Hovnanian Enterprises
Annual Report 2014

Plain-text annual report

Hovnanian Enterprises, Inc. Annual Report 2014 Hovnanian Enterprises, Inc. Communities Financial Highlights REVENUES AND INCOME (Dollars in Millions) Total Revenues Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt (1) Income (Loss) Before Income Taxes Net Income (Loss) ASSETS, DEBT AND EQUITY (Dollars in Millions) Total Assets Total Recourse Debt Total Equity Deficit INCOME PER COMMON SHARE (Shares in Thousands) Assuming Dilution: Income (Loss) Per Common Share Active Selling Communities Proposed Communities Arizona California Delaware Florida Georgia Illinois Maryland Minnesota New Jersey North Carolina Ohio Pennsylvania South Carolina Texas Virginia/DC West Virginia Total 12 10 7 13 2 11 9 7 8 5 18 2 4 75 17 1 201 6 30 5 20 - 16 10 3 31 7 6 3 9 29 14 2 191 Years Ended October 31, 2014 2013 2012 2011 2010 $ 2,063.4 $ 1,851.3 $ 1,485.4 $ 1,134.9 $ 1,371.8 $ $ $ $ $ $ 26.6 20.2 307.1 2,289.9 1,657.6 (117.8) $ $ $ $ $ $ 27.7 21.9 31.3 1,759.1 1,529.4 (432.8) $ $ $ $ $ $ (55.0) (101.2) (66.2) 1,684.3 1,542.2 (485.3) $ $ $ $ $ $ (194.1) (291.6) (286.1) 1,602.2 1,602.8 (496.6) $ $ $ $ $ $ (184.6) (295.3) 2.6 1,817.6 1,616.3 (337.9) Weighted Average Number of Common Shares Outstanding 162,441 162,329 126,350 100,444 $ 1.87 $ 0.22 $ (0.52) $ (2.85) $ 0.03 79,683 (1) Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt is a non-GAAP financial measure. See page 5 of this Annual Report for a reconciliation to Income (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: SG&A ratio back to the normalized level of around 10% In spite of housing market conditions best described as in the future. “choppy”, during fiscal 2014 we continued our strategy of top line revenue growth. Our total revenues grew Throughout fiscal 2014, we made good progress in 11.5% to $2.1 billion in fiscal 2014 compared with $1.9 leveraging our interest expense as a percentage of total billion in the prior year. This growth was driven by a revenues. For all of fiscal 2014, total interest expense as a 4.4% increase in consolidated deliveries, an 8.1% percentage of total revenue declined 90 basis points to increase in average sales price and a 4.7% increase in our 6.9% compared with 7.8% in the prior year. consolidated community count. Our pre-tax profit of $20.2 million for fiscal 2014 was income from unconsolidated joint ventures was less than quite similar to the $21.9 million of pre-tax income we the previous year, but nevertheless both were solid at had for all of fiscal 2013. Our net income was $307.1 $13.8 million and $7.9 million, respectively, in fiscal million, or $1.87 per fully diluted common share, 2014 compared with $18.7 million and $12.0 million, In fiscal 2014, pre-tax profit for financial services and compared with net income of $31.3 million, or $0.22 per respectively, in fiscal 2013. fully diluted common share during the same period a year ago. Net income for fiscal 2014 included a non-cash tax At October 31, 2014, our consolidated community count benefit of $285.1 million from the reduction of the was 201 communities compared to 192 communities at Company’s valuation allowance for its deferred tax the end of fiscal 2013. This was the first time since 2009 assets. that our consolidated community count was above 200. We expect additional growth in community count going For the second consecutive year, we achieved what we forward and the proceeds from our offering of $250 would consider to be a normalized gross margin. Our million of 8.00% Senior Notes due 2019 completed in homebuilding gross margin percentage, before interest November 2014 will allow us to grow our community expense and land charges included in cost of sales, was count more rapidly. 19.9% for fiscal 2014, which was slightly lower than the 20.1% that we reported for fiscal 2013. During fiscal 2014, we, in line with trends in the homebuilding industry in general, experienced a slower As we grew our revenue sequentially each quarter, our sales pace per community compared to 2013. This year- total SG&A expenses as a percentage of total revenues over-year decline in sales pace was not something we decreased sequentially each quarter in fiscal 2014. expected to experience at this early stage of a housing However, primarily related to our efforts to grow our recovery. We had 28.4 net contracts per community for community count and the adverse impact of slower all of fiscal 2014, which was less than the 30.7 we had in deliveries per community, for all of fiscal 2014, our fiscal 2013. For the fourth quarter of 2014, we posted a SG&A expense ratio of 12.4% increased slightly for the slight year-over-year increase in net contracts per full year compared to 11.9% for all of fiscal 2013. As we community. Hopefully, this will prove to be the start of a continue to generate future revenue growth and achieve a more positive trend for our sales pace during fiscal 2015. more normalized pace per community, we expect to be able to leverage our fixed expenses further and get our While sales pace per community during fiscal 2014 was disappointing, a 4.7% increase in community count lead 1to an increase in the absolute level of net contracts and At the beginning of fiscal 2015, we are focused on land dollar amount of net contracts for the full year. During transactions with home deliveries for 2016 and beyond. fiscal 2014, the number of consolidated net contracts We currently control all of the land we need for 2015 increased slightly to 5,559 homes from 5,544 homes in deliveries and 83% of our expected 2016 deliveries. We the same period of the previous year. Due to a healthy have plenty of liquidity and our land acquisition teams increase in average sales price combined with the continue to work hard across the country to identify new increase in community count, the dollar amount of land parcels. consolidated net contracts increased 10.0% to just over $2.1 billion. Even if housing demand does not improve in Ultimately, demographics are in our favor, and 2015, we believe the increased community count we've consumers should buy homes at an increased rate in the achieved to date, combined with the additional future. We continue to believe that the housing industry communities we plan to open, will position us to achieve remains in the early stages of a recovery. Simply put, the higher levels of home sales in 2015. population and number of households in the US is growing, and the nation is building fewer homes today The dollar amount of our consolidated backlog increased than it needs to meet demand over the long-term. We 12.3% to $855.8 million at October 31, 2014 from $762.4 have positioned ourselves to take advantage of these million at the end of last year. The number of homes in trends. consolidated backlog grew to 2,229 at October 31, 2014 up from 2,167 at the end of last year. This increase in We would like to thank all of our associates and backlog combined with the growth in community count stakeholders that have supported us throughout the year. gives us the confidence that we'll be able to continue to We will continue to persistently strive to become the best grow our top line as we head into next year. homebuilder and provider of related financial services in the nation. Future profitability is dependent on our ability to continue to grow our revenues, so that we can gain more efficiencies and return many of our operating metrics to normal levels. Over time, this should allow us to achieve higher levels of sustained profitability. Even after we spent $585.8 million on land and land development in fiscal 2014, we ended the fiscal year with $309.2 million of liquidity. If you add the proceeds from the November 2014 $250 million bond issuance, it brings our pro forma liquidity at October 31, 2014 to $554.9 million. We have a lot of runway in front of us before any material levels of debt come due as only $60.8 million of debt matures in fiscal 2015. Needless to say, we feel good about our liquidity position and we will continue with land purchases that meet our underwriting hurdle rates. Ara K. Hovnanian Chairman of the Board, President and Chief Executive Officer 2Communities Under Development(1) (Dollars In Thousands Except Average Price) Net Contracts(2) Deliveries Contract Backlog Twelve Months Ended October 31, October 31, 2014 2013 % Change 2014 2013 % Change 2014 2013 % 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 476 $243,055 $510,620 801 $379,514 $473,801 849 $263,837 $310,762 576 $185,035 $321,241 2,482 $826,707 $333,081 375 $208,273 $555,395 573 $269,284 $469,955 628 $310,718 $494,774 835 $217,759 $260,789 608 $182,225 $299,712 2,502 $739,784 $295,677 398 $194,678 $489,142 Home Dollars Avg. Price 5,559 $2,106,421 $378,921 5,544 $1,914,448 $345,319 Unconsolidated Joint Ventures Home Dollars Avg. Price Total Home Dollars Avg. Price 324 $127,270 $392,809 633 $282,205 $445,822 5,883 $2,233,691 $379,686 6,177 $2,196,653 $355,618 DELIVERIES INCLUDE EXTRAS (16.9)% (9.7)% 8.7% 27.5% 22.1% (4.2)% 1.7% 21.2% 19.2% (5.3)% 1.5% 7.2% (0.8)% 11.7% 12.7% (5.8)% 7.0% 13.5% 0.3% 10.0% 9.7% (48.8)% (54.9)% (11.9)% (4.8)% 1.7% 6.8% 550 $274,734 $499,516 701 $331,759 $473,266 789 $225,958 $286,386 652 $202,620 $310,768 2,389 $747,753 $312,998 416 $230,189 $553,337 617 $279,695 $453,314 623 $288,323 $462,798 657 $162,758 $247,730 535 $146,264 $273,391 2,331 $684,258 $293,547 503 $223,029 $443,398 5,497 $2,013,013 $366,202 5,266 $1,784,327 $338,839 437 $164,082 $375,475 664 $306,174 $461,105 5,934 $2,177,095 $366,885 5,930 $2,090,501 $352,530 (10.9)% (1.8)% 10.2% 12.5% 15.1% 2.3% 20.1% 38.8% 15.6% 21.9% 38.5% 13.7% 2.5% 9.3% 6.6% (17.3)% 3.2% 24.8% 4.4% 12.8% 8.1% (34.2)% (46.4)% (18.6)% 0.1% 4.1% 4.1% 146 $73,327 $502,240 371 $188,923 $509,227 665 $188,595 $283,601 232 $81,071 $349,443 770 $295,319 $383,532 45 $28,612 $635,822 2,229 $855,847 $383,960 112 $49,123 $438,601 2,341 $904,970 $386,574 220 $105,006 $477,299 271 $141,168 $520,916 605 $150,716 $249,118 308 $98,656 $320,312 677 $216,367 $319,597 86 $50,526 $587,516 2,167 $762,439 $351,841 225 $85,936 $381,938 2,392 $848,375 $354,672 (33.6)% (30.2)% 5.2% 36.9% 33.8% (2.2)% 9.9% 25.1% 13.8% (24.7)% (17.8)% 9.1% 13.7% 36.5% 20.0% (47.7)% (43.4)% 8.2% 2.9% 12.3% 9.1% (50.2)% (42.8)% 14.8% (2.1)% 6.7% 9.0% Notes: (1) Segment data excludes unconsolidated joint ventures. (2) 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.” 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, industry and business conditions and impacts of the sustained homebuilding downturn; (2) adverse weather and other environmental conditions and natural disasters; (3) levels of indebtedness and restrictions on the Company’s operations and activities imposed by the agreements governing the Company’s outstanding indebtedness; (4) the Company's sources of liquidity; (5) changes in credit ratings; (6) changes in market conditions and seasonality of the Company’s business; (7) the availability and cost of suitable land and improved lots; (8) shortages in, and price fluctuations of, raw materials and labor; (9) regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting home prices and sales activity in the markets where the Company builds homes; (10) fluctuations in interest rates and the availability of mortgage financing; (11) changes in tax laws affecting the after-tax costs of owning a home; (12) operations through joint ventures with third parties; (13) government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (14) product liability litigation, warranty claims and claims made by mortgage investors; (15) levels of competition; (16) availability of financing to the Company; (17) successful identification and integration of acquisitions; (18) significant influence of the Company’s controlling stockholders; (19) availability of net operating loss carryforwards; (20) utility shortages and outages or rate fluctuations; (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, 2014 and subsequent filings with the Securities and Exchange Commission. 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 Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt (1) Income (Loss) Before Income Taxes Net Income (Loss) Net Income (Loss) 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 Equity Deficit 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 2014 2013 2012 2011 2010 Years Ended October 31, $ $ $ 2,063,380 5,224 7,897 $ $ $ 1,851,253 4,965 12,040 $ $ $ 1,485,353 12,530 5,401 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 26,559 20,180 307,144 1.87 162,441 291,220 1,344,310 2,289,930 1,657,557 120,527 (117,799) 167,903 173,427 (190,585) 145,409 1.19x 138.3% 1.5x 19.9% 8.4% $ $ $ $ $ $ $ $ $ $ $ $ $ $ 27,660 21,935 31,295 0.22 162,329 361,047 1,078,764 1,759,130 1,529,445 80,636 (432,799) 171,234 179,605 9,268 132,611 1.35x 158.0% 1.7x 20.1% 9.7% $ $ $ $ $ $ $ $ $ $ $ $ $ $ (54,958) (101,248) (66,197) (0.52) 126,350 337,434 981,466 1,684,250 1,542,196 57,077 (485,345) 97,475 107,411 (66,998) 147,048 0.73x 156.9% 1.4x 17.8% 7.2% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1,134,907 101,749 (8,958) (194,078) (291,588) (286,087) (2.85) 100,444 328,358 968,112 1,602,180 1,602,770 45,869 (496,602) (25,522) (12,204) (207,415) 156,998 N/A 143.4% 1.1x 15.6% N/A $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1,371,842 135,699 956 (184,630) (295,282) 2,588 0.03 79,683 480,185 1,001,940 1,817,560 1,616,347 24,970 (337,938) (2,271) 13,615 32,487 154,307 0.09x 121.7% 1.3x 16.8% 1.0% 5,559 2,106,421 5,497 2,013,013 2,229 855,847 $ $ $ 5,544 1,914,448 5,266 1,784,327 2,167 762,439 $ $ $ 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 $ $ $ (1) Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt is not a financial measure calculated in accordance with generally accepted accounting principles (GAAP). The most directly comparable GAAP financial measure is Income (Loss) Before Income Taxes. The reconciliation of Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt to Income (Loss) Before Income Taxes is presented on page 5 of this Annual Report. Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt should be considered in addition to, but not as a substitute for, Income (Loss) Before Income Taxes, Net Income (Loss) 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 Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer 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 Income (Loss). The reconciliation of Adjusted EBIT and Adjusted EBITDA to Net Income (Loss) 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, Income (Loss) Before Income Taxes, Net Income (Loss), 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 mortgage warehouse debt and non-recourse debt and is net of homebuilding cash balances. Capitalization includes debt, as previously defined, and total equity deficit. Calculated based on a five quarter average. (4) Derived by dividing total cost of sales, excluding cost of sales interest, by the five quarter average homebuilding inventory, excluding inventory not owned and capitalized interest. (5) Excludes cost of sales interest. (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 Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt to Income (Loss) Before Income Taxes: (Dollars In Thousands) Income (Loss) Before Income Taxes Inventory Impairment Loss and Land Option Write-Offs Expenses Associated with the Debt Exchange Offer Unconsolidated Joint Venture Investment Write-Downs Loss (Gain) on Extinguishment of Debt Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt Reconciliation of Adjusted EBIT and Adjusted EBITDA to Net Income (Loss): (Dollars In Thousands) Net Income (Loss) Income Tax Benefit 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 EBITDA Inventory Impairment Loss and Land Option Write-offs Expenses Associated with the Debt Exchange Offer Loss (Gain) on Extinguishment of Debt Adjusted EBITDA $ $ 2014 20,180 5,224 – – 1,155 Years Ended October 31, 2013 21,935 4,965 – – 760 $ 2012 (101,248) 12,530 4,694 – 29,066 $ 2011 (291,588) 101,749 – 3,289 (7,528) $ 2010 (295,282) 135,699 – – (25,047) $ 26,559 $ 27,660 $ (54,958) $ (194,078) $ (184,630) Years Ended October 31, 2014 307,144 (286,964) 141,344 161,524 5,224 – 1,155 167,903 161,524 1,132 4,392 167,048 5,224 – 1,155 173,427 $ $ $ $ 2013 31,295 (9,360) 143,574 165,509 4,965 – 760 171,234 165,509 4,712 3,659 173,880 4,965 – 760 179,605 $ $ $ $ 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 $ $ $ $ 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, 2014 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-8551 Hovnanian Enterprises, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 22-1851059 (I.R.S. Employer Identification No.) 110 West Front Street, P.O. Box 500, Red Bank, N.J. (Address of Principal Executive Offices) 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, $0.01 par value per share 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 NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: Class B Common Stock, $0.01 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 “website”, 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, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) was $531,159,828. As of the close of business on December 15, 2014, there were outstanding 131,075,900 shares of the Registrant’s Class A Common Stock and 14,805,695 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 10, 2015, 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 Page PART I....................................................................................................................................................................... 1 Business ...................................................................................................................................................................... 1 1 1A Risk Factors ................................................................................................................................................................ 9 1B Unresolved Staff Comments ....................................................................................................................................... 19 Properties .................................................................................................................................................................... 19 2 3 Legal Proceedings ...................................................................................................................................................... 19 4 Mine Safety Disclosures ............................................................................................................................................. 20 Executive Officers of the Registrant ........................................................................................................................... 20 PART II ..................................................................................................................................................................... 21 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . 21 6 Selected Financial Data .............................................................................................................................................. 22 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ..................................... 23 7A Quantitative and Qualitative Disclosures About Market Risk .................................................................................... 55 Financial Statements and Supplementary Data .......................................................................................................... 55 8 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................................... 55 9A Controls and Procedures ............................................................................................................................................. 56 9B Other Information ....................................................................................................................................................... 58 PART III ................................................................................................................................................................... 58 10 Directors, Executive Officers and Corporate Governance ......................................................................................... 58 11 Executive Compensation ............................................................................................................................................ 59 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................... 59 13 Certain Relationships and Related Transactions, and Director Independence ........................................................... 60 14 Principal Accountant Fees and Services ..................................................................................................................... 60 PART IV .................................................................................................................................................................... 61 15 Exhibits and Financial Statement Schedules .............................................................................................................. 61 Signatures ................................................................................................................................................................... 67 i This page intentionally left blank 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 312,000 homes, including 5,934 homes in fiscal 2014. The Company has 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 201 communities in 34 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 $61,000 (low-income housing) to $1,745,000 with an average sales price, including options, of $366,000 nationwide in fiscal 2014. 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 Homes’ existing residential communities. We also entered 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 The Company markets and builds homes that are constructed in 17 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, Washington, D.C. and West Virginia 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 2,006 full-time employees (whom we refer to as associates) as of October 31, 2014. 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, D.C., 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 Given the low levels of total U.S. housing starts, and our belief in the long-term recovery of the homebuilding market, we remain focused on identifying new land parcels, growing our community count and growing our revenues, which are critical to improving our financial performance. We continue to see opportunities to purchase land at prices that make economic sense in light of our current sales prices and sales paces and plan to continue pursuing such land acquisitions. In addition to our current focus on maintaining strong liquidity and evaluating new investment opportunities, we intend to continue to focus on our historic key business strategies, as enumerated below. 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. 2 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 home buyers. 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 home buyers. 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 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. 3 ● 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 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 2014, 2013 and 2012, rather than purchase additional lots in underperforming communities, we took advantage of this right and walked away from 5,148 lots, 1,611 lots and 2,134 lots, respectively, out of 22,119 total lots, 17,134 total lots and 13,552 total lots, respectively, under option, resulting in pretax charges of $4.0 million, $2.6 million and $2.7 million, respectively. Design - Our residential communities are generally located in suburban areas easily accessible through public and 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, New Jersey, North Carolina, South 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 preclosing quality control inspections as well as responding to postclosing 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 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, Washington, D.C. and West Virginia. 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. 4 During the year ended October 31, 2014, for the markets in which our mortgage subsidiaries originated loans, 16.7% of our home buyers paid in cash and 65.0% of our noncash home buyers obtained mortgages from our mortgage banking subsidiary. The loans we originated in fiscal 2014 were 28.4% Federal Housing Administration/Veterans Affairs (“FHA/VA”), 71.1% prime and 0.5% 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 2 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, 2014, range from $61,000 (low-income housing) to $960,000 in the Northeast, from $140,000 to $1,525,000 in the Mid-Atlantic, from $111,000 to $760,000 in the Midwest, from $163,000 to $796,000 in the Southeast, from $120,000 to $1,076,000 in the Southwest and from $185,000 to $1,745,000 in the West. Closings generally occur and are typically reflected in revenues within six months of when sales contracts are signed. Information on homes delivered by segment for the year ended October 31, 2014, 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 $274,734 331,759 225,958 202,620 747,753 230,189 $2,013,013 164,082 $2,177,095 Homes Delivered 550 701 789 652 2,389 416 5,497 437 5,934 Average Price $499,516 473,266 286,386 310,768 312,998 553,337 $366,202 375,475 $366,885 The value of our net sales contracts, excluding unconsolidated joint ventures, increased to $2.1 billion from $1.9 billion for the years ended October 31, 2014 and 2013, respectively. The number of homes contracted increased to 5,559 in 2014 from 5,544 in 2013. The increase in the number of homes contracted occurred along with an increase in the number of open-for-sale communities from 192 at October 31, 2013 to 201 at October 31, 2014. We contracted an average of 28.4 homes per average active selling community in 2014 compared to 30.7 homes per average active selling community in 2013, demonstrating a small decrease in sales pace per community as the homebuilding market stagnated in 2014. 5 Information on the value of net sales contracts by segment for the years ended October 31, 2014 and 2013, is set forth below: (Value of net sales contracts in thousands) Northeast Mid-Atlantic Midwest Southeast Southwest West Consolidated total Unconsolidated joint ventures Total including unconsolidated joint ventures 2014 $ 243,055 379,514 263,837 185,035 826,707 208,273 $ 2,106,421 127,270 $ 2,233,691 2013 $ 269,284 310,718 217,759 182,225 739,784 194,678 $ 1,914,448 282,205 $ 2,196,653 Percentage of Change (9.7)% 22.1% 21.2% 1.5% 11.7% 7.0% 10.0% (54.9)% 1.7% The following table summarizes our active selling communities under development as of October 31, 2014. The contracted not delivered and remaining homes available in our active selling communities are included in the consolidated total homesites 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 M Mid-Atlantic Midwest Southeast Southwest West Total Communities 10 34 36 24 87 10 201 Approved Homes 2,470 4,412 4,549 2,851 12,259 2,019 28,560 Homes Delivered 1,251 1,670 1,142 1,114 7,503 922 13,602 Contracted Not Delivered(1) 146 371 665 232 770 45 2,229 Remaining Homes Available(2) 1,073 2,371 2,742 1,505 3,986 1,052 12,729 (1) Includes 221 home sites under option. (2) Of the total remaining homes available, 993 were under construction or completed (including 57 models and sales offices), and 5,336 were under option. Backlog At October 31, 2014 and 2013, including unconsolidated joint ventures, we had a backlog of signed contracts for 2,341 homes and 2,392 homes, respectively, with sales values aggregating $905.0 million and $848.4 million, respectively. The majority of our backlog at October 31, 2014, is expected to be completed and closed within the next six months. At November 30, 2014 and 2013, our backlog of signed contracts, including unconsolidated joint ventures, was 2,458 homes and 2,464 homes, respectively, with sales values aggregating $964.6 million and $892.8 million, respectively. For information on our backlog excluding unconsolidated joint ventures, see the table on page 43 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Homebuilding.” 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 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 6 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 investments 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, 2014, 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 34,953 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 37. 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 Total Land Option Price Book Value 24 10 34 19 12 31 14 11 25 27 9 36 30 5 35 5 25 30 3,076 $211,434 998 4,074 $7,936 $102,804 $110,740 1,512 $154,005 1,695 3,207 $6,476 $34,358 $40,834 809 $40,240 582 1,391 $1,225 $15,903 $17,128 4,087 $267,406 634 4,721 1,600 $136,903 76 1,676 330 $91,394 4,596 4,926 $8,773 $16,435 $25,208 $12,926 $11,725 $24,651 $14,584 $40,318 $54,902 119 72 191 11,414 $901,382 8,581 19,995 $51,920 $221,543 $273,463 (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, 2014, option fees and deposits aggregated approximately $44.2 million. As of October 31, 2014, we spent an additional $7.7 million in nonrefundable predevelopment costs on such properties. 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 7 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. 8 We are also subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment, including those regulating the emission or discharge of materials into the environment, the management of stormwater runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing (“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 can prohibit or severely restrict development and homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses. See Item 3 “Legal Proceedings” and Note 19 to the Consolidated Financial Statements. 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 reliably predict the extent of any effect these requirements may have on us, 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 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. 