XNYS:HOV Hovnanian Enterprises Inc Quarterly Report 10-Q Filing - 4/30/2012

Effective Date 4/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q
 
(Mark One)
[ X ]           Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For quarterly period ended APRIL 30, 2012
OR

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

Commission file number 1-8551

Hovnanian Enterprises, Inc. (Exact Name of Registrant as Specified in Its Charter)

Delaware (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, NJ  07701 (Address of Principal Executive Offices)

732-747-7800 (Registrant's Telephone Number, Including Area Code)

N/A  (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 [ X ]    No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ X ]  No [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [   ]  Accelerated Filer  [ X ]
Non-Accelerated Filer  [   ]  (Do not check if smaller reporting company)   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 [ X ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 112,106,217 shares of Class A Common Stock and 14,659,953 shares of Class B Common Stock were outstanding as of June 4, 2012.
 
 
1

 
 
HOVNANIAN ENTERPRISES, INC.
 
   
FORM 10-Q
 

INDEX
PAGE
NUMBER
   
PART I.  Financial Information
 
Item l.  Financial Statements:
 
   
Condensed Consolidated Balance Sheets as of April 30, 2012 (unaudited) and October 31, 2011
3
   
Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended April 30, 2012 and 2011
5
   
Condensed Consolidated Statement of Equity (unaudited) for the six months ended April 30, 2012
6
   
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended April 30, 2012 and 2011
7
   
Notes to Condensed Consolidated Financial Statements (unaudited)
9
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
29
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
55
   
Item 4.  Controls and Procedures
56
   
PART II.  Other Information
 
Item 1.  Legal Proceedings
56
   
Item 1A.  Risk Factors
56
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
57
   
Item 6.  Exhibits
57
   
Signatures
59
 
 
2

 
 
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
 
   
April 30,
2012
   
October 31,
2011
 
   
(Unaudited)
      (1)  
ASSETS
             
               
Homebuilding:
             
Cash and cash equivalents
  $ 195,158     $ 244,356  
                 
Restricted cash
    48,249       73,539  
                 
Inventories:
               
Sold and unsold homes and lots under development
    690,608       720,149  
                 
Land and land options held for future development or sale
    228,487       245,529  
                 
Consolidated inventory not owned:
               
   Specific performance options
    -       2,434  
           Model sale leaseback financing programs
    27,041       -  
                 
           Total consolidated inventory not owned
    27,041       2,434  
                 
         Total inventories
    946,136       968,112  
                 
Investments in and advances to unconsolidated joint ventures
    60,512       57,826  
                 
Receivables, deposits, and notes
    53,847       52,277  
                 
Property, plant, and equipment – net
    51,239       53,266  
                 
Prepaid expenses and other assets
    63,953       67,698  
                 
Total homebuilding
    1,419,094       1,517,074  
                 
Financial services:
               
Cash and cash equivalents
    11,859       6,384  
Restricted cash
    8,908       4,079  
Mortgage loans held for sale
    75,077       72,172  
Other assets
    3,005       2,471  
                 
Total financial services
    98,849       85,106  
                 
Total assets
  $ 1,517,943     $ 1,602,180  

(1)  Derived from the audited balance sheet as of October 31, 2011.

See notes to condensed consolidated financial statements (unaudited).
 
3

 
 
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
   
April 30,
2012
   
October 31,
2011
 
   
(Unaudited)
      (1)  
LIABILITIES AND EQUITY
             
               
Homebuilding:
             
Nonrecourse land mortgages
  $ 28,089     $ 26,121  
Accounts payable and other liabilities
    275,615       303,633  
Customers’ deposits
    20,996       16,670  
Nonrecourse mortgages secured by operating properties
    19,269       19,748  
Liabilities from inventory not owned
    26,695       2,434  
                 
Total homebuilding
    370,664       368,606  
                 
Financial services:
               
Accounts payable and other liabilities
    20,128       14,517  
Mortgage warehouse line of credit
    64,530       49,729  
                 
Total financial services
    84,658       64,246  
                 
Notes payable:
               
Senior secured notes
    967,156       786,585  
Senior notes
    481,373       802,862  
TEU senior subordinated amortizing notes
    7,891       13,323  
Accrued interest
    18,050       21,331  
                 
Total notes payable
    1,474,470       1,624,101  
                 
Income taxes payable
    42,935       41,829  
                 
Total liabilities
    1,972,727       2,098,782  
                 
Equity:
               
Hovnanian Enterprises, Inc. stockholders’ equity deficit:
               
Preferred stock, $.01 par value - authorized 100,000 shares; issued 5,600 shares with a liquidation preference of $140,000 at April 30, 2012 and at October 31, 2011
    135,299       135,299  
Common stock, Class A, $.01 par value – authorized 200,000,000 shares; issued 123,846,752 shares at April 30, 2012 and 92,141,492 shares at October 31, 2011 (including 11,760,763 and 11,694,720 shares at April 30, 2012 and October 31, 2011, respectively, held in Treasury)
    1,238       921  
Common stock, Class B, $.01 par value (convertible to Class A at time of sale) – authorized 30,000,000 shares; issued 15,351,701 shares at April 30, 2012 and 15,252,212 shares at October 31, 2011 (including 691,748 shares at April 30, 2012 and October 31, 2011 held in Treasury)
    154       153  
Paid in capital - common stock
    649,623       591,696  
Accumulated deficit
    (1,125,969 )     (1,109,506 )
Treasury stock - at cost
    (115,360 )     (115,257 )
                 
Total Hovnanian Enterprises, Inc. stockholders’ equity deficit
    (455,015 )     (496,694 )
                 
Noncontrolling interest in consolidated joint ventures
    231       92  
                 
Total equity deficit
    (454,784 )     (496,602 )
                 
Total liabilities and equity
  $ 1,517,943     $ 1,602,180  

(1) Derived from the audited balance sheet as of October 31, 2011.

See notes to condensed consolidated financial statements (unaudited).
 
