to the debt for debt exchange
Inventory impairment and land option write-offs
(Increase) decrease in assets:
Mortgage notes receivable
Restricted cash, receivables, prepaids, deposits, and other assets
Inventories
(Decrease) increase in liabilities:
State and federal income tax liabilities
Customers’ deposits
Accounts payable, accrued interest and other accrued liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Proceeds from sale of property and assets
Purchase of property, equipment, and other fixed assets and acquisitions
Investment in and advances to unconsolidated joint ventures
Distributions of capital from unconsolidated joint ventures
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from mortgages and notes
Payments related to mortgages and notes
Proceeds from model sale leaseback financing programs
Payments related to model sale leaseback financing programs
Proceeds from land bank financing program
Payments related to land bank financing program
Net proceeds from senior secured notes
Net proceeds from senior notes
Net proceeds from exchangeable notes units
Net proceeds from tangible equity units
Net proceeds from Class A Common Stock
Net proceeds (payments) related to mortgage warehouse lines of credit
Deferred financing cost from land banking financing program and note
issuances
Principal payments and debt repurchases
Payments related to the debt for debt exchange
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents balance, beginning of year
Cash and cash equivalents balance, end of year
Supplemental disclosures of cash flows:
Cash received during the year for income taxes
$
$
70
6,223
6,453
7,436
(230)
(5,401)
1,790
29,066
4,694
12,530
(44,852)
3,680
8,430
(34,947)
5,903
(1,576)
(66,998)
3,206
(5,059)
(4,743)
5,096
(1,500)
16,240
(25,605)
34,389
(1,444)
50,927
(6,081)
797,000
-
100,000
-
47,324
57,756
(19,381)
(941,158)
(18,874)
(103)
90,990
22,492
250,740
273,232 $
9,340
6,219
6,047
(266)
8,958
1,583
(7,528)
-
101,749
14,154
59,686
(88,385)
23,919
7,150
(63,954)
(207,415)
1,341
(826)
(4,071)
4,751
1,195
16,614
(14,247)
-
-
-
-
12,660
151,220
-
83,707
54,899
(23,914)
(5,396)
(185,763)
-
-
89,780
(116,440)
367,180
250,740 $
12,576
8,706
5,051
(69)
(956)
2,251
(25,047)
-
135,699
(16,780)
40,400
(27,726)
(44,444)
(9,291)
(50,471)
32,487
474
(2,456)
(5,262)
7,228
(16)
9,125
(5,662)
-
-
-
-
-
-
-
-
-
17,786
(1,656)
(111,576)
-
-
(91,983)
(59,512)
426,692
367,180
103 $
28,008 $
253,425
Supplemental disclosure of noncash investing activities:
During fiscal 2012, we purchased our partners’ interest in one of our unconsolidated homebuilding joint
ventures. The consolidation of this entity resulted in increases in inventory, other assets, non-recourse land mortgages
and accounts payables and other liabilities of $34.3 million, $5.0 million, $20.6 million and $15.8 million, respectively.
In fiscal 2012, we completed several debt for equity exchanges and a debt for debt exchange. See Notes 9 and
10 for further information.
In fiscal 2011, our partner in a land development joint venture transferred its interest in the venture to us. The
consolidation resulted in increases in inventory and non-recourse land mortgages of $9.5 million and $18.5 million,
respectively, and a decrease in other liabilities of $9.0 million.
See notes to consolidated financial statements.
71
HOVNANIAN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance
with U.S. Generally Accepted Accounting Principles (GAAP) and include our accounts and those of all wholly-owned
subsidiaries, and variable interest entities in which we are deemed to be the primary beneficiary, after elimination of all
significant intercompany balances and transactions. Our fiscal year ends October 31.
2. Business
Our operations consist of homebuilding, financial services, and corporate. Our homebuilding operations are
made up of six reportable segments defined as Northeast, Mid-Atlantic, Midwest, Southeast, Southwest, and West.
Homebuilding operations comprise the substantial part of our business, with approximately 97% of consolidated
revenues for the years ended October 31, 2012, 2011 and 2010. We are a Delaware corporation, building and selling
homes at October 31, 2012 in 172 consolidated new home communities in Arizona, California, Delaware, Florida,
Georgia, Illinois, Maryland, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Texas,
Virginia, Washington, D.C., and West Virginia. We offer a wide variety of homes that are designed to appeal to first-
time buyers, first and second-time move-up buyers, luxury buyers, active adult buyers, and empty nesters. Our financial
services operations, which are a reportable segment, provide mortgage banking and title services to the homebuilding
operations’ customers. We do not typically retain or service the mortgages that we originate but rather sell the mortgages
and related servicing rights to investors. Corporate primarily includes the operations of our corporate office whose
primary purpose is to provide executive services, accounting, information services, human resources, management
reporting, training, cash management, internal audit, risk management, and administration of process redesign, quality,
and safety.
See Note 11 “Operating and Reporting Segments” for further disclosure of our reportable segments.
3. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and these differences could have a significant impact
on the financial statements.
Income Recognition from Home and Land Sales - We are primarily engaged in the development, construction,
marketing and sale of residential single-family and multi-family homes where the planned construction cycle is less than
12 months. For these homes, in accordance with ASC 360-20, “Property, Plant and Equipment - Real Estate Sales”,
revenue is recognized when title is conveyed to the buyer, adequate initial and continuing investments have been
received and there is no continued involvement. In situations where the buyer’s financing is originated by our mortgage
subsidiary and the buyer has not made an adequate initial investment or continuing investment as prescribed by ASC
360-20, the profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor has been
completed.
Income Recognition from Mortgage Loans - Our Financial Services segment originates mortgages, primarily for
our homebuilding customers. We use mandatory investor commitments and forward sales of mortgage-backed securities
(MBS) to hedge our mortgage-related interest rate exposure on agency and government loans.
We elected the fair value option for our mortgage loans held for sale in accordance with ASC 825, “Financial
Instruments”, which permits us to measure our loans held for sale at fair value. Management believes that the election of
the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings
caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without
having to apply complex hedge accounting provisions.
Substantially all of the mortgage loans originated are sold within a short period of time in the secondary
mortgage market on a servicing released, nonrecourse basis, although the Company remains liable for certain limited
72
representations, such as fraud, and warranties related to loan sales. Mortgage investors could seek to have us buy back
loans or compensate them from losses incurred on mortgages we have sold based on claims that we breached our limited
representations and warranties. We believe there continues to be an industry-wide issue with the number of purchaser
claims in which purchasers purport to have found inaccuracies related to the sellers’ representations and warranties in
particular loan sale agreements. We have established reserves for probable losses.
Interest Income Recognition for Mortgage Loans Receivable and Recognition of Related Deferred Fees and
Costs- Interest income is recognized as earned for each mortgage loan during the period from the loan closing date to the
sale date when legal control passes to the buyer, and the sale price is collected. All fees related to the origination of
mortgage loans and direct loan origination costs are expensed when incurred, given the short term holding period for our
loans. These fees and costs include loan origination fees, loan discount, and salaries and wages.
Cash and Cash Equivalents - Cash and cash equivalents include cash deposited in checking accounts, overnight
repurchase agreements, certificates of deposit, Treasury Bills and government money market funds with maturities of
90 days or less when purchased. Our cash balances are held at a few financial institutions and may, at times, exceed
insurable amounts. We believe we mitigate this risk by depositing our cash in major financial institutions. At October 31,
2012 and 2011, we had no cash equivalents as the full balance of cash and cash equivalents was held as cash.
Fair Value of Financial Instruments - The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Our financial instruments consist of cash and cash
equivalents, restricted cash, receivables, deposits and notes, accounts payable and other liabilities, customer deposits,
mortgage loans held for sale, nonrecourse land and operating properties mortgages, mortgage warehouse lines of credit,
accrued interest, and the senior secured notes, senior notes, senior amortizing notes, senior exchangeable notes and
senior subordinated amortizing notes payable. The fair value of the senior secured notes, senior notes, senior amortizing
notes, senior exchangeable notes and senior subordinated amortizing notes payable is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining
maturities.
Inventories - Inventories consist of land, land development, home construction costs, capitalized interest,
construction overhead and property taxes. Construction costs are accumulated during the period of construction and
charged to cost of sales under specific identification methods. Land, land development, and common facility costs are
allocated based on buildable acres to product types within each community, then charged to cost of sales equally based
upon the number of homes to be constructed in each product type.
We record inventories in our consolidated balance sheets at cost unless the inventory is determined to be
impaired, in which case the inventory is written down to its fair value. Our inventories consist of the following three
components: (1) sold and unsold homes and lots under development, which includes all construction, land, capitalized
interest, and land development costs related to started homes and land under development in our active communities;
(2) land and land options held for future development or sale, which includes all costs related to land in our communities
in planning or mothballed communities; and (3) consolidated inventory not owned, which includes all costs related to
specific performance options, variable interest entities, and other options, which consists primarily of model homes
financed with an investor and inventory related to land banking arrangements.
We decide to mothball (or stop development on) certain communities when we determine that current
performance does not justify further investment at that time. When we decide to mothball a community, the inventory is
reclassified on our consolidated balance sheets from "Sold and unsold homes and lots under development" to "Land and
land options held for future development or sale". As of October 31, 2012, the book value of the 53 mothballed
communities was $124.2 million, net of impairment charges of $467.8 million. We regularly review communities to
determine if mothballing is appropriate. During fiscal 2012, we mothballed one community, re-activated two and sold
five communities which were previously mothballed communities.
During fiscal 2012, we entered into certain model sale leaseback financing arrangements, whereby we sold and
leased back certain of our model homes with the right to participate in the potential profit when each home is sold to a
third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes, these
sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our
Consolidated Balance Sheet, the inventory of $33.7 million was reclassified to consolidated inventory not owned, with a
$32.9 million liability from inventory not owned for the amount of net cash received.
73
During fiscal 2012, we entered into a land banking arrangement with GSO Capital Partners LP (“GSO”). We
sold a portfolio of our land parcels to GSO, and GSO provided us an option to purchase back finished lots on a quarterly
basis. Because of our option to repurchase these parcels, for accounting purposes, this transaction is considered a
financing rather than a sale. For purposes of our Consolidated Balance Sheet, the inventory of $56.9 million was
reclassified to consolidated inventory not owned, with a $44.8 million liability from inventory not owned recorded for
the amount of net cash received.
The recoverability of inventories and other long-lived assets is assessed in accordance with the provisions of
ASC 360-10, “Property, Plant and Equipment - Overall”. ASC 360-10 requires long-lived assets, including inventories,
held for development to be evaluated for impairment based on undiscounted future cash flows of the assets at the lowest
level for which there are identifiable cash flows. As such, we evaluate inventories for impairment at the individual
community level, the lowest level of discrete cash flows that we measure.
We evaluate inventories of communities under development and held for future development for impairment
when indicators of potential impairment are present. Indicators of impairment include, but are not limited to, decreases
in local housing market values, decreases in gross margins or sales absorption rates, decreases in net sales prices (base
sales price net of sales incentives), or actual or projected operating or cash flow losses. The assessment of communities
for indication of impairment is performed quarterly, primarily by completing detailed budgets for all of our communities
and identifying those communities with a projected operating loss for any projected fiscal year or for the entire projected
community life. For those communities with projected losses, we estimate the remaining undiscounted future cash flows
and compare those to the carrying value of the community, to determine if the carrying value of the asset is recoverable.
The projected operating profits, losses, or cash flows of each community can be significantly impacted by our
estimates of the following:
●
future base selling prices;
●
future home sales incentives;
●
future home construction and land development costs; and
●
future sales absorption pace and cancellation rates.
These estimates are dependent upon specific market conditions for each community. While we consider
available information to determine what we believe to be our best estimates as of the end of a quarterly reporting period,
these estimates are subject to change in future reporting periods as facts and circumstances change. Local market-
specific conditions that may impact our estimates for a community include:
●
the intensity of competition within a market, including available home sales prices and home sales
incentives offered by our competitors, including foreclosed homes where they have an impact on our
ability to sell homes;
●
the current sales absorption pace for both our communities and competitor communities;
●
community-specific attributes, such as location, availability of lots in the market, desirability and
uniqueness of our community, and the size and style of homes currently being offered;
● potential for alternative product offerings to respond to local market conditions;
●
changes by management in the sales strategy of the community; and
●
current local market economic and demographic conditions and related trends and forecasts.
These and other local market-specific conditions that may be present are considered by management in
preparing projection assumptions for each community. The sales objectives can differ between our communities, even
within a given market. For example, facts and circumstances in a given community may lead us to price our homes with
the objective of yielding a higher sales absorption pace, while facts and circumstances in another community may lead
us to price our homes to minimize deterioration in our gross margins, although it may result in a slower sales absorption
74
pace. In addition, the key assumptions included in our estimate of future undiscounted cash flows may be interrelated.
For example, a decrease in estimated base sales price or an increase in homes sales incentives may result in a
corresponding increase in sales absorption pace. Additionally, a decrease in the average sales price of homes to be sold
and closed in future reporting periods for one community that has not been generating what management believes to be
an adequate sales absorption pace may impact the estimated cash flow assumptions of a nearby community. Changes in
our key assumptions, including estimated construction and development costs, absorption pace and selling strategies,
could materially impact future cash flow and fair value estimates. Due to the number of possible scenarios that would
result from various changes in these factors, we do not believe it is possible to develop a sensitivity analysis with a level
of precision that would be meaningful to an investor.
If the undiscounted cash flows are more than the carrying amount of the community, then the carrying amount
is recoverable, and no impairment adjustment is required. However, if the undiscounted cash flows are less than the
carrying amount, then the community is deemed impaired and is written-down to its fair value. We determine the
estimated fair value of each community by determining the present value of its estimated future cash flows at a discount
rate commensurate with the risk of the respective community, or in limited circumstances, prices for land in recent
comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for
the land (other than in a forced liquidation sale), and recent bona fide offers received from outside third parties. Our
discount rates used for all impairments recorded from October 31, 2010 to October 31, 2012 range from 16.8% to
20.3%. The estimated future cash flow assumptions are virtually the same for both our recoverability and fair value
assessments. Should the estimates or expectations used in determining estimated cash flows or fair value, including
discount rates, decrease or differ from current estimates in the future, we may be required to recognize additional
impairments related to current and future communities. The impairment of a community is allocated to each lot on a
relative fair value basis.
From time to time, we write off deposits and approval, engineering and capitalized interest costs when we
determine that it is no longer probable that we will exercise options to buy land in specific locations or when we redesign
communities and/or abandon certain engineering costs. In deciding not to exercise a land option, we take into
consideration changes in market conditions, the timing of required land takedowns, the willingness of land sellers to
modify terms of the land option contract (including timing of land takedowns), and the availability and best use of our
capital, among other factors. The write-off is recorded in the period it is deemed not probable that the optioned property
will be acquired. In certain instances, we have been able to recover deposits and other pre-acquisition costs that were
previously written off. These recoveries have not been significant in comparison to the total costs written off.
Land and land options held for sale includes land parcels, on which we have decided not to build homes, and
are reported at the lower of carrying amount or fair value less costs to sell. In determining the fair value of land held for
sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis
studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale)
and recent bona fide offers received from outside third parties. At October 31, 2012, land and land options held for sale
had a carrying value of $4.4 million.
Insurance Deductible Reserves - For homes delivered in fiscal 2012 and 2011, our deductible under our general
liability insurance is $20 million per occurrence for construction defect and warranty claims. For bodily injury claims,
our deductible per occurrence in fiscal 2012 and 2011 is $0.1 million up to a $5 million limit. Our aggregate retention in
fiscal 2012 and 2011 is $21 million for construction defect, warranty and bodily injury claims. We do not have a
deductible on our worker's compensation insurance. Reserves for estimated losses for construction defects, warranty,
bodily injury and worker’s compensation claims have been established using the assistance of a third-party actuary. We
engage a third-party actuary that uses our historical warranty and construction defect data and worker's compensation
data to assist our management in estimating 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 worker's compensation programs. The
estimates include provisions for inflation, claims handling and legal fees. These estimates are subject to a high degree of
variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of
products we build, claim settlement patterns, insurance industry practices, and legal interpretations, among others.
Because of the high degree of judgment required in determining these estimated liability amounts, actual future costs
could differ significantly from our currently estimated amounts.
75
Interest - Interest attributable to properties under development during the land development and home
construction period is capitalized and expensed along with the associated cost of sales as the related inventories are sold.
Interest incurred in excess of interest capitalized, which occurs when assets qualifying for interest capitalization are less
than our outstanding debt balances, is expensed as incurred in “Other interest.”
Interest costs incurred, expensed and capitalized were:
(Dollars in thousands)
Interest capitalized at beginning of year
Plus interest incurred(1)
Less cost of sales interest expensed
Less other interest expensed(2)(3)
Interest capitalized at end of year(4)
Year Ended
October 31,
October 31,
2012
121,441 $
147,048
54,538
97,895
116,056 $
2011
136,288 $
156,998
74,676
97,169
121,441 $
October 31,
2010
164,340
154,307
84,440
97,919
136,288
$
$
(1)
(2)
(3)
Data does not include interest incurred by our mortgage and finance subsidiaries.
Other interest expensed is comprised of interest that does not qualify for capitalization because our assets that
qualify for interest capitalization (inventory under development) do not exceed our debt. Interest on completed
homes and land in planning which does not qualify for capitalization is expensed.
Cash paid for interest, net of capitalized interest is the sum of other interest expensed, as defined above, and
interest paid by our mortgage and finance subsidiaries adjusted for the change in accrued interest, which is
calculated as follows:
(Dollars in thousands)
Other interest expensed
Interest paid by our mortgage and finance subsidiaries
Decrease in accrued interest
Cash paid for interest, net of capitalized interest
Year Ended
October 31,
October 31,
2012
97,895 $
2,433
1,132
101,460 $
2011
97,169 $
1,959
2,637
101,765 $
October 31,
2010
97,919
1,848
2,110
101,877
$
$
(4) We have incurred significant inventory impairments in recent years, which are determined based on total
inventory including capitalized interest. However, the capitalized interest amounts above are shown gross before
allocating any portion of the impairments to capitalized interest.
Land Options - Costs incurred to obtain options to acquire improved or unimproved home sites are capitalized.
Such amounts are either included as part of the purchase price if the land is acquired or charged to “Inventory
impairments loss and land option write-offs” if we determine we will not exercise the option. If the options are with
variable interest entities and we are the primary beneficiary, we record the land under option on the Consolidated
Balance Sheets under “Consolidated inventory not owned” with an offset under “Liabilities from inventory not
owned”. If the option obligation is to purchase under specific performance or has terms that require us to record it as
financing, then we record the option on the Consolidated Balance Sheets under “Consolidated inventory not owned”
with an offset under “Liabilities from inventory not owned”. In accordance with ASC 810-10 “Consolidation - Overall”,
we record costs associated with other options on the Consolidated Balance Sheets under “Land and land options held for
future development or sale.”
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated
homebuilding and land development joint ventures are accounted for under the equity method of accounting. Under the
equity method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery
of lots or homes to third parties. Our ownership interests in the joint ventures vary but our voting interests are generally
50% or less. In determining whether or not we must consolidate joint ventures where we are the managing member of
the joint venture, we assess whether the other partners have specific rights to overcome the presumption of control by us
as the manager of the joint venture. In most cases, the presumption is overcome because the joint venture agreements
require that both partners agree on establishing the significant operating and capital decisions of the partnership,
including budgets, in the ordinary course of business. The evaluation of whether or not we control a venture can require
significant judgment. In accordance with ASC 323-10, “Investments - Equity Method and Joint Ventures - Overall”, we
assess our investments in unconsolidated joint ventures for recoverability, and if it is determined that a loss in value of
76
the investment below its carrying amount is other than temporary, we write down the investment to its fair value. We
evaluate our equity investments for impairment based on the joint venture’s projected cash flows. This process requires
significant management judgment and estimates. There were no write-downs in fiscal 2010, 2011 or 2012.
Deferred Bond Issuance Costs - Costs associated with the issuance of our senior secured, senior, senior
amortizing, senior exchangeable and senior subordinated amortizing notes are capitalized and amortized over the term of
each note’s issuance.
Debt Issued At a Discount - Debt issued at a discount to the face amount is accreted up to its face amount
utilizing the effective interest method over the term of the note and recorded as a component of interest on the
Consolidated Statements of Operations.
Post Development Completion and Warranty Costs - In those instances where a development is substantially
completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover
the cost of such work. In addition, we estimate and accrue warranty costs as part of cost of sales for repair costs under
$5,000 per occurrence to homes, community amenities and land development infrastructure. We also accrue for warranty
costs over $5,000 per occurrence as part of our general liability insurance deductible as selling, general, and
administrative costs. Both of these liabilities are recorded in “Accounts payable and other liabilities” in the Consolidated
Balance Sheets.
Advertising Costs - Advertising costs are expensed as incurred. During the years ended October 31, 2012,
2011, and 2010, advertising costs expensed totaled to $18.2 million, $20.3 million and $18.2 million, respectively.
Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts
recorded for financial reporting and for income tax purposes. If the combination of future years’ income (or loss)
combined with the reversal of the timing differences results in a loss, such losses can be carried back to prior years or
carried forward to future years to recover the deferred tax assets. In accordance with ASC 740-10, “Income Taxes -
Overall”, we evaluate our deferred tax assets quarterly to determine if valuation allowances are required. ASC 740-10
requires that companies assess whether valuation allowances should be established based on the consideration of all
available evidence using a “more-likely-than-not” standard.
We recognize tax liabilities in accordance with ASC 740-10, and we adjust these liabilities when our judgment
changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate. These
differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Common Stock - Each share of Class A Common Stock entitles its holder to one vote per share and each share
of Class B Common Stock generally entitles its holder to ten votes per share. The amount of any regular cash dividend
payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash
dividend payable on a share of Class B Common Stock. If a shareholder desires to sell shares of Class B Common Stock,
such stock must be converted into shares of Class A Common Stock.
On April 11, 2012, we issued 25,000,000 shares of our Class A Common Stock at a price of $2.00 per share,
resulting in net proceeds of $47.3 million. The net proceeds of the issuance, along with cash on hand, were used to
purchase $75.4 million principal amount of our senior notes, as discussed in Note 9.
Pursuant to agreements with bondholders, during the year ended October 31, 2012, we issued an aggregate of
8,443,713 shares of our Class A Common Stock in exchange for an aggregate of $33.2 million of our outstanding
indebtedness, consisting of $7.8 million principal amount of our 6.25% Senior Notes due 2016, $4.0 million principal
amount of our 7.5% Senior Notes due 2016, $18.3 million of our outstanding 8.625% Senior Notes due 2017 and
approximately $3.1 million aggregate principal amount of our 12.072% senior subordinated amortizing notes (the
“exchanges”). The exchanges were effected with existing bondholders, without any underwriters, and no commission or
other remuneration was paid or given directly or indirectly for soliciting such exchanges. The exchanges resulted in a
gain on extinguishment of debt of $9.5 million for the year ended October 31, 2012.
On February 9, 2011, we issued 13,512,500 shares of our Class A Common Stock, including 1,762,500 shares
issued pursuant to the over-allotment option granted to the underwriters, at a price of $4.30 per share. A portion of the
net proceeds of the issuance, together with the net proceeds from the issuances of the 11.875% Senior Notes due 2015
77
and the 7.25% Tangible Equity Units were used to fund certain tender offers and subsequent redemptions as described in
Note 9.
On August 4, 2008, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”) designed to
preserve shareholder value and the value of certain tax assets primarily associated with net operating loss carryforwards
(NOL) and built-in losses under Section 382 of the Internal Revenue Code. Our ability to use NOLs and built-in losses
would be limited, if there was an “ownership change” under Section 382. This would occur if shareholders owning (or
deemed under Section 382 to own) 5% or more of our stock increase their collective ownership of the aggregate amount
of our outstanding shares by more than 50 percentage points over a defined period of time. The Rights Plan was adopted
to reduce the likelihood of an “ownership change” occurring as defined by Section 382. Under the Rights Plan, one right
was distributed for each share of Class A Common Stock and Class B Common Stock outstanding as of the close of
business on August 15, 2008. Effective August 15, 2008, if any person or group acquires 4.9% or more of the
outstanding shares of Class A Common Stock without the approval of the Board of Directors, there would be a
triggering event causing significant dilution in the voting power of such person or group. However, existing stockholders
who owned, at the time of the Rights Plan’s adoption, 4.9% or more of the outstanding shares of Class A Common Stock
will trigger a dilutive event only if they acquire additional shares. The approval of the Board of Directors’ decision to
adopt the Rights Plan may be terminated by the Board at any time, prior to the Rights being triggered. The Rights Plan
will continue in effect until August 15, 2018, unless it expires earlier in accordance with its terms. The approval of the
Board of Directors’ decision to adopt the Rights Plan was submitted to a stockholder vote and approved at a special
meeting of stockholders held on December 5, 2008. Also at the Special Meeting on December 5, 2008, our stockholders
approved an amendment to our Certificate of Incorporation to restrict certain transfers of Class A Common Stock in
order to preserve the tax treatment of our net operating loss carryforwards and built-in losses under Section 382 of the
Internal Revenue Code. Subject to certain exceptions pertaining to pre-existing 5% stockholders and Class B
stockholders, the transfer restrictions in the amended Certificate of Incorporation generally restrict any direct or indirect
transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the
effect would be to (i) increase the direct or indirect ownership of our stock by any person (or public group) from less
than 5% to 5% or more of our common stock; (ii) increase the percentage of our common stock owned directly or
indirectly by a person (or public group) owning or deemed to own 5% or more of our common stock; or (iii) create a
new public group. Transfers included under the transfer restrictions include sales to persons (or public groups) whose
resulting percentage ownership (direct or indirect) of common stock would exceed the 5% thresholds discussed above, or
to persons whose direct or indirect ownership of common stock would by attribution cause another person (or public
group) to exceed such threshold.
In July 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares
of Class A Common Stock. As of October 31, 2012, approximately 3.5 million shares have been purchased under this
program, 0.1 million shares of which were repurchased during the year ended October 31, 2012.
Preferred Stock - 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. 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 fiscal 2012, 2011 and 2010, we did not pay any dividends on the Series A Preferred Stock due
to covenant restrictions in our indentures.
Depreciation - Property, plant and equipment are depreciated using the straight-line method over the estimated
useful life of the assets ranging from 3 to 40 years.
Prepaid Expenses - Prepaid expenses which relate to specific housing communities (model setup, architectural
fees, homeowner warranty program fees, etc.) are amortized to cost of sales as the applicable inventories are sold. All
other prepaid expenses are amortized over a specific time period or as used and charged to overhead expense.
Allowance for Doubtful Accounts – We regularly review our receivable balances, which are included in
Receivables, deposits and notes on the Consolidated Balance Sheets, for collectability and record an allowance against a
receivable when it is deemed that collectability is uncertain. These receivables include receivables from our insurance
carriers, receivables from municipalities related to the development of utilities or other infrastructure, and other
miscellaneous receivables. At October 31, 2012 and 2011, the balance for allowance for doubtful accounts was $8.2
78
million and $0.6 million, respectively. The balance at October 31, 2012 primarily related to the allowance for receivables
from our insurance carriers for certain warranty claims which may not be fully recoverable, allowances for receivables
from municipalities and an allowance for a receivable related to a legal settlement. The balance at October 31, 2011
primarily related to the allowance for receivables from municipalities. During fiscal 2012 and 2011, we recorded $7.7
million and $0.1 million, respectively, of additional reserves and less than $0.1 million and $0.1 million, respectively, in
write-offs. In addition, in fiscal 2011, we reversed $0.7 million related to an allowance on a note receivable that was
fully collected during the year.
Stock Options - We account for our stock options under ASC 718-10, “Compensation - Stock Compensation -
Overall”, which requires the fair-value based method of accounting for stock awards granted to employees and measures
and records the cost of employee services received in exchange for an award of equity instruments based on the grant-
date fair value of the award. That cost is recognized over the period during which an employee is required to provide
service in exchange for the award.
The fair value of option awards is established at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for October 31, 2012, October 31, 2011 and October 31, 2010: risk
free interest rate of 1.65%, 2.99% and 3.24%, respectively; dividend yield of zero; historical volatility factor of the
expected market price of our common stock of 0.97 for year ended 2012, 0.94 for the year ended 2011, and 0.90 for the
year ended 2010; a weighted-average expected life of the option of 7.37 years for 2012, 7.25 years for 2011 and 7.12
years for 2010; and an estimated forfeiture rate of 15.99% for 2012, 14.93% for fiscal 2011 and 13.42% for fiscal
2010. The benefits of tax deductions in excess of recognized compensation cost are reported as both a financing cash
inflow and an operating cash outflow.
Compensation cost arising from nonvested stock granted to employees and from nonemployee stock awards is
recognized as expense using the straight-line method over the vesting period.
For the years ended October 31, 2012, 2011 and 2010, total stock-based compensation expense was $6.5
million, $6.2 million and $8.7 million, respectively. Included in this total stock-based compensation expense was
incremental expense for stock options of $4.1 million, $4.4 million and $5.0 million for the years ended October 31,
2012, October 31, 2011 and October 31, 2010, respectively. Because we are currently in a position of fully reserving
any tax benefits generated from losses, the amount net of tax is not presented.
Per Share Calculations - Basic earnings per share is computed by dividing net income (loss) (the “numerator”)
by the weighted-average number of common shares outstanding (the “denominator”) for the period. The basic weighted-
average number of shares for the twelve months ended October 31, 2012 includes 8.8 million shares related to Purchase
Contracts (issued as part of our 7.25% Tangible Equity Units) which are issuable in the future with no additional cash
required to be paid by the holders thereof. Computing diluted earnings per share is similar to computing basic earnings
per share, except that the denominator is increased to include the dilutive effects of all issued options and non-vested
shares of restricted stock, as well as common shares issuable upon conversion of our senior exchangeable notes. Any
options that have an exercise price greater than the average market price are considered to be anti-dilutive and are
excluded from the diluted earnings per share calculation.
All outstanding non-vested shares of restricted stock that contain non-forfeitable rights to dividends or dividend
equivalents that participate in undistributed earnings with common stock are considered participating securities and are
included in computing earnings per share pursuant to the two-class method. The two-class method is an earnings
allocation formula that determines earnings per share for each class of common stock and participating securities
according to dividends or dividend equivalents and participation rights in undistributed earnings. The Company’s
restricted common stock (“non-vested shares”) are considered participating securities.
For the years ended October 31, 2012 and October 31, 2011, 0.2 million and 0.3 million, respectively, of
incremental shares attributed to non-vested stock and outstanding options to purchase common stock were excluded
from the computation of diluted earnings per share because we had a net loss for the period, and any incremental shares
would not be dilutive. Also, for the year ended October 31, 2012, 18.6 million common shares issuable upon the
conversion of our senior exchangeable notes were excluded from the computation of diluted earnings per share because
we had a net loss for the period. For the year ended October 31, 2010, diluted earnings per common share was computed
using the weighted average number of shares outstanding adjusted for the 1.0 million incremental shares attributed to
non-vested stock and outstanding options to purchase common stock.
79
In addition, shares related to out-of-the money stock options that could potentially dilute basic earnings per
share in the future that were not included in the computation of diluted earnings per share were 2.5 million, 5.1 million
and 4.6 million for the years ended October 31, 2012, 2011 and 2010, respectively, because to do so would have been
anti-dilutive for the periods presented.
Computer Software Development - In accordance with ASC 350-10 “Intangibles - Goodwill and Other”, we
capitalize certain costs incurred in connection with developing or obtaining software for internal use. Once the software
is substantially complete and ready for its intended use, the capitalized costs are amortized over the systems' estimated
useful life.
Noncontrolling Interest – We record a non-controlling interest in a subsidiary as a component of equity. Our
net income (loss) attributable to non-controlling interest is insignificant for all periods presented and is reported in
"Other operations" in the Consolidated Statements of Operations.
Recent Accounting Pronouncements - In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which provides a consistent
definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S.
GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles
and expands the disclosure requirements, particularly for Level 3 fair value measurements. The guidance was effective
for the Company beginning February 1, 2012 and is applied prospectively. The adoption of this guidance, which relates
primarily to disclosure, did not have a material impact on our Consolidated Financial Statements.
4. Leases
We lease certain property under non-cancelable leases. Office leases are generally for terms of three to five
years and generally provide renewal options. Model home leases are generally for shorter terms of approximately one to
three years with renewal options on a month-to-month basis. In most cases, we expect that in the normal course of
business, leases that will expire will be renewed or replaced by other leases. The future lease payments required under
operating leases that have initial or remaining non-cancelable terms in excess of one year are as follows:
Years Ending October 31,
2013
2014
2015
2016
2017
After 2018
Total
(In Thousands)
11,164
$
9,347
8,625
7,505
3,723
1,615
41,979
$
Net rental expense for the three years ended October 31, 2012, 2011 and 2010, was $12.4 million, $15.3 million
and $19.9 million, respectively. These amounts include rent expense for various month-to-month leases on model
homes, furniture, and equipment. These amounts also include abandoned lease cost accruals, as well as the amortization
of those accruals over the lease term, for leased space that we have abandoned due to our reduction in size and
consolidation of certain locations. Certain leases contain renewal or purchase options and generally provide that the
Company shall pay for insurance, taxes and maintenance.
80
5. Property, Plant and Equipment
Homebuilding property, plant, and equipment consists of land, land improvements, buildings, building
improvements, furniture, and equipment used to conduct day-to-day business and are recorded at cost less accumulated
depreciation.
Property, plant, and equipment balances as of October 31, 2012 and 2011 were as follows:
(In thousands)
Land
Buildings
Building improvements
Furniture
Equipment
Total
Less accumulated depreciation
Total
6. Restricted Cash and Deposits
October 31,
2012
2011
$
$
2,398 $
66,843
9,475
6,272
39,222
124,210
75,686
48,524 $
2,398
66,833
11,832
7,239
40,348
128,650
75,384
53,266
Restricted cash and cash equivalents on the Consolidated Balance Sheets, amounting to $64.2 million and $77.6
million as of October 31, 2012 and 2011, respectively, partially represents cash collateralizing our letter of credit
agreements and facilities and is discussed in Note 8. In addition, we collateralize our surety bonds with cash. The
balances of this surety bond collateral were $6.2 million and $12.8 million at October 31, 2012 and 2011, respectively,
which was in cash equivalents, the book value of which approximates fair value. The remaining balance is for
customers’ deposits of $27.3 million and $7.1 million as of October 31, 2012 and 2011, respectively, which are restricted
from use by us.
Total Customers’ deposits are shown as a liability on the Consolidated Balance Sheets. These liabilities are
significantly more than the applicable years’ escrow cash balances because in some states the deposits are not restricted
from use and in other states we are able to release the majority of this escrow cash by pledging letters of credit and
surety bonds.
7. Mortgage Loans Held for Sale
Our mortgage banking subsidiary originates mortgage loans, primarily from the sale of our homes. Such
mortgage loans are sold in the secondary mortgage market within a short period of time of origination. Mortgage loans
held for sale consist primarily of single-family residential loans collateralized by the underlying property. We have
elected the fair value option to record loans held for sale and therefore these loans are recorded at fair value with the
changes in the value recognized in the Statements of Operations in “Revenues: Financial services.” We currently use
forward sales of mortgage-backed securities, interest rate commitments from borrowers and mandatory and/or best
efforts forward commitments to sell loans to investors to protect us from interest rate fluctuations. These short-term
instruments, which do not require any payments to be made to the counterparty or investor in connection with the
execution of the commitments, are recorded at fair value. Gains and losses on changes in the fair value are recognized in
the Statements of Operations in “Revenues: Financial services”.
At October 31, 2012 and 2011, respectively, $104.6 million and $52.7 million of mortgages held for sale were
pledged against our mortgage warehouse lines of credit (see Note 8). We may incur losses with respect to mortgages that
were previously sold that are delinquent and which had underwriting defects, but only to the extent the losses are not
covered by mortgage insurance or resale value of the home. The reserves for these estimated losses are included in the
"Financial services – Accounts payable and other liabilities" balance on the Consolidated Balance Sheet. Our reserves
for these estimated losses increased in fiscal 2012 as the number of repurchase or make-whole inquiries increased in
fiscal 2012 to 66 compared to 39 in fiscal 2011.
81
The activity in our loan origination reserves in fiscal 2012 and 2011 was as follows:
(In thousands)
Twelve Months Ended
October 31,
2012
2011
Loan origination reserves, beginning of period
Provisions for losses during the period
Adjustments to pre-existing provisions for losses from changes in estimates
Payments/settlements
Loan origination reserves, end of period
$
$
5,063 $
4,060
1,802
(1,591)
9,334 $
5,486
2,108
(1,520)
(1,011)
5,063
8. Mortgages and Notes Payable
We have nonrecourse mortgages for a small number of our communities totaling $38.3 million, as well as our
Corporate Headquarters totaling $18.8 million which are secured by the related real property and any improvements.
These loans have installment obligations with annual principal maturities in the years ending October 31 of
approximately: $39.3 million in 2013, $1.1 million in 2014, $1.2 million in 2015, $1.3 million in 2016, $1.4 million in
2017 and $12.8 million after 2017. The interest rates on these obligations range from 5.0% to 10.0% at October 31,
2012.
We have certain stand alone cash collateralized letter of credit agreements and facilities under which there were
a total of $29.5 million and $54.1 million of letters of credit outstanding as of October 31, 2012 and October 31, 2011,
respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated
accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for
other uses. As of October 31, 2012 and October 31, 2011, the amount of cash collateral in these segregated accounts was
$30.7 million and $57.7 million, respectively, which is reflected in “Restricted cash” on the Consolidated Balance
Sheets.
Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian
Mortgage”), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing
rights are sold in the secondary mortgage market within a short period of time. Our secured Master Repurchase
Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”) is a short-term borrowing
facility that provides up to $75.0 million through November 16, 2012 and thereafter up to $50.0 million through March
28, 2013. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to
permanent investors. Interest is payable monthly on outstanding advances at the current LIBOR subject to a floor of
1.625% plus the applicable margin ranging from 2.5% to 3.0% based on the takeout investor and type of loan. As of
October 31, 2012, the aggregate principal amount of all borrowings under the Chase Master Repurchase Agreement was
$58.8 million.
On May 29, 2012, K. Hovnanian Mortgage entered into a second secured Master Repurchase Agreement with
Customers Bank (“Customers Master Repurchase Agreement), which is a short-term borrowing facility that provides up
to $37.5 million through May 28, 2013. The loan is secured by the mortgages held for sale and is repaid when we sell
the underlying mortgage loans to permanent investors. Interest is payable daily or as loans are sold to permanent
investors on outstanding advances at the current LIBOR subject to a floor of 3.5% plus the applicable margin ranging
from 3.0% to 5.5% based on the takeout investor and type of loan. As of October 31, 2012, the aggregate principal
amount of all borrowings under the Customers Master Repurchase Agreement was $22.9 million.
On June 29, 2012, K. Hovnanian Mortgage entered into a third secured Master Repurchase Agreement with
Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse Master Repurchase Agreement”), which is a short-
term borrowing facility that provides up to $50.0 million through June 28, 2013. The loan is secured by the mortgages
held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable
monthly on outstanding advances at the Credit Suisse Cost of Funds, which was 0.63% at October 31, 2012, plus the
applicable margin ranging from 3.75% to 4.0% based on the takeout investor and type of loan. As of October 31, 2012,
the aggregate principal amount of all borrowings under the Credit Suisse Master Repurchase Agreement was $25.8
million.
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The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Credit Suisse Master
Repurchase Agreement (together, the “Master Repurchase Agreements”) require K. Hovnanian Mortgage to satisfy and
maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time
mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few
weeks), the immateriality to us on a consolidated basis of the size of the Master Repurchase Agreements, the levels
required by these financial covenants, our ability based on our immediately available resources to contribute sufficient
capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the
terms of the agreement, we do not consider any of these covenants to be substantive or material. As of October 31,
2012, we believe we were in compliance with the covenants under the Master Repurchase Agreements.
9. Senior Secured, Senior, Senior Amortizing, Senior Exchangeable and Senior Subordinated Amortizing Notes
Senior Secured, Senior, Senior Amortizing, Senior Exchangeable and Senior Subordinated Amortizing Notes
balances as of October 31, 2012 and 2011, were as follows:
(In thousands)
Senior Secured Notes:
10.625% Senior Secured Notes due October 15, 2016 (net of discount)
7.25% Senior Secured First Lien Notes due October 15, 2020
9.125% Senior Secured Second Lien Notes due November 15, 2020
2.0% Senior Secured Notes due November 1, 2021 (net of discount)
5.0% Senior Secured Notes due November 1, 2021 (net of discount)
Total Senior Secured Notes
Senior Notes:
6.5% Senior Notes due January 15, 2014
6.375% Senior Notes due December 15, 2014
6.25% Senior Notes due January 15, 2015
11.875% Senior Notes due October 15, 2015 (net of discount)
6.25% Senior Notes due January 15, 2016 (net of discount)
7.5% Senior Notes due May 15, 2016
8.625% Senior Notes due January 15, 2017
Total Senior Notes
11.0% Senior Amortizing Notes due December 1, 2017
Senior Exchangeable Notes due December 1, 2017
7.25% Senior Subordinated Amortizing Notes due February 15, 2014
Year Ended
October 31,
2012
October 31,
2011
- $
577,000
220,000
53,109
127,260
977,369 $
36,649 $
3,015
21,438
59,716
130,343
86,532
121,043
458,736 $
23,149 $
76,851 $
6,091 $
786,585
-
-
-
-
786,585
53,373
29,214
52,720
127,488
171,880
172,269
195,918
802,862
-
-
13,323
$
$
$
$
$
$
$
As of October 31, 2012, future maturities of our borrowings (assuming no exchange of our senior exchangeable
notes), were as follows (in thousands):
Fiscal Year Ended October 31,
2013
2014
2015
2016
2017
Thereafter
Total
$
$
6,232
42,609
89,506
222,413
126,293
1,071,694
1,558,747
Except for K. Hovnanian Enterprises, Inc. ("K. Hovnanian"), the issuer of the notes, our home mortgage
subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, certain of our title insurance
subsidiaries and our foreign subsidiary, we and each of our subsidiaries are guarantors of the senior secured, senior,
senior amortizing, senior exchangeable and senior subordinated amortizing notes outstanding at October 31, 2012 (see
Note 22). In addition, the 5.0% Senior Secured Notes due 2021 and the 2.0% Senior Secured Notes due 2021 are
guaranteed by K. Hovnanian JV Holdings, L.L.C. and its subsidiaries except for certain joint ventures and joint venture
83
holding companies (collectively, the “Secured Group”). Members of the Secured Group do not guarantee K.
Hovnanian's other indebtedness.
The indentures governing the notes do not contain any financial maintenance covenants, but do contain
restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries,
including K. Hovnanian, to incur additional indebtedness (other than certain permitted indebtedness, refinancing
indebtedness and non-recourse indebtedness), pay dividends and make distributions on common and preferred stock,
repurchase subordinated indebtedness with respect to certain of the senior secured notes, make other restricted payments,
make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all
assets and enter into certain transactions with affiliates. The indentures also contain events of default which would
permit the holders of the notes to declare the notes to be immediately due and payable if not cured within applicable
grace periods, including the failure to make timely payments on the notes or other material indebtedness, the failure to
comply with agreements and covenants and specified events of bankruptcy and insolvency and, with respect to the
indentures governing the senior secured notes, the failure of the documents granting security for the senior secured notes
to be in full force and effect and the failure of the liens on any material portion of the collateral securing the senior
secured notes to be valid and perfected. As of October 31, 2012, we believe we were in compliance with the covenants
of the indentures governing our outstanding notes.
Under the terms of the indentures, we have the right to make certain redemptions and, depending on market
conditions and covenant restrictions, may do so from time to time. We also continue to evaluate our capital structure and
may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers,
open market purchases, private transactions, or otherwise or seek to raise additional debt or equity capital, depending on
market conditions and covenant restrictions.
If our consolidated fixed charge coverage ratio, as defined in the indentures governing our senior secured and
senior notes (other than the senior exchangeable notes), is less than 2.0 to 1.0, we are restricted from making certain
payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing
indebtedness, and non-recourse indebtedness. As a result of this restriction, we are currently restricted from paying
dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. If current market trends continue or
worsen, we will continue to be restricted from paying dividends for the foreseeable future. Our inability to pay
dividends is in accordance with covenant restrictions and will not result in a default under our bond indentures or
otherwise affect compliance with any of the covenants contained in the bond indentures.
On November 3, 2003, K. Hovnanian issued $215.0 million 6.5% Senior Notes due 2014. The notes are
redeemable in whole or in part at our option at 100% of their principal amount upon payment of a make-whole price.
The net proceeds of the issuance were used for general corporate purposes. These notes were the subject of a November
2011 exchange offer discussed below.
On March 18, 2004, K. Hovnanian issued $150.0 million 6.375% Senior Notes due 2014. The notes are
redeemable in whole or in part at our option at 100% of their principal amount upon payment of a make-whole price.
The net proceeds of the issuance were used to redeem all of our $150 million outstanding 9.125% Senior Notes due
2009, which occurred on May 3, 2004, and for general corporate purposes. Also on March 18, 2004, we paid off our
$115 million Term Loan with available cash. These notes were the subject of a November 2011 exchange offer
discussed below.
On November 30, 2004, K. Hovnanian issued $200.0 million 6.25% Senior Notes due 2015. The notes are
redeemable in whole or in part at our option at 100% of their principal amount upon payment of a make-whole price.
The net proceeds of the issuance were used to repay the outstanding balance on our revolving credit facility and for
general corporate purposes. These notes were the subject of a November 2011 exchange offer discussed below.
On August 8, 2005, K. Hovnanian issued $300.0 million 6.25% Senior Notes due 2016. The 6.25% Senior
Notes were issued at a discount to yield 6.46% and have been reflected net of the unamortized discount in the
accompanying Consolidated Balance Sheets. The notes are redeemable in whole or in part at our option at 100% of their
principal amount plus the payment of a make-whole amount. The net proceeds of the issuance were used to repay the
outstanding balance under our revolving credit facility as of August 8, 2005, and for general corporate purposes,
including acquisitions. These notes were the subject of a November 2011 exchange offer discussed below.
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On February 27, 2006, K. Hovnanian issued $300.0 million of 7.5% Senior Notes due 2016. The notes are
redeemable in whole or in part at our option at 100% of their principal amount plus the payment of a make-whole
amount. The net proceeds of the issuance were used to repay a portion of the outstanding balance under our revolving
credit facility as of February 27, 2006. These notes were the subject of a November 2011 exchange offer discussed
below.
On June 12, 2006, K. Hovnanian issued $250.0 million of 8.625% Senior Notes due 2017. The notes are
redeemable in whole or in part at our option at 100% of their principal amount plus the payment of a make-whole
amount. The net proceeds of the issuance were used to repay a portion of the outstanding balance under our revolving
credit facility as of June 12, 2006. These notes were the subject of a November 2011 exchange offer discussed below.
On May 27, 2008, K. Hovnanian issued $600.0 million ($594.4 million net of discount) of 11.5% Senior
Secured Notes due 2013. The notes were secured, subject to permitted liens and other exceptions, by a second-priority
lien on substantially all of the assets owned by us, K. Hovnanian and the guarantors to the extent such assets secured
obligations under the 10.625% Senior Secured Notes due 2016. A portion of the net proceeds of the issuance were used
to repay the outstanding balance under the then existing amended credit facility. These second lien notes were the
subject of tender offers, and notes that remained outstanding following such tender offers were subsequently redeemed,
as discussed below.
On December 3, 2008, K. Hovnanian issued $29.3 million of 18.0% Senior Secured Notes due 2017 in
exchange for $71.4 million of various series of our unsecured senior notes. This exchange resulted in a recognized gain
on extinguishment of debt of $41.3 million, net of the write-off of unamortized discounts and fees. The notes were
secured, subject to permitted liens and other exceptions, by a third-priority lien on substantially all of the assets owned
by us, K. Hovnanian, and the guarantors to the extent such assets secured obligations under our 10.625% Senior Secured
Notes due 2016 and 11.5% Senior Secured Notes due 2013. These third lien notes were the subject of tender offers, and
notes that remained outstanding following such tender offers were subsequently redeemed, as discussed below.
On October 20, 2009, K. Hovnanian issued $785.0 million ($770.9 million net of discount) of 10.625% Senior
Secured Notes due October 15, 2016. The notes were secured, subject to permitted liens and other exceptions, by a first-
priority lien on substantially all of the assets owned by us, K. Hovnanian and the guarantors. The net proceeds from this
issuance, together with cash on hand, were used to fund certain cash tender offers for our then outstanding 11.5% Senior
Secured Notes due 2013 and 18.0% Senior Secured Notes due 2017 and certain series of our unsecured notes. In May
2011, we issued $12.0 million of additional 10.625% Senior Secured Notes as discussed below. The 10.625% Senior
Secured Notes due 2016 were the subject of a tender offer in October 2012, and the notes that were not tendered in the
tender offer were redeemed, as discussed below.
On January 15, 2010, the remaining $13.6 million principal amount of our 6.0% Senior Subordinated Notes due
2010 matured and was paid. During the year ended October 31, 2010, we repurchased in open market transactions $27.0
million principal amount of 6.5% Senior Notes due 2014, $54.5 million principal amount of 6.375% Senior Notes due
2014, $29.5 million principal amount of 6.25% Senior Notes due 2015, $1.4 million principal amount of 8.875% Senior
Subordinated Notes due 2012, and $11.1 million principal amount of 7.75% Senior Subordinated Notes due 2013. The
aggregate purchase price for these repurchases was $97.9 million, plus accrued and unpaid interest. These repurchases
resulted in a gain on extinguishment of debt of $25.0 million during the year ended October 31, 2010, net of the write-
off of unamortized discounts and fees.
On February 14, 2011, K. Hovnanian issued $155.0 million aggregate principal amount of 11.875% Senior
Notes due 2015, which are guaranteed by us and substantially all of our subsidiaries. The Senior Notes bear interest at a
rate of 11.875% per annum, which is payable semi-annually on April 15 and October 15 of each year, beginning on
April 15, 2011, and mature on October 15, 2015. The 11.875% Senior Notes are redeemable in whole or in part at our
option at any time at 100% of their principal amount plus an applicable “Make-Whole Amount.” In addition, we may
redeem up to 35% of the aggregate principal amount of the 11.875% Senior Notes prior to April 15, 2014 with the net
cash proceeds from certain equity offerings at 111.875% of principal. These notes were the subject of a November 2011
exchange offer discussed below.
The net proceeds from the issuances of the 11.875% Senior Notes due in 2015, Class A Common Stock (see
Note 3) and 7.25% Tangible Equity Units (see Note 10) were approximately $286.2 million, a portion of which were
used to fund the purchase through tender offers, on February 14, 2011, of the following series of K. Hovnanian’s senior
and senior subordinated notes: approximately $24.6 million aggregate principal amount of 8.0% Senior Notes due 2012,
85
$44.1 million aggregate principal amount of 8.875% Senior Subordinated Notes due 2012 and $29.2 million aggregate
principal amount of 7.75% Senior Subordinated Notes due 2013 (the “2013 Notes” and, together with the 2012 Senior
Notes and the 2012 Senior Subordinated Notes, the “Tender Offer Notes”). On February 14, 2011, K. Hovnanian called
for redemption on March 15, 2011 all Tender Offer Notes that were not tendered in the tender offers for an aggregate
redemption price of approximately $60.1 million. Such redemptions were funded with proceeds from the offerings of
the Class A Common Stock, the Tangible Equity Units and the Senior Notes.
On May 4, 2011, K. Hovnanian issued $12.0 million of additional 10.625% Senior Secured Notes due 2016
resulting in net proceeds of approximately $11.6 million. On June 3, 2011 we used these net proceeds together with cash
on hand, to fund the redemption of the remaining outstanding principal amount ($0.5 million) of our 11.5% Senior
Secured Notes due 2013 and the remaining outstanding principal amount ($11.7 million) of our 18.0% Senior Secured
Notes due 2017. These transactions, along with the tender offers and redemptions in February and March 2011 discussed
above, resulted in a loss of $3.1 million during the year ended October 31, 2011.
During the three months ended October 31, 2011 we completed a number of open market repurchases. These
included $24.6 million principal amount of 11.875% Senior Notes due 2015, and $1.0 million principal amount of 6.5%
Senior Notes due 2014. The aggregate purchase price for these repurchases was $14.0 million, plus accrued and unpaid
interest. These repurchases resulted in a gain on extinguishment of debt of $10.6 million, net of the write-off of
unamortized discounts and fees. The gains from the repurchases are included in the Consolidated Statement of
Operations as “(Loss) gain on extinguishment of debt”.
On November 1, 2011, K. Hovnanian issued $141.8 million aggregate principal amount of 5.0% Senior Secured
Notes due 2021 (the “5.0% 2021 Notes”) and $53.2 million aggregate principal amount of 2.0% Senior Secured Notes
due 2021 (the “2.0% 2021 Notes and, together with the 5.0% 2021 Notes, the “2021 Notes”) in exchange for $195.0
million of K. Hovnanian's unsecured senior notes with maturities ranging from 2014 through 2017. Holders of the senior
notes due 2014 and 2015 that were exchanged in the exchange offer also received an aggregate of approximately $14.2
million in cash payments and all holders of senior notes that were exchanged in the exchange offer received accrued and
unpaid interest (in the aggregate amount of approximately $3.3 million). Costs associated with this transaction were $4.7
million. The 5.0% 2021 Notes and the 2.0% 2021 Notes were issued as separate series under an indenture, but have
substantially the same terms other than with respect to interest rate and related redemption provisions, and vote together
as a single class. The 2021 Notes are redeemable in whole or in part at our option at any time, at 100.0% of the principal
amount plus the greater of 1% of the principal amount and an applicable “Make-Whole Amount.” In addition, we may
redeem up to 35% of the aggregate principal amount of the notes before November 1, 2014 with the net cash proceeds
from certain equity offerings at 105.0% (in the case of the 5.0% Secured Notes) and 102.0% (in the case of the 2.0%
Secured Notes) of principal. The accounting for the debt exchange was treated as a troubled debt restructuring. Under
this accounting, the Company did not recognize any gain or loss on extinguishment of debt and the costs associated with
the debt exchange were expensed as incurred as shown in “Other operations” in the Consolidated Statement of
Operations.
The guarantees with respect to the 2021 Notes of the Secured Group are secured, subject to permitted liens and
other exceptions, by a first-priority lien on substantially all of the assets of the members of the Secured Group. As
of October 31, 2012, the collateral securing the guarantees primarily included (1) $51.1 million of cash and cash
equivalents and (2) equity interests in guarantors that are members of the Secured Group. Subsequent to such date, cash
uses include general business operations and real estate and other investments. The aggregate book value of the real
property of the Secured Group collateralizing the 2021 Notes was approximately $37.5 million as of October 31, 2012
(not including the impact of inventory investments, home deliveries, or impairments thereafter and which may differ
from the appraised value). Members of the Secured Group also own equity in joint ventures, either directly or indirectly
through ownership of joint venture holding companies, with a book value of $45.9 million as of October 31, 2012; this
equity is not pledged to secure, and is not collateral for, the 2021 Notes. Members of the Secured Group are “unrestricted
subsidiaries” under K. Hovnanian's other senior notes, senior secured notes, senior amortizing notes, senior
exchangeable notes and senior subordinated amortizing notes, and thus have not guaranteed such indebtedness.
In addition, on November 1, 2011, K. Hovnanian entered into a Second Supplemental Indenture (the “11.875%
Notes Supplemental Indenture”), among K. Hovnanian, the Company, as guarantor, the other guarantors party thereto
and Wilmington Trust Company, as trustee, amending and supplementing that certain Indenture dated February 14, 2011
(the “Base Indenture”) by and among K. Hovnanian, the Company, as guarantor, and Wilmington Trust Company, as
trustee, as amended by the First Supplemental Indenture dated as of February 14, 2011 (the “First Supplemental
Indenture”), by and among K. Hovnanian, the Company, as guarantor, the other guarantors party thereto and Wilmington
86
Trust Company, as trustee (the Base Indenture as amended by the First Supplemental Indenture, the “Existing
Indenture”). The 11.875% Notes Supplemental Indenture was executed and delivered following the receipt by K.
Hovnanian of consents from a majority of the holders of K. Hovnanian’s 11.875% Senior Notes due 2015. The 11.875%
Notes Supplemental Indenture provides for the elimination of substantially all of the restrictive covenants and certain of
the default provisions contained in the Existing Indenture and the 11.875% Senior Notes due 2015.
On October 2, 2012, K. Hovnanian issued $577.0 million aggregate principal amount of 7.25% senior secured
first lien notes due 2020 (the "First Lien Notes") and $220.0 million aggregate principal amount of 9.125% senior
secured second lien notes due 2020 (the "Second Lien Notes" and, together with the First Lien Notes, the "2020 Secured
Notes") in a private placement (the "2020 Secured Notes Offering"). The net proceeds from the 2020 Secured Notes
Offering, together with the net proceeds of the Units offering discussed below, and cash on hand, were used to fund the
tender offer and consent solicitation with respect to the Company’s then outstanding 10.625% Senior Secured Notes due
2016 and the redemption of the remaining notes that were not purchased in the tender offer as described below.
The First Lien Notes are secured by a first-priority lien and the Second Lien Notes are secured by a second-
priority lien, in each case, subject to permitted liens and other exceptions, on substantially all the assets owned by us, K.
Hovnanian and the guarantors of such notes. At October 31, 2012, the aggregate book value of the real property that
would constitute collateral securing the 2020 Secured Notes was approximately $572.4 million, which does not include
the impact of inventory investments, home deliveries, or impairments thereafter and which may differ from the value if it
were appraised. In addition, cash collateral that would secure the 2020 Secured Notes was $236.8 million as of October
31, 2012, which includes $30.7 million of restricted cash collateralizing certain letters of credit. Subsequent to such date,
cash uses include general business operations and real estate and other investments.
The First Lien Notes are redeemable in whole or in part at our option at any time prior to October 15, 2015 at
100% of the principal amount plus an applicable “Make-Whole Amount.” We may also redeem some of all of the First
Lien Notes at 105.438% of principal commencing October 15, 2015, at 103.625% of principal commencing October 15,
2016, at 101.813% of principal commencing October 15, 2017 and 100% of principal commencing October 15, 2018. In
addition, we may redeem up to 35% of the aggregate principal amount of the First Lien Notes prior to October 15, 2015
with the net cash proceeds from certain equity offerings at 107.25% of principal.
The Second Lien Notes are redeemable in whole or in part at our option at any time prior to November 15, 2015
at 100% of the principal amount plus an applicable “Make-Whole Amount.” We may also redeem some of all of the
Second Lien Notes at 106.844% of principal commencing November 15, 2015, at 104.563% of principal commencing
November 15, 2016, at 102.281% of principal commencing November 15, 2017 and 100% of principal commencing
November 15, 2018. In addition, we may redeem up to 35% of the aggregate principal amount of the Second Lien Notes
prior to November 15, 2015 with the net cash proceeds from certain equity offerings at 109.125% of principal.
Also on October 2, 2012, the Company and K. Hovnanian issued $100,000,000 aggregate stated amount of
6.0% Exchangeable Note Units (the “Units”) (equivalent to 100,000 Units). Each $1,000 stated amount of Units initially
consists of (1) a zero coupon senior exchangeable note due December 1, 2017 (the “Exchangeable Note”) issued by K.
Hovnanian, which bears no cash interest and has an initial principal amount of $768.51 per Exchangeable Note, and that
will accrete to $1,000 at maturity and (2) a senior amortizing note due December 1, 2017 (the “Senior Amortizing
Note”) issued by K. Hovnanian, which has an initial principal amount of $231.49 per Senior Amortizing Note, bears
interest at a rate of 11.0% per annum, and has a final installment payment date of December 1, 2017. Each Unit may be
separated into its constituent Exchangeable Note and Senior Amortizing Note after the initial issuance date of the Units,
and the separate components may be combined to create a Unit.
Each Exchangeable Note had an initial principal amount of $768.51 (which will accrete to $1,000 over the term
of the Exchangeable Note at an annual rate of 5.17% from the date of issuance, calculated on a semi-annual bond
equivalent yield basis). Holders may exchange their Exchangeable Notes at their option at any time prior to 5:00 p.m.,
New York City time, on the business day immediately preceding December 1, 2017. Each Exchangeable Note will be
exchangeable for shares of Class A Common Stock at an initial exchange rate of 185.5288 shares of Class A Common
Stock per Exchangeable Note (equivalent to an initial exchange price, based on $1,000 principal amount at maturity, of
approximately $5.39 per share of Class A Common Stock). The exchange rate will be subject to adjustment in certain
events. Following certain corporate events that occur prior to the maturity date, the Company will increase the
applicable exchange rate for any holder who elects to exchange its Exchangeable Notes in connection with such
corporate event. In addition, holders of Exchangeable Notes will also have the right to require K. Hovnanian to
repurchase such holders’ Exchangeable Notes upon the occurrence of certain of these corporate events.
87
On each June 1 and December 1 commencing on June 1, 2013 (each, an “installment payment date”) K.
Hovnanian will pay holders of Senior Amortizing Notes equal semi-annual cash installments of $30.00 per Senior
Amortizing Note (except for the June 1, 2013 installment payment, which will be $39.83 per Senior Amortizing Note),
which cash payment in the aggregate will be equivalent to 6.0% per year with respect to each $1,000 stated amount of
Units. Each installment will constitute a payment of interest (at a rate of 11.0% per annum) and a partial repayment of
principal on the Senior Amortizing Note. Following certain corporate events that occur prior to the maturity date, holders
of the Senior Amortizing Notes will have the right to require K. Hovnanian to repurchase such holders’ Senior
Amortizing Notes.
The net proceeds of the Units Offering, along with the net proceeds from the 2020 Secured Notes Offering
previously discussed, and cash on hand, were used to fund the tender offer and consent solicitation with respect to the
Company’s then outstanding 10.625% Senior Secured Notes due 2016 and redemption of the remaining notes that were
not purchased in the tender offer as described below.
On October 2, 2012, pursuant to a cash tender offer and consent solicitation, we purchased in a fixed-price
tender offer approximately $637.2 million aggregate principal amount of 10.625% Senior Secured Notes due 2016 for
approximately $691.3 million, plus accrued and unpaid interest. Subsequently, all 10.625% Senior Secured Notes due
2016 that were not tendered in the tender offer (approximately $159.8 million) were redeemed for an aggregate
redemption price of approximately $181.8 million. The tender offer and redemption resulted in a loss on extinguishment
of debt of $87.0 million, including of the write-off of unamortized discounts and fees.
During the year ended October 31, 2012, we repurchased for cash in the open market and privately negotiated
transactions $21.0 million principal amount of our 6.25% Senior Notes due 2016, $61.1 million principal amount of our
7.5% Senior Notes due 2016, $37.4 million principal amount of our 8.625% Senior Notes due 2017 and $2.0 million
principal amount of our 11.875% Senior Notes due 2015. No such repurchases were made during the quarter ended
October 31, 2012. The aggregate purchase price for these repurchases was $72.2 million, plus accrued and unpaid
interest. These repurchases resulted in a gain on extinguishment of debt of $48.4 million for the year ended October 31,
2012, net of the write-off of unamortized discounts and fees. The gain is included in the Consolidated Statement of
Operations as “(Loss) gain on extinguishment of debt.” Certain of these repurchases were funded with the proceeds from
our April 11, 2012 issuance of 25,000,000 shares of our Class A Common Stock (see Note 3).
In addition, during the year ended October 31, 2012, pursuant to agreements with bondholders we exchanged
$7.8 million principal amount of our 6.25% Senior Notes due 2016, $4.0 million principal amount of our 7.5% Senior
Notes due 2016 and $18.3 million of our outstanding 8.625% Senior Notes due 2017 for shares of our Class A Common
Stock, as discussed in Note 3. These transactions were treated as a substantial modification of debt, resulting in a gain
on extinguishment of debt of $9.3 million for the year ended October 31, 2012. No such exchanges were made during
the quarter ended October 31, 2012. The gain is included in the Consolidated Statement of Operations as “(Loss) gain on
extinguishment of debt.”
10. Tangible Equity Units
On February 9, 2011, we issued an aggregate of 3,000,000 7.25% Tangible Equity Units (the “Units”), and on
February 14, 2011, we issued an additional 450,000 Units pursuant to the over-allotment option granted to the
underwriters. Each Unit initially consists of (i) a prepaid stock purchase contract (each a “Purchase Contract”) and (ii) a
senior subordinated amortizing note due February 15, 2014 (each, a “Senior Subordinated Amortizing Note”). As of
October 31, 2012 and 2011, we had an aggregate principal amount of $6.1 million and $13.3 million, respectively, of
Senior Subordinated Amortizing Notes outstanding. On each February 15, May 15, August 15 and November 15, K.
Hovnanian will pay holders of Senior Subordinated Amortizing Notes equal quarterly cash installments of $0.453125
per Senior Subordinated Amortizing Note, which cash payments in the aggregate will be equivalent to 7.25% per year
with respect to each $25 stated amount of Units. Each installment constitutes a payment of interest (at a rate of 12.072%
per annum) and a partial repayment of principal on the Senior Subordinated Amortizing Notes, allocated as set forth in
the amortization schedule provided in the indenture under which the Senior Subordinated Amortizing Notes were
issued. The Senior Subordinated Amortizing Notes have a scheduled final installment payment date of February 15,
2014. If we elect to settle the Purchase Contracts early, holders of the Senior Subordinated Amortizing Notes will have
the right to require K. Hovnanian to repurchase such holders’ Senior Subordinated Amortizing Notes, except in certain
circumstances as described in the indenture governing Senior Subordinated Amortizing Notes.
88
Unless settled earlier, on February 15, 2014 (subject to postponement under certain circumstances), each
Purchase Contract will automatically settle and we will deliver a number of shares of Class A Common Stock based on
the applicable market value, as defined in the purchase contract agreement, which will be between 4.7655 shares and
5.8140 shares per Purchase Contract (subject to adjustment). Each Unit may be separated into its constituent Purchase
Contract and Senior Subordinated Amortizing Note after the initial issuance date of the Units, and the separate
components may be combined to create a Unit. The Senior Subordinated Amortizing Note component of the Units is
recorded as debt, and the Purchase Contract component of the Units is recorded in equity as additional paid in
capital. We have recorded $68.1 million, the initial fair value of the Purchase Contracts, as additional paid in
capital. As of October 31, 2012, 1.6 million Purchase Contracts have been converted into 7.7 million shares of our Class
A Common Stock.
During the second quarter of fiscal 2012, we exchanged pursuant to agreements with bondholders
approximately $3.1 million aggregate principal amount of our Senior Subordinated Amortizing Notes for shares of our
Class A Common Stock, as discussed in Note 3. These transactions resulted in a gain on extinguishment of debt of $0.2
million for the year ended October 31, 2012.
11. Operating and Reporting Segments
Our operating segments are components of our business for which discrete financial information is available
and reviewed regularly by the chief operating decision maker, our Chief Executive Officer, to evaluate performance and
make operating decisions. Based on this criteria, each of our communities qualifies as an operating segment, and
therefore, it is impractical to provide segment disclosures for this many segments. As such, we have aggregated the
homebuilding operating segments into six reportable segments.
Our homebuilding operating segments are aggregated into reportable segments based primarily upon
geographic proximity, similar regulatory environments, land acquisition characteristics and similar methods used to
construct and sell homes. Our reportable segments consist of the following six homebuilding segments and a financial
services segment:
Homebuilding:
(1) Northeast (New Jersey and Pennsylvania)
(2) Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia, and Washington D.C.)
(3) Midwest (Illinois, Minnesota, and Ohio)
(4) Southeast (Florida, Georgia, North Carolina, and South Carolina)
(5) Southwest (Arizona and 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, urban infill and active adult homes in
planned residential developments. In addition, from time to time, operations of the homebuilding segments include sales
of land. Operations of the Company’s Financial Services segment include mortgage banking and title services provided
to the homebuilding operations’ customers. We do not typically retain or service mortgages that we originate but rather
sell the mortgages and related servicing rights to investors.
Corporate and unallocated primarily represents operations at our headquarters in Red Bank, New Jersey. This
includes our executive offices, information services, human resources, corporate accounting, training, treasury, process
redesign, internal audit, construction services, and administration of insurance, quality, and safety. It also includes
interest income and interest expense resulting from interest incurred that cannot be capitalized in inventory in the
Homebuilding segments, as well as the gains or losses on extinguishment of debt from debt repurchases or exchanges.
Evaluation of segment performance is based primarily on operating earnings from continuing operations before
provision for income taxes (“(Loss) income before income taxes”). (Loss) income before income taxes for the
Homebuilding segments consist of revenues generated from the sales of homes and land, (loss) income from
unconsolidated entities, management fees and other income, less the cost of homes and land sold, selling, general and
administrative expenses and minority interest expense. Income before income taxes for the Financial Services segment
89
consist of revenues generated from mortgage financing, title insurance and closing 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 operations of our segments was as follows:
(In thousands)
Revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total revenues
(Loss) income before income taxes:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Loss before income taxes
(In thousands)
Assets:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total assets
Year Ended October 31,
2012
2011
2010
$
201,984 $
199,716
70,567
79,453
425,152
128,658
233,326 $
273,080
106,719
128,684
518,931
185,851
298,713
282,052
93,358
93,493
393,639
178,480
1,446,591 1,105,530 1,339,735
31,973
134
$ 1,485,353 $ 1,134,907 $ 1,371,842
38,735
27
29,481
(104)
$
(4,683) $
17,262
253
(4,828)
42,178
(3,177)
47,005
15,087
(163,340)
(92,605)
(4,762)
(13,226)
(11,219)
23,192
(61,769)
(160,389)
8,899
(143,792)
$ (101,248) $ (291,588) $ (295,282)
(99,276) $
(17,286)
(8,977)
(11,874)
29,316
(40,599)
(148,696)
8,109
(151,001)
October 31,
2012
$
$
396,073 $
200,969
73,305
90,132
235,367
143,851
1,139,697
164,634
379,919
1,684,250 $
2011
385,217
219,287
59,105
83,044
188,321
168,590
1,103,564
85,106
413,510
1,602,180
90
(In thousands)
Investments in and advances to unconsolidated joint ventures:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Corporate and unallocated
Total investments in and advances to unconsolidated joint ventures
(In thousands)
Homebuilding interest expense:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Corporate and unallocated
Financial services interest expense (income) (1)
Total interest expense, net
October 31,
2012
18,954 $
32,014
2,190
4,636
-
2,490
60,284
799
61,083 $
2011
15,450
26,477
2,957
4,687
-
7,310
56,881
945
57,826
$
$
Year Ended October 31,
2012
2011
2010
$
$
25,507 $
9,988
2,994
5,310
15,880
14,416
74,095
78,338
553
152,986 $
33,833 $
10,180
2,441
4,036
14,552
10,264
75,306
96,539
350
172,195 $
27,105
16,572
3,807
5,570
13,927
17,896
84,877
97,482
(291)
182,068
(1) Financial services interest income and interest expenses are included in the Financial services lines on the
Consolidated Statements of Operations in the respective revenues and expenses sections.
(In thousands)
Depreciation:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total depreciation and intangible amortization and impairment
(In thousands)
Net additions to operating properties and equipment:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total net additions to operating properties and equipment
91
Year Ended October 31,
2012
2011
316 $
370
517
47
217
302
1,769
328
4,126
6,223 $
677 $
437
1,825
132
292
409
3,772
391
5,177
9,340 $
Year Ended October 31,
2012
2011
2,944 $
55
218
30
-
-
3,247
21
1,791
5,059 $
191 $
19
66
34
28
118
456
74
296
826 $
2010
1,167
474
1,609
356
340
832
4,778
447
7,351
12,576
2010
426
-
290
-
19
-
735
-
1,721
2,456
$
$
$
$
(In thousands)
Equity in earnings (losses) from unconsolidated joint ventures:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total equity in earnings (losses) from unconsolidated joint ventures
12. Income Taxes
Income taxes payable consists of the following:
(In thousands)
State income taxes:
Current
Deferred
Federal income taxes:
Current
Deferred
Total
Year Ended October 31,
2012
2011
$
$
3,202 $
155
598
1,503
-
(57)
5,401 $
(4,474) $
(4,340)
672
676
83
(1,575)
(8,958) $
2010
(29)
(391)
390
322
664
-
956
Year Ended October 31,
2012
2011
$
$
940 $
-
5,942
-
6,882 $
36,164
-
5,665
-
41,829
The provision for income taxes is composed of the following charges (benefits):
(In thousands)
Current income tax (benefit) expense:
Federal
State(1)
Total current income tax (benefit):
Total
Year Ended October 31,
2012
2011
2010
$
$
277 $
(35,328)
(35,051)
(35,051) $
(1,577) $ (291,334)
(6,536)
(3,924)
(5,501)
(297,870)
(5,501) $ (297,870)
(1) The current state income tax expense is net of the use of state net operating losses totaling $3.4 million, $0.5
million, and $0.4 million for the years ended October 31, 2012, 2011, and 2010, respectively.
The 2012 total income tax benefit was $35.1 million primarily due to various state tax expenses and the
elimination of uncertain state tax positions consistent with past practices and precedents of the relevant taxing authorities
in their dealings with the Company. In 2011, we recorded a tax benefit of $5.5 million primarily due to a decrease in tax
reserves for uncertain tax positions. In 2010, we recorded a tax benefit of $297.9 million. This benefit was primarily due
to the Worker, Homeownership, and Business Assistance Act of 2009, under which the Company was able to carryback
its 2009 net operating loss to previously profitable years that were not available for carryback prior to the new tax
legislation. We recorded the impact of the carryback of $291.3 million in the three months ended January 31, 2010. We
received $274.1 million in the second quarter of fiscal 2010 and the remaining $17.2 million in the three months ended
January 31, 2011.
In accordance with ASC 740, we evaluate our deferred tax assets quarterly to determine if valuation allowances
are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the
consideration of all available evidence using a “more likely than not” standard. Because of the downturn in the
homebuilding industry during 2010 and 2011, resulting in significant inventory and intangible impairments, we are in a
three-year cumulative loss position as of October 31, 2012. According to ASC 740, a three-year cumulative loss is
significant negative evidence in considering whether deferred tax assets are realizable, and in this circumstance, the
Company does not rely on projections of future taxable income to support the recovery of deferred tax assets.
92
During 2012, we increased the valuation allowance by $38.5 million against our deferred tax assets. Our
valuation allowance increased to $937.9 million at October 31, 2012 from $899.4 million at October 31, 2011 primarily
due to additional valuation allowance recorded for the federal and state tax benefits related to losses incurred during the
period. Our state net operating losses of approximately $2.3 billion expire between 2013 and 2032. Our federal net
operating losses of $1.5 billion expire between 2028 and 2032.
The deferred tax assets and liabilities have been recognized in the Consolidated Balance Sheets as follows:
(In thousands)
Deferred tax assets:
Association subsidy reserves
Depreciation
Inventory impairment loss
Uniform capitalization of overhead
Warranty and legal reserves
Deferred income
Acquisition intangibles
Restricted stock bonus
Rent on abandoned space
Stock options
Provision for losses
Joint venture loss
Federal net operating losses
State net operating losses
Other
Total deferred tax assets
Deferred tax liabilities:
Acquisition intangibles
Debt repurchase income
Other
Total deferred tax liabilities
Valuation allowance
Net deferred income taxes
Year Ended October 31,
2012
2011
- $
1,870
255,996
6,046
16,320
1,173
27,598
5,830
5,318
5,831
32,647
12,496
528,117
180,184
11,362
1,090,788
296
152,414
197
152,907
(937,881)
- $
233
1,035
295,271
6,446
19,915
1,235
32,688
8,053
6,868
1,956
28,183
16,172
444,573
180,399
9,547
1,052,574
303
152,564
293
153,160
(899,414)
-
$
$
The effective tax rates varied from the statutory federal income tax rate. The effective tax rate is affected by a
number of factors, the most significant of which is the valuation allowance recorded against our deferred tax assets. The
sources of these factors were as follows:
Computed “expected” tax rate
State income taxes, net of Federal income tax benefit
Permanent differences, net
Deferred tax asset valuation allowance impact
Tax contingencies
Adjustments to prior years’ tax accruals
Other
Effective tax rate
Year Ended October 31,
2012
35.0%
(2.6)
(0.3)
(32.3)
34.8
-
-
34.6%
2011
35.0%
(0.1)
(1.2)
(25.8)
(3.2)
(2.8)
-
1.9%
2010
35.0%
(0.3)
1.2
65.2
-
-
(0.2)
100.9%
ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely
than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits.
93
Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be
recognized upon the adoption of ASC 740-10 and in subsequent periods. This interpretation also provides guidance on
measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition.
We recognize tax liabilities in accordance with ASC 740-10 and we adjust these liabilities when our judgment
changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate of the
tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which
they are determined.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in
the accompanying consolidated statement of operations. Accrued interest and penalties are included within the related
tax liability line in the consolidated balance sheet.
The following is a tabular reconciliation of the total amount of unrecognized tax benefits for the year (in
millions) excluding interest and penalties
Unrecognized tax benefit—November 1,
Gross increases—tax positions in current period
Decrease related to tax positions taken during a prior period
Settlements
Lapse of statute of limitations
Unrecognized tax benefit—October 31,
$
$
2012
26.8 $
0.6
(16.2)
-
(1.3)
9.9 $
2011
23.0
9.3
-
(0.4)
(5.1)
26.8
Related to the unrecognized tax benefits noted above, as of October 31, 2012, and 2011, we have recognized a
liability for interest and penalties of $0.4 million and $18.8 million, respectively. For the years ended October 31, 2012,
2011 and 2010, we recognized $(18.3) million, $(2.0) million and $(3.2) million, respectively, of interest and penalties in
income tax benefit.
It is likely that, within the next twelve months, the amount of the Company's unrecognized tax benefits will
decrease by approximately $9.3 million, excluding penalties and interest. This reduction is expected primarily due to the
expiration of the statutes of limitation or the expectation of settlement. The total amount of unrecognized tax benefits
that, if recognized, would affect the Company’s effective tax rate (excluding any related impact to the valuation
allowance) is $9.9 million and $26.8 million as of October 31, 2012 and 2011, respectively. The recognition of
unrecognized tax benefits could have an impact on the Company’s deferred tax assets and the valuation allowance.
There is an open federal audit for the year ended October 31, 2010. We are also subject to various income tax
examinations in the states in which we do business. The outcome for a particular audit cannot be determined with
certainty prior to the conclusion of the audit, appeal, and in some cases, litigation process. As each audit is concluded,
adjustments, if any, are appropriately recorded in the period determined. To provide for potential exposures, tax reserves
are recorded, if applicable, based on reasonable estimates of potential audit results. However, if the reserves are
insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of
operations. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2008 –
2011.
13. Reduction of Inventory to Fair Value
We record impairment losses on inventories related to communities under development and held for future
development when events and circumstances indicate that they may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash
flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value
of each impaired community by determining the present value of the estimated future cash flows at a discount rate
commensurate with the risk of the respective community. For the year ended October 31, 2012, our discount rates used
for the impairments recorded range from 16.8% to 18.5%. Should the estimates or expectations used in determining
cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize
additional impairments. We recorded impairment losses, which are included in the Consolidated Statements of
94
Operations and deducted from inventory, of $9.8 million, $77.5 million, and $122.5 million for the years ended October
31, 2012, 2011, and 2010, respectively.
The following table represents impairments by segment for fiscal 2012, 2011, and 2010:
(Dollars in millions)
Year Ended October 31, 2012
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Number of
Communities
Dollar
Amount of
Impairment
2.8 $
0.4
1.6
2.8
-
2.2
9.8 $
Pre-
Impairment
Value $
19.6
0.8
4.5
8.3
-
4.9
38.1
10 $
3
2
12
-
5
32 $
(Dollars in millions)
Year Ended October 31, 2011
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Number of
Communities
Dollar
Amount of
Impairment
54.9 $
3.4
1.1
1.5
0.1
16.5
77.5 $
Pre-
Impairment
Value $
179.9
17.3
4.2
5.1
0.3
45.2
252.0
11 $
5
7
11
1
6
41 $
(Dollars in millions)
Year Ended October 31, 2010
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Number of
Communities
Dollar
Amount of
Impairment
72.2 $
3.4
4.6
2.2
0.9
39.2
122.5 $
Pre-
Impairment
Value $
156.5
7.1
8.2
8.0
10.8
62.8
253.4
14 $
8
15
21
6
19
83 $
The Consolidated Statements of Operations line entitled “Homebuilding-Inventory impairment loss and land
option write-offs” also includes write-offs of options and approval, engineering and capitalized interest costs that we
record when we redesign communities and/or abandon certain engineering costs and we do not exercise options in
various locations because the communities’ pro forma profitability is not projected to produce adequate returns on
investment commensurate with the risk. The total aggregate write-offs were $2.7 million, $24.3 million, and $13.2
million for the years ended October 31, 2012, 2011, and 2010, respectively. Occasionally, these write-offs are offset by
recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away
costs. Historically, these recoveries have not been significant in comparison to the total costs written off.
95
The following table represents write-offs of such costs by segment for fiscal 2012, 2011, and 2010:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
14. Retirement Plan
Year Ended October 31,
2012
0.7 $
0.6
0.2
0.7
0.4
0.1
2.7 $
2011
13.4 $
6.1
0.5
0.8
0.4
3.1
24.3 $
2010
4.5
8.9
0.0
(0.6)
0.3
0.1
13.2
$
$
In December 1982, we established a tax-qualified, defined contribution savings and investment retirement plan
(a 401(k) plan). All associates are eligible to participate in the retirement plan, and employer contributions are based on
a percentage of associate contributions and our operating results. There were no plan costs charged to operations in
fiscals 2012, 2011 and 2010 as forfeited unvested contributions were used to cover such costs. In fiscal 2009, we
suspended the employer match portion of the program. In fiscal 2013, the employer match portion of the program will be
reinstated.
15. Stock Plans
We have a stock option plan for certain officers and key employees. Options are granted by a committee
appointed by the Board of Directors or its delegee in accordance with the stock option plan. The exercise price of all
stock options must be at least equal to the fair market value of the underlying shares on the date of the grant. Options
granted before June 8, 2007 generally vest in four equal installments on the third, fourth, fifth and sixth anniversaries of
the date of the grant. Options granted on or after June 8, 2007 generally vest in four equal installments on the second,
third, fourth and fifth anniversaries of the date of the grant. All options expire 10 years after the date of the grant. During
the year ended October 31, 2012, each of the five non-employee directors of the Company were given the choice to
receive stock options or a reduced number of shares of restricted stock. Those that selected options were granted options
to purchase between 42,130 and 61,573 shares. Non-employee directors’ options vest in three equal installments on the
first, second and third anniversaries of the date of the grant. Stock option transactions are summarized as follows:
Options outstanding at beginning of period
Granted
Exercised
Forfeited
Cancellations
Expired
Options outstanding at end of period
Options exercisable at end of period
309,067 $
6,019,070 $
2,467,170
9.61
5.97
Weighted-
Average
Exercise
Price
October 31,
2012
5,094,367 $
1,334,828 $
6,250
94,808 $
7.05
2.59
2.55
4.77
October 31,
2011
6,316,860 $
674,100 $
238,499 $
1,200,000 $
458,094 $
5,094,367 $
1,764,338
Weighted-
Average
Exercise Price
8.72
1.93
7.33
11.19
11.57
7.05
October 31,
2010
5,774,767 $
1,132,750 $
348,000 $
242,657 $
Weighted-
Average
Exercise Price
9.42
4.73
2.86
15.33
6,316,860 $
2,519,600
8.72
The total intrinsic value of options exercised during fiscal 2012 and 2010 was $8 thousand and $0.5 million,
respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock
exceeds the exercise price of the option. There were no options exercised in fiscal 2011.
At October 31, 2012, 0.9 million options outstanding and exercisable had an intrinsic value of $1.6 million.
Exercise prices for options outstanding at October 31, 2012 ranged from $1.93 to $60.36.
The weighted-average fair value of grants made in fiscal 2012, 2011, and 2010 was $1.74, $1.57, and $3.77 per
share, respectively. Based on the fair value at the time they were granted, the weighted-average fair value of options
vested in fiscal 2012, 2011, and 2010 was $3.61, $3.92, and $8.58 per share, respectively.
96
The following table summarizes the exercise price range and related number of options outstanding at
October 31, 2012:
Range of Exercise Prices
$1.93 – $5.00
$5.01 – $10.00
$10.01 – $20.00
$20.01 – $30.00
$30.01 – $40.00
$40.01 – $50.00
$50.01 – $60.00
$60.01 – $70.00
Weighted-
Average
Exercise
Price
2.95
6.46
16.97
21.77
32.53
41.45
54.70
60.36
5.97
Weighted-
Average
Remaining
Contractual
Life
8.06
5.67
0.24
4.57
2.77
1.25
2.42
2.67
7.17
Number
Outstanding
4,531,491 $
831,000 $
141,704 $
265,000 $
204,875 $
10,000 $
30,000 $
5,000 $
6,019,070 $
The following table summarizes the exercise price range and related number of exercisable options at
October 31, 2012:
Range of Exercise Prices
$1.93 – $5.00
$5.01 – $10.00
$10.01 – $20.00
$20.01 – $30.00
$30.01 – $40.00
$40.01 – $50.00
$50.01 – $60.00
$60.01 – $70.00
Weighted-
Average
Exercise
Price
3.09
6.46
16.97
21.77
32.53
41.45
54.70
60.36
10.10
Weighted-
Average
Remaining
Contractual
Life
6.99
5.67
0.24
4.57
2.77
1.25
2.42
2.67
5.56
Number
Exercisable
1,176,588 $
634,003 $
141,704 $
265,000 $
204,875 $
10,000 $
30,000 $
5,000 $
2,467,170 $
Officers and key employees that are granted stock options may elect to receive either the amount of stock
options granted, or a reduced number of shares of restricted stock, or a combination thereof. Shares of restricted stock
vest 25% each year beginning on the 2nd anniversary of the grant date. Participants age 60 years or older, or age 58 with
15 years of service vest after one year. During the years ended October 31, 2012 and 2011, we granted 133,855
(including 104,167 shares to certain of our non-employee directors) and 44,468 shares of restricted stock, respectively,
and also issued 32,112 and 20,613 shares, relating to awards granted in prior fiscal years, respectively. During the years
ended October 31, 2012 and 2011, 9,845 and 16,744 shares of restricted stock were forfeited, respectively.
For certain associates in certain years, a portion of their bonus is paid by issuing a deferred right to receive our
common stock. The number of shares is calculated for each bonus year by dividing the portion of the bonus subject to
the deferred right award by our average stock price for the year or the stock price at year-end, whichever is lower.
Twenty-five percent of the deferred right award will vest and shares will be issued one year after the year end and then
25% a year for the next three years. Participants with 20 years of service or over 58 years of age vest immediately.
During the years ended October 31, 2012 and 2011, we issued 258,228 and 355,403 shares relating to awards granted in
prior fiscal years. During the years ended October 31, 2012 and 2011, 8,701 and 45,818 shares were forfeited,
respectively.
For the years ended October 31, 2012, 2011 and 2010, no rights in lieu of bonus payments were awarded. For
the years ended October 31, 2012, 2011 and 2010 total compensation cost recognized in the Consolidated Statement of
Operations for the annual restricted stock grants, the deferred compensation awards and the stock portion of the long
term incentive plan was $2.4 million, $1.7 million and $3.7 million, respectively. In addition to nonvested share awards
97
summarized in the following table, there were 534,143, 692,668 and 1,100,250 shares of vested restricted stock at
October 31, 2012, 2011 and 2010, respectively, which were deferred at the associates' election.
A summary of the Company’s nonvested share awards as of and for the year ended October 31, 2012, is as
follows:
Nonvested at beginning of period
Granted
Vested
Forfeited
Nonvested at end of period
Weighted-
Average
Grant Date
Fair Value
4.99
4.11
7.45
5.82
4.49
Shares
1,810,177 $
557,693 $
(221,319) $
(18,546) $
2,128,005 $
Included in the above table are restricted stock awards for a long term incentive plan for certain associates,
which is a performance based plan. The awards included above for this plan are based on our current best estimate of the
outcome for the performance criteria. The change in this estimate resulted in an increase of 0.4 million shares, which is
reflected in the granted row on the above table.
As of October 31, 2012, we had 3.6 million shares authorized for future issuance under our equity
compensation plans. In addition, as of October 31, 2012, there were $13.1 million of total unrecognized compensation
costs related to nonvested share based compensation arrangements. That cost is expected to be recognized over a
weighted-average period of 2.1 years.
During fiscal 2011, the Chief Executive Officer and Chief Financial Officer consented to a cancellation of
certain of their options (with the full understanding that the Company made no commitment to provide them with any
other form of consideration in respect of the cancelled options) in order to reduce a portion of the equity reserve
“overhang” under the Company’s equity compensation plans represented by the number of shares of the Company’s
common stock remaining available for future issuance under such plans (including shares that may be issued upon the
exercise or vesting of outstanding options and other rights). No compensation expense was recorded related to the
cancellation of stock options in fiscal 2011, as the options canceled were fully vested and expensed prior to fiscal 2011.
16. Transactions with Related Parties
During the year ended October 31, 2003, we entered into an agreement (as subsequently amended) to purchase
land in California for approximately $31.4 million from an entity that is owned by Hirair Hovnanian, a family relative of
our Chairman of the Board and Chief Executive Officer. As of October 31, 2012, we had an option deposit of $3.0
million related to this land acquisition agreement. Neither the Company nor the Chairman of the Board and Chief
Executive Officer has a financial interest in the relative’s company from whom the land was purchased.
During the fiscal years ended October 31, 2012, 2011, and 2010, an engineering firm owned by Tavit Najarian,
a relative of our Chairman of the Board and Chief Executive Officer, provided services to the Company totaling $0.9
million, $1.0 million, and $1.3 million, respectively. Neither the Company nor the Chairman of the Board and Chief
Executive Officer has a financial interest in the relative’s company from whom the services were provided.
During the fiscal years ended October 31, 2011 and 2010, a real estate development firm owned by Mazin
Kalian, a relative of our Chairman of the Board and Chief Executive Officer, provided consulting services to the
Company totaling less than $0.1 million and $0.2 million, respectively, including significant travel related
expenses. The consulting services consisted primarily of negotiations, community design and cost analysis on a
potential joint venture. During the fiscal year ended October 31, 2012, there were no consulting services provided.
Neither the Company nor the Chairman of the Board and Chief Executive Officer has a financial interest in the relative’s
company from whom the services were provided.
In December 2005, we entered into an agreement to purchase land in New Jersey from an entity that is owned
by Hirair Hovnanian, a family relative of our Chairman of the Board and Chief Executive Officer at a base price of
$25 million. The land was to be acquired in four phases over a period of three years from the date of acquisition of the
98
first phase and the land seller was obligated to obtain all government approvals. The purchase prices for all phases were
subject to an increase in the purchase price of the phase per annum from February 1, 2008. On June 11, 2008, the parties
amended the purchase agreement and closed title to 43 of the 86 building lots in phase one. The purchase of the balance
of phase one was deferred to no later than the scheduled closing of phase four. On November 12, 2009, the parties closed
title to 83 building lots located in phase two. On June 22, 2010, the parties closed title to 84 building lots located in
phase three. On June 13, 2011, the parties closed title to the 137 building lots, which included the building lots
contained within phase four and the deferred balance of building lots from phase one. During the fiscal year ended
October 31, 2011, all of the property under the purchase agreement had been purchased by the Company for a total
purchase price of approximately $29.2 million. Neither the Company nor the Chairman of the Board and Chief
Executive Officer has or had a financial interest in the relatives' company from whom the land was purchased.
17. Warranty Costs
Over the past several years, general liability insurance for homebuilding companies and their suppliers and
subcontractors has become very difficult to obtain. The availability of general liability insurance has been limited due to
a decreased number of insurance companies willing to underwrite for the industry. In addition, those few insurers willing
to underwrite liability insurance have significantly increased the premium costs. We have been able to obtain general
liability insurance but at higher premium costs with higher deductibles. We have been advised that a significant number
of our subcontractors and suppliers have also had difficulty obtaining insurance that also provides us coverage. As a
result, we introduced an owner controlled insurance program for certain of our subcontractors, whereby the
subcontractors pay us an insurance premium based on the value of their services, and we absorb the liability associated
with their work on our homes as part of our overall general liability insurance.
We establish a warranty accrual for repair costs under $5,000 per occurrence to homes, community amenities,
and land development infrastructure. We accrue for warranty costs as part of cost of sales at the time each home is
closed and title and possession have been transferred to the homebuyer. In addition, we accrue for warranty costs over
$5,000 per occurrence as part of our general liability insurance deductible, which is expensed as selling, general, and
administrative costs. For homes delivered in fiscal 2012 and 2011, our deductible under our general liability insurance is
$20 million per occurrence for construction defects and warranty claims. For bodily injury claims, our deductible per
occurrence in 2012 and 2011 is $0.1 million up to a $5 million limit. Our aggregate retention in 2012 and 2011 is $21
million for construction defects, warranty and bodily injury claims. Additions and charges in the warranty reserve and
general liability reserve for the years ended October 31, 2012 and 2011 were as follows:
(In Thousands)
Balance, beginning of year
Additions during year
Charges incurred during year
Balance, end of year
Year Ended October 31,
2012
123,865 $
30,947
(33,663)
121,149 $
$
$
2011
125,268
36,849
(38,252)
123,865
Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our
historical warranty and construction defect data and worker’s compensation data to assist us in estimating our reserves
for 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, excluding insurance deductibles paid, were $18.1 million and
$9.8 million for the years ended October, 2012 and 2011, respectively, for prior year deliveries. In the third quarter of
fiscal 2012, we settled two construction defect claims, one claim relating to the Northeast segment and one claim
relating to the West segment, which made up the majority of the payments for the period.
99
18. Commitments and Contingent Liabilities
We are involved in litigation arising in the ordinary course of business, none of which is expected to have a
material adverse effect on our financial position or results of operations, and we are subject to extensive and complex
regulations that affect the development and home building, sales and customer financing processes, including zoning,
density, building standards and mortgage financing. These regulations often provide broad discretion to the
administering governmental authorities. This can delay or increase the cost of development or homebuilding.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of
health and the environment. The particular environmental laws that apply to any given community vary greatly
according to the community site, the site’s environmental conditions and the present and former uses of the site. These
environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs,
and can prohibit or severely restrict development and homebuilding activity.
We received in October 2012 a notice from Region III of the United States Environmental Protection Agency
(“EPA”) concerning stipulated penalties, totaling approximately $120,000, based on the extent to which we reportedly
did not meet certain compliance performance specified in the previously reported consent decree entered into in August
2010; we have since paid the stipulated penalties as assessed. Until terminated by court order, which can occur no
sooner than three years from the date of its entry, the consent decree remains in effect and could give rise to additional
assessments of stipulated penalties. In October 2012, we also received notices from Region III of EPA concerning
alleged violations of stormwater discharge permits, issued in 2010 pursuant to the federal Clean Water Act, at two
projects in Maryland; we are negotiating with the EPA a resolution of these more recent administrative proceedings that
would involve our paying a penalty and agreeing to certain measures in order to comply with those permits. We do not
expect the impact on us to be material.
We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the
future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive
compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In
addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many
factors, some of which are beyond our control, such as changes in policies, rules, and regulations and their
interpretations and application.
The Company is also involved in the following litigation:
Hovnanian Enterprises, Inc. and K. Hovnanian Venture I, L.L.C. have been named as defendants in a class
action suit. The action was filed by Mike D’Andrea and Tracy D’Andrea, on behalf of themselves and all others
similarly situated in the Superior Court of New Jersey, Gloucester County. The action was initially filed on May 8, 2006
alleging that the HVAC systems installed in certain of the Company’s homes are in violation of applicable New Jersey
building codes and are a potential safety issue. On December 14, 2011, the Superior Court granted class certification; the
potential class is 1,065 homes. We filed a request to take an interlocutory appeal regarding the class certification
decision. The Appellate Division denied the request, and we filed a request for interlocutory review by the New Jersey
Supreme Court, which remanded the case back to the Appellate Division for a review on the merits of the appeal on May
8, 2012. The plaintiff seeks unspecified damages as well as treble damages pursuant to the NJ Consumer Fraud
Act. The Company believes there is insurance coverage available to it for this action. While we have determined that a
loss related to this case is not probable, it is not possible to estimate a loss or range of loss related to this matter at this
time given the class certification is still in review by the Appellate Divison. On December 19, 2011, certain subsidiaries
of the Company filed a separate action seeking indemnification against the various manufactures and subcontractors
implicated by the class action.
100
19. Variable Interest Entities
The Company enters into land and lot option purchase contracts to procure land or lots for the construction of
homes. Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the
obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option
purchase contracts, many of the option deposits are not refundable at the Company's discretion. Under the requirements
of ASC 810, certain option purchase contracts may result in the creation of a variable interest in the entity that owns the
land parcel under option.
In compliance with ASC 810, the Company analyzes its option purchase contracts to determine whether the
corresponding land sellers are variable interest entities (“VIEs”) and, if so, whether the Company is the primary
beneficiary. Although the Company does not have legal title to the underlying land, ASC 810 requires the Company to
consolidate a VIE if the Company is determined to be the primary beneficiary. In determining whether it is the primary
beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that
most significantly impact the VIE’s economic performance. Such activities would include, among other things,
determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE,
or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of the VIE
or the right to receive benefits from the VIE. As a result of its analyses, the Company determined that, as of October 31,
2012 and October 31, 2011, it was not the primary beneficiary of any VIEs from which it is purchasing land under
option purchase contracts.
We will continue to secure land and lots using options, some of which are with VIEs. Including deposits on our
unconsolidated VIEs, at October 31, 2012, we had total cash and letters of credit deposits amounting to approximately
$57.5 million to purchase land and lots with a total purchase price of $743.2 million. The maximum exposure to loss
with respect to our land and lot options is limited to our deposits, although some deposits are refundable at our request or
refundable if certain conditions are not met.
20. 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 and other homebuilders as well as financial
investors to develop finished lots for sale to the joint venture’s members or other third parties.
During the three months ended January 31, 2011, we entered into a joint venture agreement to acquire a
portfolio of homebuilding projects, including land we previously owned in the consolidated group. We sold the land we
owned to the joint venture for net proceeds of $36.1 million, which was equal to our basis in the land at that time, and
recorded an investment in unconsolidated joint ventures of $19.7 million for our interest in the venture. During the three
months ended April 30, 2011, we expanded this joint venture, selling additional land we owned to the joint venture for
net proceeds of $27.2 million, which was equal to our book value in the land at that time, and recorded an additional
investment of $11.4 million of our interest in the venture. Separately, during the three months ended January 31, 2011,
our partner in a land development joint venture transferred its interest in the venture to us. The consolidation resulted in
increases in inventory and non-recourse land mortgages of $9.5 million and $18.5 million, respectively, and a decrease
in other liabilities of $9.0 million.
During the three months ended July 31, 2012, we purchased our partners’ interest in one of our unconsolidated
homebuilding joint ventures. The consolidation of this entity resulted in increases in inventory, other assets, non-
recourse land mortgages and accounts payables and other liabilities of $34.3 million, $5.0 million, $20.6 million and
$15.8 million, respectively.
101
The tables set forth below summarize the combined financial information related to our unconsolidated
homebuilding and land development joint ventures that are accounted for under the equity method.
(Dollars In Thousands)
Assets:
Cash and cash equivalents
Inventories
Other assets
Total assets
Liabilities and equity:
Accounts payable and accrued liabilities
Notes payable
Total liabilities
Equity of:
Hovnanian Enterprises, Inc.
Others
Total equity
Total liabilities and equity
Debt to capitalization ratio
(Dollars In Thousands)
Assets:
Cash and cash equivalents
Inventories
Other assets
Total assets
Liabilities and equity:
Accounts payable and accrued liabilities
Notes payable
Total liabilities
Equity of:
Hovnanian Enterprises, Inc.
Others
Total equity
Total liabilities and equity
Debt to capitalization ratio
October 31, 2012
Land
Homebuilding
Development Total
$
$
$
$
29,657 $
177,170
12,886
219,713 $
24,651 $
79,675
104,326
45,285
70,102
115,387
219,713 $
41%
1,686 $ 31,343
14,853 192,023
5 12,891
16,544 $236,257
12,233 $ 36,884
79,675
12,233 116,559
794 46,079
3,517 73,619
4,311 119,698
16,544 $236,257
40%
0%
October 31, 2011
Land
Homebuilding
Development Total
$
$
$
$
21,380 $
310,743
25,388
357,511 $
21,035 $
199,821
220,856
52,013
84,642
136,655
357,511 $
59%
287 $ 21,667
14,786 325,529
25,388
15,073 $372,584
11,710 $ 32,745
21 199,842
11,731 232,587
1,312 53,325
2,030 86,672
3,342 139,997
15,073 $372,584
59%
1%
As of October 31, 2012 and 2011, we had advances outstanding of approximately $15.0 million and $11.7
million, respectively, to these unconsolidated joint ventures, which were included in the “Accounts payable and accrued
liabilities” balances in the tables above. On our Consolidated Balance Sheets, our “Investments in and advances to
unconsolidated joint ventures” amounted to $61.1 million and $57.8 million at October 31, 2012 and 2011,
respectively. In some cases, our net investment in these joint ventures is less than our proportionate share of the equity
reflected in the tables above because of the differences between asset impairments recorded against our joint venture
investments and any impairments recorded in the applicable joint venture. Impairments of our joint venture
equity investments are recorded when we deem a decline in fair value to be other than temporary while impairments
recorded in the joint ventures are recorded when undiscounted cash flows of the community indicate that the carrying
amount is not recoverable. During fiscal 2011 and fiscal 2012, we did not write down any joint venture investments
based on our determination that none of the investments in our joint ventures sustained an other than temporary
impairment during those periods.
102
(Dollars In Thousands)
Revenues
Cost of sales and expenses
Joint venture net income
Our share of net income
(Dollars In Thousands)
Revenues
Cost of sales and expenses
Joint venture net (loss) income
Our share of net (loss) income
(Dollars In Thousands)
Revenues
Cost of sales and expenses
Joint venture net income (loss)
Our share of net income
For The Twelve Months Ended
October 31, 2012
Land
Development Total
Homebuilding
323,177 $
$
(300,892)
22,285 $
4,763 $
$
$
11,531 $ 334,708
(9,318) (310,210)
2,213 $ 24,498
5,871
1,108 $
For The Twelve Months Ended
October 31, 2011
Land
Development Total
Homebuilding
177,301 $
$
(181,651)
(4,350) $
(8,395) $
$
$
12,226 $ 189,527
(11,114) (192,765)
(3,238)
(7,748)
1,112 $
647 $
For The Twelve Months Ended
October 31, 2010
Land
Development Total
Homebuilding
137,073 $
$
(135,878)
1,195 $
683 $
$
$
19,307 $ 156,380
(21,260) (157,138)
(758)
1,152
(1,953) $
469 $
“Income (loss) from unconsolidated joint ventures” in the accompanying Consolidated Statements of
Operations reflects our proportionate share of the loss or income of these unconsolidated homebuilding and land
development joint ventures. The difference between our share of the loss or income from these unconsolidated joint
ventures in the tables above compared to the Consolidated Statements of Operations is due primarily to one joint venture
that had net income for which we do not get any share of the profit because of the cumulative equity position of the joint
venture, the reclassification of the intercompany portion of management fee income from certain joint ventures, and the
deferral of income for lots purchased by us from certain joint ventures. To compensate us for the administrative services
we provide as the manager of certain joint ventures we receive a management fee based on a percentage of the
applicable joint venture’s revenues. These management fees, which totaled $15.2 million, $7.6 million and $6.3 million
for the years ended October 31, 2012, 2011 and 2010, respectively, are recorded in homebuilding selling, general and
administrative on the Consolidated Statement of Operations.
In determining whether or not we must consolidate joint ventures that we manage, we assess whether the other
partners have specific rights to overcome the presumption of control by us as the manager of the joint venture. In most
cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing
the operations 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. The amount
of financing is generally targeted to be no more than 50% of the joint venture’s total assets. For our more recent joint
ventures, obtaining financing has become challenging, therefore, some of our joint ventures are capitalized only with
equity. However, for our most recent joint venture, a portion of our partner's contribution was in the form of mortgage
financing. Including the impact of impairments recorded by the joint ventures, the average debt to capitalization ratio of
all our joint ventures is currently 40%. Any joint venture financing is on a nonrecourse basis, with guarantees from us
limited only to performance and completion of development, environmental warranties and indemnification, standard
indemnification for fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing. In some
instances, the joint venture entity is considered a VIE under ASC 810 due to the returns being capped to the equity
holders; however, in these instances, we have determined that we are not the primary beneficiary, and therefore we do
not consolidate these entities.
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21. Fair Value of Financial Instruments
ASC 820, "Fair Value Measurements and Disclosures" (“ASC 820”), provides a framework for measuring fair
value, expands disclosures about fair-value measurements and establishes a fair value hierarchy which prioritizes the
inputs used in measuring fair value summarized as follows:
Level 1: Fair value determined based on quoted prices in active markets for identical assets.
Level 2: Fair value determined using significant other observable inputs.
Level 3: Fair value determined using significant unobservable inputs.
Our financial instruments measured at fair value on a recurring basis are summarized below:
(In thousands)
Mortgage loans held for sale (1)
Interest rate lock commitments
Forward contracts
Total
Fair Value
Hierarchy
Fair Value at
October 31,
2012
Fair Value at
October 31,
2011
Level 2
Level 2
Level 2
$
$
116,912 $
(8)
120
117,024 $
73,126
142
(1,096)
72,172
(1) The aggregate unpaid principal balance is $113.8 million and $70.4 million at October 31, 2012 and 2011,
respectively.
We elected the fair value option for our mortgage loans held for sale in accordance with ASC 825, “Financial
Instruments” (“ASC 825”), which permits us to measure financial instruments at fair value on a contract-by-contract
basis. Management believes that the election of the fair value option for loans held for sale improves financial reporting
by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative
instruments used to economically hedge them without having to apply complex hedge accounting provisions. Fair value
of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage
whole loans with similar characteristics.
The assets accounted for using the fair value option are initially measured at fair value. Gains and losses from
initial measurement and subsequent changes in fair value are recognized in the Financial Services segment’s income
(loss). The changes in fair values that are included in income (loss) are shown, by financial instrument and financial
statement line item, below:
(In thousands)
Year Ended October 31, 2012
Mortgage
Loan
Commitments
Loans Held
For Sale
Forward
Contracts
Changes in fair value included in net (loss) income, all reflected in
financial services revenues
$
(572 ) $
(151 ) $
1,216
(In thousands)
Year Ended October 31, 2011
Mortgage
Loan
Commitments
Loans Held
For Sale
Forward
Contracts
Changes in fair value included in net (loss) income, all reflected in
financial services revenues
$
362 $
63 $
(842)
(In thousands)
Year Ended October 31, 2010
Mortgage
Loan
Commitments
Loans Held
For Sale
Forward
Contracts
Changes in fair value included in net (loss) income, all reflected in
financial services revenues
$
326 $
(175 ) $
448
104
The Company's assets measured at fair value on a nonrecurring basis are those assets for which the Company
has recorded valuation adjustments and write-offs during the fiscal years ended October 31, 2012 and 2011. The assets
measured at fair value on a nonrecurring basis are all within the Company's Homebuilding operations and are
summarized below:
Nonfinancial Assets
(In thousands)
Year Ended
October 31, 2012
Fair Value
Hierarchy
Pre-
Impairment
Amount
Total Losses Fair Value
Sold and unsold homes and lots under development
Level 3
Land and land options held for future development or sale Level 3
$
$
11,065 $
26,998 $
(3,234) $
(6,589) $
7,831
20,409
Nonfinancial Assets
(In thousands)
Year Ended
October 31, 2011
Fair Value
Hierarchy
Pre-
Impairment
Amount
Total Losses Fair Value
Sold and unsold homes and lots under development
Level 3
Land and land options held for future development or sale Level 3
$
$
167,568 $
84,384 $
(50,999) $
(26,483) $
116,569
57,901
We record impairment losses on inventories related to communities under development and held for future
development when events and circumstances indicate that they may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash
flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value
of each impaired community by determining the present value of its estimated future cash flows at a discount rate
commensurate with the risk of the respective community. Should the estimates or expectations used in determining cash
flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional
impairments. We recorded inventory impairments, which are included in the Consolidated Statements of Operations as
“Inventory impairment loss and land option write-offs” and deducted from Inventory of $9.8 million, $77.5 million and
$122.5 million for the years ended October 31, 2012, 2011 and 2010, respectively.
The Financial Services segment had a pipeline of loan applications in process of $307.0 million at October 31,
2012. Loans in process for which interest rates were committed to the borrowers totaled approximately $43.4 million as
of October 31, 2012. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these
commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily
represent future cash requirements.
The Financial Services segment uses investor commitments and forward sales of mandatory mortgage-backed
securities (“MBS”) to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees,
elements of credit and interest rate risk. Credit risk is managed by entering into MBS forward commitments, option
contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors
meeting the segment’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference
between the contract price and fair value of the MBS forward commitments and option contracts. At October 31, 2012,
the segment had open commitments amounting to $13.0 million to sell MBS with varying settlement dates through
December 20, 2012.
Our Level 1 financial instruments consist of cash and cash equivalents and restricted cash, the fair value of
which is based on Level 1 inputs.
Our Level 2 financial instruments consist of mortgage loans held for sale and senior notes and senior
subordinated amortizing notes payable. The fair value of mortgage loans held for sale is determined as discussed
above. The fair value of each series of the senior unsecured notes and senior subordinated amortizing notes is estimated
based on recent trades or quoted market prices for the same issues or based on recent trades or quoted market prices for
our debt of similar security and maturity to achieve comparable yields. The fair value of the senior unsecured notes (all
series in the aggregate) and senior subordinated amortizing notes, was estimated at $448.7 million and $5.5 million,
105
respectively, as of October 31, 2012. As of October 31, 2011 the fair value of the senior unsecured notes (all series in
the aggregate) and senior subordinated amortizing notes was estimated at $359.0 million and $4.4 million, respectively.
Our Level 3 financial instruments consist of the senior secured, senior amortizing and senior exchangeable
notes payable. The fair value of each of the senior secured notes (all series in the aggregate), senior amortizing
notes and senior exchangeable notes is estimated based on third party broker quotes. The fair value of the senior secured
notes (all series in the aggregate), senior amortizing notes and senior exchangeable notes was estimated at $994.2
million, $23.1 million and $87.2 million, respectively, as of October 31, 2012. As of October 31, 2011, the fair value of
the senior secured notes (all series in the aggregate) was estimated at $653.5 million.
22. Financial Information of Subsidiary Issuer and Subsidiary Guarantors
Hovnanian Enterprises, Inc., the parent company (the “Parent”), is the issuer of publicly traded common stock,
preferred stock, which is represented by depository shares, and 7.25% Tangible Equity Units. One of its wholly owned
subsidiaries, K. Hovnanian Enterprises, Inc. (the “Subsidiary Issuer”), acts as a finance entity that as of October 31,
2012, had issued and outstanding approximately $992.0 million of senior secured notes ($977.4 million, net of discount),
$460.6 million senior notes ($458.7 million, net of discount), $23.1 million senior amortizing notes and $76.9 million
senior exchangeable notes (issued as components of our 6.0% exchangeable note units) and $6.1 million senior
subordinated amortizing notes (issued as a component of our 7.25% Tangible Equity Units). The senior secured notes,
senior notes, senior amortizing notes, senior exchangeable notes and senior subordinated amortizing notes are fully and
unconditionally guaranteed by the Parent.
In addition to the Parent, each of the wholly owned subsidiaries of the Parent other than the Subsidiary Issuer
(collectively, “Guarantor Subsidiaries”), with the exception of our home mortgage subsidiaries, certain of our title
insurance subsidiaries, joint ventures, subsidiaries holding interests in our joint ventures and our foreign subsidiary
(collectively, the “Nonguarantor Subsidiaries”), have guaranteed fully and unconditionally, on a joint and several basis,
the obligations of the Subsidiary Issuer to pay principal and interest under the senior secured notes (other than the 2021
Notes), senior notes, senior exchangeable notes, senior amortizing notes and senior subordinated amortizing notes. The
2021 Notes are guaranteed by the Guarantor Subsidiaries and the members of the Secured Group (see Note 9).
The senior notes, senior amortizing notes, senior exchangeable notes and senior subordinated amortizing notes
have been registered under the Securities Act of 1933, as amended. The 2020 Secured Notes (see Note 9) and the 2021
Notes are not, pursuant to the indentures under which such notes were issued, required to be registered. The
Consolidating Condensed Financial Statements presented below are in respect of our registered notes only and not the
2020 Secured Notes or the 2021 Notes (however, the Guarantor Subsidiaries for the 2020 Secured Notes are the same as
those represented by the accompanying Consolidating Condensed Financial Statements). In lieu of providing separate
financial statements for the Guarantor Subsidiaries of our registered notes, we have included the accompanying
Consolidating Condensed Financial Statements. Therefore, separate financial statements and other disclosures
concerning such Guarantor Subsidiaries are not presented.
The following Consolidating Condensed Financial Statements present the results of operations, financial
position and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, (iv) the Nonguarantor
Subsidiaries and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis.
106
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2012
(In thousands)
Assets:
Homebuilding
Financial services
Investments in consolidated
subsidiaries
Total assets
Liabilities and equity:
Homebuilding
Financial services
Notes payable
Income taxes payable
Intercompany
Stockholders’ (deficit) equity
Non-controlling interest in
consolidated joint ventures
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Nonguarantor
Subsidiaries Eliminations Consolidated
$
6,155 $
259,339 $
976,836 $
23,669
277,286 $
140,965
$
1,519,616
164,634
$
$
25
6,180 $
15,311
70,067
274,650 $ 1,070,572 $
1,671 $
125 $
1,561,635
40,551
391,628 $
23,070
271
(33,669)
418,251 $
61,800 $
122,024
489
(85,403)
(85,403) $
-
1,684,250
$
449,533 (1,930,998) 1,494,224
(804,952)
(485,575)
643,888
(12,759)
246,467
(85,403)
455,224
145,094
1,562,395
6,882
-
(485,575)
230
1,684,250
230
418,251 $
(85,403) $
Total liabilities and equity
$
6,180 $
274,650 $ 1,070,572 $
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2011
(In thousands)
Assets:
Homebuilding
Financial services
Investments in and amounts due
to and from consolidated
subsidiaries
Total assets
Liabilities and equity:
Homebuilding
Financial services
Notes payable
Income taxes payable
Stockholders’ (deficit) equity
Non-controlling interest in
consolidated joint ventures
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Nonguarantor
Subsidiaries Eliminations Consolidated
$
12,756 $ 200,281 $ 1,096,594 $
4,537
207,443 $
80,569
$
1,517,074
85,106
(467,562) 2,140,349 (2,435,348)
$ (454,806) $ 2,340,630 $ (1,334,217) $
(9,364)
278,648 $
771,925
771,925 $
-
1,602,180
$
2,172 $
1,623,957
(33) $
355,191 $
4,231
144
2,113
716,706 (1,695,896)
39,716
(496,694)
11,276 $
60,015
$
207,265
771,925
92
278,648 $
771,925 $
368,606
64,246
1,624,101
41,829
(496,694)
92
1,602,180
Total liabilities and equity
$ (454,806) $ 2,340,630 $ (1,334,217) $
107
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 2012
(In thousands)
Revenues:
Homebuilding
Financial services
Intercompany charges
Total revenues
Expenses:
Homebuilding
Financial services
Total expenses
Loss on extinguishment of debt
Income from unconsolidated
joint ventures
(Loss) income before income
taxes
State and federal income tax
(benefit) provision
Equity in (loss) income
from subsidiaries
Net (loss) income
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
9 $
9
(270) $ 1,364,733 $
8,082
98,805
(120,094)
98,535 1,252,721
87,124 $
30,653
(3,590)
114,187
(4,978) $
24,879
19,901
1,446,618
38,735
-
1,485,353
(28)
3,030 150,297 1,300,728
5,737
3,002 150,297 1,306,465
(29,066)
79,899
17,951
97,850
5,334
(12)
5,322
561
4,840
1,539,288
23,648
1,562,936
(29,066)
5,401
(2,993)
(80,828)
(53,183)
21,177
14,579
(101,248)
(17,495)
(17,580)
24
(35,051)
(80,699)
(66,197) $
$
(80,828) $
(35,603) $
21,153 $
80,699
95,278 $
-
(66,197)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 2011
(In thousands)
Revenues:
Homebuilding
Financial services
Intercompany charges
Total revenues
Expenses:
Homebuilding
Financial services
Total expenses
Gain on extinguishment of debt
Loss from unconsolidated joint
ventures
(Loss) income before income
taxes
State and federal income tax
(benefit) provision
Equity in (loss) income from
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
21 $
(245) $ 1,103,249 $
5,523
(152,042)
956,730
114,592
21 114,347
307
5,704 164,947 1,218,886
4,809
6,011 164,947 1,223,695
7,528
7,360 $
23,958
(655)
30,663
1,073
16,263
17,336
(712)
(8,246)
(4,959) $
38,105
33,146
1,105,426
29,481
-
1,134,907
13,084
(8)
13,076
1,403,694
21,371
1,425,065
7,528
(8,958)
(5,990)
(43,072)
(267,677)
5,081
20,070
(291,588)
(20,084)
14,583
(5,501)
subsidiaries
Net (loss) income
(300,181)
$ (286,087) $
(43,072) $
(282,260) $
5,081 $
300,181
320,251 $
-
(286,087)
108
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 2010
$
(In thousands)
Revenues:
Homebuilding
Financial services
Intercompany charges
Total revenues
Expenses:
Homebuilding
Financial services
Total expenses
Gain on extinguishment of debt
Income (loss) from
unconsolidated joint ventures
(Loss) income before income
taxes
State and federal income tax
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
20 $
(350) $ 1,340,887 $
6,353
(190,616)
20 128,033 1,156,624
128,383
4,272 $
25,620
(228)
29,664
(4,960) $
62,461
57,501
1,339,869
31,973
-
1,371,842
8,638 173,709 1,473,481
5,182
9,143 173,709 1,478,663
505
(11,332)
17,905
6,573
25,557
(518)
25,039
25,047
(1,023)
1,979
1,670,053
23,074
1,693,127
25,047
956
(9,123)
(20,629)
(323,062)
25,070
32,462
(295,282)
(benefit) provision
(309,922)
12,052
(297,870)
Equity in (loss) income from
subsidiaries
Net income (loss)
(298,211)
2,588 $
$
(20,629) $
(335,114) $
25,070 $
298,211
330,673 $
-
2,588
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2012
(In thousands)
Cash flows from operating
activities:
Net (loss) income
Adjustments to reconcile net
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
(66,197) $
(80,828) $
(35,603) $
21,153 $
95,278 $
(66,197)
(loss) income to net cash (used
in) provided by operating
activities
Net cash (used in) provided by
operating activities
Net cash provided by (used in)
investing activities
Net cash provided by (used in)
financing activities
Intercompany financing
activities - net
Net increase (decrease) in cash
Cash and cash equivalents
balance, beginning of period
Cash and cash equivalents
balance, end of period
37,030
51,593
146,028
(140,174)
(95,278)
(801)
(29,167)
(29,235)
110,425
(119,021)
-
146
(3,260)
1,614
47,221
(79,976)
49,670
74,075
(18,054) 194,040
84,975
-
(153,863)
2,972
(22,123)
(65,455)
-
-
-
-
-
(66,998)
(1,500)
90,990
-
22,492
- 112,122
(4,989)
143,607
-
250,740
$
- $ 197,097 $
(2,017) $
78,152 $
- $
273,232
109
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2011
(In thousands)
Cash flows from operating
activities:
Net (loss) income
Adjustments to reconcile net
(loss) income to net cash
provided by (used in)
operating activities
Net cash (used in) provided by
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$ (286,087) $
(43,072) $
(282,260) $
5,081 $
320,251 $
(286,087)
93,926
(34,441)
357,401
(17,963)
(320,251)
78,672
operating activities
(192,161)
(77,513)
75,141
(12,882)
-
(207,415)
Net cash provided by (used in)
investing activities
Net cash provided by (used in)
financing activities
Intercompany financing activities
-
-
(223)
1,418
54,899
56,428
2,367
(23,914)
137,252
(79,163)
(10) (100,248)
(69,462)
7,823
11,373
(24,005)
-
-
-
-
1,195
89,780
-
(116,440)
10 212,370
(12,812)
167,612
-
367,180
$
- $ 112,122 $
(4,989) $
143,607 $
- $
250,740
- net
Net (decrease) increase in cash
Cash and cash equivalents
balance, beginning of period
Cash and cash equivalents
balance, end of period
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2010
(In thousands)
Cash flows from operating
activities:
Net income (loss)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities
Net cash provided by (used
in) operating activities
Net cash (used in) provided by
investing activities
Net cash (used in) provided by
financing activities
Intercompany financing activities
- net
Net (decrease) increase in cash
Cash and cash equivalents
balance, beginning of period
Cash and cash equivalents
balance, end of period
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
2,588 $
(20,629) $
(335,114) $
25,070 $
330,673 $
2,588
(24,192)
47,439
151,814
185,511
(330,673)
29,899
(21,604)
26,810
(183,300)
210,581
-
32,487
(1,146)
1,130
(113,232)
3,463
17,786
21,604
-
6,385
(80,037)
183,755
2,772
(211,744)
17,753
-
10 292,407
(15,584)
149,859
(16)
(91,983)
-
(59,512)
426,692
$
10 $ 212,370 $
(12,812) $
167,612 $
- $
367,180
110
23. Unaudited Summarized Consolidated Quarterly Information
Summarized quarterly financial information for the years ended October 31, 2012 and 2011 is as follows:
October 31,
July 31,
April 30,
Three Months Ended
2012
487,045 $
481,996
5,300
(87,033)
3,077
(84,207)
203
(84,410) $
2012
387,011 $
395,221
689
6,230
852
(1,817)
(36,493)
34,676 $
2012
341,698 $
364,678
3,216
27,039
1,495
2,338
536
1,802 $
January 31,
2012
269,599
308,511
3,325
24,698
(23)
(17,562)
703
(18,265)
(0.59) $
142,249
(0.59) $
142,249
0.25 $
138,472
0.25 $
138,552
0.02 $
116,021
0.02 $
116,117
(0.17)
108,735
(0.17)
108,735
October 31,
July 31,
April 30,
Three Months Ended
2011
341,625 $
387,604
59,873
10,563
(2,479)
(97,768)
580
(98,348) $
2011
285,618 $
326,121
11,426
(1,391)
(2,255)
(55,575)
(4,645)
(50,930) $
2011
255,097 $
306,978
16,925
(1,644 )
(3,232 )
(73,682 )
(1,015 )
(72,667 ) $
January 31,
2011
252,567
302,613
13,525
-
(992)
(64,563)
(421)
(64,142)
(0.90) $
108,740
(0.90)
108,740
(0.47) $
108,721
(0.47)
108,721
(0.69 ) $
105,894
(0.69 )
105,894
(0.82)
78,598
(0.82)
78,598
(In Thousands Except Per Share Data)
Revenues
Expenses
Inventory impairment loss and land option write-offs
(Loss) gain on extinguishment of debt
Income (loss) from unconsolidated joint ventures
(Loss) income before income taxes
State and federal income tax provision (benefit)
Net (loss) income
Per share data:
Basic:
(Loss) income per common share
Weighted-average number of common shares outstanding
Assuming dilution: (Loss) income per common share
Weighted-average number of common shares outstanding
$
$
$
$
(In Thousands Except Per Share Data)
Revenues
Expenses
Inventory impairment loss and land option write-offs
Gain (loss) on extinguishment of debt
Loss from unconsolidated joint ventures
Loss before income taxes
State and federal income tax provision (benefit)
Net loss
Per share data:
Basic:
Loss per common share
Weighted-average number of common shares outstanding
Assuming dilution: Loss per common share
Weighted-average number of common shares outstanding
$
$
$
111
(This page has been left blank intentionally.)
Comparison of Five-Year Cumulative Total Return*
Among Hovnanian Enterprises, Inc., the S&P 500 Index and the S&P Homebuilding Index
The following graph compares on a cumulative basis the yearly percentage change over the five-year period ended October
31, 2012 in (i) the total shareholder return on the Company’s Class A Common Stock with (ii) the total return of the Standard
& Poor’s (S&P) 500 Index and with (iii) the total return on the S&P Homebuilding Index. Such yearly percentage change has
been measured by dividing (i) the sum of (a) the cumulative amount of dividends for the measurement period, assuming
dividend reinvestment, and (b) the price per share at the end of the measurement period less the price per share at the
beginning of the measurement period, by (ii) the price per share at the beginning of the measurement period. The price of
each share has been set at $100 on October 31, 2007 for the preparation of the five year graph.
During fiscal 2012, the indexed price per share of Hovnanian’s Class A Common Stock increased 198.7%, which
percentage increase outperformed the S&P Homebuilding Index increase of 137.2%. As reflected in the graph below,
the indexed price per share of Hovnanian’s Class A Common Stock increased from $12.66 at October 31, 2011 to $37.82 at
October 31, 2012, a 198.7% increase compared with the indexed price of a share of the S&P Homebuilding Index, which
increased 137.2% from $57.35 at October 31, 2011 to $136.06 at October 31, 2012.
Note: The stock price performance shown on the following graph is not necessarily indicative of future stock performance.
Hovnanian Enterprises, Inc.
S&P 500
S&P Homebuilding
$160
$140
$120
$100
$80
$60
$40
$20
$0
10/07
10/08
10/09
10/10
10/11
10/12
*$100 invested on 10/31/07 in stock or index, assuming reinvestment of dividends.
Fiscal year ending October 31.
Source: Standard & Poor’s Financial Services, LLC, a division of The McGraw-Hill Companies Inc..
(This page has been left blank intentionally.)
Board of Directors and
Corporate Officers
Corporate Information
INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche LLP
100 Kimball Drive
Parsippany, New Jersey
07054-0319
TRANSFER AGENT AND
REGISTRAR
Computershare
P.O. Box 43078
Providence, Rhode Island 02940
For additional information on the
Direct Registration System please
visit the Investor Relations section
of our website at khov.com
For additional information, visit
our website at khov.com
BOARD OF
DIRECTORS
Ara K. Hovnanian
Chairman of the Board,
President, Chief Executive
Officer and Director
Robert B. Coutts
Director
Edward A. Kangas
Director
Joseph A. Marengi
Director
John J. Robbins
Director
J. Larry Sorsby
Executive Vice President,
Chief Financial Officer
and Director
Stephen D. Weinroth
Director
CHIEF OPERATING
OFFICER
Thomas J. Pellerito
ANNUAL MEETING
March 12, 2013, 10:30 a.m.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
VICE PRESIDENTS
David L. Bachstetter
Charles E. D’Angelo
Laura C. Dempsey
Michael Discafani
David A. Friend
Jane M. Hurd
Brad G. O’Connor
Jeffrey T. O’Keefe
Nicholas Pappas
P. Dean Potter
David G. Valiaveedan
Laura A. VanVelthoven
C. Douglas Whitlock
Marcia Wines
STOCK LISTING
Hovnanian Enterprises, Inc.
Class A common stock is traded on
the New York Stock Exchange
under the symbol HOV.
FORM 10-K
A copy of the Form 10-K, as filed
with the Securities and Exchange
Commission, is included herein.
Additional copies are available free
of charge upon request to the:
Office of the Controller
Hovnanian Enterprises, Inc.
110 West Front Street
Red Bank, New Jersey 07701
732-383-2200
INVESTOR RELATIONS
CONTACTS
J. Larry Sorsby
Executive Vice President, Chief
Financial Officer
732-383-2200
Jeffrey T. O’Keefe
Vice President, Investor Relations
732-383-2200
E-mail: ir@khov.com
Hovnanian Enterprises, Inc.
110 West Front Street
Red Bank, New Jersey 07701
732-383-2200
For additional information visit our website at khov.com