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. In 9 June 2013, we entered into a new $75 million unsecured revolving credit facility under which letters of credit may be issued. We also have certain stand-alone letter of credit facilities and agreements pursuant to which letters of credit are issued. However, we may need additional letters of credit above the amounts provided under these 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 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 those months. 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 increased our price and margin exposure as we worked through this inventory. General economic conditions in the United States remain weak. Several challenges, such as persistently high unemployment levels in some of our markets, economic weakness and uncertainty, declining oil prices, the restrictive mortgage lending environment and rising mortgage interest rates continue to impact the housing market and, consequently, our performance. Our mixed operating results during the year ended October 31, 2014 and other national data demonstrate that the pace of the housing recovery has slowed. However, both national new home sales and our homes sales remain below historical levels. We continue to believe that we are still in the early stages of the housing recovery, but in light of recent market trends, we currently expect to continue to experience uneven results across our operating markets. Further, a worsening of general economic conditions could 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, nonrecourse 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 (“MBS”) 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. 10 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 and the mortgage environment remains constrained. The maximum size of mortgage loans that are treated as conforming by Fannie Mae and Freddie Mac was reduced in the past few years, 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. 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, 2014, including the debt of the subsidiaries that guarantee our debt, was $1,670.3 million ($1,657.6 million net of discount); and • Our debt service payments for the 12-month period ended October 31, 2014, were $127.4 million, substantially all of which represented interest incurred and the remainder of which represented payments on the principal of our 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 and other credit facilities and agreements. In addition, as of October 31, 2014, we had $32.0 million in aggregate outstanding face amount of letters of credit issued under various letter of credit and other credit facilities and agreements, certain of which were collateralized by $5.6 million of cash. Our fees for these letters of credit for the year ended October 31, 2014, which are based on both the used and unused portion of the facilities and agreements, were $1.7 million. We also had substantial contractual commitments and contingent obligations, including approximately $227.7 million of performance bonds as of October 31, 2014. 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. 11 Our sources of liquidity are limited and may not be sufficient to meet our needs. We are largely 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. Although we generated $9.3 million of cash from operating activities in the fiscal year ended October 31, 2013, for the year ended October 31, 2014 we used $190.6 million of cash for operations, after taking into account land purchases, and currently expect to continue to generate negative or slightly positive 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 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 letters 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. 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 and our revolving credit facility 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 and under our revolving credit facility, 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 debt instruments (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. 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 12 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 six 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. 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 increased the price of drywall in 2013 by approximately 20% 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. We have experienced some labor shortages and increased labor costs over the past few years. 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, while in fiscal 2014, 2013 and 2012, we did not have significant land option write-offs or impairments, during fiscal 2011, 2010 and 2009, 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 $24.3 million, $13.2 million and $45.4 million, respectively. Also, in fiscal 2011, 2010 and 2009, as a result of the difficult market conditions, we recorded inventory impairment losses on owned property of $77.5 million, $122.5 million and $614.1 million, respectively. If market conditions worsen, additional inventory impairment losses and land option write-offs will likely be necessary. We conduct a significant portion of our business in Arizona, California, New Jersey and Texas, and accordingly, regional factors affecting home sales and activities in these markets may have a large impact on our results of operations. 13 We presently conduct a significant portion of our business in Arizona, California, New Jersey and Texas, which subjects us to risks associated with the regional and local economies of these 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. These markets may also depend, to a degree, on certain sectors of the economy and any declines in those sectors may impact home sales and activities in that region. For example, to the extent the oil and gas industries, which can be very volatile, are negatively impacted by declining commodity prices, climate change, legislation or other factors, it could result in reduced employment, or other negative economic consequences, which in turn could adversely impact our home sales and activities in Texas. Furthermore, precarious economic and budget situations at the state government level may adversely affect the market for our homes in the affected areas. Events impacting these markets could also negatively affect the other markets in which we operate. 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 the Company’s business, financial condition and results of operations could be materially adversely affected. 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 the perception that interest rates will rise, including as a result of government actions), increases in the costs to obtain mortgages or decreases in availability of mortgage financing could lower demand for new homes because of the increased monthly mortgage costs and cash required to close on mortgages 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, even above the minimum standards set by Fannie Mae, Freddie Mac and HUD/FHA, 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 in the past few years, 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, in 2010 HUD tightened FHA underwriting standards and the mortgage environment remains constrained. 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. 14 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, 2014, we had invested an aggregate of $63.9 million in these joint ventures, including advances to these joint ventures of approximately $1.8 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 if 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, it has been difficult 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. 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 homebuilding, 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, including those regulating the emission or discharge of materials into the environment, the management of stormwater runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing (“environmental laws”). 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. In addition, noncompliance with these laws and regulations could result in fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses. For example, we 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 specified in the previously reported consent decree entered into in August 2010; we have since paid the stipulated penalties as assessed, and more recently have paid approximately $8,000 in response to an EPA demand received in June 2013 for stipulated penalties based on information about our performance under the consent decree for 2012. The consent decree was terminated by court order without objection in December 2013. 15 In March 2013, we received a letter from the EPA requesting information about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during the 1990s. We understand that the development is in the vicinity of a former lead smelter and that recent tests on soil samples from properties within the development conducted by the EPA show elevated levels of lead. We also understand that the smelter ceased operations many years before the Company entity involved acquired the properties in the area and carried out the re-development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us a potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We have begun preliminary discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company's obligations, if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a material impact on the Company. The EPA requested additional information in April 2014 and the Company has responded to its information request. We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot reliably predict the extent of any effect these requirements may have on us, 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 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. 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. 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. For example, in the past we have received construction defect and home warranty claims associated with, and we were involved in a multidistrict litigation concerning, allegedly defective drywall manufactured in China (“Chinese Drywall”) that may have been responsible for noxious smells and accelerated corrosion of certain metals in certain homes we have constructed. We remediated certain homes in response to such claims and settled the litigation. 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, if the costs associated with such claims significantly exceed the amount of our insurance coverage, or if our insurers do not pay on claims under our policies (whether because of dispute, inability, or otherwise), 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. Our insurance companies have the right to review our claims and claims history, and do so from time to time, and could decline to pay on such claims if such reviews determine the claims did not meet the terms for coverage. Additionally, we may need to significantly increase our construction defect and home warranty reserves as a result of insurance not being available for any of the reasons discussed above, such claims or the results of our annual actuarial study. 16 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. While we believe these reserves are adequate for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed our expectations, additional expense may be incurred. 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 agreements governing our outstanding debt instruments 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 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. 17 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 and the limited liability company 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 enabled them to cast approximately 56% of the votes that could be cast by the holders of our outstanding Class A and Class B common stock combined as of October 31, 2014. Their combined stock ownership enables them to exert significant control over us, including power to control the election of the Board of Directors 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 past 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, 2014, 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 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 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 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 Junior 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 18 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 United States 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 and 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, acts of war or terrorism or any outbreak or escalation of hostilities throughout the world or health pandemics, may have a substantial impact on the economy, consumer confidence, the housing market, our associates and our customers. Further, perceived threats to national security and other actual or potential conflicts or wars and related geopolitical risks have created many economic and political uncertainties. If any such events were to occur, it could have a material adverse impact on 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 470,000 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. 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, including those regulating the emission or discharge of materials into the environment, the management of stormwater runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing (“environmental laws”). 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. In addition, noncompliance with these laws and regulations could result in fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses. 19 In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during the 1990s. We understand that the development is in the vicinity of a former lead smelter and that recent tests on soil samples from properties within the development conducted by the EPA show elevated levels of lead. We also understand that the smelter ceased operations many years before the Company entity involved acquired the properties in the area and carried out the re-development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us a potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We have begun preliminary discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company's obligations, if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a material impact on the Company. The EPA requested additional information in April 2014 and the Company has responded to its information request. We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot reliably predict the extent of any effect these requirements may have on us, 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 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. (collectively, the “Company Defendants”) 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. The Company Defendants filed a request to take an interlocutory appeal regarding the class certification decision. The Appellate Division denied the request, and the Company Defendants 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 Appellate Division, on remand, heard oral arguments on December 4, 2012, reviewing the Superior Court’s original finding of class certification. On June 18, 2013, the Appellate Division affirmed class certification. On July 3, 2013, the Company Defendants appealed the June 2013 Appellate Division’s decision to the New Jersey Supreme Court, which elected not to hear the appeal on October 22, 2013. The plaintiff class was seeking unspecified damages as well as treble damages pursuant to the NJ Consumer Fraud Act. The Company Defendants’ motion to consolidate an indemnity action they filed against various manufacturer and sub-contractor defendants to require these parties to participate directly in the class action was denied by the Superior Court; however, the Company Defendants’ separate action seeking indemnification against the various manufacturers and subcontractors implicated by the class action is ongoing. The Company Defendants, the Company Defendants’ insurance carriers and the plaintiff class agreed to the terms of a settlement on May 15, 2014 in which the plaintiff class will receive a payment of $21 million in settlement of all claims, with the majority of the settlement being funded by the Company Defendants’ insurance carriers. The settlement agreement is being negotiated and is subject to Court approval. The Company has fully reserved for its share of the settlement. 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. 20 Part II ITEM 5 MARKET FOR 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 490 stockholders of record at December 15, 2014. There is no established public trading market for our Class B Common Stock, which was held by 238 stockholders of record at December 15, 2014. 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, 2014 and 2013: Quarter First Second Third Fourth October 31, 2014 October 31, 2013 High $6.63 $6.18 $5.30 $4.35 Low $4.80 $4.42 $4.00 $3.10 High $7.00 $6.32 $6.43 $5.53 Low $4.42 $4.76 $5.20 $4.93 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 2014. The maximum number of shares that may yet be purchased under the Company’s repurchase plans or programs is 0.5 million. 21 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. Summary Consolidated Statements of Operations Data (In thousands, Except Per Share Data) Revenues Expenses excluding inventory impairment Year Ended October 31, October 31, October 31, October 31, 2014 $2,063,380 2013 $1,851,253 2012 $1,485,353 2011 $1,134,907 October 31, 2010 $1,371,842 loss and land option write-offs 2,044,718 1,835,633 1,550,406 1,323,316 1,557,428 Inventory impairment loss and land option write-offs Total Expenses (Loss) gain on extinguishment of debt Income (loss) from unconsolidated joint ventures Income (loss) before income taxes State and federal income tax benefit Net income (loss) Per share data: Basic: Income (loss) per common share Weighted-average number of common shares outstanding Assuming dilution: Income (loss) per common share Weighted-average number of common shares outstanding Summary Consolidated Balance Sheet Data (In thousands) Total assets Mortgages and lines of credit Senior secured notes, senior notes, senior amortizing notes, senior exchangeable notes and TEU senior subordinated amortizing notes (net of discount) Total equity deficit 5,224 2,049,942 (1,155) 4,965 1,840,598 (760) 12,530 1,562,936 (29,066) 101,749 1,425,065 7,528 135,699 1,693,127 25,047 7,897 20,180 (286,964) $307,144 12,040 21,935 (9,360) $31,295 5,401 (101,248) (35,051) $(66,197) (8,958) (291,588) (5,501) $(286,087) 956 (295,282) (297,870) $2,588 $2.05 $0.22 $(0.52) $(2.85) $0.03 146,271 145,087 126,350 100,444 78,691 $1.87 $0.22 $(0.52) $(2.85) $0.03 162,441 162,329 126,350 100,444 79,683 October 31, October 31, October 31, October 31, 2014 $2,289,930 $197,446 2013 $1,759,130 $172,299 2012 $1,684,250 $164,562 2011 $1,602,180 $95,598 October 31, 2010 $1,817,560 $98,613 $1,657,557 $(117,799) $1,529,445 $(432,799) $1,542,196 $(485,345) $1,602,770 $(496,602) $1,616,347 $(337,938) 22 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, 2014 2013 1.2 1.2 1.1 1.1 2012 (a) (b) 2011 (a) (b) 2010 (a) (b) (a) Earnings for the years ended October 31, 2012, 2011 and 2010 were insufficient to cover fixed charges for such period by $105.1 million, $272.9 million and $273.8 million, respectively. (b) Earnings for the years ended October 31, 2012, 2011 and 2010 were insufficient to cover fixed charges and preferred stock dividends for such period by $105.1 million, $272.9 million and $273.8 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 2014, 2013, 2012, 2011 and 2010. ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In fiscal 2014, we generated growth in revenues and achieved our second consecutive year of profitability. However, the significant market growth exhibited in the housing industry in 2013 slowed in 2014. During fiscal 2014, we experienced some positive operating trends compared to the prior year. For the year ended October 31, 2014, sale of homes revenues increased 12.8% as compared to the prior year. The increase in revenues was due both to an increase in the volume of deliveries, which was a result of increased community count, and an increase in average price per home, which was a result of geographic and community mix of our deliveries and price increases in certain of our individual communities. Active selling communities increased from 192 at October 31, 2013, to 201 at October 31, 2014. During fiscal 2013, we were able to raise prices in a number of our communities and we experienced the benefit of these increases in fiscal 2014 as we delivered homes from these communities. However, in fiscal 2014, our ability to raise prices has been limited as the sales pace per community has slowed, and in some communities, we have lowered prices or increased incentives. During fiscal 2014, we also experienced some negative results. Net contracts were relatively flat for the year ended October 31, 2014, compared to the same period of the prior year despite the increased community count. For the year ended October 31, 2014, compared to the year ended October 31, 2013, our gross margin percentage, before cost of sales interest expense and land charges, decreased slightly from 20.1% to 19.9%. Net contracts per average active selling community decreased to 28.4 for the year ended October 31, 2014 compared to 30.7 in the same period in the prior year. Selling, general and administrative costs (including corporate general and administrative expenses) as a percentage of total revenue increased from 11.9% for the year ended October 31, 2013, to 12.4% for the year ended October 31, 2014. When comparing sequentially from the third quarter of fiscal 2014 to the fourth quarter of fiscal 2014, our gross margin percentage, before cost of sales interest expense and land charges, decreased from 21.3% to 19.3% while selling, general and administrative costs (including corporate general and administrative expenses) as a percentage of total revenues improved from 12.2% to 9.3%, as compared to the third quarter of fiscal 2014. The decrease in gross margin reflected a tightening and more competitive homebuilding market. Selling, general and administrative costs include some fixed costs that are not impacted by delivery volume. Therefore, as deliveries and revenues increased from the third quarter of fiscal 2014 to the fourth quarter of fiscal 2014, selling, general and administrative costs as a percentage of total revenues decreased. 23 Despite these negative factors, based on the 12.3% increase in the dollar value of backlog and increased community count at October 31, 2014 compared to October 31, 2013, we believe that we are well-positioned going into fiscal 2015. However, several challenges, such as persistently high unemployment levels in some of our markets, economic weakness and uncertainty, declining oil prices, the restrictive mortgage lending environment and rising mortgage interest rates, continue to impact the housing market and, consequently, our performance. Our mixed operating results during the year ended October 31, 2014, and other national data demonstrate that the pace of the housing recovery has slowed. However, both national new home sales and our home sales remain below historical levels. We continue to believe that we are still in the early stages of the housing recovery, but in light of recent market trends, we currently expect to continue to experience uneven results across our operating markets. Given the low levels of total U.S. housing starts, and our belief in the long-term recovery of the homebuilding market, we remain focused on identifying new land parcels, growing our community count and growing our revenues, which are critical to improving our financial performance. We continue to see opportunities to purchase land at prices that make economic sense in light of our current 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 2014, we opened for sale 98 new communities and closed 89 communities, resulting in a net increase of 9 communities from 192 communities at October 31, 2013 to 201 communities at October 31, 2014. In addition, during fiscal 2014, we put under option or acquired approximately 8,700 lots in 193 wholly owned communities. Homebuilding selling, general and administrative expenses increased $25.7 million from $165.8 million for the year ended October 31, 2013 to $191.5 million for the year ended October 31, 2014. Approximately half of the increase was due to higher sales compensation, increased advertising costs and increased architectural expenses, all related to recent and future community count growth, as well as a reduction of joint venture management fees, which offset general and administrative expenses, received as a result of fewer joint venture deliveries. The other half of the increase was due to increased staffing levels primarily associated with the new communities and increased compensation reflective of the competitive homebuilding market. Corporate general and administrative expenses as a percentage of total revenue remained relatively flat at 3.1% for the year ended October 31, 2014 compared to 2.9% for the year ended October 31, 2013. Given the persistence of difficult market conditions, improving the efficiency of our selling, general and administrative expenses will continue to be a significant area of focus, and as we generate revenue from our increased community count, we expect to be able to leverage these costs. 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 Mortgage Loans - Our Financial Services segment originates mortgages, primarily for our homebuilding customers. We use mandatory investor commitments and forward sales of 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 Accounting Standards Codification (“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. While we believe these reserves are adequate for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed our expectations, additional expense may be incurred. 24 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 accounted for as financings. 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, 2014, the net book value associated with our 45 mothballed communities was $103.3 million, net of impairment charges recorded in prior periods of $412.4 million. We regularly review communities to determine if mothballing is appropriate. During fiscal 2014, we did not mothball any new communities, re-activated two mothballed communities and sold three mothballed communities. From time to time we enter into option agreements that include specific performance requirements, whereby we are required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in accordance with ASC 360-20-40-38, we are required to record this inventory on our Consolidated Balance Sheets. As of October 31, 2014, we had $3.5 million of specific performance options recorded on our Consolidated Balance Sheets to “Consolidated inventory not owned – specific performance options,” with a corresponding liability of $3.4 million recorded to “Liabilities from inventory not owned.” Consolidated inventory not owned also consists of other options that were included on our Consolidated Balance Sheets in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). We sell and lease 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 in accordance with ASC 360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Consolidated Balance Sheet, at October 31, 2014, inventory of $70.4 million was recorded to “Consolidated inventory not owned – other options,” with a corresponding amount of $64.9 million recorded to “Liabilities from inventory not owned.” We have land banking arrangements, whereby we sell our land parcels to the land banker and they provide us an option to purchase back finished lots on a quarterly basis. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 360-20-40-38, these transactions are considered financings rather than sales. For purposes of our Consolidated Balance Sheet, at October 31, 2014, inventory of $35.0 million was recorded as “Consolidated inventory not owned – other options,” with a corresponding amount of $24.1 million recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions. 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. 25 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; ● 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 to an investor. 26 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, 2012 to October 31, 2014 ranged from 16.8% to 19.3%. 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 $0.6 million and $2.7 million, respectively, of our total inventories at October 31, 2014 and 2013, 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. 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 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 2012, 2013 or 2014. Post-Development Completion, Warranty Costs and Insurance Deductible Reserves - 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. We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible. This accrual is expensed as selling, general and administrative costs. For homes delivered in fiscal 2014 and 2013, 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 2014 and 2013 is $0.25 million, up to a $5 million limit. Our aggregate retention in fiscal 2014 and 2013 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 workers’ 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 27 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. In addition, we establish a warranty accrual for lower cost-related issues to cover home repairs, community amenities, and land development infrastructure that are not covered under our general liability and construction defect policy. We accrue an estimate for these 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. See Note 17 to the Consolidated Financial Statements for additional information on the amount of warranty costs recognized in cost of goods sold and administrative expenses. 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” (“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. 