 
4

 
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
 
   
Three Months Ended April 30,
   
Six Months Ended April 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
  Homebuilding:
                       
    Sale of homes
  $ 312,494     $ 246,974     $ 564,824     $ 482,859  
    Land sales and other revenues
    20,691       2,819       31,270       12,407  
                                 
      Total homebuilding
    333,185       249,793       596,094       495,266  
  Financial services
    8,513       5,304       15,203       12,398  
                                 
      Total revenues
    341,698       255,097       611,297       507,664  
                                 
Expenses:
                               
  Homebuilding:
                               
    Cost of sales, excluding interest
    271,563       210,463       488,990       411,893  
    Cost of sales interest
    13,317       13,956       25,793       29,582  
    Inventory impairment loss and land option write-offs
    3,216       16,925       6,541       30,450  
                                 
      Total cost of sales
    288,096       241,344       521,324       471,925  
                                 
    Selling, general and administrative
    35,125       39,837       68,379       80,044  
                                 
      Total homebuilding expenses
    323,221       281,181       589,703       551,969  
                                 
  Financial services
    5,363       5,177       10,540       10,647  
                                 
  Corporate general and administrative
    12,264       11,952       25,049       26,960  
                                 
  Other interest
    26,056       24,887       48,051       48,872  
                                 
  Other operations
    990       706       6,388       1,593  
                                 
      Total expenses
    367,894       323,903       679,731       640,041  
                                 
Gain (loss) on extinguishment of debt
    27,039       (1,644 )     51,737       (1,644 )
                                 
Income (loss) from unconsolidated joint ventures
    1,495       (3,232 )     1,473       (4,224 )
                                 
Income (loss) before income taxes
    2,338       (73,682 )     (15,224 )     (138,245 )
                                 
State and federal income tax (benefit) provision:
                               
  State
    468       (372 )     1,101       293  
  Federal
    68       (643 )     138       (1,729 )
                                 
    Total income taxes
    536       (1,015 )     1,239       (1,436 )
                                 
Net income (loss)
  $ 1,802     $ (72,667 )   $ (16,463 )   $ (136,809 )
                                 
Per share data:
                               
Basic:
                               
 Income (loss) per common share
  $ 0.02     $ (0.69 )   $ (0.15 )   $ (1.49 )
 Weighted-average number of common shares outstanding
    116,021       105,894       112,338       92,020  
                                 
Assuming dilution:
                               
  Income (loss) per common share
  $ 0.02     $ (0.69 )   $ (0.15 )   $ (1.49 )
  Weighted-average number of common shares outstanding
    116,117       105,894       112,338       92,020  

See notes to condensed consolidated financial statements (unaudited).
 
5

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In Thousands Except Share Amounts)
(Unaudited)

   
A Common Stock
   
B Common Stock
   
Preferred Stock
                               
   
Shares Issued and Outstanding
   
Amount
   
Shares Issued and Outstanding
   
Amount
   
Shares Issued and Outstanding
   
Amount
   
Paid-In
Capital
   
Accumulated Deficit
   
Treasury Stock
   
Noncontrolling Interest
   
Total
 
                                                                   
Balance, November 1, 2011
    80,446,772     $ 921       14,560,464     $ 153       5,600     $ 135,299     $ 591,696     $ (1,109,506 )   $ (115,257 )   $ 92     $ (496,602 )
                                                                                         
Stock options, amortization
  and issuances
                                                    2,639                               2,639  
                                                                                         
Restricted stock 
  amortization, issuances and 
  forfeitures
    140,119       2       117,399       1                       132                               135  
                                                                                         
Stock issuance
    25,000,000       250                                       47,000                               47,250  
                                                                                         
Issuance of shares for debt
    3,064,330       30                                       8,191                               8,221  
                                                                                         
Settlement of prepaid common stock purchase contracts
    3,482,901       35                                       (35 )                             -  
                                                                                         
Conversion of Class B to
  Class A Common Stock
    17,910               (17,910 )                                                             -  
                                                                                         
Changes in noncontrolling
  interest in consolidated
  joint ventures
                                                                            139       139  
                                                                                         
Treasury stock purchases
    (66,043 )                                                             (103 )             (103 )
                                                                                         
Net loss
                                                            (16,463 )                     (16,463 )
                                                                                         
Balance, April 30, 2012
    112,085,989     $ 1,238       14,659,953     $ 154       5,600     $ 135,299     $ 649,623     $ (1,125,969 )   $ (115,360 )   $ 231     $ (454,784 )

See notes to condensed consolidated financial statements (unaudited).

 
6

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

   
Six Months Ended
April 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (16,463 )   $ (136,809 )
Adjustments to reconcile net loss to net cash
used in operating activities:
               
Depreciation
    3,217       4,565  
Compensation from stock options and awards
    2,867       3,617  
Amortization of bond discounts and deferred financing costs
    3,493       2,780  
Gain on sale and retirement of property
and assets
    (127 )     (269 )
(Income) loss from unconsolidated joint ventures
    (1,473 )     4,224  
Distributions of earnings from unconsolidated joint ventures
    297       293  
(Gain) loss on extinguishment of debt
    (51,737 )     1,644  
Expenses related to the debt for debt exchange
    4,683       -  
Inventory impairment and land option write-offs
    6,541       30,450  
(Increase) decrease in assets:
               
Mortgage loans held for sale
    (2,905 )     38,954  
Restricted cash, receivables, prepaids, deposits and
other assets
    18,953       29,384  
Inventories
    15,435       (27,660 )
Increase (decrease) in liabilities:
               
State and federal income tax liabilities
    1,106       22,573  
Customers’ deposits
    4,326       5,707  
Accounts payable, accrued interest and other accrued liabilities
    (28,079 )     (75,412 )
Net cash used in operating activities
    (39,866 )     (95,959 )
Cash flows from investing activities:
               
Proceeds from sale of property and assets
    134       928  
Purchase of property, equipment, and other fixed assets
    (728 )     (449 )
Investments in and advances to unconsolidated
joint ventures
    (2,768 )     (3,228 )
Distributions of capital from unconsolidated joint ventures
    1,258       1,385  
Net cash used in investing activities
    (2,104 )     (1,364 )
Cash flows from financing activities:
               