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. Capital Resources and Liquidity Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey and Pennsylvania), the Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia), the Midwest (Illinois, Minnesota and Ohio), the Southeast (Florida, Georgia, North Carolina and South Carolina), the Southwest (Arizona and 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 have had such facilities for our homebuilding operations) and the issuance of new debt and equity securities. Our homebuilding cash balance at October 31, 2014 decreased by $64.0 million from October 31, 2013. During the period, we spent $585.8 million on land and land development. After considering this land and land development and all other operating activities, including revenue received from deliveries, we used $190.6 million of cash. Cash provided by financing activities was $137.4 million, which included the issuance of senior unsecured notes in the first quarter of fiscal 2014. Our cash uses during fiscal 2014 and 2013 were for operating expenses, land purchases, land deposits, land development, construction spending, financing transactions, debt payments and repurchases, state income taxes, interest payments and investments in joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, financing transactions, debt issuances, model sale leasebacks, land banking deals, financial service revenues and other revenues. In June 2013, we enhanced our liquidity by entering into a $75 million 28 unsecured revolving credit facility, as discussed below. We believe that these sources of cash will be sufficient through fiscal 2015 to finance our working capital requirements and other needs, including the ability to add new communities to grow our homebuilding operations. 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, 2014, 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 higher levels of 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 higher levels of sustained profitability, including through land acquisitions. 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. We did not repurchase any shares under this program during fiscal 2014 or 2013. During fiscal 2012, we repurchased 0.1 million shares under this program. As of October 31, 2014, the maximum number of shares of Class A Common Stock that may yet be purchased under this program is 0.5 million. (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 per share. 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. 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 2014, 2013, and 2012, 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 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 February 9, 2011, we issued an aggregate of 3,000,000 7.25% Tangible Equity Units (the “TEUs”), and on February 14, 2011, we issued an additional 450,000 TEUs pursuant to the over-allotment option granted to the underwriters. Each TEU initially consisted 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”). The Senior Subordinated Amortizing Note component of the TEUs was recorded as debt, and the Purchase Contract component of the TEUs which had a fair value of $68.1 million was recorded in equity as additional paid-in capital. 29 The final quarterly cash installment payment of $0.453125 per Senior Subordinated Amortizing Note was due on February 15, 2014, and was paid to holders thereof on February 18, 2014 (which was the next business day). On February 18, 2014, (which was the first business day after the mandatory settlement date of February 15, 2014) we issued to holders of Purchase Contracts an aggregate of 6,085,224 shares of our Class A Common Stock in settlement of an aggregate of 1,276,933 Purchase Contracts (such amount was based on a settlement rate of 4.7655 shares of Class A Common Stock for each Purchase Contract). In addition, we paid a de minimis amount of cash to holders of the Purchase Contracts in lieu of fractional shares. Accordingly, as of October 31, 2014, we had no Purchase Contracts or Senior Subordinated Amortizing Notes outstanding. 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 9 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. The gain is included in the Consolidated Statements of Operations as “Loss on extinguishment of debt.” On February 14, 2011, K. Hovnanian issued $155.0 million aggregate principal amount of 11.875% Senior Notes due 2015. The 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.” 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, an issuance of Class A Common Stock in February 2011, and TEUs were approximately $286.2 million, a portion of which were used to fund the purchase through tender offers, on February 14, 2011, of certain series of K. Hovnanian’s then outstanding senior and senior subordinated notes and the subsequent redemption on March 15, 2011 of all such notes that were not tendered in the tender offers. 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 certain 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.” Due to the then-existing financial condition of K. Hovnanian as determined in accordance with ASC 470-60, “Accounting by Debtors and Creditors for Troubled Debt Restructurings” and, because the holders of the senior notes that exchanged such notes for 2021 Notes granted K. Hovnanian a concession in the form of extended maturities and reduced interest rates, 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 in “Other operations” in the Consolidated Statement of Operations. See Note 9 to the consolidated financial statements for further discussion. The guarantees 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”) with respect to the 2021 Notes 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, 2014, the collateral securing the guarantees included (1) $92.1 million of cash and cash equivalents (subsequent to such date, cash uses include general business operations and real estate and other investments); (2) approximately $120.4 million aggregate book value of real property of the Secured Group, 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, and (3) equity interests in guarantors that are members of the Secured Group. 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 $59.1 million as of October 31, 2014; 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 and senior secured notes, and thus have not guaranteed such indebtedness. 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 30 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, 2014, the aggregate book value of the real property that constituted collateral securing the 2020 Secured Notes was approximately $673.1 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 secured the 2020 Secured Notes was $168.6 million as of October 31, 2014, which included $5.6 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 or 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 (a “Senior Exchangeable Note”) issued by K. Hovnanian, which bears no cash interest and has an initial principal amount of $768.51 per Senior Exchangeable Note, and that will accrete to $1,000 at maturity and (2) a senior amortizing note due December 1, 2017 (a “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 Senior 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 Senior Exchangeable Note had an initial principal amount of $768.51 (which will accrete to $1,000 over the term of the Senior 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 Senior 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 Senior 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 Senior 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 rate for any holder who elects to exchange its Senior Exchangeable Notes in connection with such corporate event. In addition, holders of Senior Exchangeable Notes will also have the right to require K. Hovnanian to repurchase such holders’ Senior Exchangeable Notes upon the occurrence of certain of these corporate events. As of October 31, 2014, 18,305 Senior Exchangeable Notes have been converted into 3.4 million shares of our Class A Common Stock, all of which were converted during the first quarter of fiscal 2013. 31 On each June 1 and December 1 (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 was $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 the write-off of unamortized discounts and fees. The loss is included in the Consolidated Statement of Operations as “(Loss) gain on extinguishment of debt.” 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. 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 15 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 Notes 9 and 15 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. The gain is included in the Consolidated Statement of Operations as “(Loss) gain on extinguishment of debt.” On September 16, 2013, K. Hovnanian issued an aggregate principal amount of $41.6 million of its 6.25% Senior Notes due 2016. The Notes were issued as additional 6.25% Senior Notes due 2016 under the indenture dated as of August 8, 2005. The net proceeds from this offering were used to fund the redemption on October 15, 2013 of all of K. Hovnanian’s outstanding 6.5% Senior Notes due 2014 and 6.375% Senior Notes due 2014 and to pay related fees and expenses. On January 10, 2014, K. Hovnanian issued $150.0 million aggregate principal amount of 7.0% Senior Notes due 2019, resulting in net proceeds of approximately $147.8 million. The notes are redeemable in whole or in part at our option at any time prior to July 15, 2016 at 100% of their principal amount plus an applicable “Make-Whole Amount.” We may also redeem some or all of the notes at 103.5% of principal commencing July 15, 2016, at 101.75% of principal commencing January 15, 2017 and 100% of principal commencing January 15, 2018. In addition, we may redeem up to 35% of the aggregate principal amount of the notes prior to July 15, 2016, with the net cash proceeds from certain equity offerings at 107.0% of principal. We used a portion of the net proceeds to fund the redemption on February 9, 2014 (effected on February 10, 2014, which was the next business day after the redemption date) of the remaining outstanding principal amount ($21.4 million) of our 6.25% Senior Notes due 2015. The redemption resulted in a loss on extinguishment of debt of $1.2 million, net of the write-off of unamortized fees, and is included in the Consolidated Statement of Operations as “Loss on extinguishment of debt” for fiscal 2014. The remaining net proceeds from the offering were used to pay related fees and expenses and for general corporate purposes. 32 In the fourth quarter of fiscal 2014, K. Hovnanian solicited and obtained the requisite consent of holders of its 2020 Secured Notes to certain amendments to the indentures under which such notes were issued. K. Hovnanian paid an aggregate of $3.3 million to holders who consented thereunder. On November 5, 2014, K. Hovnanian issued $250.0 million aggregate principal amount of 8.0% Senior Notes due 2019, resulting in net proceeds of $245.7 million. These proceeds will be used for general corporate purposes, including land acquisition and development (see Note 25 to the Consolidated Financial Statements). As of October 31, 2014, we had $992.0 million of outstanding senior secured notes ($979.9 million, net of discount), comprised of $577.0 million 7.25% Senior Secured First Lien Notes due 2020 (the “First Lien Notes”), $220.0 million 9.125% Senior Secured Second Lien Notes due 2020 (the “Second Lien Notes” and, together with the First Lien Notes, the “2020 Secured Notes”), $53.2 million 2.0% Senior Secured Notes due 2021 (the “2.0% 2021 Notes”) and $141.8 million 5.0% Senior Secured Notes due 2021 (the “5.0% 2021 Notes” and together with the 2.0% 2021 Notes, the “2021 Notes”). As of October 31, 2014, we also had $591.1 million of outstanding senior notes ($590.5 million, net of discount), comprised of $172.7 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, $60.8 million 11.875% Senior Notes due 2015 and $150.0 million 7.0% Senior Notes due 2019. In addition, as of October 31, 2014, we had outstanding $17.0 million 11.0% Senior Amortizing Notes due 2017 (issued as a component of our 6.0% Exchangeable Note Units) and, $70.1 million Senior Exchangeable Notes due 2017 (issued as a component of our 6.0% Exchangeable Note Units). 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 and senior exchangeable notes outstanding at October 31, 2014 (see Note 23 to the Consolidated Financial Statements). In addition, the 2021 Notes are guaranteed by 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 nonrecourse indebtedness), pay dividends and make distributions on common and preferred stock, repurchase subordinated indebtedness (with respect to certain of the senior secured and senior 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, 2014, 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 nonrecourse 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. We anticipate that 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 debt instruments or otherwise affect compliance with any of the covenants contained in the debt instruments. In June 2013, K. Hovnanian, as borrower, and we and certain of our subsidiaries, as guarantors, entered into a five-year, $75.0 million unsecured revolving credit facility (the “Credit Facility”) with Citicorp USA, Inc., as administrative agent and issuing bank, and Citibank, N.A., as a lender. The Credit Facility is available for both letters of credit and general corporate purposes. The Credit Facility does not contain any financial maintenance covenants, but does 33 contain certain restrictive covenants that track those contained in our indenture governing the 8.0% Senior Notes due 2019, which are described in Note 9 to the Consolidated Financial Statements. The Credit Facility also contains certain customary events of default which would permit the administrative agent at the request of the required lenders to, among other things, declare all loans then outstanding to be immediately due and payable if such default is not cured within applicable grace periods, including the failure to make timely payments of amounts payable under the Credit Facility or other material indebtedness or the acceleration of other material indebtedness, the failure to comply with agreements and covenants or for representations or warranties to be correct in all material respects when made, specified events of bankruptcy and insolvency, and the entry of a material judgment against a loan party. Outstanding borrowings under the Credit Facility accrue interest at an annual rate equal to either, as selected by K. Hovnanian, (i) the alternate base rate plus the applicable spread determined on the date of such borrowing or (ii) an adjusted London Interbank Offered Rate (“LIBOR”) rate plus the applicable spread determined as of the date two business days prior to the first day of the interest period for such borrowing. As of October 31, 2014, there were no borrowings and $26.5 million of letters of credit outstanding under the Credit Facility, and as of such date, we believe we were in compliance with the covenants under the Credit Facility. In addition to the Credit Facility, we have certain stand–alone cash collateralized letter of credit agreements and facilities under which there were a total of $5.5 million and $5.1 million letters of credit outstanding at October 31, 2014 and 2013, 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, 2014 and 2013, the amount of cash collateral in these segregated accounts was $5.6 million and $5.2 million, respectively, which is reflected in “Restricted cash and cash equivalents” 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. In certain instances, we retain the servicing rights for a small amount of loans. Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”), which was amended on June 30, 2014, is a short-term borrowing facility that provides up to $50.0 million through July 30, 2015. 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 an adjusted LIBOR rate, which was 0.156% at October 31, 2014 plus the applicable margin of 2.85%. Therefore, at October 31, 2014, the interest rate was 3.0%. As of October 31, 2014 and 2013, the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $25.5 million and $33.6 million, respectively. K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master Repurchase Agreement”), which was amended on May 27, 2014 to extend the maturity date to May 26, 2015, that is a short-term borrowing facility that provides up to $37.5 million through maturity. 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, plus the applicable margin ranging from 2.75% to 5.25% based on the takeout investor, type of loan, and the number of days on the warehouse line. As of October 31, 2014 and 2013, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $20.4 million and $30.7 million, respectively. K. Hovnanian Mortgage has a third secured Master Repurchase Agreement with Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse Master Repurchase Agreement”), which was last amended on November 17, 2014, that is a short-term borrowing facility that provides up to $50.0 million through October 27, 2015. The facility also provides an additional $30.0 million which can be used between 10 calendar days prior to the end of a fiscal quarter through the 45th calendar day after a fiscal quarter end; provided that the amount outstanding may not exceed $50.0 million outside of this date range. 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 0.44% at October 31, 2014, plus the applicable margin ranging from 2.25% to 2.75% based on the takeout investor, type of loan and the number of days outstanding. As of October 31, 2014 and 2013, the aggregate principal amount of all borrowings outstanding under the Credit Suisse Master Repurchase Agreement was $19.7 million and $27.4 million, respectively. 34 In February 2014, K. Hovnanian Mortgage executed a new secured Master Repurchase Agreement with Comerica Bank (“Comerica Master Repurchase Agreement”), which was amended on July 7, 2014 to extend the maturity date to July 6, 2015, that is a short-term borrowing facility that provides up to $35.0 million through maturity. 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 at LIBOR, subject to a floor of 0.25%, plus the applicable margin of 2.625%. As of October 31, 2014, the interest rate was 2.875% and the aggregate principal amount of all borrowings outstanding under the Comerica Master Repurchase Agreement was $11.3 million. The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement, Credit Suisse Master Repurchase Agreement and Comerica 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, 2014, we believe we were in compliance with the covenants under the Master Repurchase Agreements. Total inventory, excluding consolidated inventory not owned, increased $257.5 million during the year ended October 31, 2014. Total inventory, excluding consolidated inventory not owned, increased in the Mid-Atlantic by $54.5 million, in the Midwest by $58.4 million, in the Southeast by $44.4 million, in the Southwest by $99.9 million and in the West by $3.0 million. This increase was partially offset by a decrease in the Northeast of $2.7 million. The increases were primarily attributable to new land purchases and land development during fiscal 2014, offset by home deliveries. The decrease in the Northeast during fiscal 2014 was due to delivering homes at a faster pace than purchasing new land to replenish our inventory. During fiscal 2014, we incurred $1.2 million in impairments, primarily in the Midwest. In addition, we wrote-off costs in the amount of $4.0 million during fiscal 2014 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, 2014 are expected to be closed during the next six months. The total inventory increase discussed above excluded the increase in consolidated inventory not owned of $8.0 million. Consolidated inventory not owned consists of specific performance options and other options that were added to our Consolidated Balance Sheet in accordance with US GAAP. The increase from October 31, 2013 to October 31, 2014 was primarily due to an increase in the sale and leaseback of certain model homes during fiscal 2014, partially offset by a decrease in land banking transactions. We sell and lease 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 in accordance with ASC 360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale for accounting purposes. Therefore, for purposes of our Consolidated Balance Sheet, at October 31, 2014, inventory of $70.4 million was recorded to “Consolidated inventory not owned - other options,” with a corresponding amount of $64.9 million recorded to “Liabilities from inventory not owned.” In addition, we have land banking arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots on a quarterly basis. Because of our options to repurchase these parcels, for accounting purposes in accordance with ASC 360-20-40-38, these transactions are considered a financing rather than a sale. For purposes of our Consolidated Balance Sheet, at October 31, 2014, inventory of $35.0 million was recorded to “Consolidated inventory not owned - other options,” with a corresponding amount of $24.1 million recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions. From time to time, we enter into option agreements that include specific performance requirements whereby we are required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in accordance with ASC 360-20-40-38, we are required to record this inventory on our Consolidated Balance Sheets. As of October 31, 2014, we had $3.5 million of specific performance options recorded on our Consolidated Balance Sheets to “Consolidated inventory not owned - specific performance options,” with a corresponding liability of $3.4 million recorded to “Liabilities from inventory not owned.” 35 Our inventory representing “Land and land options held for future development or sale” at October 31, 2014 on the Consolidated Balance Sheets increased by $48.3 million compared to October 31, 2013. The increase was primarily due to the acquisition of new land in all segments during fiscal 2014, offset by 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, Mid-Atlantic, Southeast and Southwest. 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 (other than with respect to specific performance options discussed above). 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” on the Consolidated Balance Sheets. Also included in "Land and land options held for future development or sale” 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 the 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 time as the markets improve or we determine to sell the property. As of October 31, 2014, we had mothballed land in 45 communities. The book value associated with these communities at October 31, 2014 was $103.3 million, net of impairment charges recorded in prior periods of $412.4 million. We continually review communities to determine if mothballing is appropriate. During fiscal 2014, we did not mothball any new communities, and sold three communities which were previously mothballed. In addition, two communities which were previously mothballed were re-activated during fiscal 2014. Inventories held for sale, which are land parcels where we have decided not to build homes, represented $0.6 million and $2.7 million, respectively, of our total inventories at October 31, 2014 and 2013, 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. 36 The following tables summarize home sites included in our total residential real estate. The increase in total home sites available at October 31, 2014 compared to October 31, 2013 is attributable to signing new land option agreements and acquiring new land parcels, offset by terminating certain option agreements and delivering homes. October 31, 2014: 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, 2013: 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 Total Home Contracted Not Sites Delivered Remaining Home Sites Available 5,293 5,949 4,798 6,458 6,432 6,023 34,953 2,867 37,820 17,720 16,971 262 34,953 2,867 37,820 4,768 5,598 4,792 3,835 7,060 6,044 32,097 2,613 34,710 16,326 15,523 248 32,097 2,613 34,710 146 371 665 232 770 45 2,229 112 2,341 1,746 221 262 2,229 112 2,341 220 271 605 308 677 86 2,167 225 2,392 1,645 274 248 2,167 225 2,392 5,147 5,578 4,133 6,226 5,662 5,978 32,724 2,755 35,479 15,974 16,750 - 32,724 2,755 35,479 4,548 5,327 4,187 3,527 6,383 5,958 29,930 2,388 32,318 14,681 15,249 - 29,930 2,388 32,318 37 The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities. The increase from October 31, 2013 to October 31, 2014 is due to a focused effort to improve top line revenue growth by increasing our number of started unsold homes available for expedited delivery. The total number of model homes decreased from October 31, 2013 to October 31, 2014, primarily due to model homes that were sold to a third party in sales and lease-back transactions during fiscal 2014. Northeast Mid-Atlantic Midwest Southeast Southwest West Total Started or completed unsold homes and models per active selling communities(1) October 31, 2014 October 31, 2013 Unsold Homes Models 2 12 13 23 6 1 57 111 181 59 107 413 65 936 Total 113 193 72 130 419 66 993 Unsold Homes Models 14 9 8 9 13 8 61 95 78 17 57 346 40 633 Total 109 87 25 66 359 48 694 4.6 0.3 4.9 3.3 0.3 3.6 (1) Active selling communities (which are communities that are open for sale with 10 or more home sites available) were 201 and 192 at October 31, 2014 and 2013, respectively. Ratio does not include substantially completed communities, which are communities with less than 10 home sites available. Investments in and advances to unconsolidated joint ventures increased $12.5 million during the fiscal year ended October 31, 2014 compared to October 31, 2013. The increase was primarily due to an investment in a new joint venture in the third quarter of fiscal 2014, partially offset by a partnership distribution received during the period, along with the timing of advances at October 31, 2014 as compared to October 31, 2013. As of October 31, 2014 and 2013, we had investments in nine and seven homebuilding joint ventures, respectively. We also had an investment in one land development joint venture as of each of October 31, 2014 and October 31, 2013. 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 $47.4 million from October 31, 2013 to $92.5 million at October 31, 2014. The increase was primarily due to receivables for amounts expected to be received from our insurance carriers for existing and future estimated warranty claims. When reserves for claims are recorded, the portion that is probable for recovery from insurance carriers is recorded as a receivable. In addition, there were increases due to the timing of funding for home closings, and new deposits and notes receivable, partially offset by decreases for certain notes receivable collected during the period. Prepaid expenses and other assets were as follows as of: (In thousands) Prepaid insurance Prepaid project costs Net rental properties Other prepaids Other assets Total October 31, 2014 $3,378 32,186 1,456 32,184 154 $69,358 October 31, 2013 $3,213 23,841 1,975 30,055 267 $59,351 Dollar Change $165 8,345 (519) 2,129 (113) $10,007 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. The increase of $8.3 million from October 31, 2013 to October 31, 2014 was associated with the opening of 98 new communities during fiscal 2014. Other prepaids increased $2.1 million during the period, primarily due to prepaid bond fees associated with our 7.0% Senior Notes issued in the first quarter of fiscal 2014 and the consent solicitations with respect to the 2020 Secured Notes in the fourth quarter of fiscal 2014, partially offset by the amortization of prepaid bond fees. 38 Financial Services - Restricted cash and cash equivalents decreased $5.4 million to $16.2 million at October 31, 2014. The decrease was primarily related to a decrease in the volume and timing of home closings at the end of fiscal 2014 compared to the end of fiscal 2013. Financial Services - Mortgage loans held for sale consist primarily of residential mortgages receivable held for sale of which $92.1 million and $109.7 million at October 31, 2014 and 2013, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The decrease in mortgage loans held for sale from October 31, 2013 was related to a decrease in the volume of loans originated during the fourth quarter of 2014 compared to the fourth quarter of 2013, along with a slight decrease in the average loan value. Financial Services – Other assets decreased $2.3 million to $2.0 million at October 31, 2014. The decrease was related to the closing of mortgages in November 2013, which were funded in the fourth quarter of fiscal 2013. Income Taxes Receivable increased $287.8 million from a payable of $3.3 million at October 31, 2013 to a receivable of $284.5 million at October 31, 2014 primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets, slightly offset by state taxes, as discussed under “- Results of Operations” and Note 12 to the Consolidated Financial Statements. Nonrecourse mortgages increased to $103.9 million at October 31, 2014, from $62.9 million at October 31, 2013. The increase was primarily due to new mortgages for communities across all homebuilding segments obtained during fiscal 2014. 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, 2014 $119,657 183,231 22,490 37,689 7,809 $370,876 2013 $98,585 136,029 26,454 39,704 6,992 $307,764 Dollar Change $21,072 47,202 (3,964) (2,015) 817 $63,112 The increase in accounts payable was primarily related to the higher volume of deliveries in the fourth quarter of fiscal 2014 compared to the fourth quarter of fiscal 2013, along with the timing of invoices and payments, due to an increase in construction spending during the period, which correlates to the increase in backlog from October 31, 2013 to October 31, 2014. Reserves increased during the period primarily due to reserves for existing and future claims, a large portion of which are expected to be reimbursed from our insurance carriers. When reserves for claims are recorded, the portion that is probable for recovery from insurance carriers is recorded as a receivable. The decrease in accrued expenses is primarily due to the amortization of accruals related to abandoned lease space along with the timing of other accruals, partially offset an increase in accrued property taxes. The decrease in accrued compensation is primarily due to the timing of accrued payroll at the end of fiscal 2014 as compared to the end of fiscal 2013. Customers’ deposits increased $4.9 million to $35.0 million at October 31, 2014. The increase is primarily related to the increase in backlog during the period. Liabilities from inventory not owned increased $4.5 million to $92.4 million at October 31, 2014. The increase is due to an increase in the sale and leaseback of certain model homes accounted for as financing transactions, along with an increase in specific performance transactions, partially offset by a decrease in land banking transactions during the period as described above. Financial Services - Accounts payable and other liabilities decreased $10.6 million to $22.3 million at October 31, 2014. The decrease is primarily related to the decrease in Financial Services restricted cash during the period, due to a decrease in the volume and timing of home closings during the fourth quarter of fiscal 2014 compared to the fourth quarter of fiscal 2013. 