Proceeds from mortgages and notes
    5,966       9,426  
Payments related to mortgages and notes
    (4,477 )     (13,785 )
Net proceeds from Senior Notes
    -       151,220  
Net proceeds from TEU issuance
    -       83,707  
Net proceeds from Common Stock issuance
    47,250       54,899  
Net payments related to mortgage
warehouse lines of credit
    14,801       (40,115 )
Principal payments and debt repurchases
    (73,024 )     (157,034 )
Proceeds from model sale leaseback financing programs
    26,695       -  
Deferred financing costs from note issuance
    -       (4,445 )
Payments related to the debt for debt exchange
    (18,861 )     -  
Purchase of treasury stock
    (103 )     -  
Net cash (used in) provided by financing activities
    (1,753 )     83,873  
Net decrease in cash and cash equivalents
    (43,723 )     (13,450 )
Cash and cash equivalents balance, beginning
of period
    250,740       367,180  
Cash and cash equivalents balance, end of period
  $ 207,017     $ 353,730  

 
7

 
 
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
(Continued)
 
   
Six Months Ended
April 30,
 
   
2012
   
2011
 
Supplemental disclosures of cash flow:
           
Cash paid during the period for:
           
Income taxes
 
$
133
   
$
23,984
 

Supplemental disclosure of noncash financing activities:
 
In the second quarter of fiscal 2012, we completed several debt for equity exchanges.  See Notes 11, 12 and 15 for further information.

In the first quarter of fiscal 2012, we completed a debt for debt exchange. See Note 11 for further information.
 
In the first quarter of fiscal 2011, our partner in a land development joint venture transferred its interest in the venture to us.  The consolidation resulted in increases in inventory and non-recourse land mortgages of $9.5 million and $18.5 million, respectively, and a decrease in other liabilities of $9.0 million, for such quarter.

See notes to Condensed Consolidated Financial Statements (unaudited).
 
 
8

 
 
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Hovnanian Enterprises, Inc. and Subsidiaries (the "Company”, “we”, “us” or “our”) has reportable segments consisting of six Homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and the Financial Services segment (see Note 17).

The accompanying unaudited Condensed Consolidated Financial Statements include our accounts and those of all wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions.  Certain immaterial prior year amounts have been reclassified to conform to the current year presentation.

1.  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2011.  In the opinion of management, all adjustments for interim periods presented have been made, which include normal recurring accruals and deferrals necessary for a fair presentation of our consolidated financial position, results of operations, and cash flows.  The preparation of financial statements in conformity with 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.  Results for interim periods are not necessarily indicative of the results which might be expected for a full year.  The balance sheet at October 31, 2011 has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

2.  For the three and six months ended April 30, 2012, the Company’s total stock-based compensation expense was $1.7 million ($1.3 million net of tax) and $2.9 million, respectively, and $1.7 million and $3.6 million for the three and six months ended April 30, 2011, respectively.  Included in this total stock-based compensation expense was the vesting of stock options of $1.6 million ($1.2 million net of tax) and $2.6 million for the three and six months ended April 30, 2012, respectively, and $1.3 million and $2.6 million for the three and six months ended April 30, 2011, respectively.

3.  Interest costs incurred, expensed and capitalized were:

   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
                         
Interest capitalized at beginning of period
  $ 123,315     $ 134,504     $ 121,441     $ 136,288  
Plus interest incurred(1)
    34,493       39,895       70,838       77,722  
Less cost of sales interest expensed
    13,317       13,956       25,793       29,582  
Less other interest expensed(2)(3)
    26,056       24,887       48,051       48,872  
Interest capitalized at end of period(4)
  $ 118,435     $ 135,556     $ 118,435     $ 135,556  
 
(1) 
Data does not include interest incurred by our mortgage and finance subsidiaries.
(2)
Other interest expensed is comprised of interest that does not qualify for interest 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.
 
 
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(3)
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:
 
   
Three Months Ended April 30,
   
Six Months Ended April 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
Other interest expensed
  $ 26,056     $ 24,887     $ 48,051     $ 48,872  
Interest paid by our mortgage and finance subsidiaries
    468       425       944       1,007  
Decrease in accrued interest
    14,350       10,634       3,283       1,649  
Cash paid for interest, net of capitalized interest
  $ 40,874     $ 35,946     $ 52,278     $ 51,528  
 
(4)
We have incurred significant inventory impairments in recent years, which are determined based on total inventory including capitalized interest. However, the capitalized interest amounts above are shown gross before allocating any portion of the impairments to capitalized interest.

4.  Accumulated depreciation at April 30, 2012 and October 31, 2011 amounted to $77.8 million and $75.4 million, respectively, for our homebuilding property, plant and equipment.

5.  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 six months ended April 30, 2012, our discount rates used for the impairments recorded ranged from 16.8% to 18.5%.  Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.  We recorded impairment losses, which are included in the Condensed Consolidated Statement of Operations and deducted from inventory, of $2.1 million and $16.3 million for the three months ended April 30, 2012 and 2011, respectively, and $5.2 million and $23.1 million for the six months ended April 30, 2012 and 2011, respectively.

The following tables represent inventory impairments by homebuilding segment for the three and six months ended April 30, 2012 and 2011:
 
(Dollars in millions)
 
Three Months Ended
April 30, 2012
   
Three Months Ended
April 30, 2011
 
   
Number of
Communities
   
Dollar
Amount of
Impairment
   
Pre-
Impairment
Value(1)
   
Number of
Communities
   
Dollar
Amount of
Impairment
   
Pre-
Impairment
Value(1)
 
Northeast
   
-
    $
-
    $
-
     
3
    $
12.3
    $
70.7
 
Mid-Atlantic
   
1
     
0.1
     
0.2
     
2
     
1.8
     
9.5
 
Midwest
   
-
     
-
     
-
     
-
     
-
     
-
 
Southeast
   
5
     
2.0
     
4.5
     
-
     
-
     
-
 
Southwest
   
-
     
-
     
-
     
-
     
-
     
-
 
West
   
-
     
-
     
-
     
1
     
2.2
     
5.1
 
Total
   
6
    $
2.1
    $
4.7
     
6
    $
16.3
    $
85.3
 
 
 
(Dollars in millions)
   
Six Months Ended
April 30, 2012
     
Six Months Ended
April 30, 2011
 
   
Number of
Communities
   
Dollar
Amount of
Impairment
   
Pre-
Impairment
Value(1)
   
Number of
Communities
   
Dollar
Amount of
Impairment
   
Pre-
Impairment
Value(1)
 
Northeast
    5     $ 2.4     $ 16.1       5     $ 17.7     $ 88.6  
Mid-Atlantic
    3       0.4       0.8       3       2.1       10.9  
Midwest
    1       0.1       1.1       -       -       -  
Southeast
    8       2.3       5.4       -       -       -  
Southwest
    -       -       -       -       -       -  
West
    -       -       -       2       3.3       10.6  
Total
    17     $ 5.2     $ 23.4       10     $ 23.1     $ 110.1  

(1)  Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s
      impairments.

 
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The Condensed Consolidated Statement of Operations line item 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.  Total aggregate write-offs related to these items were $1.1 million and $0.6 million for the three months ended April 30, 2012 and 2011, respectively, and $1.3 million and $7.3 million for the six months ended April 30, 2012 and 2011, 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 cost written off.
 
  The following tables represent write-offs of such costs (after giving effect to any recovered deposits in the applicable period) and the number of lots walked away from by homebuilding segment for the three and six months ended April 30, 2012 and 2011:

   
Three Months Ended
April 30,
 
   
2012
   
2011
 
(Dollars in millions)
 
Number of Walk-Away Lots
   
Dollar Amount of Write-Offs
   
Number of Walk-Away Lots
   
Dollar Amount of Write-Offs
 
                         
Northeast
   
-
    $
0.3
     
56
    $
-
 
Mid-Atlantic
   
3
     
0.1
     
1,522
     
0.1
 
Midwest
   
67
     
0.1
     
98
     
0.4
 
Southeast
   
593
     
0.6
     
190
     
0.1
 
Southwest
   
165
     
-
     
2
     
-
 
West
   
-
     
-
     
-
     
-
 
Total
   
828
    $
1.1
     
1,868
    $
0.6
 
 
   
Six Months Ended
April 30,
 
   
2012
   
2011
 
(Dollars in millions)
 
Number of Walk-Away Lots
   
Dollar Amount of Write-Offs
   
Number of Walk-Away Lots
   
Dollar Amount of Write-Offs
 
                         
Northeast
   
-
    $
0.3
     
1,045
    $
3.1
 
Mid-Atlantic
   
182
     
0.2
     
1,774
     
0.5
 
Midwest
   
105
     
0.1
     
230
     
0.4
 
Southeast
   
734
     
0.7
     
1,173
     
0.3
 
Southwest
   
165
     
-
     
70
     
-
 
West
   
-
     
-
     
143
     
3.0
 
Total
   
1,186
    $
1.3
     
4,435
    $
7.3
 

We have decided to mothball (or stop development on) certain communities when we have determined the current performance does not justify further investment at the time.  When we decide to mothball a community, the inventory is reclassified from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale”.  During the first half of fiscal 2012, we did not mothball any communities but we re-activated two previously mothballed communities and sold three previously mothballed communities.  As of April 30, 2012, the net book value associated with our 54 total mothballed communities was $141.0 million, net of impairment charges of $449.5 million.
 
During the second quarter of fiscal 2012, we entered into certain model sale leaseback financing arrangements, whereby we sell and leaseback certain of our model homes with the right to participate in the potential profit when the home is sold to a third party at the end of the lease.  As a result of our continued involvement, these sale and leaseback transactions are considered a financing rather than a sale.  Therefore, for purposes of our Condensed Consolidated Balance Sheet, the inventory is reclassified to inventory not owned, with a corresponding liability from inventory not owned for the amount of cash received.
 
 
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6.  We establish a warranty accrual for repair costs under $5,000 per occurrence to homes, community amenities, and land development infrastructure.  We accrue for warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer.  In addition, we accrue for warranty costs over $5,000 per occurrence as part of our general liability insurance deductible, which is expensed as selling, general, and administrative costs.  For homes delivered in fiscal 2012 and 2011, our deductible under our general liability insurance is $20 million per occurrence for construction defects and warranty claims.  For bodily injury claims, our deductible per occurrence in 2012 and 2011 is $0.1 million up to a $5 million limit.  Our aggregate retention in 2012 and 2011 is $21 million for construction defects, warranty and bodily injury claims.  Additions and charges in the warranty reserve and general liability reserve for the three and six months ended April 30, 2012 and 2011 were as follows:
 
   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
                         
Balance, beginning of period
  $ 124,725     $ 123,189     $ 123,865     $ 125,268  
Additions
    8,492       5,357       17,082       12,845  
Charges incurred
    (9,637 )     (9,779 )     (17,367 )     (19,346 )
Balance, end of period
  $ 123,580     $ 118,767     $ 123,580     $ 118,767  

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 $1.9 million and $0.9 million for the three months ended April 30, 2012 and 2011, respectively, and $2.6 million and $6.4 million for the six months ended April 30, 2012 and 2011, respectively, for prior year deliveries.

7.  We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations, and we are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing.  These regulations often provide broad discretion to the administering governmental authorities.  This can delay or increase the cost of development or homebuilding. 
 
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment.  The particular environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site.  These environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and homebuilding activity. 
 
We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules, and regulations and their interpretations and application. 
 
The Company is also involved in the following litigation: 
 
Hovnanian Enterprises, Inc. and K. Hovnanian Venture I, L.L.C. have been named as defendants in a class action suit. The action was filed by Mike D’Andrea and Tracy D’Andrea, on behalf of themselves and all others similarly situated in the Superior Court of New Jersey, Gloucester County. The action was initially filed on May 8, 2006 alleging that the HVAC systems installed in certain of the Company’s homes are in violation of applicable New Jersey building codes and are a potential safety issue. On December 14, 2011, the Superior Court granted class certification; the potential class is 1,065 homes.  The defendants filed a request to take an interlocutory appeal regarding the class certification decision. The Appellate Division denied the request, and the 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 plaintiff seeks unspecified damages as well as treble damages pursuant to the NJ Consumer Fraud Act.   The Company believes there is insurance coverage available to it for this action.  While we have determined that a loss related to this case is not probable, it is not possible to estimate a loss or range of loss related to this matter at this time.  On December 19, 2011, certain subsidiaries of the Company filed a separate action seeking indemnification against the various manufactures and subcontractors implicated by the class action.
  