39 Financial Services - Mortgage warehouse lines of credit decreased $14.8 million from $91.7 million at October 31, 2013, to $76.9 million at October 31, 2014. The decrease correlates to the decrease in the volume of mortgage loans held for sale during the period. Accrued interest increased $3.9 million to $32.2 million at October 31, 2014. This increase is primarily due to interest related to our 7.0% Senior Notes issued in January 2014. 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, 2014 Year Ended October 31, 2013 October 31, 2012 $228,686 (12,487) 1,241 (5,313) $212,127 11.5% $378,747 (14,077) (7,762) 8,992 $365,900 24.6% $333,106 5,043 3,043 9,254 $350,446 30.9% Sale of homes revenues increased $228.7 million, or 12.8%, for the year ended October 31, 2014, increased $378.7 million, or 26.9%, for the year ended October 31, 2013 and increased $333.1 million, or 31.1%, for the year ended October 31, 2012. The increased revenues in fiscal 2014 were primarily due to the number of home deliveries increasing 4.4% and the average price per home increasing to $366,202 in fiscal 2014 from $338,839 in fiscal 2013. The increased revenues in fiscal 2013 were primarily due to the number of home deliveries increasing 12.6% and the average price per home increasing to $338,839 in fiscal 2013 from $300,595 in fiscal 2012. The increased revenues in fiscal 2012 were primarily due to the number of home deliveries increasing 22.0% and the average price per home increasing to $300,595 in fiscal 2012 from $279,873 in 2011. 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 2013 and 2012, we were able to raise prices in a number of our communities. During fiscal 2014, our ability to raise prices was much more limited than in fiscal 2013. As a result, the average price increase in fiscal 2014 related more to the geographic and community mix of deliveries as opposed to price increases. For information on land sales, see the section titled “Land Sales and Other Revenues” below. 40 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, 2014 Year Ended October 31, 2013 October 31, 2012 $274,734 550 $499,516 $331,759 701 $473,266 $225,958 789 $286,386 $202,620 652 $310,768 $747,753 2,389 $312,998 $230,189 416 $553,337 $279,695 617 $453,314 $288,323 623 $462,798 $162,758 657 $247,730 $146,264 535 $273,391 $684,258 2,331 $293,547 $223,029 503 $443,398 $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 $2,013,013 5,497 $366,202 $1,784,327 5,266 $338,839 $1,405,580 4,676 $300,595 $164,082 437 $375,475 $306,174 664 $461,105 $320,657 680 $471,554 $2,177,095 5,934 $366,885 $2,090,501 5,930 $352,530 $1,726,237 5,356 $322,300 The increase in housing revenues during year ended October 31, 2014, as compared to year ended October 31, 2013, was primarily attributed an increase in deliveries and average sales price. The increase in deliveries was primarily due to the increase in community count. Housing revenues and average sales prices in 2014 increased in all of our homebuilding segments combined by 12.8% and 8.1%, respectively. In our homebuilding segments, homes delivered increased in fiscal 2014 as compared to fiscal 2013 by 12.5%, 20.1%, 21.9% and 2.5% in the Mid-Atlantic, Midwest, Southeast and Southwest, respectively, and decreased by 10.9% and 17.3% in the Northeast and West, respectively. The increase in housing revenues and deliveries during the year ended October 31, 2013, as compared to year ended October 31, 2012, was primarily attributed to market improvements demonstrated by an increase in sales pace per average active selling community from 28.1 to 30.7 for fiscal 2012 and 2013, respectively. Housing revenues and average sales prices in 2013 increased in all of our homebuilding segments combined by 26.9% and 12.7%, respectively. In our homebuilding segments, homes delivered increased in fiscal 2013 as compared to fiscal 2012 by 22.2%, 37.7%, 11.0% and 16.4% in the Northeast, Midwest, Southeast and Southwest, respectively, and decreased by 4.0% and 10.2% in the Mid- Atlantic and West, respectively. 41 Quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the years ending October 31, 2014, 2013 and 2012 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 Quarter Ended October 31, July 31, April 30, 2014 2014 2014 January 31, 2014 $95,886 113,144 78,203 57,297 254,668 82,325 $681,523 $51,176 96,981 77,917 51,495 194,178 40,030 $511,777 $60,165 89,834 55,392 55,403 200,788 76,425 $538,007 $64,356 91,701 72,287 39,855 204,460 44,686 $517,345 $65,550 68,431 48,624 50,792 164,212 40,693 $438,302 $75,485 119,935 65,242 59,467 269,985 79,167 $669,281 $53,133 60,350 43,739 39,128 128,085 30,746 $355,181 $52,038 70,897 48,391 34,218 158,084 44,390 $408,018 Quarter Ended October 31, July 31, April 30, 2013 2013 2013 January 31, 2013 $105,914 89,048 53,313 45,276 220,948 63,595 $578,094 $68,499 71,797 59,808 42,901 149,594 50,747 $443,346 $66,447 89,123 37,918 35,265 181,593 52,030 $462,376 $69,118 79,104 57,066 54,581 195,403 39,322 $494,594 $53,099 57,706 39,356 37,119 160,988 61,308 $409,576 $86,311 89,896 60,898 51,479 235,517 55,461 $579,562 $54,234 52,447 32,172 28,605 120,728 46,095 $334,281 $45,356 69,922 39,988 33,263 159,269 49,148 $396,946 42 (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 October 31, July 31, April 30, 2012 2012 2012 January 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 $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 $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 Contracts per average active selling community in fiscal 2014 were 28.4 compared to fiscal 2013 of 30.7. Our reported level of sales contracts (net of cancellations) has been impacted by the decrease in the pace of sales in all of the Company’s segments, due the housing recovery slowed during fiscal 2014. 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: to unfavorable market conditions, as Quarter First Second Third Fourth 2014 2013 2012 18 % 17% 22% 22% 16 % 15% 17% 23% 21% 16% 20% 23% 2011 22% 20% 18% 21% 2010 21% 17% 23% 24% 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 2014 2013 2012 11 % 17% 13% 14% 12% 15% 12% 14% 18% 21% 18% 18% 2011 18% 22% 20% 18% 2010 13% 17% 15% 25% 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, and continuing through 2009, 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. The contract cancellations over the past several years, as shown in the table above, have been within what we believe to be a normal range. However, market conditions remain uncertain and it is difficult to predict what cancellation rates will be in the future. 43 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, 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 October 31, 2014 October 31, 2013 October 31, 2012 $73,327 146 $105,006 220 $115,416 264 $188,923 371 $141,168 271 $118,773 266 $188,595 665 $150,716 605 $81,071 232 $98,656 308 $95,716 427 $62,696 235 $295,319 770 $216,367 677 $160,840 506 $28,612 45 $50,526 86 $78,877 191 $855,847 2,229 $762,439 2,167 $632,318 1,889 Our net contracts for the full years of fiscal 2014 and 2013, excluding unconsolidated joint ventures, increased 0.3% and 7.9%, respectively, as compared to the prior fiscal year. In the month of November 2014, excluding unconsolidated joint ventures, we signed an additional 408 net contracts amounting to $167.3 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 October 31, 2014 $2,013,013 Year Ended October 31, 2013 $1,784,327 October 31, 2012 $1,405,580 expense 1,612,122 1,426,032 1,155,643 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 400,891 53,101 358,295 51,939 347,790 5,224 306,356 4,965 249,937 48,843 201,094 12,530 land charges $342,566 $301,391 $188,564 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 19.9% 17.3% 17.0% 20.1% 17.2% 16.9% 17.8% 14.3% 13.4% 44 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, 2014 100% 70.3 % 3.4 % 1.3 % 5.1 % 80.1 % 19.9 % 2.6 % 17.3 % Year Ended October 31, 2013 100% 70.0% 3.3% 1.4% 5.2% 79.9% 20.1% 2.9% 17.2% October 31, 2012 100% 71.1% 3.4% 1.7% 6.0% 82.2% 17.8% 3.5% 14.3% 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 margin percentage, before interest expense and land impairment and option write-off charges, decreased slightly to 19.9% for the year ended October 31, 2014, compared to 20.1% for the same period last year. The slight decrease in gross margin percentage during the year ended October 31, 2014 was due to minor increases in price concessions and direct costs from some of our communities delivering homes this year. The increase in gross margin percentage during the year ended October 31, 2013 was primarily due to the mix of higher margin homes delivered during the year compared to the prior year. This mix change is a result of delivering more homes in communities where we acquired the land more recently at lower costs than land acquired before the housing downturn. In addition, during fiscal 2013 we saw an increase in the pace of sales in some of our markets and, as a result, in a majority of communities we were able to increase base prices and increase lot premiums. For the years ended October 31, 2014, 2013 and 2012, gross margin was favorably impacted by the reversal of prior period inventory impairments of $48.0 million, $60.5 million and $75.7 million, respectively, which represented 2.4%, 3.4% and 5.4%, respectively, of “Sale of homes” revenue. 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 $5.2 million, $5.0 million, and $12.5 million during the years ended October 31, 2014, 2013, and 2012, respectively, to their estimated fair value. See Note 13 to the Consolidated Financial Statements for an additional discussion. During the years ended October 31, 2014, 2013, and 2012, we wrote-off residential land options and approval and engineering costs totaling $4.0 million, $2.6 million, and $2.7 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 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 in fiscal 2012 and all segments except the West in fiscal 2014 and 2013. The inventory impairments amounted to $1.2 million, $2.4 million, and $9.8 million for the years ended October 31, 2014, 2013 and 2012, respectively. For the past three years, 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 reflective of the overall improvement of the housing industry. 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 2014. In 2014, we walked away from 23.3% of all the lots we controlled under option contracts. The remaining 76.7% of our option lots are in communities that we believe remain economically feasible. 45 The following table represents lot option walk-aways by segment for the year ended October 31, 2014: (In millions) Northeast Mid-Atlantic Midwest Southeast Southwest West Total Dollar Amount of Walk Number of Walk- Away Away $0.9 0.2 1.0 0.7 1.2 - $4.0 Lots 265 1,173 995 1,788 927 - 5,148 % of Walk- Away Lots 5.2% 22.8% 19.3% 34.7% 18.0% 0% 100.0% Total Option Lots(1) 3,475 4,448 2,393 6,591 4,860 352 22,119 Walk- Away Lots as a % of Total Option Lots 7.6% 26.4% 41.6% 27.1% 19.1% 0% 23.3% (1) Includes lots optioned at October 31, 2014 and lots optioned that the Company walked away from in the year ended October 31, 2014. We can incur costs while investigating land options, whereby we decided not to pursue the opportunity before we control the lots. These costs are expensed in the period we decided to no longer pursue the opportunity. For the year ended October 31, 2014, such costs were not significant and are therefore not shown in the tables above. In addition, we sometimes walk-away from a lot option when we have only incurred costs of less than $50,000, such costs are not shown in the tables above. The following table represents impairments by segment for the year ended October 31, 2014: (In millions) Northeast Mid-Atlantic Midwest Southeast Southwest West Total Dollar Amount of Impairment $0.3 - 0.9 - - - $1.2 % of Impairments 25.0% 0% 75.0% 0% 0% 0% 100.0% Pre- Impairment Value(1) $0.6 - 3.8 - - - $4.4 % of Pre- Impairment Value 50.0% 0% 23.7% 0% 0% 0% 27.3% (1) Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s impairments. 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 October 31, 2014 $5,224 3,077 2,147 865 $1,282 Year Ended October 31, 2013 $17,711 16,012 1,699 291 $1,408 October 31, 2012 $31,788 24,158 7,630 5,695 $1,935 46 Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. 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 13 land sales in the year ended October 31, 2014, compared to 14 in the same period of the prior year. Despite one less number of land sales in the period, revenue associated therewith can vary significantly due to the mix of land parcels sold. For example, there was one significant land sale in the Southwest during the year ended October 31, 2013, resulting in a decrease of $12.5 million in land sales revenue for the year ended October 31, 2014. There were 16 land sales in the year ended October 31, 2012, and a decrease of $14.1 million in land sales revenue from the year ended October 31, 2012 to October 31, 2013. Land sales and other revenues decreased $11.2 million and $21.8 million for the years ended October 31, 2014 and 2013 compared to the same period in the prior year. 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. The decrease for the year ended October 31, 2014, compared to the year ended October 31, 2013, was mainly due to the decrease in land sales discussed above, offset by an increase among the various component of other revenue with $0.4 million coming from an increase in forfeited deposits. The decrease for the year ended October 31, 2013, compared to the year ended October 31, 2012, was mainly due to the decrease in land sales discussed above, a $3.0 million decrease in interest income recognized from a note receivable, as well as minor fluctuations spread across the various components of other revenues. Homebuilding Selling, General and Administrative Homebuilding selling, general and administrative (“SGA”) expenses increased $25.7 million to $191.5 million for the year ended October 31, 2014 as compared to the year ended October 31, 2013. Approximately half of the increase was due to higher sales compensation, increased advertising costs and increased architectural expenses, all related to recent and future community count growth, as well as a reduction of joint venture management fees, which offset general and administrative expenses, received as a result of fewer joint venture deliveries. The other half of the increase was due to increased staffing levels primarily associated with the new communities and increased compensation reflective of the competitive homebuilding market. SGA increased to $165.8 million for the year ended October 31, 2013 from $142.1 million for the year ended October 31, 2012. This increase was due to higher insurance costs and construction defect reserves and additional reserves for a receivable from an insurance provider and a receivable related to a prior year land sale. 47 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 2014 Compared Variance 2013 Compared 2014 to 2013 2013 to 2012 2012 $275,830 $(7,517) 550 $499,516 $(7,025) $282,855 $1,519 $(9,036) 617 (67) $46,202 $453,314 $49,529 $233,326 $(4,683) 505 $20,847 $432,467 $6,202 112 $332,719 $23,897 701 $473,266 $43,416 $289,303 $24,388 623 $10,468 $462,798 $(491) 78 $16,223 $273,080 $17,262 649 $48,499 $414,299 $7,126 (26) $226,174 $17,879 789 $286,386 $62,689 $163,485 $12,270 657 $38,656 $247,730 $5,609 132 $56,766 $106,719 $253 $12,017 477 180 $24,378 $223,352 $204,671 $9,247 652 $310,768 $57,101 $147,570 $6,455 535 $37,377 $273,391 $2,792 117 $18,886 $128,684 $(4,828) $11,283 482 53 $38,231 $235,160 $751,426 $74,527 2,389 $312,998 $54,068 $697,358 $178,427 $518,931 $42,178 $(1,932) 2,003 58 $36,055 $257,492 $76,459 2,331 $19,451 $293,547 $34,281 328 $230,308 $21,303 416 $553,337 $7,222 $223,086 $14,398 $6,905 503 (87) $37,235 $185,851 $(3,177) $17,575 560 (57) $109,939 $443,398 $117,218 $326,180 Northeast Homebuilding revenue (Loss) income before income taxes Homes delivered Average sales price Mid-Atlantic Homebuilding revenue Income before income taxes Homes delivered Average sales price Midwest Homebuilding revenue Income before income taxes Homes delivered Average sales price Southeast Homebuilding revenue Income (loss) before income taxes Homes delivered Average sales price Southwest Homebuilding revenue Income before income taxes Homes delivered Average sales price West Homebuilding revenue Income (loss) before income taxes Homes delivered Average sales price Homebuilding Results by Segment Northeast – Homebuilding revenues decreased 2.5% in fiscal 2014 compared to fiscal 2013 primarily due to a 10.9% decrease in homes delivered and a $2.1 million decrease in land sales and other revenue, offset by a 10.2% increase in average selling price. The increase in average sales prices was the result of the mix of communities delivering in fiscal 2014 compared to fiscal 2013. Income before income taxes decreased $9.0 million to a loss of $7.5 million, compared to income before income taxes in the prior year of $1.5 million, which was mainly due to a $7.9 million increase in selling, general and administrative costs, a decrease of $5.0 million in income from unconsolidated joint ventures and a slight decrease in gross margin percentage before interest expense for fiscal 2014 compared to fiscal 2013. 48 Homebuilding revenues increased 21.2% in fiscal 2013 compared to fiscal 2012 primarily due to a 22.2% increase in homes delivered and a 4.8% increase in average selling price, offset by an $11.8 million decrease in land sales and other revenue. The increase in average sales prices was the result of the mix of communities delivering in fiscal 2013 compared to fiscal 2012. Income before income taxes increased $6.2 million, compared to a loss before income taxes in the prior year, to a profit of $1.5 million, which was mainly due to the increase in homebuilding revenues discussed above, a decrease of $0.4 million in inventory impairment and land option write-offs and an increase in gross margin percentage before interest expense for fiscal 2013 compared to fiscal 2012. Mid-Atlantic – Homebuilding revenues increased 15.0% in fiscal 2014 compared to fiscal 2013 primarily due to a 12.5% increase in homes delivered and a 2.3% increase in average selling price. The increase in average sales price was due to the mix of communities that delivered in fiscal 2014 compared to fiscal 2013. Income before income taxes decreased $0.5 million to $23.9 million, due mainly to a $9.5 million increase in selling, general and administrative costs, offset by the increase in homebuilding revenues discussed above. Additionally, the gross margin percentage before interest expense was relatively flat for fiscal 2014 compared to fiscal 2013. Homebuilding revenues increased 5.9% in fiscal 2013 compared to fiscal 2012 primarily due to an 11.7% increase in average selling price, offset by a 4.0% decrease in homes delivered. The increase in average sales price was due to the mix of communities that delivered in fiscal 2013 compared to fiscal 2012. Income before income taxes increased $7.1 million to $24.4 million, due mainly to a decrease of $0.9 million in inventory impairment and land option write-offs, an increase of $3.7 million from income from unconsolidated joint ventures and the increase in homebuilding revenues discussed above. Additionally, the gross margin percentage before interest expense was relatively flat for fiscal 2013 compared to fiscal 2012. Midwest – Homebuilding revenues increased 38.3% in fiscal 2014 compared to fiscal 2013. The increase was primarily due to a 20.1% increase in homes delivered and a 15.6% increase in average sales price. Income before income taxes increased $5.6 million to $17.9 million. The increase in income was primarily due to the increase in homebuilding revenues discussed above and a slight increase in gross margin percentage before interest expense, offset by a $4.8 million increase in selling, general and administrative costs and a $1.7 million increase in inventory impairment and land option write-offs. Homebuilding revenues increased 53.2% in fiscal 2013 compared to fiscal 2012. The increase was primarily due to a 37.7% increase in homes delivered and a 10.9% increase in average sales price. Income before income taxes increased $12.0 million to $12.3 million. The increase in income was primarily due to the increase in homebuilding revenues discussed above, a decrease of $1.6 million in inventory impairment and land option write-offs, and an increase in gross margin percentage before interest expense. Southeast – Homebuilding revenues increased 38.7% in fiscal 2014 compared to fiscal 2013. The increase was primarily due to a 21.9% increase in homes delivered and a 13.7% increase in average sales price. Income before income taxes increased by $2.8 million to $9.2 million due to the increase in homebuilding revenues discussed above, a $0.7 million increase in land sales and other revenue and a $0.8 million increase in income from unconsolidated joint ventures. These increases are being offset by a $4.9 million increase in selling, general and administrative costs and a slight decrease in gross margin percentage before interest expense. Homebuilding revenues increased 14.7% in fiscal 2013 compared to fiscal 2012. The increase was primarily due to an 11.0% increase in homes delivered and a 16.3% increase in average sales price. Loss before income taxes decreased by $11.3 million to a profit of $6.5 million due to the increase in homebuilding revenues discussed above, a decrease of $3.3 million in inventory impairment and land option write-offs, a $2.5 million decrease in selling, general and administrative costs and an increase in gross margin percentage before interest expense. Southwest – Homebuilding revenues increased 7.8% in fiscal 2014 compared to fiscal 2013 primarily due to a 2.5% increase in homes delivered and a 6.6% increase in average sales price, offset by a $9.4 million decrease in land sales and other revenue. The increase in average sales price was due to the mix of communities that delivered in fiscal 2014 compared to fiscal 2013. Income before income taxes decreased $1.9 million to $74.5 million in fiscal 2014 mainly due to a $5.7 million increase in selling, general and administrative costs, the decrease in land sales and other revenue discussed above and a slight decrease in gross margin percentage before interest expense, offset by the increase in homebuilding revenues discussed above. 49 Homebuilding revenues increased 34.4% in fiscal 2013 compared to fiscal 2012 primarily due to a 16.4% increase in homes delivered, 14.0% increase in average sales price and a $9.9 million increase in land sales and other revenue. The increase in average sales price was due to the mix of communities that delivered in fiscal 2013 compared to fiscal 2012. Income before income taxes increased $34.3 million to $76.5 million in 2013 mainly due to the increase in homebuilding revenues discussed above. Additionally, the gross margin percentage before interest expense for fiscal 2013 increased compared to fiscal 2012. West – Homebuilding revenues increased 3.2% in fiscal 2014 compared to fiscal 2013 primarily due to a 24.8% increase in average sales price, partially offset by a 17.3% decrease in homes delivered, which was due to the different mix of communities delivered in fiscal 2014 compared to fiscal 2013. Income before income taxes increased $6.9 million to $21.3 million in fiscal 2014 due mainly to the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense, offset by $1.5 million increase in selling, general and administrative costs. Homebuilding revenues increased 20.0% in fiscal 2013 compared to fiscal 2012 primarily due to a 35.9% increase in average sales price, partially offset by a 10.2% decrease in homes delivered, which was due to the different mix of communities delivered in fiscal 2013 compared to fiscal 2012. Loss before income taxes decreased $17.6 million to a profit of $14.4 million in fiscal 2013 due mainly to a $2.3 million decrease in inventory impairment and land option write offs, and the increase in homebuilding revenues discussed above. In addition, there was a significant increase in gross margin percentage before interest expense. Financial Services Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of 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. For the years ended October 31, 2014, 2013 and 2012, FHA/VA loans represented 28.4%, 32.7%, and 41.7%, respectively, of our total loans. While the origination of FHA/VA loans have decreased over the last three fiscal years, our conforming conventional loan originations as a percentage of our total loans increased from 53.7% for fiscal 2012 to 62.7% for fiscal 2013 and to 69.2% for fiscal 2014. 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. During the years ended October 31, 2014, 2013, and 2012, financial services provided a $13.8 million, $18.7 million and $15.1 million pretax profit, respectively. In fiscal 2014, financial services pretax profit decreased $4.9 million compared to fiscal 2013 due to a decrease in the number of mortgage originations, as the percentage of our noncash home buyers that obtained mortgages from our subsidiary decreased by 600 basis points. In fiscal 2013, financial services pretax profit increased $3.6 million compared to fiscal 2012 due to increases in the number of mortgage originations and the average price of loans settled. In the market areas served by our wholly owned mortgage banking subsidiaries, approximately 65%, 71%, and 76% of our noncash home buyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2014, 2013, and 2012, 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 increased $9.0 million for the year ended October 31, 2014 compared to the year ended October 31, 2013, and increased $6.1 million for the year ended October 31, 2013 compared to the year ended October 31, 2012. The increase in expenses for fiscal 2014 was attributed to increased total compensation as a result of an increase in headcount, additional expenses related to earned amounts under the company’s 2010 long-term incentive plan and increased professional services for various corporate operations. The increase in expenses for fiscal 2013 was due to increased total compensation as a result of a slight increase in headcount, additional amounts accrued for bonuses as a result of improved operating performance, including achieving profitability for fiscal 2013, and additional professional services for various corporate operations. 50 Other Interest Other interest decreased $3.9 million to $87.4 million for the year ended October 31, 2014 compared to October 31, 2013. For fiscal 2013, other interest decreased $6.6 million to $91.3 million compared to October 31, 2012. 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. In fiscal 2014, 2013 and 2012, as our inventory balances for the qualifying assets have increased, the amount of interest required to be directly expensed has decreased. 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 increased $3.8 million to $4.6 million for the year ended October 31, 2014, and decreased $3.4 million to $0.8 million for the year ended October 31, 2013. The increase in expenses from October 31, 2014 compared to October 31, 2013 was mainly due to the gain recognized in fiscal 2013 from the sale of our last remaining senior rental residential property. The decrease in expenses from October 31, 2013 compared to October 31, 2012 was due mainly to the $4.7 million of costs incurred from the debt exchange completed in fiscal 2012 discussed above under “- Capital Resources and Liquidity,” because there were similar gains from sales of senior rental residential properties in both fiscal 2012 and fiscal 2013. Loss on Extinguishment of Debt For the year ended October 31, 2014, our loss on extinguishment of debt was $1.2 million, due to the redemption of the remaining outstanding principal amount ($21.4 million) of our 6.25% Senior Notes due 2015. During the year ended October 31, 2013, our loss on extinguishment of debt decreased $28.3 million to $0.8 million. In the fourth quarter of 2013, K. Hovnanian issued an aggregate principal amount of $41.6 million of its 6.25% Senior Notes due 2016. The Notes were issued as additional 6.25% Senior Notes due 2016 under the indenture dated as of August 8, 2005. The net proceeds from this offering were used to fund the redemption on October 15, 2013 of all of K. Hovnanian’s outstanding 6.5% Senior Notes due 2014 and 6.375% Senior Notes due 2014 and to pay related fees and expenses. These transactions resulted in a write-off of prepaid fees and a make whole true-up, totaling $0.8 million. During the year ended October 31, 2012, our loss on extinguishment of debt was $29.1 million. During 2012, we repurchased for cash in the open market and privately negotiated transactions a total of $121.4 million principal amount of various issues of our unsecured notes for an aggregate purchase price of $72.2 million, plus accrued and unpaid interest. We recognized a gain of $48.4 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, we exchanged a total of $33.2 million aggregate principal amount of various issuances of our outstanding senior notes senior and our 12.072% senior subordinated amortizing notes for Class A Common Stock. These transactions resulted in a gain on extinguishment of debt of $9.5 million. We also 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. Income from Unconsolidated Joint Ventures Income from unconsolidated joint ventures consists of our share of the earnings or losses of our joint ventures. Income from unconsolidated joint ventures decreased $4.1 million for the year ended October 31, 2014. Income was $7.9 million for the year ended October 31, 2014, compared $12.0 million for the year ended October 31, 2013. The decrease in income was due to fewer deliveries at certain of our joint ventures, and a decrease in the average sales price of the joint venture deliveries. The decrease in average sales price was primarily the result of the mix of communities during each of the respective periods. Income from unconsolidated joint ventures increased $6.6 million to $12.0 million for the year ended October 31, 2013 compared to $5.4 million for the year ended October 31, 2012. The increase in income was due to certain of our homebuilding joint ventures delivering more homes and reporting increased profits in fiscal 2013. In addition, we recognized a higher profit from one of our land development joint ventures during fiscal 2013, which had a larger land sale in fiscal 2013 compared to fiscal 2012. 