8.  Cash and cash equivalents include cash deposited in checking accounts, overnight repurchase agreements, certificates of deposit, Treasury Bills and government money market funds with maturities of 90 days or less when purchased.  Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts.  We believe we help to mitigate this risk by depositing our cash in major financial institutions.  At April 30, 2012, we had no cash equivalents as the full balance of cash and cash equivalents was held as cash.

 
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 9.   Our mortgage banking subsidiary originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary mortgage market within a short period of time of origination. Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. We have elected the fair value option to record loans held for sale and therefore these loans are recorded at fair value with the changes in the value recognized in the Statements of Operations in “Revenues: Financial services.” We currently use forward sales of mortgage-backed securities, interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to investors to protect us from interest rate fluctuations. These short-term instruments, which do not require any payments to be made to the counter-party or investor in connection with the execution of the commitments, are recorded at fair value. Gains and losses on changes in the fair value are recognized in the Statements of Operations in “Revenues: Financial services”. Loans held for sale of $2.3 million and $1.0 million at April 30, 2012 and October 31, 2011, respectively, represent loans that cannot currently be sold at reasonable terms in the secondary mortgage market.  These loans are serviced by a third party until such time that they can be liquidated via alternative mortgage markets, foreclosure or repayment.  

At April 30, 2012 and October 31, 2011, respectively, $66.9 million and $52.7 million of such mortgages held for sale were pledged against our mortgage warehouse line of credit (see Note 10). We may incur losses with respect to mortgages that were previously sold that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the home. Historically, we have not made significant payments associated with mortgages we originated. We have reserves for potential losses on mortgages we previously sold. The reserves are included in the "Mortgage loans held for sale" balance on the Condensed Consolidated Balance Sheet.

The activity in our loan origination reserves during the three and six months ended April 30, 2012 and 2011 was as follows:
 
   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
                         
Loan origination reserves, beginning of period
  $ 6,429     $ 5,694     $ 5,063     $ 5,486  
Provisions for losses during the period
     724        976        2,388        1,786  
Adjustments to pre-existing provisions for losses from changes in estimates
    (39 )     (339 )      53       (917 )
Payments/settlements
    (544 )     (767 )     (934 )     (791 )
Loan origination reserves, end of period
  $ 6,570     $ 5,564     $ 6,570     $ 5,564  
 
10.  We do not have a revolving credit facility.  We have certain stand alone cash collateralized letter of credit agreements and facilities under which there were a total of $33.1 million and $54.1 million of letters of credit outstanding as of April 30, 2012 and October 31, 2011, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. As of April 30, 2012 and October 31, 2011, the amount of cash collateral in these segregated accounts was $33.8 million and $57.7 million, respectively, which is reflected in “Restricted cash” on the Condensed Consolidated Balance Sheets.

Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”) is a short-term borrowing facility that provides up to $75 million through November 1, 2012 and thereafter up to $50 million through March 28, 2013. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors.  Interest is payable monthly on outstanding advances at the current LIBOR subject to a floor of 1.625% plus the applicable margin ranging from 2.5% to 3.0% based on the takeout investor and type of loan. As of April 30, 2012, the aggregate principal amount of all borrowings under the Chase Master Repurchase Agreement was $64.5 million.

The Chase Master Repurchase Agreement requires 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 facilities, 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 April 30, 2012, we believe we were in compliance with the covenants of the Chase Master Repurchase Agreement.

 
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11. As of April 30, 2012, we had $992.0 million of outstanding senior secured notes ($967.2 million, net of discount), comprised of $797.0 million 10 5/8% Senior Secured Notes due 2016 (the “10 5/8% 2016 Notes”), $53.2 million 2.0% Senior Secured Notes due 2021 Notes (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 April 30, 2012, we also had $483.6 million of outstanding senior notes ($481.4 million, net of discount), comprised of $36.7 million 6 1/2% Senior Notes due 2014, $3.0 million 6 3/8% Senior Notes due 2014, $21.4 million 6 1/4% Senior Notes due 2015, $138.9 million 6 1/4% Senior Notes due 2016, $90.5 million 7 1/2% Senior Notes due 2016, $130.3 million 8 5/8% Senior Notes due 2017 and $62.8 million 11 7/8% Senior Notes due 2015. In addition, as of April 30, 2012, we had outstanding $7.9 million 7.25% Tangible Equity Units as discussed below in Note 12. 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 and senior notes and Amortizing Notes (see Note 12) outstanding at April 30, 2012 (see Note 22).  In addition, 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 10 5/8% Senior Secured Notes due 2016 are secured by a first-priority lien, subject to permitted liens and other exceptions, on substantially all the assets owned by us, K. Hovnanian Enterprises, Inc. (“K. Hovnanian”) (the issuer of the senior secured notes) and the guarantors of such senior secured notes. At April 30, 2012, the aggregate book value of the real property collateral securing these notes was approximately $687.1 million, which does not include the impact of inventory investments, home deliveries, or impairments thereafter and which may differ from the appraised value. In addition, cash collateral securing these notes was $135.9 million as of April 30, 2012, which includes $33.8 million of restricted cash collateralizing certain letters of credit. Subsequent to such date, cash uses include general business operations and real estate investments.

On November 1, 2011, K. Hovnanian issued $141.8 million aggregate principal amount of 5.0% 2021 Notes and $53.2 million aggregate principal amount of 2.0% 2021 Notes in exchange for $195.0 million of K. Hovnanian's unsecured senior notes with maturities ranging from 2014 through 2017. Holders of the senior notes due 2014 and 2015 that were exchanged in the exchange offer also received an aggregate of approximately $14.2 million in cash payments and all holders of senior notes that were exchanged in the exchange offer received accrued and unpaid interest (in the aggregate amount of approximately $3.3 million). Costs associated with this transaction were $4.7 million.  The 5.0% 2021 Notes and the 2.0% 2021 Notes were issued as separate series under an indenture, but have substantially the same terms other than with respect to interest rate and related redemption provisions, and vote together as a single class. The accounting for the debt exchange is being treated as a troubled debt restructuring. Under this accounting, the Company did not recognize any gain or loss on extinguishment of debt and the costs associated with the debt exchange were expensed as incurred as shown in “Other operations” in the Condensed Consolidated Statement of Operations.
 
The guarantees with respect to the 2021 Notes of the Secured Group are secured, subject to permitted liens and other exceptions, by a first-priority lien on substantially all of the assets of the members of the Secured Group. As of April 30, 2012, the collateral securing the guarantees primarily included (1) $92.0 million of cash and cash equivalents and (2) equity interests in guarantors that are members of the Secured Group.  Subsequent to such date, cash uses include general business operations and real estate and other investments. The aggregate book value of the real property of the Secured Group collateralizing the 2021 Notes was approximately $31.5 million as of April 30, 2012 (not including the impact of inventory investments, home deliveries, or impairments thereafter and which may differ from the appraised value).  Members of the Secured Group also own equity in joint ventures, either directly or indirectly through ownership of joint venture holding companies, with a book value of $48.4 million as of April 30, 2012; this equity is not pledged to secure, and is not collateral for, the 2021 Notes. Members of the Secured Group are “unrestricted subsidiaries” under K. Hovnanian's other senior and senior secured notes and Amortizing Notes, and thus have not guaranteed such indebtedness. 
 
During the three and six months ended April 30, 2012, we repurchased in open market and privately negotiated transactions $15.2 million and $21.0 million, respectively, principal amount of our 6 1/4% Senior Notes due 2016 and $22.8 million and $61.1 million, respectively, principal amount of 7 1/2% Senior Notes due 2016. In addition, during the second quarter of fiscal 2012, we repurchased, $37.4 million principal amount of 8 5/8% Senior Notes due 2017. The aggregate purchase price for these repurchases was $51.7 million and $70.7 million, respectively, for the three and six months ended April 30, 2012, plus accrued and unpaid interest.  These repurchases resulted in a gain on extinguishment of debt of $23.3 million and $48.0 million, respectively, for the three and six months ended April 30, 2012, net of the write-off of unamortized discounts and fees. The gain is included in the Condensed Consolidated Statement of Operations as “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).

During the second quarter of fiscal 2012, we also purchased pursuant to agreements with bondholders, $9.1 million aggregate principal amount of our outstanding 8.625% Senior Notes due 2017 in exchange for Class A Common Stock, as discussed in Note 15. These transactions resulted in a gain on extinguishment of debt of $3.5 million for the three months ended April 30, 2012.

 
14

 
 
The indentures governing the notes do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness (other than certain permitted indebtedness, refinancing indebtedness and non-recourse indebtedness), pay dividends and make distributions on common and preferred stock, repurchase senior and senior subordinated notes (with respect to the senior secured first-lien notes indenture), 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 April 30, 2012 we believe we were in compliance with the covenants of the indentures governing our outstanding notes.
 
Under the terms of the indentures (including with respect to the Amortizing Notes), 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, is less than 2.0 to 1.0, we are restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness, and non-recourse indebtedness. As a result of this restriction, we are currently restricted from paying dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. If current market trends continue or worsen, we will continue to be restricted from paying dividends for the foreseeable future.  Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our bond indentures or otherwise affect compliance with any of the covenants contained in the bond indentures.

 12.  On February 9, 2011, we issued an aggregate of 3,000,000 7.25% Tangible Equity Units (the “Units”), and on February 14, 2011, we issued an additional 450,000 Units pursuant to the over-allotment option granted to the underwriters. Each Unit initially consists of (i) a prepaid stock purchase contract (each a “Purchase Contract”) and (ii) a senior subordinated amortizing note due February 15, 2014 (each, an “Amortizing Note”).  As of April 30, 2012, we had an aggregate principal amount of $7.9 million Amortizing Notes outstanding. On each February 15, May 15, August 15 and November 15, K. Hovnanian will pay holders of Amortizing Notes equal quarterly cash installments of $0.453125 per Amortizing Note, which cash payments in the aggregate will be equivalent to 7.25% per year with respect to each $25 stated amount of Units. Each installment constitutes a payment of interest (at a rate of 12.072% per annum) and a partial repayment of principal on the Amortizing Note, allocated as set forth in the amortization schedule provided in the indenture under which the Amortizing Notes were issued.  The Amortizing Notes have a scheduled final installment payment date of February 15, 2014.  If we elect to settle the Purchase Contracts early, holders of the Amortizing Notes will have the right to require K. Hovnanian to repurchase such holders’ Amortizing Notes, except in certain circumstances as described in the indenture governing Amortizing Notes.
 
Unless settled earlier, on February 15, 2014 (subject to postponement under certain circumstances), each Purchase Contract will automatically settle and we will deliver a number of shares of Class A Common Stock based on the applicable market value, as defined in the purchase contract agreement, which will be between 4.7655 shares and 5.8140 shares per Purchase Contract (subject to adjustment).  Each Unit may be separated into its constituent Purchase Contract and Amortizing Note after the initial issuance date of the Units, and the separate components may be combined to create a Unit.  The Amortizing Note component of the Units is recorded as debt, and the Purchase Contract component of the Units is recorded in equity as additional paid in capital.  We have recorded $68.1 million, the initial fair value of the Purchase Contracts, as additional paid in capital.  As of April 30, 2012, 1.4 million Purchase Contracts have been converted into 6.9 million shares of our Class A Common Stock.

During the second quarter of fiscal 2012, we purchased pursuant to agreements with bondholders $3.1 million aggregate principal amount of our Amortizing Notes in exchange for Class A Common Stock, as discussed in Note 15.  These transactions resulted in a gain on extinguishment of debt of $0.2 million for the three months ended April 30, 2012.

13. Basic earnings per share is computed by dividing net income (loss) (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (the “denominator”) for the period.  The basic earnings per share calculation as of April 30, 2012 includes 9.6 million shares related to Purchase Contracts (issued as part of our 7.25% Tangible Equity Units) which are issuable in the future with no additional cash required to be paid by the holders thereof. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and non-vested shares of restricted stock.  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.  
 