51 Total Taxes The total income tax benefit of $287.0 million recognized for the twelve months ended October 31, 2014 was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets, plus a refund received for a loss carryback to a previously profitable year and the impact of state tax reserves for uncertain state tax positions, partially offset by state tax expenses. The total income tax benefit of $9.4 million recognized for the year ended October 31, 2013 was primarily due to the release of reserves for a federal tax position that was settled with the Internal Revenue Service and a favorable state tax audit settlement, partially offset by state tax expenses and state tax reserves for uncertain state tax positions. The total income tax benefit was $35.1 million for the year 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. 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. During the year ended October 31, 2014, we concluded that it was more likely than not that a substantial amount of our deferred tax assets (“DTA”) would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence, both positive and negative. The positive evidence included factors such as positive earnings over the last 30 months and the expectation of continued earnings going forward and evidence of a sustained recovery in the housing markets in which we operate. Such evidence is supported by significant increases in key financial indicators over the last few years, including new orders, revenues, gross margin, backlog, community count and deliveries compared with the prior years. Economic data has also been affirming the housing market recovery. Housing starts, homebuilding volume and prices are increasing and forecasted to continue to increase. Historically low mortgage rates, affordable home prices, reduced foreclosures and a favorable home ownership to rental comparison are key factors in the recovery. Potentially offsetting this positive evidence, we are currently in a three year cumulative loss position as of October 31, 2014. As per ASC 740, cumulative losses are one of the most objectively verifiable forms of negative evidence. Thus, an entity that has suffered cumulative losses in recent years may find it difficult to support an assertion that a DTA could be realized if such an assertion is based on forecasts of future profitable results rather than an actual return to profitability. In other words, an entity that has cumulative losses generally should not use an estimate of future earnings to support a conclusion that realization of an existing DTA is more likely than not if such a forecast is not based on objectively verifiable information. An objectively verifiable estimate of future income in that instance would be based on operating results from the reporting entity's recent history. We determined that the positive evidence noted above, including our two years of sustained operating profitability, outweighs the existing negative evidence and because of our current backlog, we expect to be in a three year cumulative income position in the early part of fiscal 2015. Given that ASC 740 suggests using recent historical operating results in the instance where a three year cumulative loss position still exists, we used our recent historical profit levels in projecting our pretax income over the future years in assessing the utilization of our existing DTAs. Therefore, we concluded that it is more likely than not that we will realize a substantial portion of our DTAs, and that a full valuation allowance is no longer necessary. This analysis, along with current year usage of net operating losses, resulted in a partial reversal of $285.1 million of our valuation allowance against DTAs, leaving a remaining valuation allowance of $642.0 million. Our valuation allowance decreased to $642.0 million at October 31, 2014 from $927.1 million at October 31, 2013. Our state net operating losses of approximately $2.2 billion expire between 2015 and 2034. Our federal net operating losses of $1.5 billion expire between 2028 and 2033. 52 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, 2014, we had $88.5 million in option deposits in cash and letters of credit to purchase land and lots with a total purchase price of $1.4 billion. 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. Contractual Obligations The following summarizes our aggregate contractual commitments at October 31, 2014. Payments Due by Period (1) (In thousands) Long term debt(2)(3) Operating leases Purchase obligations (4) Total Total Less than More than 5 years $2,231,611 $181,838 $572,004 $393,314 $1,084,455 843 - $2,261,669 $195,496 $585,169 $395,706 $1,085,298 1 year 1-3 years 3-5 years 13,165 - 26,695 3,363 10,295 3,363 2,392 - (1) Total contractual obligations exclude our accrual for uncertain tax positions of $2.1 million recorded for financial reporting purposes as of October 31, 2014 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 and senior exchangeable notes, and other notes payable and $544.7 million of related interest payments for the life of such debt. (3) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. See“- Capital Resources and Liquidity.” Also does not include our $75.0 million revolving Credit Facility because there were no borrowings outstanding (there were $26.5 million of letters of credit issued) under such facility as of October 31, 2014. (4) Represents obligations under option contracts with specific performance provisions, net of cash deposits. We had outstanding letters of credit and performance bonds of approximately $32.0 million and $227.7 million, respectively, at October 31, 2014, 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% of our homebuilding cost of sales. 53 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, 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; ● Regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting 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; ● Significant influence of the Company’s controlling stockholders; ● Changes in tax laws affecting the after-tax costs of owning a home; ● Geopolitical risks, terrorist acts and other acts of war. 54 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. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A primary market risk facing us is interest rate risk on our long term debt, including debt instruments at variable interest rates. 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, 2014 and 2013, 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, 2014 by Fiscal Year of Debt Maturity FV at 10/31/14 $170,068 $265,194 $127,593 $74,357 $151,536 $1,002,064 $1,790,812 $1,837,006 2019 Thereafter 2015 Total 2016 2018 2017 (Dollars in thousands) Long term debt(1): Fixed rate Weighted-average interest rate 7.76% 6.75% 8.72% 6.24% 7.02% 7.08 % 7.17% (1) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also does not include our $75 million revolving Credit Facility under which there were no borrowings outstanding and $26.5 million of letters of credit issued as of October 31, 2014. Long-Term Debt as of October 31, 2013 by Fiscal Year of Debt Maturity (Dollars in thousands) Long term debt(1): Fixed rate Weighted-average interest FV at 10/31/13 $69,978 $87,685 $265,272 $127,662 $4,311 $1,069,925 $1,624,833 $1,693,318 2018 Thereafter 2014 Total 2015 2017 2016 rate 6.19% 10.39% 6.75% 8.70% 9.62% 7.00 % 7.24% (1) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also does not include our $75 million revolving Credit Facility under which there were no borrowings outstanding and $25.8 million of letters of credit issued as of October 31, 2013. 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. 55 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, 2014. Based upon that evaluation and subject to the foregoing, the Company’s chief 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, 2014 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 (1992) 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, 2014. The effectiveness of the Company’s internal control over financial reporting as of October 31, 2014 has been audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm, as stated in their report below. 56 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, 2014, based on criteria established in Internal Control — Integrated Framework (1992) 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, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2014 of the Company and our report dated December 19, 2014 expressed an unqualified opinion on those financial statements. /s/DELOITTE & TOUCHE LLP New York, NY December 19, 2014 57 ITEM 9B OTHER INFORMATION None. 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 10, 2015, 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 57 Chairman of the Board, Chief Executive Officer, President and Director of the Company Thomas J. Pellerito J. Larry Sorsby Brad G. O’Connor David G. Valiaveedan 67 Chief Operating Officer 59 Executive Vice President, Chief Financial Officer and Director of the Company 44 Vice President, Chief Accounting Officer and Corporate Controller 47 Vice President Finance and Treasurer Year Started With Company 1979 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 Foundation Board of Overseers 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. 58 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 10, 2015. 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 10, 2015. The following table provides information as of October 31, 2014, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance. 59 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)(5) (a) Number of Class B Common Stock securities to be issued upon exercise of outstanding options, warrants and rights (in thousands)(2)(5) (a) Weighted- average exercise price of outstanding Class A Common Stock options, warrants and rights(3) (b) Weighted- average exercise price of outstanding Class B Common Stock options, warrants and rights(4) (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in columns (a)) (in thousands)(1) (c) 6,737 - 6,737 5,803 $6.22 $4.03 - 5,803 - $6.22 - $4.03 4,863 - 4,863 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 Market Stock Units granted in fiscal 2014 (“the “MSUs”) and under the share portion of the 2013 Long-Term Incentive Program under the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan (as further amended and restated from time to time, the “Stock Plan”) and the actual number of shares for which performance has been met that are issuable under the 2010 Long-Term Incentive Program under the Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan, subject to vesting. (3) Does not take into account 2,862,122 shares that may be issued upon the vesting of restricted stock and performance- based awards discussed in (2) above, nor 192,402 shares of restricted stock vested and deferred at the associates' election, because they have no exercise price. (4) Does not take into account 2,423,445 shares that may be issued upon the vesting of the performance-based awards discussed in (2) above, nor 341,741 shares of restricted stock vested and deferred at the associates’ election, because they have no exercise price. (5) These shares include 3,633,175 shares that would be issued in full only if the maximum level of financial and stock price performance is achieved for the MSUs and the 2013 Long-Term Incentive Program under the Stock Plan, which is not currently expected. These shares also include 357,500 shares that may be issued upon exercise of outstanding options with exercise prices greater than $20.00 per share. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information called for by 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 10, 2015. ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by 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 10, 2015. 60 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, 2014 and 2013 ........................................................................................... Consolidated Statements of Operations for the years ended October 31, 2014, 2013, and 2012 ..................................... Consolidated Statements of Equity for the years ended October 31, 2014, 2013, and 2012 ............................................ Consolidated Statements of Cash Flows for the years ended October 31, 2014, 2013, and 2012 .................................... Notes to Consolidated Financial Statements .................................................................................................................... Page 68 69 70 72 73 74 76 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) 4(a) 4(b) 4(c) 4(d) 4(e) 4(f) 4(g) 4(h) 4(i) 4(j) 4(k) 4(l) 4(m) 4(n) Restated 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) Eleventh Supplemental Indenture dated as of September 16, 2013, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., and the other guarantors named therein and Deutsche Bank National Trust Company, as trustee, including form of 6.25% Senior Notes due 2016. (15) 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) 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 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) 61 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) 10(a) 10(b) 10(c) 10(d) 10(e) 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, relating to 11.875% Senior Notes due 2015, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors named therein with Wilmington Trust Company, as Trustee, including form of 11.875% 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) 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) Eighth 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 successor trustee), as trustee, relating to 8.625% Senior Notes due 2017.(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 11.875% 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) Indenture, dated as of November 5, 2014, relating to the 8.000% Senior Notes due 2019, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as Trustee, including the form of 8.000% Senior Note due 2019.(33) Ninth Supplemental Indenture, dated as of September 26, 2014, relating to the 7.25% Senior Secured First Lien Notes due 2020, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent.(34) Ninth Supplemental Indenture, dated as of September 22, 2014, relating to the 9.125% Senior Secured Second Lien Notes due 2020, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent.(35) Indenture dated as of January 10, 2014, relating to the 7.000% Senior Notes due 2019, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors named therein and Wilmington Trust, National Association, as Trustee, including the form of 7.000% Senior Note due 2019.(36) 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) 62 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)* 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. (30) 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. (30) Death and Disability Agreement between the Registrant and Ara K. Hovnanian, dated February 2, 2006. (27) 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.(26) Form of Restricted Share Unit Agreement.(26) Form of Performance Vesting Incentive Stock Option Agreement.(26) Form of Performance Vesting Nonqualified Stock Option Agreement.(26) 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.(28) Form of Amendment to Outstanding Stock Option Grants.(29) Form of Amendment to 2011 Restricted Share Unit Agreement for Ara K. Hovnanian and J. Larry Sorsby. (29) Form of Amendment to 2011 Non-Qualified Stock Option Agreement for Ara K. Hovnanian.(29) Form of Amendment to 2011 Incentive Stock Option Agreement for J. Larry Sorsby.(29) Form of Incentive Stock Option Agreement (2012).(30) Form of Restricted Share Unit Agreement (2012).(30) Form of Stock Option Agreement (2012) for Directors.(30) 10(ff)* 10(gg)* 10(hh)* 10(ii)* 10(jj)* 10(kk)* 10(ll)* 10(mm)* Form of Restricted Share Unit Agreement (2012) for Directors.(30) Form of 2013 Long-Term Incentive Program Award. (31) 10(nn)* Form of 2013 Incentive Stock Option Agreement – Performance Option Grant (Class A shares). (32) 10(oo)* Form of 2013 Non-Qualified Stock Option Agreement – Performance Option Grant (Class B shares).(32) 10(pp)* Form of Market Share Unit Agreement (Class A shares).(37) 10(qq)* Form of Market Share Unit Agreement (Class B shares).(37) 10(rr)* Form of Market Share Unit Agreement (Performance Vesting) (Class A shares).(37) 10(ss)* Form of Market Share Unit Agreement (Performance Vesting) (Class B shares).(37) 10(tt)* Form of Incentive Stock Option Agreement (2014 grants and thereafter).(37) 10(uu)* 10(vv)* Form of Restricted Share Unit Agreement (2014 grants and thereafter).(37) 10(ww)* Form of Stock Option Agreement for Directors (2014 grants and thereafter).(37) 10(xx)* 10(yy)* 10(zz)* Amended and Restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan.(6) 12 21 Form of Restricted Share Unit Agreement for Directors (2014 grants and thereafter).(37) 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan.(38) Statements re Computation of Ratios. Subsidiaries of the Registrant. 63 23(a) 23(b) 31(a) 31(b) 32(a) 32(b) 99 101 * (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) Consent of Deloitte & Touche LLP. 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. Financial Statements of GTIS - HOV Holdings, L.L.C. The following financial information from our Annual Report on Form 10-K for the year ended October 31, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets at October 31, 2014 and October 31, 2013, (ii) the Consolidated Statements of Operations for the years ended October 31, 2014, 2013 and 2012, (iii) the Consolidated Statements of Equity for years ended October 31, 2014, 2013 and 2012 (iv) the Consolidated Statements of Cash Flows for the years ended October 31, 2014, 2013 and 2012, and (v) the Notes to Consolidated Financial Statements. Management contracts or compensatory plans or arrangements. 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 on March 15, 2013. Incorporated by reference to Appendix B to the Registrant’s definitive Proxy Statement on Schedule 14A (No. 001- 08551) filed on January 27, 2014. 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. 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. Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 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 October 2, 2012. Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on September 16, 2013. 64 (16) (17) 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. (18) Incorporated by reference to Exhibits to Registration Statement (No. 333-131982) on Form S-3 of the Registrant. (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) (31) (32) (33) 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 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 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. Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended April 30, 2013 (No. 001-08551) of the Registrant. Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2013 (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 on November 5, 2014. 65 (34) (35) (36) (37) (38) Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551) filed on September 29, 2014. Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551) filed on September 23, 2014. Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551) filed on January 10, 2014. Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014 (No. 001-08551) of the Registrant. Incorporated by reference to Appendix A to the Registrant’s definitive Proxy Statement on Schedule 14A (No. 001- 08551) filed on January 27, 2014. 66 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 19, 2014 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 19, 2014, 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/ J. LARRY SORSBY J. Larry Sorsby Executive Vice President, Chief Financial Officer and Director (Principal Financial 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 /s/ STEPHEN D. WEINROTH Stephen D. Weinroth Chairman of Audit Committee and Director Chairman of Compensation Committee and Director 67 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, 2014 and 2013 .......................................................................................... Consolidated Statements of Operations for the Years Ended October 31, 2014, 2013, and 2012 ...................................... Consolidated Statements of Equity for the Years Ended October 31, 2014, 2013, and 2012 ............................................. Consolidated Statements of Cash Flows for the Years Ended October 31, 2014, 2013, and 2012 ..................................... Notes to Consolidated Financial Statements ....................................................................................................................... Page 69 70 72 73 74 76 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. 68 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, 2014 and 2013, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended October 31, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2014, 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, 2014, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 19, 2014, expressed an unqualified opinion on the Company's internal control over financial reporting. /s/DELOITTE & TOUCHE LLP New York, NY December 19, 2014 69 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, net Property, plant and equipment, net Prepaid expenses and other assets Total homebuilding Financial services: Cash and cash equivalents Restricted cash and cash equivalents Mortgage loans held for sale at fair value Other assets Total financial services Income taxes receivable – including net deferred tax benefits (Note 12) Total assets See notes to consolidated financial statements. October 31, 2014 October 31, 2013 $255,117 13,086 $319,142 10,286 961,994 273,463 752,749 225,152 3,479 105,374 108,853 1,344,310 63,883 92,546 46,744 69,358 1,885,044 792 100,071 100,863 1,078,764 51,438 45,085 46,211 59,351 1,610,277 6,781 16,236 95,338 1,988 120,343 284,543 $2,289,930 10,062 21,557 112,953 4,281 148,853 - $1,759,130 70 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) LIABILITIES AND EQUITY Homebuilding: Nonrecourse 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 lines of credit Total financial services Notes payable: Senior secured notes, net of discount Senior notes, net of discount 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: Preferred stock, $0.01 par value - authorized 100,000 shares; issued and outstanding 5,600 shares with a liquidation preference of $140,000 at October 31, 2014 and 2013 Common stock, Class A, $0.01 par value - authorized 400,000,000 shares; issued 142,836,563 shares at October 31, 2014 and 136,306,223 shares at October 31, 2013 (including 11,760,763 shares at October 31, 2014 and 2013, held in Treasury) Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) - authorized 60,000,000 shares; issued 15,497,543 shares at October 31, 2014 and 15,347,615 shares at October 31, 2013 (including 691,748 shares at October 31, 2014 and 2013 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. October 31, 2014 October 31, 2013 $103,908 370,876 34,969 16,619 92,381 618,753 22,278 76,919 99,197 979,935 590,472 17,049 70,101 - 32,222 1,689,779 - 2,407,729 $62,903 307,764 30,119 17,733 87,866 506,385 32,874 91,663 124,537 978,611 461,210 20,857 66,615 2,152 28,261 1,557,706 3,301 2,191,929 135,299 135,299 1,428 1,363 155 697,943 (837,264) (115,360) (117,799) - (117,799) $2,289,930 153 689,727 (1,144,408) (115,360) (433,226) 427 (432,799) $1,759,130 71 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 on extinguishment of debt Income from unconsolidated joint ventures Income (loss) before income taxes State and federal income tax (benefit) provision: State Federal Total income taxes Net income (loss) Per share data: Basic: Income (loss) per common share Weighted-average number of common shares outstanding Assuming dilution: Income (loss) per common share Weighted-average number of common shares outstanding See notes to consolidated financial statements. October 31, Year Ended October 31, 2014 2013 October 31, 2012 $2,013,013 7,953 2,020,966 42,414 2,063,380 $1,784,327 19,199 1,803,526 47,727 1,851,253 $1,405,580 41,038 1,446,618 38,735 1,485,353 1,615,199 53,966 5,224 1,674,389 191,537 1,865,926 28,616 63,375 87,378 4,647 2,049,942 (1,155) 7,897 20,180 (12,452) (274,512) (286,964) $307,144 $2.05 146,271 $1.87 162,441 1,442,044 52,230 4,965 1,499,239 165,809 1,665,048 29,059 54,357 91,344 790 1,840,598 (760) 12,040 21,935 518 (9,878) (9,360) $31,295 $0.22 145,087 $0.22 162,329 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) (35,328) 277 (35,051) $(66,197) $(0.52) 126,350 $(0.52) 126,350 72 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY A Common Stock Shares Issued and B Common Stock Preferred Stock Shares Issued and Shares Issued and Outstanding Amount Outstanding Amount Outstanding Amount Paid-In Capital Accumulated Treasury Deficit Stock Non Controlling Interest Total 80,446,772 $921 14,560,464 $153 5,600 $135,299 $591,696 $(1,109,506) $(115,257) $92 $(496,602) 6,250 172,941 25,000,000 2 250 8,443,713 84 4,271,398 43 117,399 1 4,078 2,763 47,074 23,167 (43) Class A common stock 19,510 (19,510) Changes in noncontrolling interest in consolidated joint ventures Treasury stock purchases Net loss Balance, October 31, (66,043) 4,078 2,766 47,324 23,251 - - (103) (66,197) 138 138 (103) (66,197) 118,294,541 1,300 14,658,353 154 5,600 135,299 668,735 (1,175,703) (115,360) 230 (485,345) 44,812 123,840 1 2,683,679 27 3,396,102 2,486 34 1 (2,486) (1) 4,169 2,608 (27) 14,242 4,169 2,609 - 14,276 - 31,295 197 197 31,295 124,545,460 1,363 14,655,867 153 5,600 135,299 689,727 (1,144,408) (115,360) 427 (432,799) (Dollars In thousands) Balance, October 31, 2011 Stock options, amortization and issuances Restricted stock amortization, issuances and forfeitures Stock issuance Issuance of shares for debt Settlement of prepaid Class A common stock purchase contracts Conversion of Class B to 2012 Stock options, amortization and issuances Restricted stock amortization, issuances and forfeitures Settlement of prepaid Class A Common Stock purchase contracts Exchange of senior exchangeable notes for Class A Common Stock Conversion of Class B to Class A common stock Changes in noncontrolling interest in consolidated joint ventures Net income Balance, October 31, 2013 Stock options, amortization and issuances Restricted stock amortization, issuances and forfeitures Settlement of prepaid Class A Common Stock purchase contracts Conversion of Class B to 42,375 400,751 1 4 6,085,224 60 151,918 2 3,700 4,576 (60) Class A common stock 1,990 (1,990) Changes in noncontrolling interest in consolidated joint ventures Net income Balance, October 31, 3,701 4,582 - - 307,144 (427) (427) 307,144 2014 131,075,800 $1,428 14,805,795 $155 5,600 $135,299 $697,943 $(837,264) $(115,360) $- $(117,799) See notes to consolidated financial statements. 73 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating Year Ended October 31, 2014 October 31, 2013 October 31, 2012 $307,144 $31,295 $(66,197) 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 from unconsolidated joint ventures Distributions of earnings from unconsolidated joint ventures Loss on extinguishment of debt Expenses related to the debt for debt exchange Inventory impairment and land option write-offs Deferred income tax benefit Decrease (increase) in assets: Mortgage loans held for sale at fair value Restricted cash, receivables, prepaids, deposits and other assets Inventories (Decrease) increase in liabilities: State and federal income tax payable 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 (Increase) decrease in restricted cash related to mortgage company 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 Proceeds from senior notes Payments related to senior notes Net proceeds from exchangeable notes units Net proceeds from Class A Common Stock Net (payments) proceeds 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 financing activities Net (decrease) increase 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 paid (received) during the period for: Interest, net of capitalized interest (see Note 3 to the Consolidated Financial Statements) Income taxes 74 3,417 10,279 10,320 (483) (7,897) 6,044 1,155 - 5,224 (287,740) 17,615 (48,908) (270,770) (104) 4,850 59,269 (190,585) 515 (3,423) (655) (21,699) 11,107 (14,155) 152,906 (112,136) 42,402 (23,188) 24,696 (42,002) - 150,000 (22,593) - - (14,744) (11,947) (5,960) - - 137,434 (67,306) 329,204 $261,898 4,712 6,842 7,843 (4,696) (12,040) 2,340 760 - 4,965 - 4,071 52,940 (111,770) (3,581) 6,273 19,314 9,268 7,369 (1,558) 4,575 (4,907) 24,806 30,285 109,209 (76,142) 21,948 (9,193) 36,233 (39,669) - 41,581 (40,424) - - (15,822) (5,071) (6,231) - - 16,419 55,972 273,232 $329,204 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 85,386 $538 86,257 $(5,780) 101,460 $(103) Supplemental disclosure of noncash investing activities: In fiscal 2013, a property that we previously acquired when our partner in a land development joint venture transferred its interest in the venture to us, was foreclosed on by the note holder. As a result, the inventory with a book value of $9.5 million and corresponding nonrecourse liability of equal amount were taken off of our balance sheet. In fiscal 2013, 18,305 of our senior exchangeable notes were exchanged for 3,396,102 shares of Class A Common Stock. In fiscal 2013, we entered into a new unconsolidated homebuilding joint venture which resulted in the transfer of an existing receivable from our joint venture partners of $0.6 million at October 31, 2012, to an investment in the joint venture at January 31, 2013. 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, nonrecourse 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. See notes to consolidated financial statements. 75 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 generally accepted accounting principles in the United States of America (“US GAAP”) and include our accounts and those of all wholly owned subsidiaries, after elimination of all 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, representing approximately 98% of consolidated revenues for the year ended October 31, 2014, and approximately 97% for each of the years ended October 31, 2013 and 2012. We are a Delaware corporation, building and selling homes at October 31, 2014 in 201 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 US 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 Accounting Standards Codification (“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. 76 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 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. Cash and Cash Equivalents – Cash represents cash deposited in checking accounts. Cash equivalents include certificates of deposit, Treasury bills and government money–market funds with maturities of 90 days or less when purchased. Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our cash in major financial institutions. At October 31, 2014 and 2013, $15.4 million and $8.4 million, respectively, of the total cash and cash equivalents was in cash equivalents, the book value of which approximates fair value. 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 and cash equivalents, receivables, deposits and notes, accounts payable and other liabilities, customer deposits, mortgage loans held for sale, nonrecourse 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 accounted for as financings. 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, 2014, the net book value associated with our 45 mothballed communities was $103.3 million, net of impairment charges recorded in prior periods of $412.4 million. We regularly review communities to determine if mothballing is appropriate. During fiscal 2014, we did not mothball any new communities, re-activated two mothballed communities and sold three mothballed communities. From time to time we enter into option agreements that include specific performance requirements, whereby we are required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in accordance with ASC 360-20-40-38, we are required to record this inventory on our Consolidated Balance Sheets. As of October 31, 2014, we had $3.5 million of specific performance options recorded on our Consolidated Balance Sheets to “Consolidated inventory not owned – specific performance options,” with a corresponding liability of $3.4 million recorded to “Liabilities from inventory not owned.” Consolidated inventory not owned also consists of other options that were included on our Consolidated Balance Sheets in accordance with US GAAP. 77 We sell and lease 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 in accordance with ASC 360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Consolidated Balance Sheet, at October 31, 2014, inventory of $70.4 million was recorded to “Consolidated inventory not owned – other options,” with a corresponding amount of $64.9 million recorded to “Liabilities from inventory not owned.” We have land banking arrangements, whereby we sell our land parcels to the land banker and they provide us an option to purchase back finished lots on a quarterly basis. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 360-20-40-38, these transactions are considered a financing rather than a sale. For purposes of our Consolidated Balance Sheet, at October 31, 2014, inventory of $35.0 million was recorded to “Consolidated inventory not owned – other options,” with a corresponding amount of $24.1 million recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions. 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. 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; ● 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; 78 ● current local market economic and demographic conditions and related trends and 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 to an investor. 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, 2012 to October 31, 2014 ranged from 16.8% to 19.3%. 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 $0.6 million and $2.7 million of our total inventories at October 31, 2014 and 2013, respectively, 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. Post-Development Completion, Warranty Costs and Insurance Deductible Reserves - 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. We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible. This accrual is expensed as selling, general, and administrative costs. For homes delivered in fiscal 2014 and 2013, 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 2014 and 2013 is $0.25 million, up to a $5 million limit. Our aggregate retention in fiscal 2014 and 2013 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 workers’ 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 79 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. In addition, we establish a warranty accrual for lower cost-related issues to cover home repairs, community amenities, and land development infrastructure that are not covered under our general liability and construction defect policy. We accrue an estimate for these 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. See Note 17 for additional information on the amount of warranty costs recognized in cost of goods sold and administrative expenses. 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) October 31, 2014 $105,093 145,409 53,966 87,378 $109,158 Year Ended October 31, 2013 $116,056 132,611 52,230 91,344 $105,093 October 31, 2012 $121,441 147,048 54,538 97,895 $116,056 (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 (Increase) decrease in accrued interest Cash paid for interest, net of capitalized interest October 31, 2014 $87,378 1,969 (3,961) $85,386 Year Ended October 31, 2013 $91,344 2,975 (8,062) $86,257 October 31, 2012 $97,895 2,433 1,132 $101,460 (4) Capitalized interest amounts are shown gross before allocating any portion of inventory 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.” 80 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 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 2012, 2013 or 2014. 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. Advertising Costs - Advertising costs are expensed as incurred. During the years ended October 31, 2014, 2013, and 2012, advertising costs expensed totaled to $21.5 million, $17.2 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. 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. 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, 2014 and 2013, the balance for allowance for doubtful accounts was $13.8 81 million and $14.7 million, respectively. The balance at October 31, 2014 and 2013 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, an allowance for a receivable for a prior year land sale and an allowance for a receivable related to a legal settlement. During fiscal 2014 and 2013, we recorded $0.4 million and $7.4 million, respectively, of additional reserves and $1.3 million and $0.8 million, respectively, in recoveries. In fiscal 2013, we also had $0.1 million in write-offs. 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. 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. 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, adjusted for nonvested shares of restricted stock (the “denominator”) for the period. The basic weighted-average number of shares included 6.1 million shares for the years ended October 31, 2014 and 2013, and 8.8 million shares for the year ended October 31, 2012, related to Purchase Contracts (issued as part of our 7.25% Tangible Equity Units) which shares, as discussed in Note 10, were all issued upon settlement of the Purchase Contracts in February 2014. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and nonvested shares of restricted stock, as well as common shares issuable upon exchange of our Senior Exchangeable Notes issued as part of our 6.0% Exchangeable Note Units. 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 nonvested shares that contain nonforfeitable 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 (“nonvested shares”) are considered participating securities. Recent Accounting Pronouncements – In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-04, “Receivables - Troubled Debt Restructurings by Creditors,” which clarifies when an in substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan has occurred. By doing so, this guidance helps determine when the creditor should derecognize the loan receivable and recognize the real estate property. The guidance is effective for the Company beginning November 1, 2015 and is not expected to have a material impact on the Company’s Consolidated Financial Statements. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), (“ASU 2014-09”). ASU 2014-09 requires entities to recognize revenue that represents the transfer of promised goods or services to customers in an amount equivalent to the consideration to which the entity expects to be entitled to in exchange for those goods or services. The following steps should be applied to determine this amount: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in ASU 605, Revenue Recognition, most industry-specific guidance in the Accounting Standards Codification. ASU 2014-09 is effective for the Company beginning November 1, 2017. Early adoption is not permitted. We are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements. 82 In June 2014, the FASB issued ASU 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures” ("ASU 2014-11"), which makes limited amendments to ASC 860, "Transfers and Servicing." ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings, eliminates accounting guidance on linked repurchase financing transactions, and expands disclosure requirements related to certain transfers of financial assets. ASU 2014-11 is effective for the Company beginning February 1, 2015. Early adoption is not permitted. This guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements. In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, “Compensation- Stock Compensation”, as it relates to awards with performance conditions that affect vesting to account for such awards. ASU 2014-12 is effective for the Company beginning November 1, 2015. Early adoption is permitted. We do not anticipate the adoption of ASU 2014-12 will have a material effect on our Consolidated Financial Statements. In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 is effective for the Company for our fiscal year ending October 31, 2017. Early adoption is permitted. We do not anticipate the adoption of ASU 2014-15 to have a material impact on the Company’s 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, 2015 2016 2017 2018 2019 Thereafter Total (In Thousands) $10,295 8,741 4,424 1,242 1,150 843 $26,695 Net rental expense for the three years ended October 31, 2014, 2013 and 2012, was $11.6 million, $10.8 million and $12.4 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. 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. 83 Property, plant and equipment balances as of October 31, 2014 and 2013 were as follows: (In thousands) Land and land improvements Buildings Building improvements Furniture Equipment Total Less accumulated depreciation Total 6. Restricted Cash and Deposits October 31, 2014 $2,398 66,871 9,660 6,187 35,227 120,343 73,599 $46,744 2013 $2,398 66,859 8,869 6,262 36,998 121,386 75,175 $46,211 Restricted cash and cash equivalents on the Consolidated Balance Sheets totaled to $29.3 million and $31.9 million as of October 31, 2014 and 2013, respectively, which included cash collateralizing our letter of credit agreements and facilities and is discussed in Note 8. Also included in this balance were homebuilding and financial services customers’ deposits of $7.5 million and $15.8 million at October 31, 2014, respectively, and $5.1 million and $21.6 million as of October 31, 2013, respectively, which are restricted from use by us. Total Homebuilding Customers’ deposits are shown as a liability on the Consolidated Balance Sheets. These liabilities are significantly more than the applicable periods’ restricted 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 these customer deposits to 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 Consolidated Statements of Operations in “Revenues: Financial services.” We currently use forward sales of MBS, interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to third-party purchasers 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 Consolidated Statements of Operations in “Revenues: Financial services.” At October 31, 2014 and 2013, $78.6 million and $94.1 million, respectively, 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” balances on the Consolidated Balance Sheets. As of October 31, 2014 and 2013, we had reserves specifically for 130 and 187 identified mortgage loans, respectively, as well as reserves for an estimate for future losses on mortgages sold but not yet identified to us. 84 The activity in our loan origination reserves in fiscal 2014 and 2013 was as follows: (In thousands) 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 (1) Loan origination reserves, end of period Year Ended October 31, 2014 $11,036 3,814 (2,574) (4,924) $7,352 2013 $9,334 3,138 (786) (650) $11,036 (1) Includes the global settlement of all loans sold to one of our previously significant mortgage purchasers, which settlements covers all of our potential liability for such loans. 8. Mortgages and Notes Payable We have nonrecourse mortgage loans for certain communities totaling $103.9 million and $62.9 million at October 31, 2014 and 2013, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of approximately $220.1 million and $132.4 million, respectively. The weighted-average interest rate on these obligations was 5.0% and 5.8% at October 31, 2014 and 2013, respectively, and the mortgage loan payments on each community primarily correspond to home deliveries. We also have nonrecourse mortgage loans on our corporate headquarters totaling $16.6 million and $17.7 million at October 31, 2014 and 2013, respectively. These loans had a weighted-average interest rate of 7.0% at both October 31, 2014 and 2013. As of October 31, 2014, these loans had installment obligations with annual principal maturities in the years ending October 31 of approximately: $1.1 million in 2015, $1.2 million in 2016, $1.3 million in 2017, $1.4 million in 2018, $1.5 million in 2019 and $10.1 million after 2019. In June 2013, K. Hovnanian Enterprises, Inc. (“K. Hovnanian”), as borrower, and we and certain of our subsidiaries, as guarantors, entered into a five-year, $75.0 million unsecured revolving credit facility (the “Credit Facility”) with Citicorp USA, Inc., as administrative agent and issuing bank, and Citibank, N.A., as a lender. The Credit Facility is available for both letters of credit and general corporate purposes. The Credit Facility does not contain any financial maintenance covenants, but does contain certain restrictive covenants that track those contained in our indenture governing the 8.0% Senior Notes due 2019, which are described in Note 9. The Credit Facility also contains certain customary events of default which would permit the administrative agent at the request of the required lenders to, among other things, declare all loans then outstanding to be immediately due and payable if such default is not cured within applicable grace periods, including the failure to make timely payments of amounts payable under the Credit Facility or other material indebtedness or the acceleration of other material indebtedness, the failure to comply with agreements and covenants or for representations or warranties to be correct in all material respects when made, specified events of bankruptcy and insolvency, and the entry of a material judgment against a loan party. Outstanding borrowings under the Credit Facility accrue interest at an annual rate equal to either, as selected by K. Hovnanian, (i) the alternate base rate plus the applicable spread determined on the date of such borrowing or (ii) an adjusted London Interbank Offered Rate (“LIBOR”) rate plus the applicable spread determined as of the date two business days prior to the first day of the interest period for such borrowing. As of October 31, 2014, there were no borrowings and $26.5 million of letters of credit outstanding under the Credit Facility, and as of such date, we believe we were in compliance with the covenants under the Credit Facility. In addition to the Credit Facility, we have certain stand–alone cash collateralized letter of credit agreements and facilities under which there were a total of $5.5 million and $5.1 million letters of credit outstanding at October 31, 2014 and 2013, 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, 2014 and 2013, the amount of cash collateral in these segregated accounts was $5.6 million and $5.2 million, respectively, which is reflected in “Restricted cash and cash equivalents” 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. In certain instances, we retain the servicing rights for a small amount of loans. Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”), which was amended on June 30, 2014, is a short-term borrowing facility that provides up 85 to $50.0 million through July 30, 2015. 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 an adjusted LIBOR rate, which was 0.156% at October 31, 2014 plus the applicable margin of 2.85%. Therefore, at October 31, 2014, the interest rate was 3.0%. As of October 31, 2014 and 2013, the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $25.5 million and $33.6 million, respectively. K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master Repurchase Agreement”), which was amended on May 27, 2014 to extend the maturity date to May 26, 2015, that is a short-term borrowing facility that provides up to $37.5 million through maturity. 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, plus the applicable margin ranging from 2.75% to 5.25% based on the takeout investor, type of loan, and the number of days on the warehouse line. As of October 31, 2014 and 2013, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $20.4 million and $30.7 million, respectively. K. Hovnanian Mortgage has a third secured Master Repurchase Agreement with Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse Master Repurchase Agreement”), which was last amended on November 17, 2014, that is a short-term borrowing facility that provides up to $50.0 million through October 27, 2015. The facility also provides an additional $30.0 million which can be used between 10 calendar days prior to the end of a fiscal quarter through the 45th calendar day after a fiscal quarter end; provided that the amount outstanding may not exceed $50.0 million outside of this date range. 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 0.44% at October 31, 2014, plus the applicable margin ranging from 2.25% to 2.75% based on the takeout investor, type of loan and the number of days outstanding. As of October 31, 2014 and 2013, the aggregate principal amount of all borrowings outstanding under the Credit Suisse Master Repurchase Agreement was $19.7 million and $27.4 million, respectively. In February 2014, K. Hovnanian Mortgage executed a new secured Master Repurchase Agreement with Comerica Bank (“Comerica Master Repurchase Agreement”), which was amended on July 7, 2014 to extend the maturity date to July 6, 2015, that is a short-term borrowing facility that provides up to $35.0 million through maturity. 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 at LIBOR, subject to a floor of 0.25%, plus the applicable margin of 2.625%. As of October 31, 2014, the interest rate was 2.875% and the aggregate principal amount of all borrowings outstanding under the Comerica Master Repurchase Agreement was $11.3 million. The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement, Credit Suisse Master Repurchase Agreement and Comerica 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, 2014, we believe we were in compliance with the covenants under the Master Repurchase Agreements. 86 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, 2014 and 2013, were as follows: (In thousands) Senior Secured Notes: 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: 6.25% 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 7.0% Senior Notes due January 15, 2019 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, 2014 October 31, 2013 $577,000 220,000 53,129 129,806 $979,935 $- 60,414 172,483 86,532 121,043 150,000 $590,472 $17,049 $70,101 $- $577,000 220,000 53,119 128,492 $978,611 $21,438 60,044 172,153 86,532 121,043 - $461,210 $20,857 $66,615 $2,152 As of October 31, 2014, future maturities of our borrowings (assuming no exchange of our senior exchangeable notes), were as follows (in thousands): Fiscal Year Ended October 31, 2015 2016 2017 2018 2019 Thereafter Total 2014 $65,053 263,994 126,293 72,945 150,000 992,000 $1,670,285 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 and senior exchangeable notes outstanding at October 31, 2014 (see Note 23). In addition, the 5.0% Senior Secured Notes due 2021 (the “5.0% 2021 Notes”) and the 2.0% Senior Secured Notes due 2021 (the “2.0% 2021 Notes” and together with the 5.0% 2021 Notes, the “2021 Notes”) 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 nonrecourse indebtedness), pay dividends and make distributions on common and preferred stock, repurchase subordinated indebtedness (with respect to certain of the senior secured and senior 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 87 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, 2014, 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 nonrecourse 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. We anticipate that 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 debt instruments or otherwise affect compliance with any of the covenants contained in the debt instruments. On November 3, 2003, K. Hovnanian issued $215.0 million 6.5% Senior Notes due 2014. 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, and pursuant to the terms of the indenture, were subsequently redeemed in full as discussed below. On March 18, 2004, K. Hovnanian issued $150.0 million 6.375% Senior Notes due 2014. The net proceeds of the issuance were used to redeem all of our $150.0 million outstanding 9.125% Senior Notes due 2009, which occurred on May 3, 2004, and for general corporate purposes. These notes were the subject of a November 2011 exchange offer discussed below, and pursuant to the terms of the indenture, were subsequently redeemed in full, as discussed below. On November 30, 2004, K. Hovnanian issued $200.0 million 6.25% Senior Notes due 2015. The net proceeds of the issuance were used to repay the outstanding balance on our then existing revolving credit facility and for general corporate purposes. These notes were the subject of a November 2011 exchange offer discussed below and were subsequently redeemed in full as 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 then existing 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. On September 16, 2013, K. Hovnanian issued $41.6 million of additional 6.25% Senior Notes due 2016 at a price equal to 100% of their principal amount as discussed below. 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 then existing 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 then existing revolving credit facility as of June 12, 2006. These notes were the subject of a November 2011 exchange offer discussed below. 88 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. 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 10. These transactions resulted in a gain on extinguishment of debt of $0.2 million for the year ended October 31, 2012. The gain is included in the Consolidated Statements of Operations as “Loss on extinguishment of debt.” On February 14, 2011, K. Hovnanian issued $155.0 million aggregate principal amount of 11.875% Senior Notes due 2015. The 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.” 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, an issuance of Class A Common Stock in February 2011 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 then outstanding 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 (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 11.875% Senior Notes due 2015. 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 certain 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.” Due to the then-existing financial condition of K. Hovnanian as determined in accordance with ASC 470-60 “Accounting by Debtors and Creditors for Troubled Debt Restructurings” and, because the holders of the senior notes that exchanged such notes for 2021 Notes granted K. Hovnanian a concession in the form of extended maturities and reduced interest rates, 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 in “Other operations” in the Consolidated Statement of Operations. 89 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, 2014, the collateral securing the guarantees included (1) $92.1 million of cash and cash equivalents (subsequent to such date, cash uses include general business operations and real estate and other investments); (2) approximately $120.4 million aggregate book value of real property of the Secured Group, 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, and (3) equity interests in guarantors that are members of the Secured Group. 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 $59.1 million as of October 31, 2014; 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 and senior secured 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 the 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 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, 2014, the aggregate book value of the real property that constituted collateral securing the 2020 Secured Notes was approximately $673.1 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 secured the 2020 Secured Notes was $168.6 million as of October 31, 2014, which included $5.6 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 or 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 (a “Senior Exchangeable Note”) issued by K. Hovnanian, which bears no cash interest and has an initial principal amount of $768.51 per Senior Exchangeable Note, and 90 that will accrete to $1,000 at maturity and (2) a senior amortizing note due December 1, 2017 (a “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 Senior 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 Senior Exchangeable Note had an initial principal amount of $768.51 (which will accrete to $1,000 over the term of the Senior 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 Senior 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 Senior 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 Senior 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 rate for any holder who elects to exchange its Senior Exchangeable Notes in connection with such corporate event. In addition, holders of Senior Exchangeable Notes will also have the right to require K. Hovnanian to repurchase such holders’ Senior Exchangeable Notes upon the occurrence of certain of these corporate events. As of October 31, 2014, 18,305 Senior Exchangeable Notes have been converted into 3.4 million shares of our Class A Common Stock, all of which were converted during the first quarter of fiscal 2013. On each June 1 and December 1 (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 was $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 the write-off of unamortized discounts and fees. The loss is included in the Consolidated Statement of Operations as “(Loss) gain on extinguishment of debt.” 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. 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 15). 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 15. 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. The gain is included in the Consolidated Statement of Operations as “(Loss) gain on extinguishment of debt.” 91 On September 16, 2013, K. Hovnanian issued an aggregate principal amount of $41.6 million of its 6.25% Senior Notes due 2016. The Notes were issued as additional 6.25% Senior Notes due 2016 under the indenture dated as of August 8, 2005. The net proceeds from this offering were used to fund the redemption on October 15, 2013 of all of K. Hovnanian’s outstanding 6.5% Senior Notes due 2014 and 6.375% Senior Notes due 2014 and to pay related fees and expenses. On January 10, 2014, K. Hovnanian issued $150.0 million aggregate principal amount of 7.0% Senior Notes due 2019, resulting in net proceeds of approximately $147.8 million. The notes are redeemable in whole or in part at our option at any time prior to July 15, 2016 at 100% of their principal amount plus an applicable “Make-Whole Amount.” We may also redeem some or all of the notes at 103.5% of principal commencing July 15, 2016, at 101.75% of principal commencing January 15, 2017 and 100% of principal commencing January 15, 2018. In addition, we may redeem up to 35% of the aggregate principal amount of the notes prior to July 15, 2016, with the net cash proceeds from certain equity offerings at 107.0% of principal. We used a portion of the net proceeds to fund the redemption on February 9, 2014 (effected on February 10, 2014, which was the next business day after the redemption date) of the remaining outstanding principal amount ($21.4 million) of our 6.25% Senior Notes due 2015. The redemption resulted in a loss on extinguishment of debt of $1.2 million, net of the write-off of unamortized fees, and is included in the Consolidated Statement of Operations as “Loss on extinguishment of debt” for fiscal 2014. The remaining net proceeds from the offering were used to pay related fees and expenses and for general corporate purposes. February 15, 2014, was the mandatory settlement date for our Purchase Contracts and was also the payment date for the last quarterly cash installment payment on the Senior Subordinated Amortizing Notes, both of which were initially issued as components of our 7.25% Tangible Equity Units. See Note 10 below for additional information. In the fourth quarter of fiscal 2014, K. Hovnanian solicited and obtained the requisite consent of holders of its 2020 Secured Notes to certain amendments to the indentures under which such notes were issued. K. Hovnanian paid an aggregate of $3.3 million to holders who consented thereunder. On November 5, 2014, K. Hovnanian issued $250.0 million aggregate principal amount of 8.0% Senior Notes due 2019, resulting in net proceeds of $245.7 million. These proceeds will be used for general corporate purposes, including land acquisition and development. 10. Tangible Equity Units On February 9, 2011, we issued an aggregate of 3,000,000 7.25% Tangible Equity Units (the “TEUs”), and on February 14, 2011, we issued an additional 450,000 TEUs pursuant to the over-allotment option granted to the underwriters. Each TEU initially consisted 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”). The Senior Subordinated Amortizing Note component of the TEUs was recorded as debt, and the Purchase Contract component of the TEUs which had a fair value of $68.1 million was recorded in equity as additional paid-in capital. The final quarterly cash installment payment of $0.453125 per Senior Subordinated Amortizing Note was due on February 15, 2014, and was paid to holders thereof on February 18, 2014 (which was the next business day). On February 18, 2014, (which was the first business day after the mandatory settlement date of February 15, 2014) we issued to holders of Purchase Contracts an aggregate of 6,085,224 shares of our Class A Common Stock in settlement of an aggregate of 1,276,933 Purchase Contracts (such amount was based on a settlement rate of 4.7655 shares of Class A Common Stock for each Purchase Contract). In addition, we paid a de minimis amount of cash to holders of the Purchase Contracts in lieu of fractional shares. Accordingly, as of October 31, 2014, we had no Purchase Contracts or Senior Subordinated Amortizing Notes outstanding. 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. 92 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, Washington D.C. and West Virginia) (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 (“Income (loss) before income taxes”). Income (loss) before income taxes for the Homebuilding segments consist of revenues generated from the sales of homes and land, income (loss) from unconsolidated entities, management fees and other income, less the cost of homes and land sold, selling, general and administrative expenses, interest expense and non-controlling interest expense. Income before income taxes for the Financial Services segment 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. 93 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 Income (loss) before income taxes: Northeast Mid-Atlantic Midwest Southeast Southwest West Total homebuilding Financial services Corporate and unallocated Income (loss) before income taxes (In thousands) Assets: Northeast Mid-Atlantic Midwest Southeast Southwest West Total homebuilding Financial services Corporate and unallocated (1) Total assets Year Ended October 31, 2014 2013 2012 $275,830 332,719 226,174 204,671 751,426 230,308 2,021,128 42,414 (162) $2,063,380 $(7,517) 23,897 17,879 9,247 74,527 21,303 139,336 13,798 (132,954) $20,180 $282,855 289,303 163,485 147,570 697,358 223,086 1,803,657 47,727 (131) $1,851,253 $1,519 24,388 12,270 6,455 76,459 14,398 135,489 18,668 (132,222) $21,935 $233,326 273,080 106,719 128,684 518,931 185,851 1,446,591 38,735 27 $1,485,353 $(4,683) 17,262 253 (4,828) 42,178 (3,177) 47,005 15,087 (163,340) $(101,248) October 31, 2014 2013 $315,573 313,494 169,967 148,096 410,756 143,245 1,501,131 120,343 668,456 $2,289,930 $323,152 240,486 104,596 101,410 305,878 130,545 1,206,067 148,853 404,210 $1,759,130 (1) Includes $285.1 million related to the partial reversal of our deferred tax asset valuation allowance in fiscal 2014. (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 94 October 31, 2014 $6,987 36,285 806 4,787 - 14,562 63,427 456 $63,883 2013 $8,828 33,052 1,661 3,412 - 3,921 50,874 564 $51,438 (In thousands) Homebuilding interest expense: Northeast Mid-Atlantic Midwest Southeast Southwest West Total homebuilding Corporate and unallocated Financial services interest expense (1) Total interest expense, net Year Ended October 31, 2014 2013 2012 $20,940 9,542 5,354 7,827 20,543 12,619 76,825 64,519 (119) $141,225 $26,163 10,037 3,737 5,861 16,071 12,960 74,829 68,745 499 $144,073 $25,507 9,988 2,994 5,310 15,880 14,416 74,095 78,338 553 $152,986 (1) Financial services 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 (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 (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 95 Year Ended October 31, 2014 2013 2012 $250 45 355 31 131 33 845 68 2,504 $3,417 $245 283 528 31 163 148 1,398 285 3,029 $4,712 $316 370 517 47 217 302 1,769 328 4,126 $6,223 Year Ended October 31, 2014 2013 2012 $44 23 927 59 39 170 1,262 28 2,133 $3,423 $388 35 279 7 44 19 772 6 780 $1,558 $2,944 55 218 30 - - 3,247 21 1,791 $5,059 Year Ended October 31, 2014 2013 2012 $(1,302) 6,459 17 2,119 - 604 $7,897 $3,738 5,631 1,045 1,287 - 339 $12,040 $3,202 155 598 1,503 - (57) $5,401 12. Income Taxes Income taxes payable (receivable), including deferred benefits, consists of the following: (In thousands) State income taxes: Current Deferred Federal income taxes: Current Deferred Total Year Ended October 31, 2014 2013 $3,197 (14,918) - (272,822) $(284,543) $3,301 - - - $3,301 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 expense (benefit): Federal State Total deferred income tax (benefit): Total Year Ended October 31, 2014 2013 2012 $(1,690) 2,466 776 (272,822) (14,918) (287,740) $(286,964) $(9,878) 518 (9,360) - - - $(9,360) $277 (35,328) (35,051) - - - $(35,051) (1) The current state income tax (benefit) expense is net of the use of state net operating losses totaling $24.5 million, $23.1 million, and $3.4 million for the years ended October 31, 2014, 2013, and 2012, respectively. The total income tax benefit of $287.0 recognized for the twelve months ended October 31, 2014 was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets plus a refund received for a loss carryback to a previously profitable year and the impact of state tax reserves for uncertain state tax positions, partially offset by state tax expenses. The total income tax benefit of $9.4 million recognized for the year ended October 31, 2013 was primarily due to the release of reserves for a federal tax position that was settled with the Internal Revenue Service and a favorable state tax audit settlement, partially offset by state tax expenses and state tax reserves for uncertain state tax positions. The total income tax benefit was $35.1 million for the year 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. 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. During the year ended October 31, 2014, we concluded that it was more likely than not that a substantial amount of our deferred tax assets (“DTA”) would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence, both positive and negative. The positive evidence included factors such as positive earnings over the last 30 months and the expectation of continued earnings going forward and evidence of a sustained recovery in the housing markets in which we operate. Such evidence is supported by significant increases in key financial indicators over the last few years, including new orders, revenues, gross margin, backlog, community count and deliveries compared with the prior years. Economic data has also been affirming the housing market recovery. Housing starts, homebuilding volume and prices are increasing and forecasted to continue to increase. Historically low mortgage rates, affordable home prices, reduced foreclosures and a favorable home ownership to rental comparison are key factors in the recovery. 96 Potentially offsetting this positive evidence, we are currently in a three year cumulative loss position as of October 31, 2014. As per ASC 740, cumulative losses are one of the most objectively verifiable forms of negative evidence. Thus, an entity that has suffered cumulative losses in recent years may find it difficult to support an assertion that a DTA could be realized if such an assertion is based on forecasts of future profitable results rather than an actual return to profitability. In other words, an entity that has cumulative losses generally should not use an estimate of future earnings to support a conclusion that realization of an existing DTA is more likely than not if such a forecast is not based on objectively verifiable information. An objectively verifiable estimate of future income in that instance would be based on operating results from the reporting entity's recent history. We determined that the positive evidence noted above, including our two years of sustained operating profitability, outweighs the existing negative evidence, and because of our current backlog, we expect to be in a three year cumulative income position in the early part of fiscal 2015. Given that ASC 740 suggests using recent historical operating results in the instance where a three year cumulative loss position still exists, we used our recent historical profit levels in projecting our pretax income over the future years in assessing the utilization of our existing DTAs. Therefore, we concluded that it is more likely than not that we will realize a substantial portion of our DTAs, and that a full valuation allowance is no longer necessary. This analysis, along with current year usage of net operating losses, resulted in a partial reversal of $285.1 million of our valuation allowance against DTAs, leaving a remaining valuation allowance of $642.0 million. Our valuation allowance decreased to $642.0 million at October 31, 2014 from $927.1 million at October 31, 2013. Our state net operating losses of approximately $2.2 billion expire between 2015 and 2034. Our federal net operating losses of $1.5 billion expire between 2028 and 2033. The deferred tax assets and liabilities have been recognized in the Consolidated Balance Sheets as follows: Year Ended October 31, 2014 2013 $2,407 219,487 9,005 14,342 547 18,014 7,121 2,830 8,481 43,585 5,633 524,879 176,225 19,516 1,052,072 395 121,934 - 122,329 (642,003) $287,740 $2,345 230,553 6,208 15,571 551 22,523 5,781 3,591 6,994 38,923 5,360 542,409 182,940 16,350 1,080,099 351 152,450 164 152,965 (927,134) $- (In thousands) Deferred tax assets: 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 97 The effective tax rate 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 related to our deferred tax assets. Due to the effects of these factors, our effective tax rates for 2014, 2013 and 2012 are not correlated to the amount of our income or loss before income taxes. 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 Effective tax rate Year Ended October 31, 2014 35.0% (3.5) 0.8 (1,393.3) (0.6) (60.4) (1,422.0)% 2013 35.0% 14.0 11.3 (66.2) (36.8) - (42.7)% 2012 35.0% (2.6) (0.3) (32.3) 34.8 - 34.6% 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. 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 Lapse of statute of limitations Unrecognized tax benefit—October 31, 2014 $1.8 0.2 - (0.3) $1.7 2013 $9.9 1.2 (9.3) - $1.8 Related to the unrecognized tax benefits noted above, as of October 31, 2014 and 2013, we have recognized a liability for interest and penalties of $0.4 million and $0.5 million, respectively. For the years ended October 31, 2014, 2013 and 2012, we recognized $(30) thousand, $0.1 million and $(18.3) 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 $0.2 million, excluding penalties and interest. This reduction is expected primarily due to the expiration of the statutes of limitation. The portion of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate (excluding any related impact to the valuation allowance) is $1.1 million and $1.2 million as of October 31, 2014 and 2013, 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, 2013. 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 98 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 2010–2013. 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 years ended October 31, 2014, 2013 and 2012, our discount rates used for the impairments recorded ranged from 16.8% to 17.3%, 18.0% to 19.3% and 16.8% to 18.5%, respectively. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments. During the years ended October 31, 2014 and 2013, we evaluated inventories of all 396 and 388 communities under development and held for future development, respectively, for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed detailed impairment calculations during the years ended October 31, 2014 and 2013 for 12 and 33 of those communities (i.e., those with a projected operating loss or other impairment indicators), respectively, with an aggregate carrying value of $28.2 million and $85.0 million, respectively, (four and eight were in the fourth quarter of fiscal 2014 and 2013, respectively, with an aggregate carrying value of $7.1 million and $21.8 million, respectively). As impairment indicators are assessed on a quarterly basis, some of the communities evaluated during the years ended October 31, 2014 and 2013 were evaluated in more than one quarterly period. Of those communities tested for impairment during the years ended October 31, 2014 and 2013, both periods had four communities with an aggregate carrying value of $23.1 million and $4.5 million, respectively, had undiscounted future cash flows that only exceeded the carrying amount by less than 20%. As a result of our impairment analysis, we recorded impairment losses, which are included in the Consolidated Statement of Operations and deducted from inventory, of $1.2 million, $2.4 million and $9.8 million for the years ended October 31, 2014, 2013 and 2012, respectively. The following table represents impairments by segment for fiscal 2014, 2013 and 2012: (Dollars in millions) Year Ended October 31, 2014 Northeast Mid-Atlantic Midwest Southeast Southwest West Total (Dollars in millions) Northeast Mid-Atlantic Midwest Southeast Southwest West Total Number of Communities 2 - 3 - - - 5 Dollar Amount of Impairment $0.3 - 0.9 - - - $1.2 Pre- Impairment Value (1) $0.6 - 3.8 - - - $4.4 Year Ended October 31, 2013 Number of Communities 4 1 - 1 - - 6 Dollar Amount of Impairment (2) $2.4 - - - - - $2.4 Pre- Impairment Value (1) $7.7 0.1 - 0.4 - - $8.2 99 (Dollars in millions) Northeast Mid-Atlantic Midwest Southeast Southwest West Total Year Ended October 31, 2012 Number of Communities 10 3 2 12 - 5 32 Dollar Amount of Impairment $2.8 0.4 1.6 2.8 - 2.2 $9.8 Pre- Impairment Value (1) $19.6 0.8 4.5 8.3 - 4.9 $38.1 (1) (2) Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s impairments. During the year ended October 31, 2013, the Mid-Atlantic had an impairment totaling $2 thousand and the Southeast had an impairment totaling $17 thousand. 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 $4.0 million, $2.6 million and $2.7 million for the years ended October 31, 2014, 2013 and 2012, 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. The following table represents write-offs of such costs by segment for fiscal 2014, 2013 and 2012: (In millions) Northeast Mid-Atlantic Midwest Southeast Southwest West Total 14. Per Share Calculations Year Ended October 31, 2014 $0.9 0.2 1.0 0.7 1.2 - $4.0 2013 $0.7 0.1 0.2 0.2 1.4 - $2.6 2012 $0.7 0.6 0.2 0.7 0.4 0.1 $2.7 Basic earnings per share is computed by dividing net income (loss) (the “numerator”) by the weighted-average number of common shares outstanding, adjusted for nonvested shares of restricted stock (the “denominator”) for the period. The basic weighted-average number of shares included 6.1 million shares for the years ended October 31, 2014 and 2013 and 8.8 million shares for the year ended October 31, 2012 related to Purchase Contracts (issued as part of our 7.25% Tangible Equity Units) which shares, as discussed in Note 10, were issued upon settlement of the Purchase Contracts in February 2014. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and nonvested shares of restricted stock, as well as common shares issuable upon exchange of our Senior Exchangeable Notes issued as part of our 6.0% Exchangeable Note Units. 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 nonvested shares that contain nonforfeitable 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 (“nonvested shares”) is considered participating securities. 100 Basic and diluted earnings per share for the periods presented below were calculated as follows: (In thousands, except per share data) Numerator: Net earnings (loss) attributable to Hovnanian Less: undistributed earnings allocated to nonvested shares Numerator for basic earnings per share Plus: undistributed earnings allocated to nonvested shares Less: undistributed earnings reallocated to nonvested shares Plus: interest on senior exchangeable notes Numerator for diluted earnings per share Denominator: Denominator for basic earnings per share Effect of dilutive securities: Share-based payments Senior exchangeable notes Denominator for diluted earnings per share – weighted-average shares outstanding Basic earnings (loss) per share Diluted earnings (loss) per share Year Ended October 31, 2013 2014 $307,144 (7,107) $300,037 7,107 (7,127) 3,487 $303,504 $31,295 (58) $31,237 58 (59) 3,720 $34,956 2012 $(66,197) - $(66,197) - - - $(66,197) 146,271 145,087 126,350 1,013 15,157 162,441 $2.05 $1.87 1,396 15,846 162,329 $0.22 $0.22 - - 126,350 $(0.52) $(0.52) Incremental shares attributed to nonvested stock and outstanding options to purchase common stock of 0.2 million for the year ended October 31, 2012, 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 shares of common stock issuable upon the exchange of our senior exchangeable notes (which were issued in fiscal 2012) were excluded from the computation of diluted earnings per share because we had a net loss for the period. 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 2.0 million, 2.2 million and 2.5 million for the years ended October 31, 2014, 2013 and 2012, respectively, because to do so would have been anti-dilutive for the periods presented. 15. Capital Stock 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 March 12, 2013, the Company held its Annual Meeting of Shareholders at which the Company’s shareholders approved an increase in the Company’s authorized common stock from 200,000,000 shares of Class A Common Stock, par value $0.01 per share (“Class A Common Stock”), to 400,000,000 shares of Class A Common Stock, par value $0.01 per share, and from 30,000,000 shares of Class B Common Stock, par value $0.01 per share (“Class B Common Stock”), to 60,000,000 shares of Class B Common Stock, par value $0.01 per share. 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. 101 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 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 (NOL) carryforwards 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 NOLs 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. On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares of Class A Common Stock. There were no shares purchased during the year ended October 31, 2014. As of October 31, 2014, the maximum number of shares of Class A Common Stock that may yet be purchased under this program is 0.5 million. 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. 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 2014, 2013 and 2012, we did not pay any dividends on the Series A Preferred Stock due to covenant restrictions in our debt instruments. Retirement Plan - 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. In fiscal 2009, we suspended the employer match portion of the program. In fiscal 2013, the employer match portion of the program was reinstated. Plan costs charged to operations were $4.7 and $0.6 million for the years ended October 31, 2014 and October 31, 2013, respectively. There were no plan costs charged to operations in fiscal 2012, as forfeited unvested contributions were used to cover such costs. 102 16. Stock Plans 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 the years ended October 31, 2014, October 31, 2013 and October 31, 2012: risk free interest rate of 2.60 %, 2.14% and 1.65%, respectively; dividend yield of zero; historical volatility factor of the expected market price of our common stock of 0.70 for the year ended 2014, 0.96 for the year ended 2013 and 0.97 for the year ended 2012; a weighted-average expected life of the option of 7.42 years for 2014, 7.30 years for 2013 and 7.37 years for 2012; and an estimated forfeiture rate of 14.59% for fiscal 2014, 18.17% for fiscal 2013 and 15.99% for fiscal 2012. For the years ended October 31, 2014, 2013 and 2012, total stock-based compensation expense was $10.3 million (pre and post tax), $6.8 million (pre and post tax) and $6.5 million (pre and post tax), respectively. Included in this total stock-based compensation expense was incremental expense for stock options of $3.9 million, $4.0 million and $4.1 million for the years ended October 31, 2014, October 31, 2013 and October 31, 2012, respectively. We have a stock incentive plan for certain officers and key employees and directors. Options are granted by a committee appointed by the Board of Directors or its delegee in accordance with the stock incentive 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, 2014, 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. Four selected to receive restricted stock units, and one selected 50% restricted stock units and 50% stock options. Non-employee directors’ options or restricted stock 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: October 31, 2014 Weighted- Average Exercise Price October 31, 2013 6,591,054 376,822 42,375 56,375 148,875 $5.74 $4.41 $2.74 $2.66 $27.42 6,019,070 887,500 44,812 76,500 194,204 Weighted- Average Exercise October 31, Price 2012 $5.97 $6.28 $2.67 $3.06 $16.92 5,094,367 1,334,828 6,250 94,808 309,067 Weighted- Average Exercise Price $7.05 $2.59 $2.55 $4.77 $9.61 Options outstanding at beginning of period Granted Exercised Forfeited Expired Options outstanding at end of period 6,720,251 $5.23 6,591,054 $5.74 6,019,070 $5.97 Options exercisable at end of period 4,100,413 3,161,952 2,467,170 The total intrinsic value of options exercised during fiscal 2014, 2013 and 2012 was $105 thousand, $167 thousand and $8 thousand, 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. At October 31, 2014, 2.2 million options outstanding and exercisable had an intrinsic value of $2.9 million. Exercise prices for options outstanding at October 31, 2014 ranged from $1.93 to $60.36. The weighted-average fair value of grants made in fiscal 2014, 2013 and 2012 was $3.06 , $5.14 and $1.74 per share, respectively. Based on the fair value at the time they were granted, the weighted-average fair value of options vested in fiscal 2014, 2013 and 2012 was $2.09, $2.72 and $3.61 per share, respectively. 103 The following table summarizes the exercise price range and related number of options outstanding at October 31, 2014: 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 Number Outstanding 4,672,501 1,690,250 - 218,375 104,125 - 30,000 5,000 6,720,251 Weighted- Average Exercise Price $3.07 $6.37 $- $21.73 $32.33 $- $54.70 $60.36 $5.23 Weighted- Average Remaining Contractual Life 6.35 6.29 - 2.58 1.58 - 0.36 0.58 6.11 The following table summarizes the exercise price range and related number of exercisable options at October 31, 2014: 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 $3.02 $6.46 $- $21.73 $32.33 $- $54.70 $60.36 $5.88 Weighted- Average Remaining Contractual Life 5.55 3.67 - 2.58 1.58 - 0.36 0.58 4.88 Number Exercisable 2,940,163 802,750 - 218,375 104,125 - 30,000 5,000 4,100,413 Officers and key associates who are eligible to receive equity grants may elect to receive either a stated number of stock options, or a reduced number of shares of restricted stock units, or a combination thereof. Shares underlying restricted stock units vest 25% each year beginning on the second anniversary of the grant date. Participants aged 60 years or older, or aged 58 with 15 years of service, are eligible to vest in their equity awards on an accelerated basis on their retirement (which in the case of the restricted stock units only applies to a retirement that is at least one year after the date of grant). During the years ended October 31, 2014, 2013 and 2012, we granted 168,161 (including 85,035 shares to certain of our non-employee directors), 104,944 (including 63,694 shares to certain of our non-employee directors) and 133,855 (including 104,167 shares to certain of our non-employee directors) restricted stock units, respectively, and also issued 67,804, 46,393 and 32,112 shares, relating to awards granted in prior fiscal years, respectively. During the years ended October 31, 2014, 2013 and 2012, 12,000, 500 and 9,845 restricted stock units were forfeited, respectively. Through fiscal 2008, for certain associates, a portion of their bonus was 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 who were over 58 years of age vest immediately. No deferred rights in lieu of bonus payments were awarded during fiscal 2014, 2013 or 2012. During the years ended October 31, 2013 and 2012, we issued 68,390 and 258,228 shares relating to awards granted in prior fiscal years, respectively. 104 For the years ended October 31, 2014, 2013 and 2012 total compensation cost recognized in the Consolidated Statement of Operations for the annual restricted stock unit grants, market share unit grants and the stock portion of the long term incentive plan was $6.2 million, $2.7 million and $2.4 million, respectively. In addition to nonvested share awards summarized in the following table, there were 534,143 vested share awards at October 31, 2014, 2013 and 2012 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, 2014, is as follows: Nonvested at beginning of period Granted Vested Forfeited Nonvested at end of period Weighted- Average Grant Date Fair Value $5.10 $4.36 $4.60 $1.93 $5.02 Shares 2,463,647 878,834 (874,343) (9,000) 2,459,138 Included in the above table are awards for the share portion of 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 a decrease of 0.1 million shares, which is reflected in the granted row on the above table. Also included in the table above are 800,000 target Market Share Units (“MSUs”) which were granted to certain officers during 2014. Fifty percent of the MSUs will vest in four equal annual installments, commencing on the second anniversary of the grant date subject to stock price performance conditions, pursuant to which the actual number of shares issuable with respect to vested MSUs may range from 0% to 175% of the target number of shares covered by the MSU awards, generally depending on the growth in the 60-day average trading price of the Company’s shares during the period between the grant date and the relevant vesting dates. The remaining fifty percent of the MSUs are also subject to financial performance conditions in addition to the stock price performance conditions applicable to all MSUs. These additional performance-based MSUs vest in four equal installments with the first installment vesting on January 1, 2017 and the remaining annual installments commencing on the third anniversary of the grant date, except that no portion of the award will vest unless the Committee determines that the Company achieved specified total revenue growth goals in fiscal 2016 compared to fiscal 2014. The fair value of the MSU grants is determined using the Monte-Carlo simulation model, which simulates a range of possible future stock prices and estimates the probabilities of the potential payouts. This model uses the average closing trading price of the Company’s Class A Common Stock on the New York Stock Exchange over the 60 calendar day period ending on the grant date. This model also incorporates the following ranges of assumptions: ● The expected volatility is based on our stock’s historical volatility commensurate with the life of each vesting traunche (2 year, 2.5 year, 3 year, 4 year and 5 years). ● The risk –free interest rate is based on the U.S. Treasury rate assumption commensurate with the life of each vesting traunche from 2-5 years. ● The expected dividend yield is not applicable since we do not currently pay dividends. The following assumptions were used for fiscal 2014 MSU Grants: historical volatility factors of the expected market price of our common stock of 47.52%, 58.07%, 63.79%, 61.12% and 64.67% for the 2 year, 2.5 year, 3 year, 4 year and 5 year vesting traunches, respectively; risk free interest rates of 0.45%, 0.71%, 0.93%, 1.32% and 1.70% for each vesting traunche, respectively; and dividend yield of zero for all time periods. As of October 31, 2014, we had 5.5 million shares authorized for future issuance under our equity compensation plans. In addition, as of October 31, 2014, there were $12.4 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 two years. 105 17. Warranty Costs General liability insurance for homebuilding companies and their suppliers and subcontractors is very difficult to obtain. The availability of general liability insurance is 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. To date, we have been able to obtain general liability insurance but at higher premium costs with higher deductibles. Our subcontractors and suppliers have advised us that they have also had difficulty obtaining insurance that also provides us coverage. As a result, we have an owner controlled insurance program for certain of our subcontractors, whereby the subcontractors pay us an insurance premium (through a reduction of amounts we would otherwise owe such subcontractors for their work on our homes) based on the risk type of the trade. We absorb the liability associated with their work on our homes as part of our overall general liability insurance at no additional cost to us because our existing general liability and construction defect insurance policy and related reserves for amounts under our deductible covers construction defects regardless of whether we or our subcontractors are responsible for the defect. For the fiscal years ended October 31, 2014 and 2013, we received $2.3 million and $2.2 million, respectively, from subcontractors related to the owner controlled insurance program, which we accounted for as a reduction to inventory. We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible. This accrual is expensed as selling, general and administrative costs. For homes delivered in fiscal 2014 and 2013, 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 2014 and 2013 is $0.25 million, up to a $5 million limit. Our aggregate retention in fiscal 2014 and 2013 is $21 million for construction defect, warranty and bodily injury claims. In addition, we establish a warranty accrual for lower cost related issues to cover home repairs, community amenities, and land development infrastructure that are not covered under our general liability and construction defect policy. We accrue an estimate for these 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. Additions and charges in the warranty reserve and general liability reserve for the fiscal years ended October 31, 2014 and 2013 were as follows: (In thousands) Balance, beginning of period Additions – Selling, general and administrative Additions – Cost of sales Charges incurred during the period Changes to pre-existing reserves Additional reserves where corresponding amounts are recorded as receivables from insurance carriers Balance, end of period Year Ended October 31, 2014 2013 $131,028 18,839 11,115 (18,241 ) (2,600 ) 37,867 $178,008 $121,149 18,676 13,529 (22,511) 185 - $131,028 Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical warranty and construction defect data, worker’s compensation data, and other industry 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 $6.4 million and $9.7 million for the fiscal years ended October 31, 2014 and 2013, respectively, for prior year deliveries. For the fiscal year ended October 31, 2014, we settled a construction defect claims relating to the Northeast and West segments which made up the majority of the payments. For the year ended October 31, 2013, payments were made up of a number of smaller construction defect claims, primarily in the Northeast. Additional reserves related to claims that are expected to be recovered from insurance carriers of $37.9 million were recorded in fiscal 2014, which were comprised of claims where we exceeded our deductible in those years. When reserves for claims are recorded, the portion that is probable for recovery from insurance carriers is recorded as a receivable. As a result, there was no impact to the Consolidated Statement of Operations for these reserves. 106 18. 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. We took ownership of the final lots in December 2013, and in accordance with ASC 810-10, we no longer have any balances consolidated under “Consolidated inventory not owned” in the Consolidated Balance Sheets. 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 years ended October 31, 2014, 2013, and 2012, 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 $1.2 million, $0.8 million and $0.9 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. In November 2012, one of our joint ventures in which the Company has a 50% interest, sold an option to acquire a parcel of land for approximately $5.5 million. The total cost to the buyer was approximately $11.1 million and on which the commission was paid. John Pellerito, the son of Mr. Pellerito, one of the Company’s executive officers, was employed by the brokerage firm that handled the transaction and received $145,710 as a commission in connection with the transaction. Mr. Pellerito did not have a financial interest in the brokerage firm involved in the transaction nor did he receive any portion of the commission paid to his son. Ms. Jovanna Pellerito, the daughter-in-law of Mr. Pellerito, one of our executive officers, was employed by the Company and, in fiscal 2014 and 2013, her total compensation, including salary, commissions and other benefits, totaled approximately $96,000 and $172,000, respectively. Her compensation was commensurate with that of similarly situated employees in her position. Ms. Pellerito left the employ of the Company in May 2014. The Company has a significant interest in the amount of estate tax liabilities and any necessary sales by the Estate of Kevork S. Hovnanian, deceased, and other members of the Hovnanian family of their assets (which includes a significant amount of shares of the Company’s Class A Common Stock and Class B Common Stock) to pay such liabilities because the benefit of federal net operating loss carryforwards (“NOLs”) to the Company would be significantly reduced or eliminated if we were to experience an “ownership change” as defined in Section 382 of the Internal Revenue Code. Based on recent impairments and current financial performance, the Company has generated NOLs of approximately $1.5 billion through the fiscal year ended October 31, 2013, and may generate NOLs in future years. During fiscal 2013, an outside law firm was retained to advise the Executors of the Estate and other members of the Hovnanian family in connection with estate tax planning. The fees and other charges of such legal services were incurred in fiscal 2013 and totaled $249,653, of which (1) the Company and (2) the Estate and Hovnanian family each paid half. Kevork S. Hovnanian was the founder and former Chairman of our Company. Our current Chairman of the Board and Chief Executive Officer and other members of his immediate family are Executors and among the beneficiaries of the will of Kevork S. Hovnanian. 19. 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, including those regulating the emission or discharge of materials into the environment, the management of stormwater runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing (“environmental laws”). 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. In addition, noncompliance with these laws and regulations could result in fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses. 107 In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during the 1990s. We understand that the development is in the vicinity of a former lead smelter and that recent tests on soil samples from properties within the development conducted by the EPA show elevated levels of lead. We also understand that the smelter ceased operations many years before the Company entity involved acquired the properties in the area and carried out the re-development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us a potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We have begun preliminary discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company's obligations, if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a material impact on the Company. The EPA requested additional information in April 2014 and the Company has responded to its information request. We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot reliably predict the extent of any effect these requirements may have on us, 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 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. (collectively, the “Company Defendants”) 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. The Company Defendants filed a request to take an interlocutory appeal regarding the class certification decision. The Appellate Division denied the request, and the Company Defendants 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 Appellate Division, on remand, heard oral arguments on December 4, 2012, reviewing the Superior Court’s original finding of class certification. On June 18, 2013, the Appellate Division affirmed class certification. On July 3, 2013, the Company Defendants appealed the June 2013 Appellate Division’s decision to the New Jersey Supreme Court, which elected not to hear the appeal on October 22, 2013. The plaintiff class was seeking unspecified damages as well as treble damages pursuant to the NJ Consumer Fraud Act. The Company Defendants’ motion to consolidate an indemnity action they filed against various manufacturer and sub- contractor defendants to require these parties to participate directly in the class action was denied by the Superior Court; however, the Company Defendants’ separate action seeking indemnification against the various manufacturers and subcontractors implicated by the class action is ongoing. The Company Defendants, the Company Defendants’ insurance carriers and the plaintiff class agreed to the terms of a settlement on May 15, 2014 in which the plaintiff class will receive a payment of $21 million in settlement of all claims, with the majority of the settlement being funded by the Company Defendants’ insurance carriers. The settlement agreement is being negotiated and is subject to Court approval. The Company has fully reserved for its share of the settlement. 20. 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 (“VIE”) 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 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 108 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, 2014 and 2013, 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, 2014, we had total cash and letters of credit deposits amounting to $88.5 million to purchase land and lots with a total purchase price of $1.4 billion. The maximum exposure to loss with respect to our land and lot options is limited to the deposits plus any pre-development costs invested in the property, although some deposits are refundable at our request or refundable if certain conditions are not met. 21. 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 home buyers. Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties. The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method. (Dollars in thousands) 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 Homebuilding October 31, 2014 Land Development $22,415 208,620 11,986 $243,021 $27,175 45,506 72,681 59,106 111,234 170,340 $243,021 21% $205 16,194 - $16,399 $1,039 5,650 6,689 2,990 6,720 9,710 $16,399 37% Total $22,620 224,814 11,986 $259,420 $28,214 51,156 79,370 62,096 117,954 180,050 $259,420 22% 109 (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 Homebuilding October 31, 2013 Land Development $30,102 101,735 6,868 $138,705 $28,016 23,904 51,920 44,141 42,644 86,785 $138,705 22% $639 11,080 - $11,719 $4,047 - 4,047 2,703 4,969 7,672 $11,719 0% Total $30,741 112,815 6,868 $150,424 $32,063 23,904 55,967 46,844 47,613 94,457 $150,424 20% As of October 31, 2014 and 2013, we had advances outstanding of approximately $1.8 million and $4.6 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 $63.9 million and $51.4 million at October 31, 2014 and 2013, respectively. (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 income Our share of net income (Dollars in thousands) Revenues Cost of sales and expenses Joint venture net income Our share of net income For The Twelve Months Ended October 31, 2014 Land Development Homebuilding $173,126 (158,233) $14,893 $7,710 $7,888 (7,313) $575 $287 For The Twelve Months Ended October 31, 2013 Land Development Homebuilding $307,993 (276,795) $31,198 $9,581 $14,659 (9,396) $5,263 $2,631 For The Twelve Months Ended October 31, 2012 Land Development Homebuilding $323,177 (300,892) $22,285 $4,763 $11,531 (9,318) $2,213 $1,108 Total $181,014 (165,546) $15,468 $7,997 Total $322,652 (286,191) $36,461 $12,212 Total $334,708 (310,210) $24,498 $5,871 “Income 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 income or loss from these unconsolidated joint ventures in the tables above compared to the Consolidated Statements of Operations is due primarily to the reclassification of the intercompany portion of management fee income from certain joint ventures (discussed below) and the deferral of income for lots 110 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 $7.5 million, $13.2 million and $15.2 million for the years ended October 31, 2014, 2013 and 2012, 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. Including the impact of impairments recorded by the joint ventures, the total debt to capitalization ratio of all our joint ventures is currently 22%. 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 810-10 “Consolidation – Overall” 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. 22. Fair Value of Financial Instruments ASC 820, "Fair Value Measurements and Disclosures," 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, 2014 Fair Value at October 31, 2013 Level 2 Level 2 Level 2 $95,643 15 (320) $95,338 $113,739 369 (1,155) $112,953 (1) The aggregate unpaid principal balance is $91.2 million and $107.7 million at October 31, 2014 and 2013, respectively. We elected the fair value option for our loans held for sale for mortgage loans originated subsequent to October 31, 2008, in accordance with ASC 825, “Financial Instruments,” 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. 111 The Financial Services segment had a pipeline of loan applications in process of $428.5 million at October 31, 2014. Loans in process for which interest rates were committed to the borrowers totaled approximately $35.6 million as of October 31, 2014. 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 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, 2014, the segment had open commitments amounting to $20.0 million to sell MBS with varying settlement dates through December 11, 2014. 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. The changes in fair values that are included in income are shown, by financial instrument and financial statement line item, below: (In thousands) Year Ended October 31, 2014 Mortgage Loans Held for Sale Interest Rate Lock Commitments Forward Contracts Changes in fair value included in net income (loss) all reflected in financial services revenues $(1,518) $(354) $835 (In thousands) Year Ended October 31, 2013 Mortgage Loans Held for Sale Interest Rate Lock Commitments Forward Contracts Changes in fair value included in net income (loss) all reflected in financial services revenues $1,604 $378 $(1,276) (In thousands) Year Ended October 31, 2012 Mortgage Loans Held for Sale Interest Rate Lock Commitments Forward Contracts Changes in fair value included in net income (loss) all reflected in financial services revenues $(572) $(151) $1,216 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, 2014 and 2013. 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, 2014 Fair Value Hierarchy Pre- Impairment Amount Total Losses Fair Value Sold and unsold homes and lots under development Land and land options held for future development or sale Level 3 Level 3 $3,841 $572 $(900) $(278) $2,941 $294 112 Nonfinancial Assets (In thousands) Year Ended October 31, 2013 Fair Value Hierarchy Pre- Impairment Amount Total Losses Fair Value Sold and unsold homes and lots under development Land and land options held for future development or sale Level 3 Level 3 $7,302 $924 $(2,249) $(136) $5,053 $788 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 $1.2 million, $2.4 million and $9.8 million for the years ended October 31, 2014, 2013 and 2012, respectively. See Note 13 for a further discussion of communities evaluated for impairment. The fair value of our cash equivalents and restricted cash and cash equivalents approximates their carrying amount, based on Level 1 inputs. The fair value of each series of the senior unsecured notes (other than the 7.0% Senior Notes due 2019 (the “2019 Notes”), the senior exchangeable notes and the senior amortizing 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, which are Level 2 measurements. The fair value of the senior unsecured notes (all series in the aggregate), other than the 2019 Notes, senior exchangeable notes and senior amortizing notes, was estimated at $464.4 million as of October 31, 2014. As of October 31, 2014, the senior subordinated amortizing notes were no longer outstanding. As of October 31, 2013, the fair value of the senior unsecured notes (all series in the aggregate), other than the senior exchangeable notes and senior amortizing notes, and senior subordinated amortizing notes was estimated at $493.4 million and $2.2 million, respectively. The fair value of each of the 2019 Notes, the senior secured notes (all series in the aggregate), the senior amortizing notes and the senior exchangeable notes is estimated based on third-party broker quotes, a Level 3 measurement. The fair value of the 2019 Notes, senior secured notes (all series in the aggregate), the senior amortizing notes and the senior exchangeable notes was estimated at $148.2 million, $1.0 billion, $17.0 million and $79.6 million, respectively, as of October 31, 2014. As of October 31, 2013, the fair value of the senior secured notes (all series in the aggregate), senior amortizing notes and senior exchangeable notes was estimated at $1.0 billion, $20.9 million and $86.8 million, respectively. The 2019 Notes were not issued as of October 31, 2013. 23. Financial Information of Subsidiary Issuer and Subsidiary Guarantors Hovnanian Enterprises, Inc., the parent company (the “Parent”), is the issuer of publicly traded common stock and preferred stock, which is represented by depository shares. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the “Subsidiary Issuer”), acts as a finance entity that, as of October 31, 2014, had issued and outstanding approximately $992.0 million of senior secured notes ($979.9 million, net of discount), $591.1 million senior notes ($590.5 million, net of discount) and $17.0 million senior amortizing notes and $70.1 million senior exchangeable notes (issued as components of our 6.0% Exchangeable Note Units). The senior secured notes, senior notes, senior amortizing notes and senior exchangeable notes are fully and unconditionally guaranteed by the Parent. 113 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 and senior amortizing notes. The Guarantor Subsidiaries are directly or indirectly 100% owned subsidiaries of the Parent. The 2021 Notes are guaranteed by the Guarantor Subsidiaries and the members of the Secured Group (see Note 9). The senior unsecured notes (except for the 2019 Notes), senior amortizing notes and senior exchangeable notes have been registered under the Securities Act of 1933, as amended. The 2019 Notes, 2020 Secured Notes and the 2021 Notes (see Note 9) are not, pursuant to the indentures under which such notes were issued, required to be registered. The Consolidating Financial Statements presented below are in respect of our registered notes only and not the 2019 Notes, 2020 Secured Notes or the 2021 Notes (however, the Guarantor Subsidiaries for the 2019 Notes and the 2020 Secured Notes are the same as those represented by the accompanying Consolidating Financial Statements). In lieu of providing separate financial statements for the Guarantor Subsidiaries of our registered notes, we have included the accompanying Consolidating 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. CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2014 (In thousands) Assets: Homebuilding Financial services Income taxes receivable Intercompany receivable (payable) Investments in and amounts due from consolidated subsidiaries Total assets Liabilities and equity: Homebuilding Financial services Notes payable Intercompany payable (receivable) Amounts due to consolidated subsidiaries Stockholders’ (deficit) equity Noncontrolling interest in consolidated joint ventures Parent Subsidiary Issuer Guarantor Subsidiaries Nonguarantor Subsidiaries Eliminations Consolidated $- $195,177 $1,336,716 11,407 40,152 244,391 $353,151 108,936 $- 1,275,453 36,161 (1,311,614 ) $1,885,044 120,343 284,543 - 338,044 $244,391 $1,470,630 $1,726,319 (338,044 ) $498,248 $(1,649,658 ) - $2,289,930 $2,842 $160 1,685,892 308,700 50,648 (117,799) 11,902 (227,324) $544,088 11,210 3,336 1,002,914 $71,663 87,987 551 $- (1,311,614 ) $618,753 99,197 1,689,779 - 164,771 338,047 (62,550 ) (275,494 ) - (117,799) - $2,289,930 Total liabilities and equity $244,391 $1,470,630 $1,726,319 $498,248 $(1,649,658 ) 114 CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2013 (In thousands) Assets: Homebuilding Financial services Intercompany receivable Investments in and amounts due to and from consolidated subsidiaries Total assets Liabilities and equity: Homebuilding Financial services Notes payable Intercompany payable Income taxes payable (receivable) Stockholders’ (deficit) equity Non-controlling interest in Parent Subsidiary Issuer Guarantor Subsidiaries Nonguarantor Subsidiaries Eliminations Consolidated $- $277,800 $1,020,435 14,570 1,093,906 $312,042 $ 134,283 14,489 $1,610,277 148,853 - (1,108,395) (62,298) 286,216 $(62,298) $1,373,981 $1,321,221 2,275 - $460,814 $(1,334,588) $1,759,130 (226,193) $3,798 $491 1,555,336 326,262 40,868 (433,226) (181,846) $437,767 14,789 2,276 805,774 (37,567) 98,182 $64,329 $ 109,748 94 (1,132,036) 286,216 (202,552) $506,385 124,537 1,557,706 - 3,301 (433,226) consolidated joint ventures Total liabilities and equity $(62,298) $1,373,981 $1,321,221 427 427 $460,814 $(1,334,588) $1,759,130 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2014 Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Eliminations Consolidated (In thousands) Revenues: Homebuilding Financial services Intercompany income Total revenues Expenses: Homebuilding Financial services Intercompany charges 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 income (loss) from $25 25 3,286 20 3,306 $- $1,651,343 9,572 $369,598 32,842 100,878 100,878 131,730 131,730 (1,155) 1,660,915 402,440 1,549,659 6,832 100,878 1,657,369 336,651 21,764 358,415 (3,281) (32,007) 94 3,640 7,803 51,828 - (298,775) (908) 12,719 $- (100,878 ) (100,878 ) $2,020,966 42,414 - 2,063,380 (100,878 ) (100,878 ) 2,021,326 28,616 - 2,049,942 (1,155) 7,897 20,180 (286,964) subsidiaries Net income (loss) 11,650 $307,144 (14,177) $(45,276) 51,828 $42,749 $51,828 (49,301 ) $(49,301 ) - $307,144 115 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2013 (In thousands) Revenues: Homebuilding Financial services Intercompany charges Total revenues Expenses: Homebuilding Financial services Total expenses (Loss) gain on extinguishment of debt Income from unconsolidated joint ventures (Loss) income before income taxes State and federal income tax (benefit) provision Equity in income (loss) from subsidiaries Net income (loss) Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Eliminations Consolidated $3 3 $(235) $1,497,016 9,386 (104,212) 1,402,190 81,816 81,581 $311,730 38,341 (2,325) 347,746 $(4,988) $1,803,526 47,727 - 1,851,253 24,721 19,733 8,608 17 8,625 123,511 123,511 1,373,360 6,721 1,380,081 295,390 22,321 317,711 10,670 10,670 1,811,539 29,059 1,840,598 (770,769) 770,009 2,327 9,713 (760) 12,040 (8,622) (812,699) 794,445 39,748 9,063 21,935 (21,541) 12,181 (9,360) 18,376 $31,295 (11,514) $(824,213) 39,748 $822,012 $39,748 (46,610) $(37,547) - $31,295 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR 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 Subsidiary Parent Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Eliminations Consolidated $9 9 $(270) $1,364,733 8,082 (120,094) 98,805 98,535 1,252,721 $87,124 30,653 (3,590) 114,187 $(4,978) $1,446,618 38,735 - 1,485,353 24,879 19,901 3,030 (28) 3,002 150,297 1,300,728 5,737 150,297 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) subsidiaries Net (loss) income (80,699) (1,521) $(66,197) $(82,349) 21,153 $(14,450) $21,153 61,067 $75,646 - $(66,197) 116 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 2014 (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 Parent $307,144 (277,932) Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Eliminations Consolidated $(45,276) $42,749 $51,828 $(49,301) $307,144 14,334 (303,507) 20,075 49,301 (497,729) 29,212 (30,942) (260,758) 71,903 - (190,585) Net cash provided by (used in) operating activities Cash flows from investing activities: Proceeds from sale of property and assets Purchase of property, equipment, and other fixed assets and acquisitions (Increase) in restricted cash related to mortgage company Investment in and advances to unconsolidated joint ventures Distributions of capital from unconsolidated joint ventures Intercompany investing activities Net cash (used in) provided by investing activities Cash flows from financing activities: Net proceeds from mortgages and notes Net proceeds from model sale leaseback financing programs Net payments from land bank financing programs Net proceeds from senior notes Net payments related to mortgage warehouse lines of credit Deferred financing cost from land banking financing program and note issuances Intercompany financing activities Net cash (used in) provided by 467 48 (3,395) (28) (655) (95) (831) (20,773) 203 (167,370) 3,787 7,117 167,370 515 (3,423) (655) (21,699) 11,107 - - (167,262) 28 (14,291) 167,370 (14,155) 39,345 1,425 17,232 1,982 (8,297) (9,009) (14,744) 121,447 40,770 19,214 (17,306) 121,447 (14,744) (29,212) (7,205) (4,051) 218,254 (691) (21,672) (167,370) (11,947) - financing activities (29,212) 114,242 262,483 (42,709) (167,370) 137,434 Net (decrease) increase in cash and cash equivalents Cash and cash equivalents balance, beginning of period Cash and cash equivalents balance, end of period - (83,962) 1,753 14,903 - (67,306) 243,470 (6,479) 92,213 329,204 $- $159,508 $(4,726) $107,116 $- $261,898 117 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 2013 (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 provided by investing activities Net cash (used in) provided by financing activities Intercompany financing activities - net Net increase (decrease) in cash Cash and cash equivalents Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Eliminations Consolidated $31,295 $(824,213) $822,012 $39,748 $(37,547) $31,295 29,653 797,892 (875,287) (11,832) 37,547 (22,027) 60,948 (26,321) (53,275) 27,916 235 11,819 18,231 (6,139) 52,914 (30,356) (60,948) - 78,598 46,373 (15,920) (4,462) (1,730) 14,061 - - - - - - 9,268 30,285 16,419 - 55,972 273,232 balance, beginning of period - 197,097 (2,017) 78,152 Cash and cash equivalents balance, end of period $- $243,470 $(6,479) $92,213 $- $329,204 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 2012 (In thousands) Cash flows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities Net cash (used in) provided by Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Eliminations Consolidated $(66,197) $(82,349) $(14,450) $21,153 $75,646 $(66,197) 37,030 53,114 124,875 (140,174) (75,646) (801) operating activities (29,167) (29,235) 110,425 (119,021) Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Intercompany financing activities - 146 (3,260) 1,614 47,221 (79,976) 49,670 74,075 - net (18,054) 194,040 84,975 (153,863) 2,972 (22,123) (65,455) 112,122 (4,989) 143,607 - - Net increase (decrease) in cash Cash and cash equivalents balance, beginning of period Cash and cash equivalents balance, end of period - - - - - - (66,998) (1,500) 90,990 - 22,492 250,740 $- $197,097 $(2,017) $78,152 $- $273,232 118 24. Unaudited Summarized Consolidated Quarterly Information Summarized quarterly financial information for the years ended October 31, 2014 and 2013 is as follows: (In thousands, except per share data) Revenues Expenses Inventory impairment loss and land option write-offs Loss on extinguishment of debt Income from unconsolidated joint ventures Income (loss) before income taxes State and federal income tax (benefit) provision Net income (loss) Per share data: Basic: Income (loss) per common share Weighted-average number of common shares outstanding Assuming dilution: October 31, 2014 $698,394 663,149 3,297 - 4,048 35,996 (286,468) $322,464 Three Months Ended July 31, 2014 $551,009 535,107 741 - 211 15,372 (1,733) $17,105 April 30, 2014 $449,929 456,617 522 (1,155) 1,067 (7,298) 604 $(7,902) January 31, 2014 $364,048 389,845 664 - 2,571 (23,890) 633 $(24,523) $2.15 $0.11 $(0.05) $(0.17) 146,413 146,365 146,325 145,982 Income (loss) per common share Weighted-average number of common shares outstanding $1.95 161,720 $0.11 162,278 $(0.05) 146,325 $(0.17) 145,982 (In thousands, except per share data) Revenues Expenses Inventory impairment loss and land option write-offs (Loss) gain on extinguishment of debt Income from unconsolidated joint ventures Income (loss) before income taxes State and federal income tax provision (benefit) Net income (loss) Per share data: Basic: Income (loss) per common share Weighted-average number of common shares outstanding Assuming dilution: Income (loss) per common share Weighted-average number of common shares outstanding 25. Subsequent Events October 31, 2013 $591,687 561,061 1,486 (760) 5,234 33,614 795 $32,819 Three Months Ended July 31, 2013 $478,357 471,036 623 - 3,690 10,388 1,922 $8,466 April 30, 2013 $422,998 422,899 2,191 - 827 (1,265) (2,583) $1,318 January 31, 2013 $358,211 380,637 665 - 2,289 (20,802) (9,494) $(11,308) $0.22 $0.06 $0.01 $(0.08) 145,821 146,056 145,948 141,725 $0.21 162,100 $0.06 162,823 $0.01 147,231 $(0.08) 141,725 On November 5, 2014, K. Hovnanian issued $250.0 million aggregate principal amount of 8.0% Senior Notes due 2019, resulting in net proceeds of $245.7 million. These proceeds will be used for general corporate purposes, including land acquisition and development. The notes will mature on November 1, 2019. The notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to August 1, 2019 at a redemption price equal to 100% of their principal amount plus an applicable “Make-Whole Amount.” At any time and from time to time on or after August 1, 2019, K. Hovnanian may also redeem some or all of the notes to a redemption price equal to 100% of their principal amount. 119 (This page has been left blank intentionally.) (This page has been left blank intentionally.) [This page intentionally left blank] [This page intentionally left blank] (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, 2014 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, 2009 for the preparation of the five year graph. Note: The stock price performance shown on the following graph is not necessarily indicative of future stock performance. $300 $250 $200 $150 $100 $50 $0 10/09 Hovnanian Enterprises, Inc. S&P 500 S&P Homebuilding 10/10 10/11 10/12 10/13 10/14 *$100 invested on 10/31/09 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 30 Rockefeller Plaza New York, NY 10112-0015 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 Vincent Pagano Jr. 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 10, 2015,10:30 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 Paul Marabella 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 BR442487-0310-AR

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