For the three months ended April 30, 2012, diluted earnings per common share were computed using the weighted average number of shares outstanding adjusted for the 0.1 million incremental shares attributed to non-vested stock and outstanding options to purchase common stock.   Incremental shares attributed to non-vested stock and outstanding options to purchase common stock of 0.06 million for the six months ended April 30, 2012, and 0.5 million for both the three and six months ended April 30, 2011 were excluded from the computation of diluted EPS because we had a net loss for the period, and any incremental shares would not be dilutive.

 
15

 
 
In addition, shares related to out-of-the money stock options that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS were 2.6 million and 4.2 million at April 30, 2012 and 2011 respectively, because to do so would have been anti-dilutive for the periods presented.
   
14.  On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000.  Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%.  The Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares.  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”.  During the three and six months ended April 30, 2012 and 2011, we did not make any dividend payments on the Series A Preferred Stock as a result of covenant restrictions in the indentures governing our senior secured, senior and senior subordinated notes discussed above.  We anticipate we will be restricted from paying dividends for the foreseeable future.

15.  Each share of Class A Common Stock entitles its holder to one vote per share and each share of Class B Common Stock entitles its holder to ten votes per share.  The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B Common Stock.  If a shareholder desires to sell shares of Class B Common Stock, such stock must be converted into shares of Class A Common Stock.

On April 11, 2012, we issued 25,000,000 shares of our Class A Common Stock at a price of $2.00 per share, resulting in net proceeds of $47.3 million.  The net proceeds of the issuance, along with cash on hand, were used to purchase $75.4 million principal amount of our senior notes, as discussed in Note 11.

Pursuant to agreements with bondholders, during the second quarter of fiscal 2012, we also issued an aggregate of 3,064,330 shares of our Class A Common Stock in exchange for approximately $12.2 million of our outstanding indebtedness, consisting of $9.1 million aggregate principal amount 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 $3.7 million for the three months ended April 30, 2012. 

In August 2008, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”) designed to preserve shareholder value and the value of certain tax assets primarily associated with net operating loss carryforwards (NOL) and built-in losses under Section 382 of the Internal Revenue Code. Our ability to use NOLs and built-in losses would be limited if there was an “ownership change” under Section 382. This would occur if shareholders owning (or deemed under Section 382 to own) 5% or more of our stock increase their collective ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a defined period of time. The Rights Plan was adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382. Under the Rights Plan, one right was distributed for each share of Class A Common Stock and Class B Common Stock outstanding as of the close of business on August 15, 2008. Effective August 15, 2008, if any person or group acquires 4.9% or more of the outstanding shares of Class A Common Stock without the approval of the Board of Directors, there would be a triggering event causing significant dilution in the voting power of such person or group.

However, existing stockholders who owned, at the time of the Rights Plan’s adoption, 4.9% or more of the outstanding shares of Class A Common Stock will trigger a dilutive event only if they acquire additional shares. The approval of the Board of Directors’ decision to adopt the Rights Plan may be terminated by the Board at any time, prior to the Rights being triggered. The Rights Plan will continue in effect until August 15, 2018, unless it expires earlier in accordance with its terms. The approval of the Board of Directors’ decision to adopt the Rights Plan was submitted to a stockholder vote and approved at a special meeting of stockholders held on December 5, 2008. Also at the Special Meeting on December 5, 2008, our stockholders approved an amendment to our Certificate of Incorporation to restrict certain transfers of Class A Common Stock in order to preserve the tax treatment of our net operating loss carryforwards and built-in losses under Section 382 of the Internal Revenue Code. Subject to certain exceptions pertaining to pre-existing 5% stockholders and Class B stockholders, the transfer restrictions in the amended Certificate of Incorporation generally restrict any direct or indirect transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the effect would be to (i) increase the direct or indirect ownership of our stock by any person (or public group) from less than 5% to 5% or more of our common stock; (ii) increase the percentage of our common stock owned directly or indirectly by a person (or public group) owning or deemed to own 5% or more of our common stock; or (iii) create a new public group. Transfers included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage ownership (direct or indirect) of common stock would exceed the 5% thresholds discussed above, or to persons whose direct or indirect ownership of common stock would by attribution cause another person (or public group) to exceed such threshold.
   
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 three months ended April 30, 2012.  During the six months ended April 30, 2012, we purchased approximately 0.1 million shares.  As of April 30, 2012, 3.5 million shares of Class A Common Stock have been purchased under this program.
  
16.  The total income tax expense was $1.2 million for the six months ended April 30, 2012 primarily due to various state tax expenses and an increase in tax reserves for uncertain tax positions.
 
 
16

 
 
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.  Given the continued downturn in the homebuilding industry in recent years, resulting in additional inventory and intangible impairments, we are in a three-year cumulative loss position as of April 30, 2012.  According to ASC 740, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are realizable.  Our valuation allowance for current and deferred taxes amounted to $906.8 million and $899.4 million at April 30, 2012 and October 31, 2011, respectively.  The valuation allowance increased during the six months ended April 30, 2012 primarily due to additional reserves recorded for the federal and state tax benefits related to the losses incurred during the period.

17.  Our operating segments are components of our business for which discrete financial information is available and reviewed regularly by the chief operating decision-maker, our Chief Executive Officer, to evaluate performance and make operating decisions.  Based on this criteria, each of our communities qualifies as an operating segment, and therefore, it is impractical to provide segment disclosures for this many segments.  As such, we have aggregated the homebuilding operating segments into six reportable segments.

Our homebuilding operating segments are aggregated into reportable segments based primarily upon geographic proximity, similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell homes.  The Company’s reportable segments consist of the following six homebuilding segments and a financial services segment:

Homebuilding:
 (1) Northeast (New Jersey and Pennsylvania)
 (2) Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia, and Washington D.C.)
 (3) Midwest (Illinois, Minnesota, and Ohio)
 (4) Southeast (Florida, Georgia, North Carolina, and South Carolina)
 (5) Southwest (Arizona and Texas)
 (6) West (California)

Financial Services

Operations of the Company’s Homebuilding segments primarily include the sale and construction of single-family attached and detached homes, attached townhomes and condominiums, urban infill and active adult homes in planned residential developments.  In addition, from time to time, operations of the homebuilding segments include sales of land.  Operations of the Company’s Financial Services segment include mortgage banking and title services provided to the homebuilding operations’ customers.  We do not 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.
 
  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 consists of revenues generated from the sales of homes and land, (loss) income from unconsolidated entities, management fees and other income, less the cost of homes and land sold, selling, general and administrative expenses, interest expense and non-controlling interest expense.  Income before income taxes for the Financial Services segment consists 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.
 
 
17

 
 
Financial information relating to the Company’s segment operations was as follows:
     
Three Months Ended
April 30,
     
Six Months Ended
April 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
                         
Revenues:
                       
  Northeast
  $ 51,775     $ 36,643     $ 93,307     $ 81,984  
  Mid-Atlantic
    64,776       46,840       119,171       93,262  
  Midwest
    23,631       17,484       41,829       31,574  
  Southeast
    36,346       16,918       56,555       32,438  
  Southwest
    114,716       99,248       206,540       190,641  
  West
    42,011       32,724       78,763       65,473  
     Total homebuilding
    333,255       249,857       596,165       495,372  
  Financial services
    8,513       5,304       15,203       12,398  
  Corporate and unallocated
    (70 )     (64 )     (71 )     (106 )
     Total revenues
  $ 341,698     $ 255,097     $ 611,297     $ 507,664  
                                 
Income (loss) before income taxes:
                               
  Northeast
  $ (125 )   $ (20,086 )   $ (5,773 )   $ (34,724 )
  Mid-Atlantic
    5,058       (5,830 )     7,669       (8,989 )
  Midwest
    (91 )     (2,407 )     (1,247 )     (4,333 )
  Southeast
    (3,876 )     (3,660 )     (6,733 )     (6,680 )
  Southwest
    8,235       6,469       12,785       11,872  
  West
    (2,948 )     (8,394 )     (3,920 )     (17,008 )
     Homebuilding income (loss) before income taxes
    6,253       (33,908 )     2,781       (59,862 )
  Financial services
    3,150       127       4,663       1,751  
  Corporate and unallocated
    (7,065 )     (39,901 )     (22,668 )     (80,134 )
     Income (loss) before income taxes
  $ 2,338     $ (73,682 )   $ (15,224 )   $ (138,245 )

(In thousands)
 
April 30,
2012
   
October 31,
2011
 
             
Assets:
           
  Northeast
  $ 377,177     $ 385,217  
  Mid-Atlantic
    214,944       219,287  
  Midwest
    67,774       59,105  
  Southeast
    78,018       83,044  
  Southwest
    193,336       188,321  
  West
    153,454       168,590  
     Total homebuilding
    1,084,703       1,103,564  
  Financial services
    98,849       85,106  
  Corporate and unallocated
    334,391       413,510  
     Total assets
  $ 1,517,943     $ 1,602,180  
 
  
            18.  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 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 April 30, 2012 and October 31, 2011 it was not the primary beneficiary of any VIEs from which it is purchasing land under option purchase contracts.
 
 
18

 
 
We will continue to secure land and lots using options, some of which are with VIEs. Including deposits on our unconsolidated VIEs, at April 30, 2012, we had total cash and letters of credit deposits amounting to approximately $25.4 million to purchase land and lots with a total purchase price of $639.0 million.  The maximum exposure to loss with respect to our land and lot options is limited to the deposits, although some deposits are refundable at our request or refundable if certain conditions are not met.
 
19.  We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing returns on capital.  Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct homes that are sold directly to third-party homebuyers.  Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties.

During the three months ended January 31, 2011, we entered into a joint venture agreement to acquire a portfolio of homebuilding projects, including land we previously owned in the consolidated group. We sold the land we owned to the joint venture for net proceeds of $36.1 million, which was equal to our basis in the land at that time, and recorded an investment in unconsolidated joint ventures of $19.7 million for our interest in the venture.  During the three months ended April 30, 2011 we expanded this joint venture, selling additional land we owned to the joint venture for net proceeds of $27.2 million, which was equal to our book value in the land at that time, and recorded an additional investment of $11.4 million for our interest in the venture. Separately, during the three months ended January 31, 2011, our partner in a land development joint venture transferred its interest in the venture to us.  The consolidation resulted in increases in inventory and non-recourse land mortgages of $9.5 million and $18.5 million, respectively, and a decrease in other liabilities of $9.0 million. 
 
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)
   
April 30, 2012
 
   
Homebuilding
   
Land Development
   
Total
 
Assets:
                 
Cash and cash equivalents
  $
23,038
    $
105
    $
23,143
 
Inventories
   
283,058
     
15,666
     
298,724
 
Other assets
   
20,718
     
5
     
20,723
 
Total assets
  $
326,814
    $
15,776
    $
342,590
 
                         
Liabilities and equity:
                       
Accounts payable and accrued liabilities
  $
29,375
    $
11,442
    $
40,817
 
Notes payable
   
162,266
     
21
     
162,287
 
Total liabilities
   
191,641
     
11,463
     
203,104
 
Equity of:
                       
Hovnanian Enterprises, Inc.
   
52,073
     
1,170
     
53,243
 
Others
   
83,100
     
3,143
     
86,243
 
Total equity
   
135,173
     
4,313
     
139,486
 
Total liabilities and equity
  $
326,814
    $
15,776
    $
342,590
 
Debt to capitalization ratio
   
55%
     
0%
     
54%
 

 
19

 
 
(Dollars in thousands)
 
October 31, 2011
 
   
Homebuilding
   
Land Development
   
Total
 
Assets:
                 
Cash and cash equivalents
  $
21,380
    $
287
    $
21,667
 
Inventories
   
310,743
     
14,786
     
325,529
 
Other assets
   
25,388
     
-
     
25,388
 
Total assets
  $
357,511
    $
15,073
    $
372,584
 
                         
Liabilities and equity:
                       
Accounts payable and accrued liabilities
  $
21,035
    $
11,710
    $
32,745
 
Notes payable
   
199,821
     
21
     
199,842
 
Total liabilities
  $
220,856
     
11,731
     
232,587
 
Equity of: