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

~~Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~

For the quarterly period ended ~~JULY~~JANUARY 31, ~~2017~~2018

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

~~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)~~Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)

22-1851059 (I.R.S. Employer Identification No.)

90 Matawan Road, 5^th Floor, Matawan, NJ 07747 (Address of Principal Executive Offices)

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

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~~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 or an emerging growth company. See the definitions of ~~“large~~“large accelerated filer,” “accelerated filer,” “smaller reporting ~~company”~~company,” and “emerging growth 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 [ ] Emerging Growth Company [ ]

~~Non-Accelerated Filer~~ ~~[ ] (Do not check if smaller reporting company)~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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~~issuer’s classes of common stock, as of the latest practicable date. ~~132,285,310~~ 132,643,015 shares of Class A Common Stock and ~~15,307,607~~15,470,480 shares of Class B Common Stock were outstanding as of ~~September 1, 2017.~~March 2, 2018.

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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

Total

Balance, October 31, 2016
132,046,012 $ 1,438 15,251,061 $ 159 5,600 $ 135,299 $ 706,137 $ (856,183
)
$ (115,360
)
$ (128,510
)

Stock options, amortization and issuances
48,250 467 467

Restricted stock amortization, issuances and forfeitures
188,548 2 59,046 1 912 915

Conversion of Class B to class A common stock
2,500 (2,500
)
-

Net loss
(344,034
)
(344,034
)

Balance, July 31, 2017
132,285,310 $ 1,440 15,307,607 $ 160 5,600 $ 135,299 $ 707,516 $ (1,200,217
)
$ (115,360
)
$ (471,162
)

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

Total

Balance, October 31, 2017

132,285,310

1,440

15,307,607

160

5,600

135,299

706,466

(1,188,376

)

(115,360

)

(460,371

)

Stock options, amortization and issuances

24,000

210

Restricted stock amortization, issuances and forfeitures

332,264

164,316

(225

)

(219

)

Conversion of Class B to Class A common stock

1,441

(1,441

)

Net (loss)

(30,809

)

(30,809

)

Balance, January 31, 2018

132,643,015

1,444

15,470,482

162

5,600

135,299

706,451

(1,219,185

)

(115,360

)

(491,189

)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

1.	Basis of Presentation

Hovnanian Enterprises, Inc. and Subsidiaries (the ~~“Company”~~“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 ~~16)~~16).

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.

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~~10-Q and Article 10 of Regulation ~~S-X~~S-X and accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form ~~10-K~~10-K for the fiscal year ended October 31, ~~2016.~~2017. 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 condensed consolidated financial position, results of operations and cash flows. The preparation of Condensed Consolidated 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 Condensed Consolidated 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, 2016 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.

~~Reclassifications~~

In November 2016, we adopted Accounting Standards Update (“ASU”) 2015-03, “Interest - Imputation of Interest,” which changes the presentation of debt issuance costs in the balance sheet from an asset to a direct reduction of the carrying amount of the related debt. The adoption of this guidance resulted in the reclassification of applicable unamortized debt issuance costs from “Prepaid expenses and other assets” of $24.5 million to “Nonrecourse mortgages secured by inventory” of $1.3 million, “Liabilities from inventory not owned” of $3.0 million and “Notes payable and term loan” of $20.2 million on our Condensed Consolidated Balance Sheets. We applied the new guidance retrospectively to all prior periods presented in the financial statements to conform to the fiscal 2017 presentation. Additionally, in November 2016, we adopted ASU 2015-15 “Interest - Imputation of Interest (Subtopic 835-30)” (“ASU 2015-15”), which was issued as a follow-up to ASU 2015-03. ASU 2015-15 allows an entity to defer and present debt issuance costs for line-of-credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Therefore, there was no change to the presentation of our “Revolving credit facility” on the Condensed Consolidated Balance Sheets for any of the periods presented.

2.	Stock Compensation

The Company ~~had~~’s total stock-based compensation expense of was $~~0.1~~1.0 million and ~~$1.6~~$0.5 million for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017, respectively,~~ 2018 and ~~stock-based compensation expense of $1.0 million and $1.8 million ($0.8 million and $1.5 million net of tax) for the three and nine months ended July 31, 2016,~~2017, respectively. Included in this total stock-based compensation ~~for the three and nine months ended July 31, 2017~~expense was the vesting of stock options of ~~$0.2~~$0.2 million and ~~$0.4 million, respectively. Included in total stock based compensation was expense of $0.3~~$0.1 million for the three months ended ~~July~~January 31, ~~2016~~ 2018 and income of $1.6 million for the nine months ended July 31, 2016, in each case related to stock options. The income was due to $2.1 million of previously recognized expense of certain performance based stock option grants for which the performance metrics were no longer expected to be satisfied, partially offset by expense from the vesting of stock options of $0.5 million during the nine months ended July 31, 2016.2017, respectively.

Interest

Interest costs incurred, expensed and capitalized were:

Three Months Ended
July 31,

Nine Months Ended
July 31,

(In thousands)

2017

2016

2017

2016

Interest capitalized at beginning of period
$ 90,960 $ 115,809 $ 96,688 $ 123,898
Plus interest incurred (1)
39,089 40,300 116,944 126,483
Less cost of sales interest expensed
19,371 28,406 58,030 66,693
Less other interest expensed (2)(3)
23,559 23,159 68,483 68,468
Less interest contributed to unconsolidated joint venture (4)
- - - 10,676
Interest capitalized at end of period (5)
$ 87,119 $ 104,544 $ 87,119 $ 104,544

	Three Months Ended January 31,
(In thousands)	2018		2017
Interest capitalized at beginning of period	$	71,051	$	96,688
Plus interest incurred(1)		41,165		38,699
Less cost of sales interest expensed		12,292		18,322
Less other interest expensed(2)(3)		29,131		22,627
Interest capitalized at end of period(4)	$	70,793	$	94,438

~~(1)~~(1)

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

~~(2)~~(2)

Other interest expensed includes interest that does not qualify for interest capitalization because our assets that qualify for interest capitalization (inventory under development) do not exceed our debt, which amounted to ~~$17.2~~$19.6 million and ~~$10.1~~$13.3 million for the three months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016, respectively, and $46.5 million and $36.8 million for the nine months ended July 31,~~ 2017, ~~and 2016,~~ respectively. Other interest also includes interest on completed homes, land in planning and fully developed lots without homes under construction, which does not qualify for capitalization, and therefore, is expensed. This component of other interest was ~~$6.4~~$9.6 million and ~~$13.1~~$9.3 million for the three months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016, respectively, and $22.0 million and $31.6 million for the nine months ended July 31,~~ 2017, ~~and 2016,~~ respectively.

~~(3)~~(3)

Cash paid ~~for~~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 on notes payable, which is calculated as follows:

Three Months Ended
July 31,

Nine Months Ended
July 31,

(In thousands)

2017

2016

2017

2016

Other interest expensed
$ 23,559 $ 23,159 $ 68,483 $ 68,468
Interest paid by our mortgage and finance subsidiaries
465 706 1,549 2,116
Decrease in accrued interest
17,528 8,641 18,882 9,909
Cash paid for interest, net of capitalized interest
$ 41,552 $ 32,506 $ 88,914 $ 80,493

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	Three Months Ended January 31,
(In thousands)	2018		2017
Other interest expensed	$	29,131	$	22,627
Interest paid by our mortgage and finance subsidiaries		601		629
Decrease in accrued interest		26,750		763
Cash paid for interest, net of capitalized interest	$	56,482	$	24,019

~~(4)~~

Represents capitalized interest which was included as part of the assets contributed to the joint venture the Company entered into in November 2015, as discussed in Note 17. There was no impact to the Condensed Consolidated Statement of Operations as a result of this transaction.

~~(5)~~(4)

Capitalized interest amounts are shown gross before allocating any portion of impairments, if any, to capitalized interest.

4.	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~~In the ~~nine months ended July 31,~~ first quarter of fiscal 2018, we did not record impairment losses, therefore, no discount rate was used for impairments. In the first quarter of fiscal 2017, our discount rate used for ~~the~~ impairments recorded ranged from 18.3% to 19.8%. For the nine months ended July 31, 2016, our discount rate used for the impairments recorded ranged from 16.8% to 18.5%. No discount rate was used for communities impaired on land held for sale and purchase offer prices were used to determine the fair value of such communities. 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 ~~nine~~three months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016,~~2017, we evaluated inventories of all ~~380~~387 and ~~418~~390 communities under development and held for future development or sale, respectively, for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. During the three months ended January 31, 2018, we did not find any indicators of impairment and therefore did not perform any detailed impairment calculations.We performed detailed impairment calculations during the ~~nine~~three months ended ~~July~~January 31, 2017 ~~and 2016~~ for ~~10 and 22~~six of those communities (i.e., those with a projected operating loss or other impairment indicators), ~~respectively,~~ with an aggregate carrying value of ~~$82.7 million and $95.5 million, respectively.~~$13.8 million. Of those communities tested for impairment during the ~~nine~~three months ended ~~July~~January 31, 2017, ~~and 2016, three and 11 communities~~one community with an aggregate carrying value of ~~$45.8~~$1.2 million, ~~and $47.8 million, respectively,~~ had undiscounted future cash ~~flows~~flow that only exceeded the carrying amount by less than 20%. As a result of our impairment analysis, we recorded ~~aggregate~~ impairment losses ~~of $3.2 million and $7.4 million, in one and seven communities, respectively, with aggregate pre-impairment values of $15.9 million and $37.0 million, respectively,~~ for the three ~~and nine~~ months ended ~~July~~January 31, 2017, respectively. We recorded aggregate impairment losses of $1.3 million and $16.4 million, in two and 12 communities, respectively, with an aggregate pre-impairment values of $5.4 million and $50.8 million, respectively, for the three and nine months ended July 31, 2016, respectively, which are included in the Condensed Consolidated ~~Statements~~Statement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from ~~inventory. Impairments decreased~~inventory, of $2.7 million for ~~the nine months ended July 31, 2017 compared to the same period~~five communities, with a pre-impairment value of ~~the prior year as the impairments recorded for the nine months ended July 31, 2016 were mainly for land held for sale in the Midwest and Northeast.~~$12.6 million. The pre-impairment value represents the carrying value, net of prior period impairments, if any, at the time of recording the impairment.

The Condensed Consolidated ~~Statements~~Statement of Operations line entitled ~~“Homebuilding:~~“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’~~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 ~~$1.0~~$0.4 million and ~~$0.2~~$0.5 million for the three months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016, respectively, and $1.9 million and $6.5 million for the nine months ended July 31,~~ 2017, ~~and 2016,~~ respectively. Such write-offs were primarily located in our Northeast, Mid-Atlantic and Southeast segments for the first three quarters of fiscal 2017 and in all of our segments for the first three quarters of fiscal 2016. 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 number of lots walked away from during the three months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016~~2017 were ~~1,200~~627 and ~~1,570, respectively,~~1,061, respectively. The walk-aways were located in all segments except the Southeast in the first quarter of fiscal 2018 and ~~2,739~~located in all segments except the Southwest and ~~5,089 during~~West in the ~~nine months ended July 31, 2017 and 2016, respectively.~~first quarter of 2017.

We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified on our Condensed Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the first ~~three quarters~~ quarter of fiscal ~~2017,~~2018, we did not mothball any additional communities, ~~but we sold three~~or sell any previously mothballed communities, ~~and~~but we re-activated ~~two~~one previously mothballed ~~communities.~~community. As of ~~July~~January 31, 2018 and October 31, 2017, ~~and October 31, 2016,~~ the net book value associated with our 2421 and 2922 total mothballed communities was ~~$61.6~~$35.6 million and ~~$74.4~~$36.7 million, respectively, which was net of impairment charges recorded in prior periods of ~~$239.0~~$206.5 million and ~~$296.3~~$214.1 million, respectively.

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 Accounting Standards Codification (“ASC”) 360-20-40-38, we are required to record this inventory on our Condensed Consolidated Balance Sheets. As of January 31, 2018 and October 31, 2017, we had no specific performance options.

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We sell and lease back certain of our model ~~homes~~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,~~360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheets, at ~~July~~January 31, 2018 and October 31, 2017, ~~and October 31, 2016,~~ inventory of ~~$70.9~~$39.4 million and ~~$79.2~~$58.5 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of ~~$62.7~~$35.8 million and ~~$69.7~~$51.8 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

We have land banking arrangements, whereby we sell our land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined ~~basis.~~schedule. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC ~~360-20-40-38,~~360-20-40-38, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheets, at ~~July~~January 31, 2018 and October 31, 2017, ~~and October 31, 2016,~~ inventory of ~~$67.6~~$54.5 million and ~~$129.5~~$66.3 million, respectively, was recorded asto “Consolidated inventory not owned,” with a corresponding amount of ~~$35.8~~$32.2 million and ~~$80.5~~$39.3 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

5.	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~~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 ~~July~~January 31,2018 and October 31, 2017, ~~and October 31, 2016,~~ 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 ~~July~~January 31, ~~2017,~~ 2018, we had total cash deposits amounting to ~~$48.6~~$56.3 million to purchase land and lots with a total purchase price of ~~$942.1 million.~~$1.0 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.

6.	Warranty Costs

General liability insurance for homebuilding companies and their suppliers and subcontractors is very difficult to obtain. The availability of general liability ~~insurance~~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 ~~nine~~three months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016,~~2017, we received ~~$3.0~~$1.0 million and ~~$3.1~~$0.9 million, respectively, from subcontractors related to the owner controlled insurance program, which we accounted for as a reduction to inventory.

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We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general ~~liability~~liability insurance deductible. This accrual is expensed as selling, general and administrative costs. For homes delivered in fiscal ~~2017~~2018 and ~~2016,~~2017, our deductible under our general liability insurance is a ~~$20~~$20 million aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal ~~2017~~2018 and ~~2016~~2017 is ~~$0.25~~$0.25 million, up to a $5$5 million limit. Our aggregate retention ~~in fiscal 2017 and 2016 is $21 million~~ for construction defect, warranty and bodily injury ~~claims.~~claims is $20 million for fiscal 2018 and $21 million for fiscal 2017. 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 three ~~and nine~~ months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016~~2017 were as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended January 31,
(In thousands)	2017			2016			2017			2016			2018			2017

Balance, beginning of period	$	117,207		$	136,706		$	121,144		$	135,053		$	127,702		$	121,144

Additions - Selling, general and administrative		2,639			4,247			8,403			13,162
Additions - Cost of sales		4,434			4,426			11,436			12,347
Additions – Selling, general and administrative														2,169			2,908
Additions – Cost of sales														5,745			3,487
Charges incurred during the period		(5,489	)		(5,942	)		(22,192	)		(21,125	)		(6,302	)		(9,526	)
Changes to pre-existing reserves		-			-			-			-			-			-
Balance, end of period	$	118,791		$	139,437		$	118,791		$	139,437		$	129,314		$	118,013

Warranty accruals are based upon historical experience. We engage a ~~third-party~~third-party actuary that uses our historical warranty and construction defect 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 construction defect programs. The estimates include provisions for inflation, claims handling and legal fees.

Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were ~~$0.5 million and $0.2~~less than$0.1 million for both the three months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016, respectively, and $0.7 million and $3.9 million for the nine months ended July 31,~~ 2017 ~~and 2016, respectively,~~ for prior year deliveries. ~~During the first three quarters of fiscal 2016, we settled~~ ~~two construction defect claims relating to the Northeast segment which made up the majority of the payments.~~

7.	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, results of operations or cash flows, and we are subject to extensive and complex laws and regulations that affect the development of land and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These laws and regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.

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 storm water 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~~ a site may vary greatly according to the community site, for example, due to the ~~site’s~~community, the environmental conditions at or near the site, 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.

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 began 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 again in March 2017 and the Company has responded to its information requests.

The Grandview at Riverwalk Port Imperial Condominium Association, Inc. filed a construction defect lawsuit against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Port Imperial Urban Renewal II, LLC, K. Hovnanian Construction Management, Inc., K. Hovnanian Companies, LLC, K. Hovnanian Enterprises, Inc., K. Hovnanian North East, Inc. aka and/or dba K. Hovnanian Companies North East, Inc., K. Hovnanian Construction II, Inc., K. Hovnanian Cooperative, Inc., K. Hovnanian Development of New Jersey, Inc., and K. Hovnanian Holdings NJ, LLC, as well as the project architect, the geotechnical engineers and various construction contractors for the project alleging various construction defects, design defects and geotechnical issues totaling approximately $41.3 million. The lawsuit included claims against the geotechnical engineers for differential soil settlement under the building, against the architects for failing to design the correct type of structure allowable under the New Jersey Building Code, and against the Hovnanian developer entity (K. Hovnanian at Port Imperial Urban Renewal II, LLC ) alleging that it: (1) had knowledge of and failed to disclose the improper building classification to unit purchasers and was therefore liable for treble damages under the New Jersey Consumer Fraud Act; and (2) breached an express warranty set forth in the Public Offering Statements that the common elements at the building were fit for their intended purpose. The Plaintiff further alleged that Hovnanian Enterprises, Inc., K. Hovnanian Holdings NJ, LLC, K. Hovnanian Development of New Jersey, Inc., and K. Hovnanian Developments of New Jersey II, Inc. were jointly liable for any damages owed by the Hovnanian development entity under a veil piercing theory.

The parties reached a settlement on the construction defect issues prior to trial, but attempts to settle the subsidence, building classification issue and Consumer Fraud Act claims were unsuccessful. The trial commenced on April 17, 2017 in Hudson County, New Jersey. In the third week of the trial, all of the Hovnanian defendants resolved the geotechnical claims for an amount immaterial to the Company, but the balance of the case continued to be tried before the jury. On June 1, 2017, the jury rendered a verdict against K. Hovnanian at Port Imperial Urban Renewal II, LLC on the breach of warranty and New Jersey Consumer Fraud claims in the total amount of $3 million, which resulted in a total verdict of $9 million against that entity due to statutory trebling, plus a to-be-determined portion of Plaintiff’s counsel fees, per the statute. The jury also found in favor of Plaintiff on its veil piercing theory. The parties have fully briefed post-trial motions on three issues: (1) the Hovnanian defendants’ motion for a judgment notwithstanding the verdict or a new trial; (2) the Hovnanian defendants’ motion addressing whether any of the Hovnanian entities could be jointly liable under a veil piercing theory for the damages awarded against K. Hovnanian at Port Imperial Urban Renewal II, LLC; and (3) the Hovnanian defendants’ motion for contractual indemnification against the project architect. The judge has set a return date of September 29, 2017 for all three motions. Once these motions are decided, the relevant Hovnanian defendants plan on appealing any remaining adverse portions of the verdict and judgment. With respect to this case, depending on the rulings of the judge and the outcome of any appeals, the range of loss is between $0 and $9 million plus the to-be-determined attorneys’ fees. Management believes that a loss is probable and reasonably estimable and that the Company has reserved for its estimated probable loss amount in its construction defect reserves. However, our assessment of the probable loss may differ from the ultimate resolution of this matter.

The Condominium Association of a second condominium project located nearby the Grandview at Riverwalk Port Imperial Condominium project also initiated a lawsuit against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Port Imperial Urban Renewal III, LLC, K. Hovnanian Homes (not a legal entity but named as a defendant), K. Hovnanian Shore Acquisitions, LLC, K. Hovnanian Construction Management, Inc., K. Hovnanian Companies, LLC, K. Hovnanian Northeast, Inc., K. Hovnanian Enterprises, Inc., K. Hovnanian Construction III, Inc., K. Hovnanian Cooperative, Inc., and K. Hovnanian Investments, LLC, as well as other design professionals and contractors asserting similar claims for construction defects, design defects and geotechnical issues. Plaintiff in this case asserts damages of approximately $70 million, which amount is potentially subject to treble damages. Discovery is ongoing in this matter, and the trial is scheduled for January 2018. The Hovnanian defendants intend to defend these claims vigorously. With respect to this case, it is not yet possible to determine if a loss is probable or reasonably estimable.

We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. For example, for a number of years, the EPA and U.S. Army Corps of Engineers have been engaged in rulemakings to clarify the scope of federally regulated wetlands, which included a June 2015 rule many affected businesses contend impermissibly expanded the scope of such wetlands that was challenged in court, stayed, and remains in litigation, a proposal in June 2017 to formally rescind the June 2015 rule and reinstate the rule scheme previously in place while the agencies initiate a new substantive rulemaking on the issue and a February 2018 rule delaying the effective date of the June 2015 rule until February 2020 (which is being challenged in federal court by a number of states). It is unclear how these and related developments, including at the state or local level, ultimately may affect the scope of regulated wetlands where we operate. Although we cannot reliably predict the extent of any effect these developments regarding wetlands, or any other requirements that may take effect 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.

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 tests on soil samples from properties within the development conducted by the EPA showed 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 began 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 again in March 2017 and the Company has responded to its information requests.

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The Grandview at Riverwalk Port Imperial Condominium Association, Inc. (the “Grandview Plaintiff”) filed a construction defect lawsuit against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Port Imperial Urban Renewal II, LLC, K. Hovnanian Construction Management, Inc., K. Hovnanian Companies, LLC, K. Hovnanian Enterprises, Inc., K. Hovnanian North East, Inc. aka and/or dba K. Hovnanian Companies North East, Inc., K. Hovnanian Construction II, Inc., K. Hovnanian Cooperative, Inc., K. Hovnanian Developments of New Jersey, Inc., and K. Hovnanian Holdings NJ, LLC, as well as the project architect, the geotechnical engineers and various construction contractors for the project alleging various construction defects, design defects and geotechnical issues totaling approximately $41.3 million. The lawsuit included claims against the geotechnical engineers for differential soil settlement under the building, against the architects for failing to design the correct type of structure allowable under the New Jersey Building Code, and against the Hovnanian-affiliated developer entity (K. Hovnanian at Port Imperial Urban Renewal II, LLC ) alleging that it: (1) had knowledge of and failed to disclose the improper building classification to unit purchasers and was therefore liable for treble damages under the New Jersey Consumer Fraud Act; and (2) breached an express warranty set forth in the Public Offering Statements that the common elements at the building were fit for their intended purpose. The Grandview Plaintiff further alleged that Hovnanian Enterprises, Inc., K. Hovnanian Holdings NJ, LLC, K. Hovnanian Developments of New Jersey, Inc., and K. Hovnanian Developments of New Jersey II, Inc. were jointly liable for any damages owed by the Hovnanian development entity under a veil piercing theory.

The parties reached a settlement on the construction defect issues prior to trial, but attempts to settle the subsidence, building classification issue and Consumer Fraud Act claims were unsuccessful. The trial commenced on April 17, 2017 in Hudson County, New Jersey. In the third week of the trial, all of the Hovnanian defendants resolved the geotechnical claims for an amount immaterial to the Company, but the balance of the case continued to be tried before the jury. On June 1, 2017, the jury rendered a verdict against K. Hovnanian at Port Imperial Urban Renewal II, LLC on the breach of warranty and New Jersey Consumer Fraud claims in the total amount of $3 million, which resulted in a total verdict of $9 million against that entity due to statutory trebling, plus a to-be-determined portion of Grandview Plaintiff’s counsel fees, per the statute. The jury also found in favor of Grandview Plaintiff on its veil piercing theory. Certain Hovnanian-affiliated defendants filed post-trial motions on three issues: (1) a motion for a judgment notwithstanding the verdict or a new trial; (2) a motion addressing whether any of the Hovnanian-affiliated entities could be jointly liable under a veil piercing theory for the damages awarded against K. Hovnanian at Port Imperial Urban Renewal II, LLC; and (3) a motion for contractual indemnification against the project architect. On October 27, 2017, the Court addressed a number of post-trial motions. The Court denied the motion for a judgment notwithstanding the verdict or a new trial, and held that Hovnanian Enterprises, Inc. and its affiliate, K. Hovnanian Developments of New Jersey, Inc., are jointly liable for the damages awarded against K. Hovnanian at Port Imperial Urban Renewal II, LLC. On November 18, 2017, the Court awarded approximately $1.8 million in attorney fees and costs to Grandview Plaintiff out of the approximately $4.8 million it had sought. Certain Hovnanian-affiliated defendants filed a motion for reconsideration of the Court’s decision on attorney fees and costs. In an order dated December 15, 2017, the Court granted the motion for reconsideration and reduced its award of attorney fees and costs to approximately $1.4 million. Final judgement in the amount of approximately $10.4 million was entered on January 12, 2018.

On January 24, 2018, the relevant Hovnanian-affiliated defendants filed a notice of appeal of all aspects of the verdict against them and a motion seeking a stay of execution of the judgement pending appeal. On February 16, 2018, the Court entered an order staying execution of the judgement provided that the Hovnanian-affiliated defendants post a supersedeas bond in the amount of approximately $11.1 million. On February 23, 2018, the Hovnanian-affiliated defendants timely submitted the bond for the Court's approval. With respect to this case, depending on the outcome of all appeals, the range of loss is between $0 and $11.1 million, inclusive of attorney fees and costs. Management believes that a loss is probable and reasonably estimable and that the Company has reserved for its estimated probable loss amount in its construction defect reserves. However, our assessment of the probable loss may differ from the ultimate resolution of this matter.

In 2014, the condominium association of the Grandview II at Riverwalk Port Imperial condominium building (the “Grandview II Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Hudson County (the “Court”) alleging various construction defects, design defects, and geotechnical issues relating to the building along with a claim for piercing the corporate veil as to certain defendants. The operative complaint (“Complaint”) brought claims against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Port Imperial Urban Renewal III, LLC, PI Investments I, LLC, K. Hovnanian Investments, LLC, K. Hovnanian Homes (not a legal entity but named as a defendant), K. Hovnanian Shore Acquisitions, LLC, K. Hovnanian Construction Management, Inc., K. Hovnanian Companies, LLC, K. Hovnanian Northeast, Inc., K. Hovnanian Enterprises, Inc., K. Hovnanian Construction III, Inc. and K. Hovnanian Cooperative, Inc. The Complaint also brought claims against various other design professionals and contractors. Grandview II Plaintiff asserted damages of approximately $69 million to $79 million, which amount was potentially subject to treble damages. On December 7, 2017, the Court issued orders adjudicating various parties’ motions for summary judgment. The Court issued an order that granted Grandview II Plaintiff’s motion for partial summary judgment on the claim seeking to pierce the corporate veil of K. Hovnanian at Port Imperial Urban Renewal III, LLC and ordered that Hovnanian Enterprises, Inc. shall be jointly and severally liable for any damages awarded against K. Hovnanian at Port Imperial Urban Renewal III, LLC, including any treble damages and attorney fees and costs. The Court also issued an order dismissing Grandview II Plaintiff’s claims for negligence and breach of implied warranties against certain Hovnanian-affiliated defendants. As of December 14, 2017, the Hovnanian-affiliated defendants reached a settlement with Grandview II Plaintiff that resolved all claims in the case involving the Hovnanian-affiliated defendants. As of October 31, 2017, the Company had fully reserved for this settlement amount. On December 15, 2017, the Court issued an order dismissing the action.

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On December 21, 2016, the members of the Company’s Board were named as defendants in a derivative and class action lawsuit filed in the Delaware Court of Chancery by Plaintiff Joseph Hong (“Plaintiff Hong”). Plaintiff Hong had previously made a demand for inspection of the books and records of the Company pursuant to Delaware law. The Company had provided certain company documents in response to Plaintiff Hong’s demand. The complaint relates to the Board of Directors’ decisions to grant Ara K. Hovnanian equity awards in the form of Class B Common Stock, alleging that the defendants breached their fiduciary duties to the Company and its stockholders; that the equity awards granted in Class B Common Stock amounted to corporate waste; and that Ara. K Hovnanian was unjustly enriched by equity awards granted to him in Class B Common Stock. The complaint seeks a declaration that the equity awards granted to Ara K. Hovnanian in Class B Common Stock between June 13, 2014 and June 10, 2016 were ultra vires, invalidation or rescission of those awards, injunctive relief, and unspecified damages.

On December 18,2017, the parties finalized a settlement agreement to resolve the litigation. Pursuant to the settlement agreement, which remains subject to approval by the Chancery Court, the Company will submit for stockholder approval at the next Annual Meeting of Stockholders a resolution to amend the Company’s Certificate of Incorporation to affirm that in the event of a merger, consolidation, acquisition, tender offer, recapitalization, reorganization or other business combination, the same consideration will be provided for shares of Class A Common Stock and Class B Common Stock unless different treatment of the shares of each such class is approved separately by a majority of each class. The Company has also agreed to implement certain operational and corporate governance measures regarding the granting of equity awards in Class B Common Stock and, further, that it will not oppose an application by Plaintiff Hong for attorney’s fees up to $275,000, the amount of which is subject to approval by the Court.

On January 11, 2018, Solus Alternative Asset Management LP (“Solus”) filed a complaint in the United States District Court for the Southern District of New York against GSO Capital Partners L.P., Hovnanian Enterprises, Inc. (“Hovnanian”), K. Hovnanian Enterprises, Inc. (“K. Hovnanian”), K. Hovnanian at Sunrise Trail III, LLC, Ara K. Hovnanian and J. Larry Sorsby. The complaint related to K. Hovnanian’s offer to exchange up to $185.0 million aggregate principal amount of its 8.0% Senior Notes due 2019 for a combination of (i) cash, (ii) K. Hovnanian’s newly issued 13.5% Senior Notes due 2026 and (iii) K. Hovnanian’s newly issued 5.0% Senior Notes due 2040 and related transactions that were previously disclosed in Hovnanian’s Current Report on Form 8-K filed on December 28, 2017. The complaint alleged, among other things, inadequate disclosure in the exchange offer documents, improper and fraudulent structuring of the transactions to impact the credit default swap market, violations of Sections 10(b), 14(e) and 20(a) of the Securities Exchange Act of 1934, and tortious interference with prospective economic advantage. Solus sought, among other things, additional disclosures regarding the transactions, compensatory and punitive damages, and a preliminary and permanent injunction to stop the transactions from going forward. The court held a hearing on Solus’ motion for a preliminary injunction on January 25, 2018. On January 29, 2018, the court denied the motion, finding that Solus failed to show that it would be irreparably harmed in the absence of an injunction.

Solus filed an amended complaint on February 1, 2018, against the same defendants. Like the initial complaint, the amended complaint alleges improper and fraudulent structuring of the transactions to impact the credit default swap market, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and tortious interference with prospective economic advantage. Solus no longer asserts inadequate disclosure claims under Sections 10(b) and 14(e). In place of injunctive relief, Solus seeks a declaratory judgment that Sunrise Trail III, LLC has waived its entitlement to interest payments under the indenture governing the 8.0% Senior Notes due 2019 and that the exchange offer breached this indenture. The defendants moved to dismiss the amended complaint on March 2, 2018.

Hovnanian believes that the claims and allegations set forth in the Solus complaint are without merit and intends to defend against them vigorously. Hovnanian is actively seeking insurance coverage for the litigation costs related to the Solus claims.

8.	Cash and Cash Equivalents, Restricted Cash and Cash Equivalents and Customer's Deposits

Cash represents cash deposited in checking accounts. Cash equivalents include certificates of deposit, Treasury bills and government ~~money~~ 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 ~~July~~January 31, ~~2017~~2018 and October 31, ~~2016, $6.4~~2017, $12.5 million and ~~$9.4~~$13.3 million, respectively, of the total cash and cash equivalents was in cash equivalents, the book value of which approximates fair value.

Homebuilding - Restricted cash and cash equivalents on the Condensed Consolidated Balance Sheets totaled ~~$25.4~~$3.2 million and ~~$22.9~~$2.1 million as of ~~July~~January 31, ~~2017~~2018 and October 31, ~~2016,~~2017, respectively, which ~~includes~~included cash collateralizing our letter of credit agreements and facilities as discussed in Note ~~10.~~11. Also included in this balance were ~~(1)~~ homebuilding customers’ deposits of $0.5 million and $0.4 million at January 31, 2018 and October 31, 2017, respectively, which are subject to restrictions on our use.

Financial services restricted cash and cash equivalents, which are included in Financial services other assets on the Condensed Consolidated Balance Sheets, totaled $15.9 million and $22.3 million as of January 31, 2018 and October 31, 2017, respectively. Included in this balance were (1) financial services customers’ deposits of ~~$0.3 million and $20.6~~$13.9 million at ~~July~~January 31, ~~2017, respectively,~~2018 and ~~$2.2 million and $15.1~~$20.0 million as of October 31, ~~2016, respectively,~~2017 which are ~~restricted from~~subject to restrictions on our use, ~~by us,~~ and (2) ~~$2.8~~$2.0 million ~~of restricted cash~~ at ~~July~~January 31, ~~2017~~2018 and ~~$3.9~~$2.3 million at October 31, ~~2016~~2017, respectively, of restricted cash under the terms of our mortgage warehouse lines of credit.

Total Homebuilding Customers’ deposits are shown as a liability on the Condensed 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.

9.	Mortgage Loans Held for Sale

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 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 Condensed Consolidated Statements of Operations in “Revenues: Financial services.” We currently use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to ~~third-party~~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 purchaser 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 Condensed Consolidated Statements of Operations in “Revenues: Financial services.”

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At ~~July~~January 31, 2018 and October 31, 2017, ~~and October 31, 2016, $65.4~~$64.5 million and ~~$147.4~~$119.6 million, respectively, of mortgages held for sale were pledged against our mortgage warehouse lines of credit (see Note ~~10)~~10). We may incur losses with respect to mortgages that were previously sold that are delinquent and which had underwriting defects, but only to the extent the losses are not covered by mortgage insurance or ~~the~~ resale value of the home. The reserves for these estimated losses are included in the “Financial ~~services - Accounts payable and other liabilities”~~services” balances on the Condensed Consolidated Balance Sheets. As of ~~July~~January 31, ~~2017~~ 2018 and ~~2016,~~2017, we had reserves specifically for 94 45and ~~130~~93 identified mortgage loans, respectively, as well as reserves for an estimate for future losses on mortgages sold but not yet identified to us. In fiscal 2017, the adjustment to pre-existing provisions for losses from changes in estimates is primarily due to the settlement of a dispute for significantly less than the amount that had been previously reserved.

The activity in our loan origination reserves during the three ~~and nine~~ months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016~~2017 was as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended January 31,
(In thousands)	2017			2016			2017			2016			2018		2017

Loan origination reserves, beginning of period	$	3,782		$	8,306		$	8,137		$	8,025		$	3,158	$	8,137
Provisions for losses during the period	$	41			45		$	120			203			30		34
Adjustments to pre-existing provisions for losses from changes in estimates		(51	)		(27	)	$	(4,485	)		96			0		(3,094	)
Payments/settlements					(197	)					(197	)
Loan origination reserves, end of period	$	3,772		$	8,127		$	3,772		$	8,127		$	3,188	$	5,077

10.

Mortgages ~~and Notes Payable~~

We ~~had~~have nonrecourse mortgage loans for certain communities totaling ~~$70.8 million and $82.1~~$64.5 million (net of debt issuance costs) at ~~July~~both January 31, 2018 and October 31, 2017, ~~and October 31, 2016,~~ respectively, which are secured by the related real property, including any improvements, with an aggregate book value of ~~$170.9~~$172.7 million and ~~$201.8~~$157.8 million, respectively. The weighted-average interest rate on these obligations was ~~5.5%~~ 5.3% at both January 31, 2018 and ~~4.9% at July~~October 31, 2017 ~~and October 31, 2016, respectively,~~ and the mortgage loan payments on each community primarily correspond to home deliveries. We also had nonrecourse mortgage loans on our corporate headquarters totaling ~~$13.3 million and $14.3~~$13.0 million at ~~July 31, 2017 and~~ October 31, ~~2016, respectively. These loans had a weighted-average interest rate of 8.9% at July 31,~~2017. On November 1, 2017, ~~and 8.8% at October 31, 2016, respectively. As of July 31, 2017,~~ these loans ~~had installment obligations~~were paid in full in connection with ~~annual principal maturities in~~ the ~~years ending October 31 of: $0.3 million in 2017, $1.4 million in 2018, $1.5 million in 2019, $1.7 million in 2020, $1.8 million in 2021 and $6.6 million after 2021.~~sale of our corporate headquarters building.

~~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 11. 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 July 31, 2017 there were $52.0 million of borrowings and $15.0 million of letters of credit outstanding under the Credit Facility. As of October 31, 2016, there were $52.0 million of borrowings and $17.9 million of letters of credit outstanding under the Credit Facility. As of July 31, 2017, 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 was a total of $1.7 million letters of credit outstanding at both July 31, 2017 and October 31, 2016, 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 both July 31, 2017 and October 31, 2016, the amount of cash collateral in these segregated accounts was $1.7 million, which is reflected in “Restricted cash and cash equivalents” 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. In certain instances, we retain the servicing rights for a small amount of loans. K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in financial services liabilities on the Condensed Consolidated Balance Sheets.

Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”), which was amended on ~~July~~January 31, ~~2017~~ 2018 to extend the maturity to ~~July~~January 31, ~~2018,~~ 2019, is a short-term borrowing facility that provides up to ~~$50.0~~$50.0 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 on outstanding advances at an adjusted LIBOR rate, which was ~~1.23%~~1.58% at ~~July~~January 31, ~~2017,~~ 2018, plus the applicable margin of 2.5% or 2.63% based upon type of loan. As of ~~July~~January 31, 2018 and October 31, 2017, ~~and October 31, 2016,~~ the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was ~~$24.7~~$21.3 million and ~~$44.1~~$41.5 million, respectively.

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K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master Repurchase Agreement”), which was amended on February ~~17, 2017,~~ ~~which~~16, 2018. The Customers Master Repurchase Agreement is a short-term borrowing facility that provides up to ~~$50.0~~$50.0 million through its maturity on February ~~16, 2018.~~ 15, 2019. 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 rate, plus the applicable margin ranging from ~~2.5%~~2.375% to ~~5.25%~~5.125% based on the type of loan and the number of days outstanding on the warehouse line. As of ~~July~~January 31, 2018 and October 31, 2017, ~~and October 31, 2016,~~ the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was ~~$31.2~~$29.6 million and ~~$38.8~~$40.7 million, respectively.

K. Hovnanian Mortgage also has a secured Master Repurchase Agreement with Comerica Bank (“Comerica Master Repurchase Agreement”), which was amended on ~~June 23,~~December 22, 2017, ~~to extend the maturity date to June 21, 2018. The Comerica Master Repurchase Agreement~~that is a short-term borrowing facility that provides up to ~~$50.0~~$50.0 million through ~~maturity.~~ December 20, 2018. 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 the current LIBOR rate, subject to a floor of 0.25%, plus the applicable margin of ~~2.5%~~2.375%. As of ~~July~~January 31, 2018 and October 31, 2017, ~~and October 31, 2016,~~ the aggregate principal amount of all borrowings outstanding under the Comerica Master Repurchase Agreement was ~~$6.2~~$12.1 million and ~~$29.8~~$32.4 million, respectively.

~~K. Hovnanian Mortgage had a secured Master Repurchase Agreement with Credit Suisse First Boston Mortgage Capital LLC~~ which was a short-term borrowing facility that provided up to $50.0 million through its maturity on February 21, 2017. The facility was not renewed after maturity, therefore there were no outstanding borrowings thereunder as of July 31, 2017. As of October 31, 2016, the aggregate principal amount of all borrowings outstanding was $32.9 million.

The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Comerica Master Repurchase Agreement (together, the ~~“Master~~“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 applicable agreement, we do not consider any of these covenants to be substantive or material. As of ~~July~~January 31, ~~2017,~~ 2018, we believe we were in compliance with the covenants under the Master Repurchase Agreements.

11.

Senior Notes and ~~Term Loan~~Credit Facilities

Senior ~~Notes~~notes and ~~Term Loan~~credit facilities balances as of ~~July~~January 31, ~~2017~~ 2018 and October 31, ~~2016,~~2017, were as follows:

(In thousands)	July 31, 2017(1)(2)		October 31, 2016(1)(2)		January 31, 2018(1)(2)		October 31, 2017(1)(2)
Senior Secured Term Loan, net of debt issuance costs	$	72,699	$	72,646
Senior Secured Term Loan due 2019, net of debt issuance costs					$	73,275	$	72,987
Senior Secured Notes:
7.25% Senior Secured First Lien Notes due October 15, 2020	$	-	$	569,641
10.0% Senior Secured Second Lien Notes due October 15, 2018 (net of discount)		-		68,951
9.125% Senior Secured Second Lien Notes due November 15, 2020		-		143,337
9.5% Senior Secured Notes due November 15, 2020		74,298		74,140	$	74,403	$	74,350
2.0% Senior Secured Notes due November 1, 2021 (net of discount)		53,049		53,022		53,067		53,058
5.0% Senior Secured Notes due November 1, 2021 (net of discount)		133,292		131,998		134,185		133,732
10.0% Senior Secured Notes due July 15, 2022		435,060		-		434,620		434,543
10.5% Senior Secured Notes due July 15, 2024		395,507		-		394,111		394,953
Total Senior Secured Notes, net of debt issuance costs	$	1,091,206	$	1,041,089	$	1,090,386	$	1,090,636
Senior Notes:
7.0% Senior Notes due January 15, 2019	$	131,839	$	148,800	$	132,074	$	131,957
8.0% Senior Notes due November 1, 2019		234,084		247,348		234,501		234,293
Total Senior Notes, net of debt issuance costs	$	365,923	$	396,148	$	366,575	$	366,250
11.0% Senior Amortizing Notes due December 1, 2017, net of debt issuance costs	$	2,018	$	6,152	$	-	$	2,045
Senior Exchangeable Notes due December 1, 2017, net of debt issuance costs	$	53,155	$	57,298	$	-	$	53,919
Unsecured Revolving Credit Facility					$	52,000	$	52,000

Table of the 10.0% 2022 Notes and the 10.5% 2024 Notes, K. Hovnanian and the Notes Guarantors entered into security and pledge agreements pursuant to which K. Hovnanian and the Notes Guarantors pledged substantially all of their assets to secure their obligations under the 10.0% 2022 Notes and the 10.5% 2024 Notes, subject to permitted liens and certain exceptions as set forth in such agreements. K. Hovnanian and the Notes Guarantors also entered into applicable intercreditor and collateral agency agreements which set forth agreements with respect to the relative priority of their various secured obligations.

The indenture governing the 10.0% 2022 Notes and the 10.5% 2024 Notes was entered into on July 27, 2017 among K. Hovnanian, the Notes Guarantors and Wilmington Trust, National Association, as trustee and collateral agent. The covenants and events of default in the indenture are described above under “~~—General”.~~

Contents

~~Other Secured Obligations~~

Our ~~$75.0 million senior secured term loan facility~~9.5% Senior Secured Notes (the ~~“Term Loan Facility”~~“9.5%2020 Notes”) ~~has a maturity of August 1, 2019 (provided that if any of K. Hovnanian~~’s 7.0% Notes remain outstanding on October 15, 2018, the maturity date of the Term Loan Facility will be October 15, 2018, or if any refinancing indebtedness with respect to the 7.0% Notes has a maturity date prior to January 15, 2021, the maturity date of the Term Loan Facility will be October 15, 2018) and bears interest at a rate equal to LIBOR plus an applicable margin of 7.0% or, at K. Hovnanian’s option, a base rate plus an applicable margin of 6.0%, payable monthly. At any time from and after September 8, 2018, K. Hovnanian may voluntarily repay outstanding Term Loans, provided that voluntary prepayments of Eurodollar loans made on a date other than the last day of an interest period applicable thereto are subject to customary breakage costs and voluntary prepayments made prior to February 1, 2019 are subject to a premium equal to 1.0% of the aggregate principal amount of the Term Loans so prepaid (any prepayment of the Term Loans made on or after February 1, 2019 are without any prepayment premium).

~~Our 9.5% 2020 Notes~~ have a maturity of November 15, 2020, and bear interest at a rate of ~~9.50%~~9.5% per annum, payable semi-annually onFebruary 15 and August 15 of each year, ~~commencing February 15, 2017,~~ to holders of record at the close of business on February 1 and August 1, as the case may be, immediately preceding such interest payment dates. The 9.5%2020 Notes are redeemable in whole or in part at our option at any time prior to November 15, 2018 at ~~100.0%~~100% of their principal amount plus an applicable “Make-Whole Amount.” At any time and from time to time on or after November 15, 2018, K. Hovnanian may also redeem some or all of the 9.5%2020 Notes at a redemption price equal to ~~100.0%~~100% of their principal amount. In addition, we may also redeem up to ~~35.0%~~35% of the aggregate principal amount of the 9.5%2020 Notes prior to November 15, 2018 with the net cash proceeds from certain equity offerings at ~~109.50%~~109.5% of principal.

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~~other than with respect to interest rate and related redemption provisions, and vote together as a single class. The 5.0% 2021 Notes bear interest at a rate of 5.0% per annum and mature on November 1, 2021 and the 2.0% 2021 Notes bear interest at a rate of 2.0% per annum and mature on November 1, 2021. Interest on the 2021 Notes is payable semi-annually on May 1 and November 1 of each year, to holders of record at the close of business on April 15 and October 15, as the case may be, immediately preceding such interest payment dates. 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 ~~1.0%~~1% of the principal amount and an applicable “Make-Whole Amount.”

~~All of K. Hovnanian’s obligations under the Term Loan Facility are guaranteed by the Notes Guarantors.~~ The ~~Term Loan Facility and the guarantees thereof are secured, subject to permitted liens and other exceptions, on a first lien priority basis relative to the 10.0% 2022~~9.5% 2020 Notes and the ~~10.5% 2024 Notes (and on a first lien super priority basis relative to future first lien indebtedness). The 9.5% 2020~~2021 Notes are guaranteed by the Notes Guarantors and the members of the JV Holdings Secured Group. The 9.5% 2020 Notes are secured on a pari passu first lien basis with K. Hovnanian’s 2021 Notes, by substantially all of the assets of the members of the JV Holdings Secured Group, subject to permitted liens and certain exceptions.

~~At July 31, 2017, the aggregate book value of the real property that constituted collateral securing the Term Loans was $~~544.3 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. Cash and cash equivalents collateral that secured the Term Loans was $202.5 million as of July 31, 2017, which included $1.7 million of restricted cash collateralizing certain letters of credit. Subsequent to such date, fluctuations as a result of cash uses include general business operations and real estate and other investments along with cash inflow primarily from deliveries. In addition, collateral securing the Term Loans includes equity interests in K. Hovnanian and the subsidiary Notes Guarantors.

~~The~~ guarantees of the JV Holdings Secured Group with respect to the 2021 Notes and the ~~9.5%~~ 9.50%2020 Notes are secured, subject to permitted liens and ~~other~~other exceptions, by a ~~first-priority~~first-priority lien on substantially all of the assets of the members of the JV Holdings Secured Group. As of ~~July~~January 31, ~~2017,~~ 2018, the collateral securing the guarantees included ~~(1) $77.7~~(1) $82.8 million of cash and cash equivalents, which included $1.0 million of restricted cash collateralizing certain letters of credit (subsequent to such date, fluctuations as a result of cash uses include general business operations and real estate and other investments along with cash inflow primarily from deliveries); ~~(2) $150.9~~(2) $140.3 million aggregate book value of real property of the JV Holdings 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)~~(3) equity interests inowned by guarantors that are members of the JV Holdings Secured Group. Members of the JV Holdings Secured Group also own equity in joint ventures, either directly or indirectly through ownership of joint venture holding companies, with a book value of ~~$84.5~~$65.4 million as of ~~July~~January 31, ~~2017;~~ 2018; this equity is not pledged to secure, and is not collateral for, the 2021 Notes. Members of the JV Holdings Secured Group are “unrestricted subsidiaries” under K. Hovnanian's other senior secured notes and senior notes, the Unsecured Revolving Credit Facility and the Existing Term Loan Facility, and thus have not guaranteed such indebtedness.

Senior Notes

As discussed in Note 21, on February 1, 2018, K. Hovnanian redeemed all of its outstanding $132.5 million aggregate principal amount of 7.0% Notes.

K. Hovnanian’s ~~7.0% Notes are redeemable in whole or in part at our option at any time at 101.75% of principal commencing January 15, 2017 and 100.0% of principal commencing January 15, 2018.~~

~~K. Hovnanian~~’s 8.0% 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 100.0% 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 at a redemption price equal to 100.0% of their principal amount.As discussed in Note 21, on February 1, 2018, K. Hovnanian accepted all of the $170.2 million aggregate principal amount of 8% Notes validly tendered and not validly withdrawn in the Exchange Offer, (representing 72.14% of the aggregate principal amount of 8% Notes outstanding prior to the Exchange Offer), issued the New Notes and as part of the Exchange Offer, the Subsidiary Purchaser purchased for $26.5 million in cash the Purchased 8.0% Notes, in each case, in accordance with the terms and conditions described in the Exchange Offer Documents.

~~Units~~Unsecured Revolving Credit Facility

~~On October 2, 2012, the Company and~~ In June 2013, K. Hovnanian ~~issued $100,000,000 aggregate stated amount~~Enterprises, Inc. (“K. Hovnanian”), as borrower, and we and certain of ~~6.0% Exchangeable Note Units~~our subsidiaries, as guarantors, entered into a five-year, $75.0 million unsecured revolving credit facility (the ~~“Units”~~“Unsecured Revolving Credit Facility”) ~~(equivalent to 100,000 Units).~~ ~~Each $1,000 stated amount~~with Citicorp USA, Inc., as administrative agent and issuing bank, and Citibank, N.A., as a lender. The Unsecured Revolving Credit Facility is available for both letters 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~~credit and general corporate purposes. Outstanding borrowings under the Unsecured Revolving Credit Facility accrue 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~~equal to either, as selected by K. Hovnanian, (i) the alternate base rate plus the applicable spread determined on 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~~such borrowing or (ii) an adjusted London Interbank Offered Rate (“LIBOR”) rate plus the applicable spread determined as of the date twobusiness 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 occurdays prior to the ~~maturity date,~~first day of the ~~Company will increase~~interest period for such borrowing. As of January 31, 2018 there were $52.0 million of borrowings and $11.9 million of letters of credit outstanding under the ~~applicable exchange rate for any holder who elects to exchange its Senior Exchangeable Notes~~Unsecured Revolving Credit Facility. As of October 31, 2017, there were $52.0 million of borrowings and $14.6 million of letters of credit outstanding under the Unsecured Revolving Credit Facility. As of January 31, 2018, we believe we were in ~~connection~~compliance with ~~such corporate event.~~ the covenants under the Unsecured Revolving Credit Facility.

In addition ~~holders~~to the Unsecured Revolving Credit Facility, we have certain stand–alone cash collateralized letter 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 July 31, 2017, 18,305 Senior Exchangeable Notes have been converted into 3.4 million shares of our Class A Common Stock, all ofcredit agreements and facilities under which ~~were converted during the first quarter of fiscal 2013. In September 2016, K. Hovnanian purchased~~there was a total of ~~20,823 Units for an aggregate purchase price of $20.6 million, in November 2016, K. Hovnanian purchased a total of 6,925 Units for an aggregate purchase price of $6.9~~$2.7 million and ~~during the nine months ended July~~$1.7 million letters of credit outstanding at January 31, 2018 and October 31, 2017, ~~K. Hovnanian purchased certain Units~~respectively. These agreements and facilities require us to maintain specified amounts of cash as ~~discussed above under “—Fiscal 2017”.~~

~~On each June 1 and December 1 (each, an “installment payment date”), K. Hovnanian~~collateral in segregated accounts to support the letters of credit issued thereunder, which will ~~pay holders of Senior Amortizing Notes equal semi-annual cash installments of $30.00 per Senior Amortizing Note (except for~~affect 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~~cash we have available for other uses. At January 31, 2018 and October 31, 2017, the amount of ~~interest (at a rate of 11.0% per annum)~~cash collateral in these segregated accounts was $2.7 million and ~~a partial repayment of principal~~$1.7 million, respectively, which is reflected in “Restricted cash and cash equivalents” 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.Condensed Consolidated Balance Sheets.

12.

Per Share Calculation

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. 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~~and, for the first quarter of fiscal 2017, common shares issuable upon exchange of our Senior Exchangeable Notes issued as part of our6.0% 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.

Table of Contents

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~~two-class method. The ~~two-class~~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 in periods when we have net income. The ~~Company~~’sCompany’s restricted common stock (“nonvested shares”) are considered participating securities.

There were no3.4 million and 4.2 million incremental shares attributed to nonvested stock and outstanding options to purchase common stock for the three ~~and nine~~ months ended ~~July~~January 31, 2018 and January 31, 2017, ~~and 2016.~~ respectively, which were excluded from the computation of diluted earnings per share because we had a net loss for the period. Also, for the three ~~and nine~~ months ended ~~July~~January 31, 2018 and 2017, ~~10.0~~3.3 million and ~~10.1~~10.0 million shares, respectively, of common stock issuable upon the exchange of our senior exchangeable notes (which were issued in fiscal ~~2012)~~2012) were excluded from the computation of diluted earnings per share because ~~we had a net loss for~~ the ~~period. For both the three and nine months ended July 31, 2016, 15.2 million shares of common stock issuable upon the exchange of our senior exchangeable notes~~ ~~were excluded from the computation of diluted earnings per share because we~~Company 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 ~~4.5~~3.2 million and ~~4.6 million~~4.8 million for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017, respectively,~~ 2018 and ~~6.8 million and 7.3 million for the three and nine months ended July 31, 2016,~~2017, respectively, because to do so would have been anti-dilutive for the periods presented.

13.

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~~$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.” During the three ~~and nine~~ months ended ~~July~~January 31, ~~2017~~ 2018 and ~~2016,~~2017, we did not pay any dividends on the Series A Preferred Stock due to 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.

14.

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 ~~110.0%~~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, ~~(other than to Permitted Transferees (as defined in the Company’s amended Certificate of Incorporation)),~~ such stock must be converted into shares of Class A Common Stock at a one to one conversion rate.

On August 4,2008, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”), which was amended on January 11, 2018, designed to preserve shareholder value and the value of certain tax assets primarily associated with net operating loss ~~(“NOL”)~~(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 initial adoption on August 4, 2008, 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 of Directors at any time, prior to the Rights being triggered. The Rights Plan will continue in effect until August ~~15, 2018,~~14,2021 (or August 14, 2019 if the stockholders of the Company have not approved the amendment by such date), unless it expires earlier in accordance with its terms. The approval of the Board of Directors’ decision to initially 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.

Table of Contents

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 ~~and nine~~ months ended ~~July~~January 31, ~~2017.~~2018. As of ~~July~~January 31, ~~2017,~~ 2018, the maximum number of shares of Class A Common Stock that may yet be purchased under this program is 0.5 million.

15.

Income Taxes

The total income tax expense of ~~$287.0~~$0.3 million ~~and $286.5 million~~recognized for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017, respectively,~~ 2018 was primarily ~~due~~related to ~~increasing our valuation allowance to fully reserve against our deferred tax assets (“DTAs”). In addition, the same periods were also impacted by~~ state tax expense from income generated ~~in some states, which~~that was not offset by tax benefits in ~~other~~ states ~~that had losses for which~~where we fully reserve the tax benefit from net operating losses.

The The total income tax expense of ~~$1.6~~$0.5 million recognized for the three months ended ~~July~~January 31, ~~2016~~ 2017 was primarily due to deferred taxes. The same period was also impacted by state tax expenses and state tax reserves for uncertain tax positions. The income tax benefit of $4.6 million for the nine months ended July 31, 2016 was primarily due to incremental losses with no associated valuation allowance and a federal tax benefit related to receiving a specified liability loss refund of taxes paid in fiscal year 2002, partially offset by a permanent difference related to stock compensation, state tax expenses, and state tax reserves for uncertain tax positions.

~~The permanent difference related to stock compensation arose because for tax purposes, the amount of stock compensation the Compa~~ny expenses is the amount reported on an associate’s W-2 when the equity award is exercised or received, whereas for accounting purposes, the amount the Company expenses is based on the fair value of the equity award on the date of grant. Therefore, the permanent difference for the first nine months of fiscal 2016 due to stock compensation was because of this different treatment, which does not arise until the time the equity award is exercised or received by the associate and therefore reported on an associate’s W-2. The amount was significant because of the issuance in fiscal 2016 of stock to Company executives in respect of awards that had been granted over ten years ago at significantly higher stock prices and thus significantly higher fair values as compared to the time of issuance to the executive. As a result, at the time the stock awards were issued in fiscal 2016, a significant permanent difference between book and tax was created impacting the effective tax rate for 2016.

~~The federal specified liabi~~lity loss refund of taxes in fiscal year 2002 was due to an amendment of a prior year’s tax return. The Internal Revenue Service issued the refund following the Company’s application therefor during the year ended October 31, 2016. The refund related to the ~~portion~~impact of permanent differences between book income and taxable income and the ~~fiscal year 2012 NOL attributable~~conversion of deductible charitable contributions to ~~a specified liability loss~~net operating losses, which pursuant to Internal Revenue Code Section 172(b)(1)(C), can be carried back ten years to October 31, 2002. A specified liability is any amount allowable as a deduction attributable to a product liability or expense incurred in investigation or settlement of claims because of a product liability. The refund was received in February 2016 and thereforeincreased the ~~tax credit was recorded in the second quarter of fiscal 2016.~~Company’s valuation allowances.

Our federal net operating losses of$1.6 billion expire between 2028 and 2037. Our state NOLs of ~~$2.2~~$2.6 billion expire between ~~2017~~2018 and ~~2036.~~2037. Of the total state amount, ~~$301.7~~$247.1 million will expire between ~~2017~~2018 through ~~2021; $253.9~~2022;$463.1 million will expire between ~~2022~~2023 through ~~2026; $1,327.3~~2027;$1.5 billion will expire between 2028 through 2032; and $350.0 million will expire between ~~2027~~2033 through ~~2031;~~2037.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and ~~$348.0~~Jobs Act of 2017 (the “Act”). Effective January 1, 2018, the comprehensive U.S. tax reform package, among other things, lowered the corporate tax rate from 35% to 21%. Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted. The effects of the Act on the Company include one major category which is the remeasurement of deferred taxes. Our accounting for the U.S. federal corporate tax rate is complete. Consequently, we have recorded a decrease related to deferred tax assets and liabilities of $298.5 million and $12.2 million, respectively, with a corresponding net adjustment to the valuation allowance for the period ending January 31, 2018, therefore there was no income tax expense or benefit as a result of the tax law changes. We will ~~expire between 2032 through 2036.~~continue to evaluate the impact of the tax reform as additional regulatory guidance is obtained. The ultimate impact of tax reform may differ from our interpretations and assumptions due to additional regulatory guidance that may be issued.

Deferred federal and state income tax assets (“DTAs”) primarily represent the deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset ag~~ainst~~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 ASC740, we evaluate our ~~deferred tax assets~~DTAs quarterly to determine if valuation allowances are required. ASC740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely thannot” standard.

As oof~~f July~~January 31, ~~2017,~~2018, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, ~~an additional~~our valuation allowance for our DTAs was ~~necessary~~appropriate in accordance with ASC ~~740.~~740. Listed below, in order of the weighting of each factor, is the available positive and negative evidence that we considered in determining that it is more likely than not that all of our DTAs will not be realized. In analyzing these factors, overall the negative evidence, both objective and subjective, outweighed the positive evidence. Based on this analysis, we ~~increased the valuation allowance against our DTAs such that we have a full valuation allowance and~~ determined that the current valuation allowance for deferred taxes of ~~$922~~$661.1 million as of ~~July~~January 31, ~~2017~~2018, which fully reserves for our DTAs, is appropriate.

~~Recent~~Fiscal2017 financial results,, especially the ~~$50.2~~$50.2 million pre-tax loss in the third quarter of 2017 primarily from the ~~$42.3~~$42.3 million loss on extinguishment of debt during the quarter, that put us in a cumulative ~~three-year~~three-year loss position as of July 31, 2017. We are still in a cumulative three-year loss position as of January 31, 2018. Per ASC 740, cumulative losses are one of the most objectively verifiable forms of negative evidence. (Negative Objective Evidence)

In thethird quarter of fiscal 2017, we completed a debt refinancing/restructuring transaction which, by extending our debt maturities, will enable us to allocate cash to invest in new communities and grow our community count to get back to sustained profitability. (Positive Objective Evidence)

The refinancing discussed in item 2 above will increase our interest incurred in fiscal2018 and future years (based on our longer term modeling) by ~~$23.4~~$23.4 million per year. (Negative Objective Evidence)

	4.	Recent financial results of $30.5 million pre-tax loss in the first quarter of 2018. (Negative Objective Evidence)
	4.5.	We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative Objective Evidence)

5.6.

We exited two geographic markets in fiscal 2016, one in fiscal 2017, and are winding down ~~operations~~operations in ~~two~~one other ~~markets~~market that have historically had losses. By exiting these underperforming markets, the Company w~~ill~~will be able to redeploy capital to better performing markets, which over time should improve our profitability. (Positive Subjective Evidence)

6.7.

Evidence of a sustained recovery in the housing markets in which we operate, supported by economic data showing h~~ousing~~housing starts, homebuilding volume and prices all increasing and forecasted to continue to increase. (Positive Subjective Evidence)

7.8.

The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to before thethe housing downturn, the uncertainty of the overall US economy and government policies and consumer confidence, all or any of which could continue to hamper a faster, stronger recovery of the housing market. (Negative Subjective Evidence)

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16.

Operating and Reporting Segments

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

Our homebuilding operating segments are aggregated into reportable segments based primarily upon ~~geographic~~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 noted below. ~~During fiscal 2016, we decided to exit the Minneapolis, MN and Raleigh, NC markets and in the third quarter of fiscal 2016, we completed the sale of our portfolios in those markets.~~

Homebuilding:

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

Table of Contents

Financial information relating to the ~~Company~~’sCompany’s segment operations was as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended January 31,
(In thousands)	2017			2016			2017			2016			2018			2017

Revenues:
Northeast	$	39,956		$	69,989		$	144,481		$	196,539		$	20,199		$	58,575
Mid-Atlantic		113,298			111,739			314,124			295,546			71,297			100,226
Midwest		41,052			72,581			126,773			249,132			40,579			43,702
Southeast		68,435			96,323			181,654			186,873			56,668			56,584
Southwest		209,295			248,546			617,959			729,606			128,305			183,409
West		104,523			101,158			301,897			237,831			85,050			96,531
Total homebuilding		576,559			700,336			1,686,888			1,895,527			402,098			539,027
Financial services		14,993			16,485			42,336			51,714			10,888			12,849
Corporate and unallocated		483			29			755			(63	)
Corporate and unallocated (1)														4,180			133
Total revenues	$	592,035		$	716,850		$	1,729,979		$	1,947,178		$	417,166		$	552,009

(Loss) income before income taxes:
(Loss) income before income taxes:
Northeast	$	(5,737	)	$	(995	)	$	(7,553	)	$	(4,945	)	$	(9,701	)	$	906
Mid-Atlantic		3,714			3,467			8,514			7,161			1,952			3,882
Midwest		(3,313	)		(2,452	)		(5,771	)		(8,034	)		(2,344	)		712
Southeast		(1,580	)		(5,621	)		(1,446	)		(14,710	)		(1,661	)		(294	)
Southwest		19,010			20,532			50,718			55,392			5,511			11,923
West		5,873			3,297			7,436			(6,989	)		8,067			(754	)
Homebuilding income before income taxes		17,967			18,228			51,898			27,875			1,824			16,375
Financial services		6,126			7,569			19,254			24,965			2,547			5,994
Corporate and unallocated (1)		(74,266	)		(24,704	)		(128,701	)		(82,545	)		(34,842	)		(22,046	)
(Loss) income before income taxes	$	(50,173	)	$	1,093		$	(57,549	)	$	(29,705	)
(Loss) income before income taxes													$	(30,471	)	$	323

17.

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~~third-party investors to develop land and construct homes that are sold directly to ~~third-party~~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~~’sventure’s members or other third parties.

~~In November 2015,~~During the ~~Company entered into a~~ new joint venture to which the Company contributed a land parcel that had been mothballed by the Company, but on which construction by the joint venture has now begun. Upon formation of the joint venture, the Company received $25.7 million of cash proceeds for the transferred land. In addition, during the thirdfirst quarter of fiscal ~~2016,~~2017, we ~~entered into a new joint venture by transferring eight communities we owned and our option to buy~~ transferred one community to the joint venture. As a result of the formation of the joint venture, the Company received $29.8 million of cash in return for the land and option transfers. During the first quarter of fiscal 2017, we expanded this joint venture by transferring one community we owned and our option to buy three communities to ~~the~~an existing joint venture, resulting in ~~our receiving $11.2~~the receipt of $11.2 million of net cash.

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)	July 31, 2017									January 31, 2018
	Homebuilding			Land Development			Total			Homebuilding			Land Development			Total
Assets:
Cash and cash equivalents	$	38,501		$	223		$	38,724		$	36,994		$	823		$	37,817
Inventories		661,510			8,582			670,092			652,030			8,370			660,400
Other assets		29,817			-			29,817			34,438			-			34,438
Total assets	$	729,828		$	8,805		$	738,633		$	723,462		$	9,193		$	732,655

Liabilities and equity:
Accounts payable and accrued liabilities	$	108,799		$	469		$	109,268		$	106,971		$	298		$	107,269
Notes payable		313,436			489			313,925			364,886			-			364,886
Total liabilities		422,235			958			423,193			471,857			298			472,155
Equity of:
Hovnanian Enterprises, Inc.		84,538			3,196			87,734			78,613			3,805			82,418
Others		223,055			4,651			227,706			172,992			5,090			178,082
Total equity		307,593			7,847			315,440			251,605			8,895			260,500
Total liabilities and equity	$	729,828		$	8,805		$	738,633		$	723,462		$	9,193		$	732,655
Debt to capitalization ratio		50	%		6	%		50	%		59	%		0	%		58	%

For the Three Months Ended July 31, 2016

(In thousands)

Homebuilding

Land Development

Total

Revenues
$ 31,145 $ 1,219 $ 32,364
Cost of sales and expenses
(37,245
)
(1,143
)
(38,388
)
Joint venture net (loss) income
$ (6,100
)
$ 76 $ (6,024
)
Our share of net (loss) income
$ (2,418
)
$ 38 $ (2,380
)

For the Nine Months Ended July 31, 2017

(In thousands)

Homebuilding

Land Development

Total

Revenues
$ 214,103 $ 4,649 $ 218,752
Cost of sales and expenses
(225,594 ) (4,696 ) (230,290 )
Joint venture net loss
$ (11,491 ) $ (47 ) $ (11,538 )
Our share of net loss
$ (10,230 ) $ (24 ) $ (10,254 )

18.

Recent Accounting ~~Pronouncements~~Pronouncements

InMay 2014, the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2014-09,~~2014-09, “Revenue from Contracts with Customers” (Topic ~~606)~~606), (“ASU ~~2014-09”~~2014-09”). ASU ~~2014-09~~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)~~(1) identify the contract(s) with a customer; ~~(2)~~(2) identify the performance obligations in the contract; ~~(3)~~(3) determine the transaction price; ~~(4)~~(4) allocate the transaction price to the performance obligations in the contract; and ~~(5)~~(5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU ~~2014-09~~2014-09 supersedes the revenue recognition requirements in ~~ASU~~ ASC 605, “Revenue Recognition,” and most industry-specific guidance in the Accounting Standards Codification. In August 2015, the FASB issued ASU ~~2015-14~~2015-14 on this same topic, which defers for one year the effective date of ASU ~~2014-09,~~2014-09, therefore making the guidance effective for the Company beginning November 1, 2018. Additionally, the FASB also decided to permit entities to early adopt the standard, which allows for either full retrospective or modified retrospective methods of adoption, for reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting this guidance on our Condensed Consolidated Financial Statements, and have been involved in industry-specific discussions with the FASB on the treatment of certain items. However, due to the nature of our operations, we expect to identify similar performance obligations in our contracts under ASU ~~2014-09~~2014-09 compared with the deliverables and separate units of account we have identified under existing accounting standards. As a result, we expect the timing of our recognition of revenues to remain generally the same. Nonetheless, we are still evaluating the impact of specific parts of this ASU, and expect our revenue-related disclosures to change upon its adoption.

In ~~August 2014,~~ February 2016, the FASB issued ASU ~~2014-15, “Disclosure of Uncertainties About an Entity~~2016’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 as of 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 Condensed Consolidated Financial Statements.

~~In February 2016, the FASB issued ASU 2016-02,~~-02, “Leases (Topic ~~842)~~842)” (“ASU ~~2016-02”~~2016-02”), which provides guidance for accounting for leases. ASU ~~2016-02~~2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU ~~2016-02~~2016-02 is effective for the Company beginning November 1, 2019. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our Condensed Consolidated Financial Statements.

InAugust 2016, the FASB issued ASU No. ~~2016-15,~~2016-15, “Statement of Cash Flows (Topic ~~230)~~230): Classification of Certain Cash Receipts and Cash Payments” (“ASU ~~2016-15”~~2016-15”). ASU ~~2016-15~~2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU ~~2016-15~~2016-15 is effective for the ~~Company~~’sCompany’s fiscal year beginning November 1, 2018. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our Condensed Consolidated Financial Statements.

InOctober 2016, the FASB issued ASU No. ~~2016-16,~~2016-16, “Income Taxes (Topic ~~740)~~740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU ~~2016-16”~~2016-16”). ASU ~~2016-16~~2016-16 provides improvement for the accounting of income taxes related to intra-entity transfers of assets other than inventory. ASU ~~2016-16~~2016-16 is effective for the ~~Company~~’sCompany’s fiscal year beginning November 1, 2018. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our Condensed Consolidated Financial Statements.

InOctober 2016, the FASB issued ASU No. ~~2016-17,~~2016-17, “Consolidation (Topic ~~810)~~810): Interests Held through Related Parties That Are under Common Control” (“ASU ~~2016-17”~~2016-17”). ASU ~~2016-17~~2016-17 amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is a primary beneficiary of that VIE. ASU ~~2016-17~~2016-17 was effective for the Company’s fiscal year beginning November 1, 2017 and the adoption did not have a material impact on our Condensed Consolidated Financial Statements.

InNovember 2016, the FASB issued ASU No.2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 amends the classification and presentation of changes in restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for the ~~Company~~’sCompany’s fiscal year beginning November 1, ~~2017.~~ 2018. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our Condensed Consolidated Financial Statements.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 amends the classification and presentation of changes in restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for the Company~~’s fiscal year beginning November 1, 2018. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our Condensed Consolidated Financial Statements.~~

19.

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~~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.

Table of Contents

Our financial instruments measured at fair value on a recurring basis are summarized below:

(In thousands)	Fair Value Hierarchy	Fair Value at July 31, 2017			Fair Value at October 31, 2016			Fair Value Hierarchy	Fair Value at January 31, 2018			Fair Value at October 31, 2017

Mortgage loans held for sale (1)	Level 2	$	77,505		$	165,077		Level 2	$	80,228		$	132,424
Interest rate lock commitments	Level 2		65			(80	)	Level 2		(248	)		(14	)
Forward contracts	Level 2		(99	)		86		Level 2		268			15
Total	Total	$	77,471		$	165,083		Total	$	80,248		$	132,425

	Three Months Ended January 31, 2017
(In thousands)	Mortgage Loans Held For Sale			Interest Rate Lock Commitments		Forward Contracts


Fair value included in net loss all reflected in financial services revenues	$	(3,024	)	$	70	$	31

Table of Contents

Three Months Ended July 31, 2016

(In thousands)

Mortgage
Loans Held
For Sale

Interest Rate
Lock
Commitments

Forward
Contracts

Changes in fair value included in net loss all reflected in financial services revenues
$ (175
)
$ 560 $ (268
)

Nine Months Ended July 31, 2017

(In thousands)

Mortgage
Loans Held
For Sale

Interest Rate
Lock
Commitments

Forward
Contracts

Changes in fair value included in net loss all reflected in financial services revenues
$ (2,911 ) $ 145 $ (186 )

Nine Months Ended July 31, 2016

(In thousands)

Mortgage
Loans Held
For Sale

Interest Rate
Lock
Commitments

Forward
Contracts

Changes in fair value included in net loss all reflected in financial services revenues
$ 3,654 $ 590 $ (818
)

The Company did not have any assets measured at fair value on a nonrecurring basis during the three months ended January 31, 2018. The Co’smpany'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 three ~~and nine~~ months ended ~~July~~January 31, ~~2017 and 2016.~~ 2017. The assets measured at fair value on a nonrecurring basis are all within the ~~Company’s~~Company's Homebuilding operations and are summarized below:

Nonfinancial Assets

Three Months Ended

July 31, 2017

(In thousands)
Fair
Value
Hierarchy

Pre-Impairment
Amount

Total
Losses

Fair Value

Sold and unsold homes and lots under development
Level 3
$ - $ - $ -
Land and land options held for future development or sale
Level 3
$ 15,852 $ (3,215 ) $ 12,637

Three Months Ended

July 31, 2016

(In thousands)
Fair
Value
Hierarchy

Pre-Impairment
Amount

Total
Losses

Fair Value

Sold and unsold homes and lots under development
Level 3
$ - $ - $ -
Land and land options held for future development or sale
Level 3
$ 5,407 $ (1,282
)
$ 4,125

Nine Months Ended

July 31, 2017

(In thousands)
Fair
Value
Hierarchy

Pre-Impairment
Amount

Total
Losses

Fair Value

Sold and unsold homes and lots under development
Level 3
$ 14,776 $ (4,136 ) $ 10,640
Land and land options held for future development or sale
Level 3
$ 22,178 $ (3,296 ) $ 18,882

		Nine Months Ended
		July 31, 2016								Three Months Ended January 31, 2017
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount		Total Losses			Fair Value		Fair Value Hierarchy	Pre- Impairment Amount		Total Losses			Fair Value

Sold and unsold homes and lots under development	Level 3	$	44,238	$	(14,399	)	$	29,839	Level 3	$	6,302	$	(2,587	)	$	3,715

Land and land options held for future development or sale	Level 3	$	6,576	$	(1,976	)	$	4,600	Level 3	$	6,326	$	(81	)	$	6,245

~~20.~~

~~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 July 31, 2017, had issued and outstanding $1,110.0 million of senior secured notes ($1,091.2 million, net of discount and debt issuance costs), $368.5 million senior notes ($365.9 million net of debt issuance costs) and $2.1 million senior amortizing notes ($2.0 million net of debt issuance costs) and $53.3 million senior exchangeable notes (issued as components of our Units) ($53.2 million net of debt issuance costs). The senior secured notes, senior notes, senior amortizing notes and senior exchangeable notes are fully and unconditionally guaranteed by the Parent.

~~In addition to the Parent, each~~

Table of the wholly owned subsidiaries of the Parent other than the Subsidiary Issuer (collectively, “Notes Guarantors”), with the exception of our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures (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 and the 9.5% 2020 Notes), senior notes, senior exchangeable notes and senior amortizing notes. The Notes Guarantors are directly or indirectly 100% owned subsidiaries of the Parent. The 2021 Notes and the 9.5% 2020 Notes are guaranteed by the Notes Guarantors and the members of the JV Holdings Secured Group (see Note 11).

The senior amortizing notes and senior exchangeable notes have been registered under the Securities Act of 1933, as amended (the “Securities Act”). The 7.0% Notes, the 8.0% Notes and our senior secured notes (see Note 11) are not, pursuant to the indentures under which such notes were issued, required to be registered under the Securities Act. The Condensed Consolidating Financial Statements presented below are in respect of our registered notes only and not the 7.0% Notes, the 8.0% Notes or the senior secured notes (however, the Notes Guarantors for the 7.0% Notes, the 8.0% Notes, the 10.0% 2022 Notes and the 10.5% 2024 Notes are the same as those represented by the accompanying Condensed Consolidating Financial Statements). In lieu of providing separate financial statements for the Notes Guarantors of our registered notes, we have included the accompanying Condensed Consolidating Financial Statements. Therefore, separate financial statements and other disclosures concerning such Notes Guarantors are not presented.

~~The following Condensed Consolidating Financial Statements present the results of operations, financial position and cash flows of (i)~~ the Parent, (ii) the Subsidiary Issuer, (iii) the Notes Guarantors, (iv) the Nonguarantor Subsidiaries and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis.

Contents

~~HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~CONDENSED CONSOLIDATING BALANCE SHEET~~

~~JULY 31, 2017~~

~~(In Thousands)~~

Parent

Subsidiary
Issuer

Guarantor
Subsidiaries

Nonguarantor
Subsidiaries

Eliminations

Consolidated

ASSETS:

Homebuilding
$ - $ 211,869 $ 1,088,088 $ 412,640 $ - $ 1,712,597
Financial services
19,018 90,704 109,722
Intercompany receivable
1,216,923 13,634 (1,230,557
)
-
Investments in and amounts due from consolidated subsidiaries
380,546 (380,546
)
-
Total assets
$ - $ 1,428,792 $ 1,487,652 $ 516,978 $ (1,611,103
)
$ 1,822,319

LIABILITIES AND EQUITY:

Homebuilding, excluding Notes payable and term loan and Revolving credit facility
$ 2,756 $ 1,571 $ 481,863 $ 65,383 $ - $ 551,573
Financial services
19,021 70,548 89,569
Income taxes (receivable) payable
(2,233
)
4,029 1,796
Notes payable and term loan and Revolving credit facility
1,648,211 1,834 498 1,650,543
Intercompany payable
153,060 1,077,497 (1,230,557
)
-
Amounts due to consolidated subsidiaries
317,579 73,936 (391,515
)
-
Stockholders’ (deficit) equity
(471,162
)
(294,926
)
(96,592
)
380,549 10,969 (471,162
)
Total liabilities and equity
$ - $ 1,428,792 $ 1,487,652 $ 516,978 $ (1,611,103
)
$ 1,822,319

~~HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~CONDENSED CONSOLIDATING BALANCE SHEET~~

~~OCTOBER 31, 2016~~

~~(In Thousands)~~

Parent

Subsidiary
Issuer

Guarantor
Subsidiaries

Nonguarantor
Subsidiaries

Eliminations

Consolidated

ASSETS:

Homebuilding
$ - $ 271,216 $ 1,194,267 $ 408,610 $ - $ 1,874,093
Financial services
13,453 183,777 197,230
Income taxes receivable
115,940 (58,597
)
226,258 32 283,633
Intercompany receivable
1,227,334 88,112 (1,315,446
)
-
Investments in and amounts due from consolidated subsidiaries
4,914 437,628 (442,542
)
-
Total assets
$ 115,940 $ 1,444,867 $ 1,871,606 $ 680,531 $ (1,757,988
)
$ 2,354,956

LIABILITIES AND EQUITY:

Homebuilding, excluding Notes payable and term loan and Revolving credit facility
$ 3,506 $ 1,118 $ 565,163 $ 83,476 $ - $ 653,263
Financial services
13,338 159,107 172,445
Notes payable and term loan and Revolving credit facility
1,652,357 5,084 317 1,657,758
Intercompany payable
157,993 1,157,453 (1,315,446
)
-
Amounts due to consolidated subsidiaries
82,951 (82,951
)
-
Stockholders’ (deficit) equity
(128,510
)
(208,608
)
130,568 437,631 (359,591
)
(128,510
)
Total liabilities and equity
$ 115,940 $ 1,444,867 $ 1,871,606 $ 680,531 $ (1,757,988
)
$ 2,354,956

~~HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS~~

~~THREE MONTHS ENDED~~ ~~JULY 31, 2017~~

~~(In Thousands)~~

Parent

Subsidiary
Issuer

Guarantor
Subsidiaries

Nonguarantor
Subsidiaries

Eliminations

Consolidated

Revenues:

Homebuilding
$ - $ - $ 489,346 $ 87,696 $ - $ 577,042
Financial services
2,569 12,424 14,993
Intercompany charges
21,792 (21,792
)
-
Total revenues
- 21,792 491,915 100,120 (21,792
)
592,035

Expenses:

Homebuilding
375 33,132 477,253 76,442 587,202
Financial services
20 1,714 7,133 8,867
Intercompany charges
21,792 (21,792
)
-
Total expenses
395 33,132 500,759 83,575 (21,792
)
596,069
Loss on extinguishment of debt
(42,258
)
(42,258
)
Income (loss) from unconsolidated joint ventures
83 (3,964
)
(3,881
)
(Loss) income before income taxes
(395
)
(53,598
)
(8,761
)
12,581 - (50,173
)
State and federal income tax provision (benefit)
129,825 (43,308
)
200,487 32 287,036
Equity in (loss) income of consolidated subsidiaries
(206,989
)
(49,961
)
12,549 244,401 -
Net (loss) income
$ (337,209
)
$ (60,251
)
$ (196,699
)
$ 12,549 $ 244,401 $ (337,209
)

~~HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS~~

~~THREE MONTHS ENDED~~ ~~JULY 31, 2016~~

~~(In Thousands)~~

Parent

Subsidiary
Issuer

Guarantor Subsidiaries

Nonguarantor Subsidiaries

Eliminations

Consolidated

Revenues:

Homebuilding
$ - $ - $ 595,124 $ 105,241 $ - $ 700,365
Financial services
2,645 13,840 16,485
Intercompany charges
26,433 (26,433
)
-
Total revenues
- 26,433 597,769 119,081 (26,433
)
716,850

Expenses:

Homebuilding
1,277 32,225 565,447 105,491 704,440
Financial services
16 1,761 7,139 8,916
Intercompany charges
27,239 (806
)
(26,433
)
-
Total expenses
1,293 32,225 594,447 111,824 (26,433
)
713,356
Income (loss) from unconsolidated joint ventures
17 (2,418
)
(2,401
)
(Loss) income before income taxes
(1,293
)
(5,792
)
3,339 4,839 - 1,093
State and federal income tax (benefit) provision
(484
)
(6,936
)
8,987 1,567
Equity in income (loss) of consolidated subsidiaries
335 93 4,839 (5,267
)
-
Net (loss) income
$ (474
)
$ 1,237 $ (809
)
$ 4,839 $ (5,267
)
$ (474
)

~~HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS~~

~~NINE~~ ~~MONTHS ENDED JULY 31, 2017~~

~~(In Thousands)~~

Parent

Subsidiary
Issuer

Guarantor Subsidiaries

Nonguarantor Subsidiaries

Eliminations

Consolidated

Revenues:

Homebuilding
$ - $ - $ 1,428,660 $ 258,983 $ - $ 1,687,643
Financial services
7,816 34,520 42,336
Intercompany charges
67,950 (67,950
)
-
Total revenues
- 67,950 1,436,476 293,503 (67,950
)
1,729,979

Expenses:

Homebuilding
2,374 99,161 1,394,594 223,354 1,719,483
Financial services
20 5,187 17,875 23,082
Intercompany charges
67,950 (67,950
)
-
Total expenses
2,394 99,161 1,467,731 241,229 (67,950
)
1,742,565
Loss on extinguishment of debt
(34,854
)
(34,854
)
Income (loss) from unconsolidated joint ventures
119 (10,228
)
(10,109
)
(Loss) income before income taxes
(2,394
)
(66,065
)
(31,136
)
42,046 - (57,549
)
State and federal income tax provision (benefit)
107,012 (58,597
)
238,038 32 286,485
Equity in (loss) income of consolidated subsidiaries
(234,628
)
(78,850
)
42,014 271,464 -
Net (loss) income
$ (344,034
)
$ (86,318
)
$ (227,160
)
$ 42,014 $ 271,464 $ (344,034
)

~~HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS~~

~~NINE~~ ~~MONTHS ENDED JULY 31, 2016~~

~~(In Thousands)~~

Parent

Subsidiary
Issuer

Guarantor Subsidiaries

Nonguarantor Subsidiaries

Eliminations

Consolidated

Revenues:

Homebuilding
$ - $ - $ 1,593,452 $ 302,012 $ - $ 1,895,464
Financial services
7,566 44,148 51,714
Intercompany charges
87,540 (87,540
)
-
Total revenues
- 87,540 1,601,018 346,160 (87,540
)
1,947,178

Expenses:

Homebuilding
2,874 101,432 1,557,620 282,981 1,944,907
Financial services
16 5,208 21,525 26,749
Intercompany charges
87,540 (87,540
)
-
Total expenses
2,890 101,432 1,650,368 304,506 (87,540
)
1,971,656
Income (loss) from unconsolidated joint ventures
40 (5,267
)
(5,227
)
(Loss) income before income taxes
(2,890
)
(13,892
)
(49,310
)
36,387 - (29,705
)
State and federal income tax (benefit) provision
(19,919
)
(22,264
)
37,586 (4,597
)
Equity in (loss) income of consolidated subsidiaries
(42,137
)
(26,979
)
36,387 32,729 -
Net (loss) income
$ (25,108
)
$ (18,607
)
$ (50,509
)
$ 36,387 $ 32,729 $ (25,108
)

~~HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS~~

~~NINE~~ ~~MONTHS ENDED JULY 31, 2017~~

~~(In Thousands)~~

Parent

Subsidiary
Issuer

Guarantor Subsidiaries

Nonguarantor Subsidiaries

Eliminations

Consolidated

Cash flows from operating activities:

Net (loss) income
$ (344,034 ) $ (86,318 ) $ (227,160 ) $ 42,014 $ 271,464 $ (344,034 )
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
114,339 (28,510 ) 674,835 286 (271,464 ) 489,486
Net cash (used in) provided by operating activities
(229,695 ) (114,828 ) 447,675 42,300 - 145,452
Cash flows from investing activities:

Proceeds from sale of property and assets
199 10 209
Purchase of property, equipment & other fixed assets and acquisitions
(5,034 ) (5,034 )
Decrease in restricted cash related to mortgage company
1,686 1,686
Increase in restricted cash related to letters of credit
(2 ) (2 )
Investments in and advances to unconsolidated joint ventures
(624 ) (467 ) (32,312 ) (33,403 )
Distributions of capital from unconsolidated joint ventures
13,976 13,976
Intercompany investing activities
89,261 (89,261 ) -
Net cash provided by (used in) investing activities
- 88,635 (5,302 ) (16,640 ) (89,261 ) (22,568 )
Cash flows from financing activities:

Net payments related to mortgages and notes
(8,618 ) (3,800 ) (12,418 )
Net payments from model sale leaseback financing programs
(4,094 ) (3,273 ) (7,367 )
Net payments from land bank financing programs
(36,047 ) (9,973 ) (46,020 )
Proceeds from senior secured notes 840,000 840,000
Payments related to senior secured, senior, senior amortizing and senior exchangeable notes
(861,976 ) (861,976 )
Net payments related to mortgage warehouse lines of credit
(83,525 ) (83,525 )
Deferred financing costs from land bank financing programs and note issuances
(11,295 ) (1,150 ) (166 ) (12,611 )
Intercompany financing activities
229,695 (393,434 ) 74,478 89,261 -
Net cash provided by (used in) financing activities
229,695 (33,271 ) (443,343 ) (26,259 ) 89,261 (183,917 )
Net decrease in cash and cash equivalents
- (59,464 ) (970 ) (599 ) - (61,033 )
Cash and cash equivalents balance, beginning of period
261,553 (395 ) 85,607 346,765
Cash and cash equivalents balance, end of period
$ - $ 202,089 $ (1,365 ) $ 85,008 $ - $ 285,732

~~HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS~~

~~NINE~~ ~~MONTHS ENDED JULY 31, 2016~~

~~(In Thousands)~~

Parent

Subsidiary
Issuer

Guarantor Subsidiaries

Nonguarantor Subsidiaries

Eliminations

Consolidated

Cash flows from operating activities:

Net (loss) income
$ (25,108
)
$ (18,607
)
$ (50,509
)
$ 36,387 $ 32,729 $ (25,108
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities
(9,089
)
(25,300
)
289,872 (3,090
)
(32,729
)
219,664
Net cash (used in) provided by operating activities
(34,197
)
(43,907
)
239,363 33,297 - 194,556
Cash flows from investing activities:

Proceeds from sale of property and assets
622 21 643
Purchase of property, equipment & other fixed assets and acquisitions
(5,064
)
(30
)
(5,094
)
Decrease in restricted cash related to mortgage company
88 88
Decrease in restricted cash related to letters of credit
873 873
Investments in and advances to unconsolidated joint ventures
(110
)
(1,395
)
(37,584
)
(39,089
)
Distributions of capital from unconsolidated joint ventures
(186
)
1,087 5,502 6,403
Intercompany investing activities
231,254 (231,254
)
-
Net cash (used in) provided by investing activities
- 231,831 (4,750
)
(32,003
)
(231,254
)
(36,176
)
Cash flows from financing activities:

Net (payments) proceeds related to mortgages and notes
(53,780
)
677 (53,103
)
Net (payments) proceeds from model sale leaseback financing programs
(977
)
357 (620
)
Net proceeds from land bank financing programs
69,388 22,331 91,719
Payments related to senior notes and senior amortizing notes
(263,994
)
(263,994
)
Net proceeds from revolving credit facility
5,000 5,000
Net proceeds related to mortgage warehouse lines of credit
6,781 6,781
Deferred financing costs from land bank financing programs and note issuances
(2,139
)
(4,180
)
(1,547
)
(7,866
)
Intercompany financing activities
34,197 (245,387
)
(20,064
)
231,254 -
Net cash provided by (used in) financing activities
34,197 (261,133
)
(234,936
)
8,535 231,254 (222,083
)
Net (decrease) increase in cash and cash equivalents
- (73,209
)
(323
)
9,829 - (63,703
)
Cash and cash equivalents balance, beginning of period
199,318 (4,800
)
59,227 253,745
Cash and cash equivalents balance, end of period
$ - $ 126,109 $ (5,123
)
$ 69,056 $ - $ 190,042

~~21.~~20.

Transactions with Related Parties

During the three months ended ~~July~~January 31, ~~2017~~2018 and ~~2016,~~2017, an engineering firm owned by Tavit Najarian, a relative of Ara K. Hovnanian, our Chairman of the Board of Directors and our Chief Executive Officer, provided services to the Company ~~of $0.2 million, for both periods. During the nine months ended July 31, 2017 and 2016, the services provided by such engineering firm to the Company totaled $0.6~~totaling $0.1 million and ~~$0.8~~$0.2 million, respectively. Neither the Company nor Mr. Hovnanian has a financial interest in the relative’s company from whom the services were provided.

21.	Subsequent events

On February 1, 2018, K. Hovnanian closed certain of the previously announced financing transactions (see Note 11) as follows: (i) K. Hovnanian borrowed the Initial Term Loans in the amount of $132.5 million under the New Term Loan Credit Agreement, and proceeds of such Initial Term Loans, together with cash on hand, were used to redeem all of K. Hovnanian’s outstanding $132.5 million aggregate principal amount of 7.0% Notes (upon redemption, all 7.0% Notes were cancelled); and (ii) K. Hovnanian accepted all of the $170.2 million aggregate principal amount of 8.0% Notes validly tendered and not validly withdrawn in the Exchange Offer, and in connection therewith, K. Hovnanian issued $90.6 million aggregate principal amount of New 2026 Notes and $90.1 million aggregate principal amount of New 2040 Notes under the New Indenture (as defined below), and as part of the Exchange Offer, the Subsidiary Purchaser purchased for $26.5 million in cash the Purchased 8.0% Notes.

K. Hovnanian issued the New 2026 Notes and the New 2040 Notes under an indenture (the “New Indenture”) dated as of February 1, 2018 among K. Hovnanian, the Company, the other guarantors party thereto and Wilmington Trust, National Association, as trustee.

The New Notes are issued by K. Hovnanian and guaranteed by the Notes Guarantors, except the Subsidiary Purchaser, which does not guarantee the New Notes. The New 2026 Notes bear interest at 13.5% per annum and mature on February 1, 2026. The New 2040 Notes bear interest at 5.0% per annum and mature on February 1, 2040. Interest on the New Notes is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2018, to holders of record at the close of business on January 15 or July 15, as the case may be, immediately preceding each such interest payment date.

The New Indenture contains restrictive covenants that limit, among other things, and in each case subject to certain exceptions, the ability of the Company and certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repurchase subordinated indebtedness and common and preferred stock, make other restricted payments, including investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. The New Indenture also contains customary events of default which would permit the holders of the applicable series of New Notes to declare those New Notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the applicable series of New Notes or other material indebtedness, the failure to satisfy covenants and specified events of bankruptcy and insolvency.

The New Indenture also contains limitations on actions with respect to the Purchased 8.0% Notes, including that, (A) K. Hovnanian and the guarantors of the New Notes shall not, (i) prior to June 6, 2018, redeem, cancel or otherwise retire, purchase or acquire any Purchased 8.0% Notes or (ii) make any interest payments on the Purchased 8.0% Notes prior to their stated maturity, and (B) K. Hovnanian and the guarantors of the New Notes shall not, and shall not permit any of their subsidiaries to, (i) sell, transfer, convey, lease or otherwise dispose of any Purchased 8.0% Notes other than to any subsidiary of Hovnanian that is not K. Hovnanian or a guarantor of the New Notes or (ii) amend, supplement or otherwise modify the Purchased 8% Notes or the indenture under which they were issued with respect to the Purchased 8% Notes, subject to certain exceptions. In addition, the New Indenture provides that notwithstanding the above, at all times on or after June 6, 2018 and prior to the stated maturity of the Purchased 8% Notes, the Subsidiary Purchaser shall continue to own and hold at least the minimum denomination thereof.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

~~During fiscal 2016,~~As we ~~had approximately $260 million of bonds mature, which we were unable~~have discussed for the past several quarters, our inability to refinance because financing was unavailable in the capital markets to companies with comparable credit ratings to ours. As a result, we shifted our focus from growth to gaining operating efficiencies and improving our bottom line, and we decided to temporarily reduce the amount of cash we were spending on ~~future~~buy land acquisitions and to exit from four underperforming markets during fiscal 2016. In addition, we increased our use of land banking and joint ventures in order to enhance our liquidity position. The net effect of these liquidity enhancing efforts was to temporarily reduce our ability to invest as aggressively in new land parcels as previously planned. This resulted in a reduction in our community count in fiscal 2016 and 2017, as a result of paying off $320 million of debt maturities from October 2015 through May 2016 has led to a reduction in community count and revenues, which impacts our overall profitability. However, for the first ~~three quarters~~time since the first quarter of 2016, we increased the number of total lots we controlled during the first quarter of fiscal ~~2017, along with a decrease in net contracts during these periods, as compared to the same periods of the prior year. However, in~~2018 sequentially from the fourth quarter of fiscal ~~2016, we were able~~2017 and year over year from the first quarter of fiscal 2017. Continued growth in lots controlled should ultimately lead to refinance certain of our debt maturities and had homebuilding cash of $339.8 million as of October 31, 2016. In addition, in July 2017, we successfully refinanced and extended the maturities of certain of our senior secured notes which were scheduled to mature in October 2018 and October and November 2020, with $440.0 million of new senior secured notes maturing in July 2022 and $400.0 million of new senior secured notes maturing in July 2024. This transaction resulted in a $42.3 million loss on early extinguishment of debt. When added to prior period results, this created a three-year cumulative loss, which led us to reconsider the realizability of our deferred tax assets in accordance with GAAP and record a $294.1 million non-cash increase in the valuation allowance for our deferred tax assets. See Note 15community count growth. Recent refinancing transactions (discussed further below) provide much needed stability to our ~~Condensed Consolidated Financial Statements.~~capital structure. Although the Company continues to transition from reducing our land position in order to pay off debt to growing through land acquisition and investment, we expect to see improved results over the remainder of fiscal 2018.

Our cash position induring the first quarter of fiscal ~~2017 has~~2018 allowed us to spend ~~$439.9~~$158.8 million on land purchases and land development during the ~~first three quarters~~period and still have $278.2 million of ~~fiscal 2017. The July 2017 refinancing transaction,~~homebuilding cash and cash equivalents as of January 31, 2018. This cash and our recent refinancing transactions, by extending our debt maturities, will enable us to allocate additional cash to further grow our business. We continue to see opportunities to purchase land at prices that make economic sense in light of our current sales prices and sales pace and plan to continue actively 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.

The factors discussed above ~~factors during~~for fiscal 2016 and 2017 led to a ~~reduction in our land position and a 19.0%~~10.8% decline in our community count over last year’s ~~third~~first quarter and as a result, during the ~~three and nine months ended July 31, 2017,~~first quarter of fiscal 2018, we experienced mixed operating results compared to ~~the same periods of~~ the prior year. Net contracts per average active selling community ~~increased~~decreased slightly to ~~26.7~~7.3 for the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 compared to ~~23.9~~7.5 in the same period in the prior year. ~~Net~~Active selling communities decreased from 157 at January 31, 2017 to 140 at January 31, 2018, and net contracts ~~per average active selling community increased to 9.4~~decreased 12.4% for the three months ended ~~July~~January 31, 2017 compared to 8.4 in the same period in the prior year. This improvement in net contracts per average active selling community demonstrates an increase in sales absorption, which allows us to be more efficient because we will deliver more homes per community without any increase in fixed overheads in those communities. Active selling communities decreased from 174 at July 31, 2016 to 141 at July 31, 2017, and net contracts decreased 10.0% and 15.1%, respectively, for the three and nine months ended July 31, 2017,2018, compared to the same ~~periods~~period of the prior year. For the three ~~and nine~~ months ended ~~July~~January 31, ~~2017,~~2018, sale of homes revenues decreased ~~10.3% and 8.2%, respectively,~~24.4% as compared to the same ~~periods~~period of the prior year, as a result of ~~the~~a 20.5% decrease in deliveries, along with our decreased community count. Gross margin percentage increased from ~~11.9% for the nine months ended July 31, 2016 to 12.9% for the nine months ended July 31, 2017, but decreased slightly from 13.1%~~13.5% for the three months ended ~~July~~January 31, ~~2016~~2017 to ~~12.8%~~14.8% for the three months ended ~~July~~January 31, ~~2017.~~2018. Gross margin percentage, before cost of sales interest expense and land charges, increased slightly from ~~16.5% for the nine months ended July 31, 2016 to 16.8% for the nine months ended July 31, 2017, but decreased slightly from 16.9%~~17.2% for the three months ended ~~July~~January 31, ~~2016~~2017 to ~~16.8%~~17.9% for the three months ended ~~July~~January 31, ~~2017. These minor changes~~2018. The improvements in both gross margin percentage and gross margin percentage, before cost of sales interest expense and land charges, are aprimarily the result of the mix of communities ~~delivering homes rather than significant changes~~delivering. The improvement in ~~prices or costs.~~gross margin percentage is also due to decreased land charges compared to the same period of the prior year. Selling, general and administrative costs (including corporate general and administrative expenses) ~~decreased $5.4 million and $16.5~~increased $2.3 million for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017, respectively,~~2018 as compared to the ~~same periods of the~~ prior ~~year; however, as~~year. As a percentage of total revenue, such costs increased from ~~9.3%~~10.9% for the three months ended ~~July~~January 31, ~~2016,~~2017 to ~~10.3%~~14.9% for the three months ended ~~July~~January 31, ~~2017 and increased from 10.2%~~2018. The increase is primarily due to legal (including litigation) fees incurred related to our recent financing transactions. We are actively seeking insurance coverage for the ~~nine months ended July 31, 2016, to 10.6% for the nine months ended July 31, 2017 due~~litigation costs. Also contributing to the ~~decrease in~~increase were higher stock compensation costs and rent expense related to the sale and leaseback of ~~homes revenues resulting from~~ our ~~decreased community count, as discussed above.~~corporate headquarters building that was sold on November 1, 2017.

When comparing sequentially from the ~~second~~fourth quarter of fiscal 2017 to the ~~third~~first quarter of fiscal ~~2017,~~2018, our gross margin percentage increased ~~slightly~~ from ~~12.6%~~13.7% to ~~12.8% and~~14.8%, however, our gross margin percentage, before cost of sales interest expense and land charges, ~~increased slightly~~decreased from ~~16.5%~~18.2% to ~~16.8%~~17.9%. Gross margin percentage increased ~~slightly~~primarily as a result of ~~product mix, despite recent labor~~decreased land charges. Gross margin percentage, before cost of sales interest expense and ~~materials cost increases, which have been affecting both us~~land charges, decreased primarily due to delivery volume. Cost of sales include some fixed costs that are not impacted by delivery volume. Therefore, as deliveries and revenues decreased from the ~~overall homebuilding industry.~~fourth quarter of fiscal 2017 to the first quarter of fiscal 2018, consistent with our normal seasonality trends, gross margin decreased. Selling, general and administrative costs (including corporate general and administrative expenses) as a percentage of total revenues ~~decreased slightly~~increased from ~~10.5%~~10.1% (8.4% excluding the fourth quarter fiscal 2017 adjustment to ~~10.3%~~our construction defect reserves) to 14.9%, as compared to the ~~second~~fourth quarter of fiscal 2017. Selling, general and administrative costs include some fixed costs that are not impacted by delivery volume. ~~Therefore, as revenues increased from the second quarter of fiscal 2017~~The increase is primarily due to ~~the third quarter of fiscal 2017, consistent~~legal (including litigation) fees incurred with our ~~normal seasonality trends, selling, general~~recent financing transactions, and ~~administrative costs as a percentage of total revenues decreased.~~higher stock compensation costs. Improving the efficiency of our selling, general and administrative expenses will continue to be a significant area of focus.

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We had ~~2,475~~2,004 homes in backlog with a dollar value of ~~$1.0 billion~~$814.4 million at ~~July~~January 31, ~~2017~~2018 (a decrease of ~~20.4%~~20.2% in dollar value compared to the ~~third quarter ended July 31, 2016)~~same period in the prior year). As discussed above, we have invested ~~$439.9~~$158.8 million in land purchases and land development ~~in the~~during first ~~three quarters~~quarter of fiscal ~~2017,~~2018, which along with continued land acquisitions, is expected to ~~eventually result in~~lead to future community count growth. However, there is typically a significant time lag from when we first control lots until the time that we open a community for sale. This timeline can vary significantly from a few months (in a market such as Houston) to ~~a few~~three to five years (in a market such as New Jersey). ~~Given~~Although our community count increased sequentially in the first quarter of fiscal 2018 from the fourth quarter of fiscal 2017, we do not anticipate sustaining this level of community count growth over the next several quarters. We previously believed sustainable community count growth would begin in the second half of fiscal 2018, however given the mix of land that we currently control and the land investment we currently anticipate, we ~~are not expecting community count growth until~~now believe it will occur in the ~~second half~~early part of fiscal ~~2018.~~ 2019.Once our community count grows, absent adverse market factors, we expect delivery and revenue growth will follow.

We continued to see strength in the underlying housing market and the 11.9% increase in our net contracts per community during the third quarter of 2017, as compared to the same period of the prior year, reflected this trend. While deliveries and revenues were lower than last year’s third quarter as a result of a decreased community count, the strong sales and our backlog at July 31, 2017 should lead to a profitable fourth quarter.

Our fourth quarter results will be impacted by Hurricane Harvey. Fortunately, less than ten homes within two of our 45 Houston communities experienced flood damage. The storm damage and construction delays caused by Hurricane Harvey will reduce our fourth quarter deliveries. In spite of this temporary impact, the long-term prospect for the Houston market remains strong. ~~The fourth quarter of fiscal 2017 results could also be negatively impacted by an issue related to~~ I-joist’s coated with a certain type of fire resistance product that were manufactured by Weyerhaeuser Company. The Company believes that the joist is present in 63 of our homes located in our Delaware and New Jersey markets. Of the identified 63 impacted homes, 17 have been delivered to homeowners, 2 are model homes, and the remainder are in various stages of construction. We are currently working with Weyerhaeuser to evaluate potential remediation solutions and determine the best course of corrective action for our customers. Of the 44 homes under construction, 43 were scheduled to close in fiscal 2017. We expect to experience a combination of delayed closings and/or cancellations with respect to these units that will likely have a negative impact on net orders, closings and revenue in the fourth quarter of fiscal 2017. Although we do not yet know the ultimate impact to our business, we do not believe we will incur any material costs, expenses or charges as a result of this issue.

CRITICAL ACCOUNTING POLICIES

As disclosed in our annual report on Form 10-K for the fiscal year ended October 31, ~~2016,~~2017, our most critical accounting policies relate to income recognition from mortgage loans; inventories; unconsolidated joint ventures; post-development completion, warranty and insurance reserves; and deferred income taxes. Since October 31, ~~2016,~~2017, there have been no significant changes to those critical accounting policies.

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 and Ohio), the Southeast (Florida, Georgia 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, the issuance of new debt and equity securities and other financing activities. Due to covenant restrictions in our debt instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness with certain maturity requirements (a limitation that we expect to continue for the foreseeable future), even if market conditions would otherwise be favorable, which could also impact our ability to grow our business. ~~In fiscal 2016, as a result of our evaluation of~~ our geographic operating footprint as it relates to our strategic objectives, we decided to exit the Minneapolis, MN and Raleigh, NC markets, and completed the sale of our land portfolios in those markets. In addition, we entered into a new joint venture by transferring eight communities to the joint venture and receiving cash in return. In the first three quarters of fiscal 2017, we transferred an additional four communities to the joint venture, which resulted in $11.2 million of net cash proceeds to us during the period. We also decided in fiscal 2016 to wind down our operations in the San Francisco Bay area in Northern California and in Tampa, FL by building and delivering homes to sell through our existing land position. Any other liquidity-enhancing transaction will depend on identifying counterparties, negotiation of documentation and applicable closing conditions and any required approvals.

Operating, Investing and Financing Activities -– Overview

Our ~~homebuilding~~homebuilding cash balance at ~~July~~January 31, ~~2017~~2018 decreased ~~$61.3~~$185.5 million from October 31, ~~2016 to $278.5 million, which is above our target liquidity range of $170 million to $245 million.~~2017. In addition to using ~~cash~~$56.0 million to pay down debt during the ~~first three quarters of fiscal 2017,~~period, we spent ~~$439.9~~$158.8 million on land and land development. After considering this land and land development and all other operating activities, including revenue received from deliveries, we ~~generated $145.5~~used $82.5 million of cash from operations. During the first ~~three quarters~~quarter of fiscal ~~2017,~~2018, cash ~~used in~~provided by investing activities was ~~$22.6~~$41.1 million, primarily related to ~~an investment in an existing~~the sale of our corporate headquarters building, along with distributions from a joint venture. Cash used in financing activities was ~~$183.9~~$145.6 million during the first ~~three quarters~~quarter of fiscal ~~2017,~~2018 which included ~~$862.0 million for repurchases of debt, $840.0 million of proceeds~~payments for debt ~~issuances, $53.4~~maturities, $13.0 million to pay-off nonrecourse mortgage loans on our corporate headquarters, $23.4 million for land banking and model sale leaseback programs and a ~~$83.5~~$51.5 million reduction in mortgage warehouse lines of credit. We intend to continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate.

Our cash uses during the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 and ~~2016~~2017 were for operating expenses, land purchases, land deposits, land development, construction spending, debt payments, 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,~~ model sale leasebacks, land banking transactions, joint ventures, financial service revenues and other revenues. We believe that these sources of cash taken together with the refinancing transactions discussed below will be sufficient through fiscal ~~2017 and~~ 2018 to finance our working capital requirements.

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, 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 partially 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 happened in the first quarter of 2017), causing us to generate positive cash flow from operations. In ~~the first three quarters of~~ fiscal ~~2017, with~~2018, we used cash from operations due to increased spending on land purchases and land development ~~relatively flat as~~ compared to the ~~first three quarters of fiscal 2016, we continued to generate cash from operations.~~past several quarters. As we continue to increase spending on land purchases and land development, cash flow from operations will decrease. As we continue to actively seek land investment opportunities, we will also remain focused on liquidity.

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Debt Transactions

As of ~~July~~January 31, ~~2017,~~2018, we had a $75.0 million outstanding senior secured term loan facility ~~(“the~~(the “Existing Term Loan Facility”) ($~~72.7~~73.3 million net of debt issuance costs), and $1,110.0 million of outstanding senior secured notes ($~~1,091.2~~1,090.4 million, net of discount and debt issuance costs), comprised of $53.2 million 2.0% 2021 Notes (defined below), $141.8 million 5.0% 2021 Notes (defined below), $75.0 million 9.5% ~~Senior Secured~~2020 Notes ~~due 2020 (the “9.5% 2020 Notes”)~~(defined below), $440.0 million 10.0% Senior Secured Notes due 2022 and $400.0 million 10.5% Senior Secured Notes due 2024. As of ~~July~~January 31, ~~2017,~~2018, we also had $368.5 million of outstanding senior notes ($~~365.9~~366.6 million net of debt issuance costs), comprised of $132.5 million 7.0% Senior Notes due 2019 and $236.0 million 8.0% Senior Notes due 2019. In addition, as of ~~July~~January 31, ~~2017, we had~~2018, there were $52.0 million of borrowings and $11.9 million of letters of credit outstanding ~~$2.1 million 11.0% Senior Amortizing Notes due 2017 (issued as a component of~~under our 6.0% Exchangeable Note Units) ($2.0 million net of debt issuance costs) and $53.3 million Senior Exchangeable Notes due 2017 (issued as a component of our 6.0% Exchangeable Note Units) ($53.2 million net of debt issuance costs)unsecured revolving credit facility (the “Unsecured Revolving Credit Facility”).

Except for K. Hovnanian, ~~the~~the issuer of the notes, our home mortgage subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures and certain of our title insurance subsidiaries, we and each of our subsidiaries are guarantors of the Existing Term Loan Facility, the Unsecured Revolving Credit Facility, senior secured ~~term loan~~notes and senior ~~secured, senior, senior amortizing and senior exchangeable~~ notes outstanding at ~~July~~January 31, ~~2017~~2018 (collectively, the “Notes Guarantors”). In addition to the Notes Guarantors, the 5.0% Senior Secured Notes due 2021 (the “5.0% 2021 Notes”), the 2.0% Senior Secured Notes due 2021 (the “2.0% 2021 Notes” and together with the 5.0% 2021 Notes, the “2021 Notes”) and the 9.5% Senior Secured Notes due 2010 (the “9.5% 2020 ~~Notes (collectively~~Notes”, collectively with the 2021 Notes, the “JV Holdings Secured Group 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 “JV Holdings Secured Group”). Members of the JV Holdings Secured Group do not guarantee K. Hovnanian's other indebtedness.

The credit agreement governing the Existing Term Loan Facility, the Unsecured Revolving Credit ~~Agreement (defined below)~~Facility and the indentures governing the notes outstanding at ~~July~~January 31, ~~2017~~2018 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ~~Company~~’sCompany’s ability and that of certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness (other than nonrecourse indebtedness, certain permitted indebtedness and refinancing indebtedness (under the Existing Term Loans ~~(defined~~(as defined below) and the 9.5% 2020 Notes, any new or refinancing indebtedness may not be scheduled to mature earlier than January 15, 2021 (so long as no member of the JV Holdings Secured Group is an obligor thereon), or February 15, 2021 (if otherwise), and under the 10.0% Senior Secured Notes due 2022 (the “10.0% 2022 Notes”) ~~and the 10.5% Senior Secured Notes due 2024 (the “10.5% 2024 Notes”)~~, any refinancing indebtedness of the 7.0% Senior Notes due 2019 (the “7.0% Notes”) and 8.0% Senior Notes due 2019 (the “8.0% Notes” and together with the 7.0% Notes, the “2019 Notes”) may not be scheduled to mature earlier than July 16, ~~2024)),~~2024, pay dividends and make distributions on common and preferred stock, repurchase subordinated indebtedness (with respect to the Existing Term ~~Loan~~Loans, the Unsecured Revolving Credit Facility and certain of the senior secured and senior notes) and common and preferred stock, make other restricted payments, including investments, sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets, enter into certain transactions with affiliates and make cash repayments of the 2019 Notes and refinancing indebtedness in respect thereof (with respect to the 10.0% 2022 ~~Notes and 10.5% 2024~~ Notes). The credit agreements governing the Existing Term Loan Facility and the Unsecured Revolving Credit ~~Agreement~~Facility and the indentures also contain events of default which would permit the lenders/holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Existing Term Loan Facility ~~(defined below)~~ (the ~~“Term~~“Existing Term Loans”)~~/notes~~ and loans made under the Unsecured Revolving Credit Facility (the “Unsecured Loans”) /notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Existing Term Loans or Unsecured Loans/notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Existing Term Loans and the Unsecured Loans, material inaccuracy of representations and warranties and with respect to the Existing Term Loans, a change of control, and, with respect to the Existing Term Loans and senior secured notes, the failure of the documents granting security for the Existing Term Loans and 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 Existing Term Loans and senior secured notes to be valid and perfected. As of ~~July~~January 31, ~~2017,~~2018, we believe we were in compliance with the covenants of the Existing Term Loan Facility, the Unsecured Revolving Credit Facility and the indentures governing our outstanding notes.

If our consolidated fixed ~~charge~~charge coverage ratio, as defined in the agreements governing our debt instruments, ~~(other than the~~ ~~6.0% Senior Exchangeable Note Units (“Units”),~~ 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 ratio 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 our debt instruments.

Under the terms of our debt agreements, we have the right to make certain redemptions and prepayments and, depending on market conditions and covenant restrictions, may do so from time to time. We also continue to evaluate our ~~capital~~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.

~~During~~In June 2013, K. Hovnanian, as borrower, and we and certain of our subsidiaries, as guarantors, entered into the ~~nine months ended July~~five-year, $75.0 million Unsecured Revolving Credit Facility with Citicorp USA, Inc., as administrative agent and issuing bank, and Citibank, N.A., as a lender. The Unsecured Revolving Credit Facility is available for both letters of credit and general corporate purposes. Outstanding borrowings under the Unsecured Revolving 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 January 31, 2018 there were $52.0 million of borrowings and $11.9 million of letters of credit outstanding under the Unsecured Revolving Credit Facility. As of October 31, 2017, there were $52.0 million of borrowings and $14.6 million of letters of credit outstanding under the Unsecured Revolving Credit Facility. As of January 31, 2018, we ~~repurchased~~believe we were in ~~open market transactions $17.5~~compliance with the covenants under the Unsecured Revolving Credit Facility.

In addition to the Unsecured Revolving Credit Facility, we have certain stand–alone cash collateralized letter of credit agreements and facilities under which there was a total of $2.7 million ~~aggregate principal~~and $1.7 million letters of credit outstanding at January 31, 2018 and October 31, 2017, 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 ~~7.0% Notes, $14.0 million aggregate principal~~cash we have available for other uses. At January 31, 2018 and October 31, 2017, the amount of ~~8.0% Notes~~cash collateral in these segregated accounts was $2.7 million and ~~6,925 Units representing $6.9~~$1.7 million, stated amount of Units. The aggregate purchase price for these transactions was $30.8 million, plus accrued and unpaid interest. These transactions resulted in a gain on extinguishment of debt of $7.8 million,respectively, which is ~~included as “Loss on Extinguishment of Debt”~~reflected in “Restricted cash and cash equivalents” on the Condensed Consolidated Statement of Operations. This gain was offset by $0.4 million of costs associated with the 9.5% 2020 Notes issued during the fourth quarter of fiscal 2016 and the debt transactions during the third quarter of fiscal 2017 discussed below.

~~On July 27, 2017,~~ K. Hovnanian issued $440.0 million aggregate principal amount of 10.0% 2022 Notes and $400.0 million aggregate principal amount of 10.5% 2024 Notes. The net proceeds from these issuances together with available cash were used to (i) purchase $575,912,000 principal amount of 7.25% Senior Secured First Lien Notes due 2020 (the “7.25% First Lien Notes”), $87,321,000 principal amount of 9.125% Senior Secured Second Lien Notes due 2020 (the “9.125% Second Lien Notes” and, together with the 7.25% First Lien Notes, the “2020 Secured Notes”) and all $75,000,000 principal amount of 10.0% Senior Secured Second Lien Notes (the “10.0% Second Lien Notes”) that were tendered and accepted for purchase pursuant to K. Hovnanian’s offers to purchase for cash (the “Tender Offers”) any and all of the 7.25% First Lien Notes, the 9.125% Second Lien Notes and the 10.0% Second Lien Notes and to pay related tender premiums and accrued and unpaid interest thereon to the date of purchase and (ii) satisfy and discharge all obligations (and cause the release of the liens on the collateral securing such indebtedness) under the indentures under which the 7.25% First Lien Notes, the 9.125% Second Lien Notes and the 10.0% Second Lien Notes were issued and in connection therewith to call for redemption on October 15, 2017 and on November 15, 2017 all remaining $1,088,000 principal amount of 7.25% First Lien Notes and all remaining $57,679,000 principal amount of 9.125% Second Lien Notes, respectively, that were not validly tendered and purchased in the applicable Tender Offer in accordance with the redemption provisions of the indentures governing the 2020 Secured Notes. These transactions resulted in a loss on extinguishment of debt of $42.3 million, which is included as “Loss on Extinguishment of Debt” on the Condensed Consolidated Statement of Operations.

The 10.0% 2022 Notes have a maturity of July 15, 2022 and bear interest at a rate of 10.0% per annum payable semi-annually on January 15 and July 15 of each year, commencing January 15, 2018, to holders of record at the close of business on January 1 and July 1, as the case may be, immediately preceding such interest payment dates. The 10.0% 2022 Notes are redeemable in whole or in part at our option at any time prior to July 15, 2019 at 100.0% of their principal amount plus an applicable “Make-Whole Amount.” K. Hovnanian may also redeem some or all of the 10.0% 2022 Notes at 105.0% of principal commencing July 15, 2019, at 102.50% of principal commencing July 15, 2020 and at 100.0% of principal commencing July 15, 2021. In addition, K. Hovnanian may also redeem up to 35% of the aggregate principal amount of the 10.0% 2022 Notes prior to July 15, 2019 with the net cash proceeds from certain equity offerings at 110.0% of principal.

The 10.5% 2024 Notes have a maturity of July 15, 2024 and bear interest at a rate of 10.5% per annum payable semi-annually on January 15 and July 15 of each year, commencing January 15, 2018, to holders of record at the close of business on January 1 and July 1, as the case may be, immediately preceding such interest payment dates. The 10.5% 2024 Notes are redeemable in whole or in part at our option at any time prior to July 15, 2020 at 100% of their principal amount plus an applicable “Make-Whole Amount.” K. Hovnanian may also redeem some or all of the 10.5% 2024 Notes at 105.25% of principal commencing July 15, 2020, at 102.625% of principal commencing July 15, 2021 and at 100.0% of principal commencing July 15, 2022. In addition, K. Hovnanian may also redeem up to 35% of the aggregate principal amount of the 10.5% 2024 Notes prior to July 15, 2020 with the net cash proceeds from certain equity offerings at 110.5% of principal.

~~All of K. Hovnanian~~’s obligations under the 10.0% 2022 Notes and the 10.5% 2024 Notes are guaranteed by the Notes Guarantors. In addition to pledges of the equity interests in K. Hovnanian and the subsidiary Notes Guarantors which secure the 10.0% 2022 Notes and the 10.5% 2024 Notes, the 10.0% 2022 Notes and the 10.5% 2024 Notes and the guarantees thereof will also be secured in accordance with the terms of the indenture and security documents governing such Notes by pari passu liens on substantially all of the assets owned by K. Hovnanian and the Notes Guarantors, in each case subject to permitted liens and certain exceptions (the collateral securing the 10.0% 2022 Notes and the 10.5% 2024 Notes will be the same as that securing the Term Loans). The liens securing the 10.0% 2022 Notes and the 10.5% 2024 Notes rank junior to the liens securing the Term Loans and any other future secured obligations that are senior in priority with respect to the assets securing the 10.0% 2022 Notes and the 10.5% 2024 Notes.

In connection with the issuance of the 10.0% 2022 Notes and the 10.5% 2024 Notes, K. Hovnanian and the Notes Guarantors entered into security and pledge agreements pursuant to which K. Hovnanian and the Notes Guarantors pledged substantially all of their assets to secure their obligations under the 10.0% 2022 Notes and the 10.5% 2024 Notes, subject to permitted liens and certain exceptions as set forth in such agreements. K. Hovnanian and the Notes Guarantors also entered into applicable intercreditor and collateral agency agreements which set forth agreements with respect to the relative priority of their various secured obligations.

See Note 11 and Note 21 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of the Existing Term Loan Facility, the Unsecured Revolving Credit Facility and K. ~~Hovnanian~~’sHovnanian’s senior secured notes and senior notes and ~~Units.~~the recently completed financing transactions, including the new credit facilities and notes issuances.

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Mortgages and Notes Payable

We ~~had~~have nonrecourse mortgage loans for certain communities totaling ~~$70.8 million and $82.1~~$64.5 million (net of debt issuance costs) at ~~July~~both January 31, ~~2017~~2018 and October 31, ~~2016,~~2017, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of ~~$170.9~~$172.7 million and ~~$201.8~~$157.8 million, respectively. The weighted-average interest rate on these obligations was ~~5.5% and 4.9%~~5.3% at ~~July~~both January 31, ~~2017~~2018 and October 31, ~~2016, respectively,~~2017 and the mortgage loan payments on each community primarily correspond to home deliveries. We also had nonrecourse mortgage loans on our corporate headquarters totaling ~~$13.3~~$13.0 million ~~and $14.3 million at July 31, 2017 and October 31, 2016, respectively. These loans had a weighted-average interest rate of 8.9% at July 31, 2017 and 8.8%~~ at October 31, ~~2016, respectively. As of July 31,~~2017. On November 1, 2017, these loans ~~had installment obligations~~were paid in full in connection with ~~annual principal maturities in~~ the ~~years ending October 31 of: $0.3 million in 2017, $1.4 million in 2018, $1.5 million in 2019, $1.7 million in 2020, $1.8 million in 2021 and $6.6 million after 2021.~~

~~In June 2013, K. Hovnanian, as borrower, and we and certain~~sale 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% Notes, which are described in Note 11 to the Condensed 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 July 31, 2017 there were $52.0 million of borrowings and $15.0 million of letters of credit outstanding under the Credit Facility. As of October 31, 2016, there were $52.0 million of borrowings and $17.9 million of letters of credit outstanding under the Credit Facility. As of July 31, 2017, we believe we were in compliance with the covenants under the Credit Facility.headquarters building.

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. The loans are secured by the mortgages held for sale and repaid when we sell the underlying mortgage loans to permanent investors. As of ~~July~~January 31, ~~2017~~2018 and October 31, ~~2016,~~2017, we had an aggregate of ~~$62.1~~$63.0 million and ~~$145.6~~$114.6 million, respectively, outstanding under several of K. Hovnanian Mortgage’s short-term borrowing facilities.

See Note 10 to the Condensed Consolidated Financial Statements for a discussion of these ~~agreements and facilities.~~ agreements.

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Inventory Activities

Total inventory, excluding consolidated inventory not owned, ~~decreased~~increased $~~24.1~~74.6 million during the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 from October 31, ~~2016.~~2017. Total inventory, excluding consolidated inventory not owned, ~~decreased~~increased in the Northeast by ~~$34.6~~$0.5 million, in the Mid-Atlantic by $15.6 million, in the Midwest by $4.6 million, in the Southeast by $7.1 million, in the Southwest by $40.9 million and in the West by ~~$39.7~~$5.9 million. These decreases were partially offset by an increase in the Mid-Atlantic of $17.9 million, in the Midwest of $0.7 million, in the Southeast of $29.2 million and the Southwest of $2.4 million. These inventory fluctuationsThe increases were primarily attributable to new land purchases and land development, partially offset by home deliveries during the period. During the ~~nine~~three months ended ~~July~~January 31, ~~2017,~~2018, we had ~~impairments in the amount of $7.4 million.~~no impairments. We wrote-off costs in the amount of ~~$1.9~~$0.4 million during the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 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 ~~July~~January 31, ~~2017~~2018 are expected to be ~~closed~~delivered during the next six to nine months.

Consolidated inventory not owned decreased $~~70.2~~30.9 million. Consolidated inventory not owned consists of options related to land banking and model financing transactions that were added to our Condensed Consolidated Balance Sheet in accordance with US GAAP. The decrease from October 31, ~~2016~~2017 to ~~July~~January 31, ~~2017~~2018 was primarily due to a decrease in land banking transactions along with a decrease in the sale and leaseback of certain model homes during the period. 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 predetermined schedule. 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 Condensed Consolidated Balance Sheet, at ~~July~~January 31, ~~2017,~~2018, inventory of ~~$67.6~~$54.5 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of ~~$35.8~~$32.2 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions. In addition, 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 Condensed Consolidated Balance Sheet, at ~~July~~January 31, ~~2017,~~2018, inventory of ~~$70.9~~$39.4 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of ~~$62.7~~$35.8 million (net of debt issuance costs) 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 Condensed Consolidated Balance Sheet. As of January 31, 2018, we had no specific performance options.

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 Condensed 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 ~~July~~January 31, ~~2017,~~2018, we had mothballed land in 2421 communities. The book value associated with these communities at ~~July~~January 31, ~~2017~~2018 was ~~$61.6~~$35.6 million, which was net of impairment charges recorded in prior periods of ~~$239.0~~$206.5 million. We continually review communities to determine if mothballing is appropriate. During the first ~~three quarters~~quarter of fiscal ~~2017,~~2018, we did not mothball any additional communities, ~~but we sold three~~or sell any previously mothballed communities, ~~and~~but we re-activated ~~two~~one previously mothballed ~~communities.~~community.

Inventories held for sale, which are land parcels where we have decided not to build homes and are actively marketing the land for sale, represented $~~48.6~~$18.5 million and ~~$48.7~~$23.6 million, respectively, of our total inventories at ~~July~~January 31, ~~2017~~2018 and October 31, ~~2016,~~2017, 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.

Table of Contents

The following tables summarize home sites included in our ~~total~~total residential real estate.

Active
Communities(1)

Active
Communities
Homes

Proposed
Developable
Homes

Total
Homes

July 31, 2017:

Northeast
4 381 3,973 4,354
Mid-Atlantic
26 1,621 2,391 4,012
Midwest
16 2,073 1,694 3,767
Southeast
17 1,962 1,479 3,441
Southwest
65 3,248 2,332 5,580
West
13 1,497 3,373 4,870

Consolidated total
141 10,782 15,242 26,024

Unconsolidated joint ventures(2)
26 3,832 1,477 5,309

Owned
6,340 5,966 12,306
Optioned
4,252 9,276 13,528

Controlled lots
10,592 15,242 25,834

Construction to permanent financing lots
190 - 190

Consolidated total
10,782 15,242 26,024

~~(1)~~ ~~Active communities are open for sale communities with ten or more~~ The increase in total home sites ~~available.~~available at January 31, 2018 compared to October 31, 2017 is attributable to signing new land option agreements and acquiring new land parcels, partially offset by delivering homes and terminating certain option agreements.

	Active Communities(1)		��	Active Communities Homes		Proposed Developable Homes		Total Homes
January 31, 2018:

Northeast		4			295		4,325		4,620
Mid-Atlantic		25			1,696		2,567		4,263
Midwest		17			1,619		2,033		3,652
Southeast		15			1,840		1,804		3,644
Southwest		66			3,942		2,250		6,192
West		13			1,545		3,483		5,028

Consolidated total		140			10,937		16,462		27,399

Unconsolidated joint ventures (2)		25			3,362		803		4,165

Owned					6,853		6,070		12,923
Optioned					3,868		10,392		14,260

Controlled lots					10,721		16,462		27,183

Construction to permanent financing lots					216		-		216

Consolidated total					10,937		16,462		27,399

(2) Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 17 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.

(1)

Active communities are open for sale communities with ten or more home sites available.

(2)

Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 17 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.

Table of Contents

	Active Communities(1)		Active Communities Homes		Proposed Developable Homes		Total Homes		Active Communities(1)		Active Communities Homes		Proposed Developable Homes		Total Homes
October 31, 2016:
October 31, 2017:

Northeast		7		642		4,220		4,862		3		319		4,208		4,527
Mid-Atlantic		30		1,987		2,202		4,189		24		1,488		2,753		4,241
Midwest		18		1,557		2,536		4,093		15		1,654		1,738		3,392
Southeast		22		1,546		1,938		3,484		15		1,972		1,384		3,356
Southwest		72		3,766		886		4,652		59		3,233		2,200		5,433
West		18		1,609		3,908		5,517		14		1,306		3,294		4,600

Consolidated total		167		11,107		15,690		26,797		130		9,972		15,577		25,549

Unconsolidated joint ventures(2)		21		3,419		1,212		4,631
Unconsolidated joint ventures (2)										27		3,667		2,103		5,770

Owned				5,764		7,778		13,542				5,675		5,747		11,422
Optioned				5,196		7,912		13,108				4,077		9,830		13,907

Controlled lots				10,960		15,690		26,650				9,752		15,577		25,329

Construction to permanent financing lots				147		-		147				220		-		220

Consolidated total				11,107		15,690		26,797				9,972		15,577		25,549

(1) ~~Active communities are open for sale communities with ten or more home sites available.~~

Active communities are open for sale communities with ten or more home sites available.

Table of Contents

The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities. ~~The decrease in the number of started~~Started unsold homes per active selling community decreased from October 31, ~~2016~~2017 to ~~July~~January 31, ~~2017~~2018. The decrease is ~~primarily due~~attributed to our ability to start less homes in the ~~decrease~~winter months in ~~community count during the period.~~certain segments.

													January 31, 2018						October 31, 2017
	July 31, 2017						October 31, 2016
	Unsold Homes		Models		Total		Unsold Homes		Models		Total		Unsold Homes		Models		Total		Unsold Homes		Models		Total

Northeast		13		7		20		57		11		68		8		6		14		11		6		17
Mid-Atlantic		91		11		102		113		4		117		53		17		70		81		11		92
Midwest		29		8		37		33		14		47		18		12		30		21		13		34
Southeast		114		29		143		66		20		86		118		28		146		118		28		146
Southwest		373		11		384		425		8		433		319		30		349		348		15		363
West		24		7		31		33		20		53		33		19		52		23		10		33

Total		644		73		717		727		77		804		549		112		661		602		83		685


Started or completed unsold homes and models per active selling communities (1)		4.6		0.5		5.1		4.3		0.5		4.8		3.9		0.8		4.7		4.6		0.7		5.3

(1)

Active selling communities (which are communities that are open for sale with ten or more home sites available) were ~~141~~140 and ~~167~~130 at ~~July~~January 31, ~~2017~~2018 and October 31, ~~2016,~~2017, respectively. ~~Ratio~~This ratio does not include substantially completed communities, which are communities with less than 10ten home sites available.

~~Homebuilding - Restricted cash and cash equivalents decreased $~~2.0 million from October 31, 2016 to $2.0 million at July 31, 2017. The decrease was primarily due to the release of escrow cash related to our warranty obligations in certain communities where the warranty coverage period has elapsed.Other Balance Sheet Activities

Investments in and advances to unconsolidated joint ventures ~~increased $8.1~~decreased $22.8 million to ~~$108.6~~$92.3 million at ~~July~~January 31, ~~2017~~2018 compared to October 31, ~~2016.~~2017. The ~~increase~~decrease was primarily due to ~~additional investments and advances to existing~~the acquisition of the remaining assets of one of our joint ventures in the first ~~three quarters of fiscal 2017, along with an investment in a new joint venture in the second~~ quarter of fiscal ~~2017. These increases were partially offset by decreases primarily related to~~2018, along with partner distributions on another joint venture during the period. As of ~~both July~~January 31, ~~2017~~2018 and October 31, ~~2016,~~2017, we had investments in 10nine and ten homebuilding joint ventures, respectively, and one land development joint venture. 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, net decreased $~~10.9~~4.3 million from October 31, ~~2016~~2017 to ~~$38.8~~$53.8 million at ~~July~~January 31, ~~2017.~~2018. The decrease was primarily due to the timing of home closings during the period, along with a decrease in ~~refundable deposits resulting~~certain insurance receivables.

Property, Plant, and Equipment decreased $33.4 million from ~~reimbursements received during the period.~~October 31, 2017 to January 31, 2018. The decrease was primarily due to our sale of our corporate headquarters building on November 1, 2017, totaling $34.7 million, net of accumulated depreciation.

Prepaid expenses and other assets were as follows as of:

	July 31,		October 31,		Dollar
(In thousands)	2017		2016		Change			January 31, 2018		October 31, 2017		Dollar Change

Prepaid insurance	$	4,506	$	3,228	$	1,278		$	3,180	$	1,893	$	1,287
Prepaid project costs		32,783		38,032		(5,249	)		30,870		30,360		510
Net rental properties		92		447		(355	)
Other prepaids		5,795		4,493		1,302			9,072		4,245		4,827
Other assets		288		562		(274	)		422		528		(106	)
Total	$	43,464	$	46,762	$	(3,298	)	$	43,544		37,026		6,518

Prepaid insurance increased during the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 due to the timing of premium payments. These costs are amortized over the life of the associated insurance policy, which can be one to three years. 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 and therefore have declined as our community count has declined. Other prepaids increased primarily due to ~~the timing of payments,~~costs related to our recent refinancing transactions, partially offset by amortization of various prepaid costs, including annual software licenses.

Table of Contents

Financial ~~services~~ Services (other ~~assets~~assets) consist primarily of residential mortgages receivable held for sale of which $~~75.6~~$77.7 million and ~~$155.0~~$131.5 million at ~~July~~January 31, ~~2017~~2018 and October 31, ~~2016,~~2017, 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, ~~2016~~2017 is related to a decrease in the volume of loans originated during the ~~third~~first quarter of ~~2017~~2018 compared to the fourth quarter of ~~2016, partially~~2017, primarily due to the decrease in deliveries, ~~along with a decrease~~partially offset by an increase in the average loan value.

~~Nonrecourse~~ ~~mortgages decreased~~ Also contributing to ~~$70.8 million at July 31, 2017 from $82.1 million at October 31, 2016. The~~the decrease in financial services other assets was ~~primarily~~a decrease in restricted cash due to the ~~payment~~timing of ~~existing mortgages, including a mortgage on a community which was transferred~~home closings at the end of the fourth quarter of fiscal 2017 compared to ~~a joint venture, partially offset by new mortgages for communities in~~ the ~~Northeast and~~end of the ~~Mid-Atlantic obtained during the nine months ended July 31, 2017.~~ first quarter of fiscal 2018.

Accounts ~~payable~~payable and other liabilities are as follows as of:

	July 31,		October 31,		Dollar
(In thousands)	2017		2016		Change			January 31, 2018		October 31, 2017		Dollar Change

Accounts payable	$	147,050	$	160,924	$	(13,874	)	$	107,185	$	128,844	$	(21,659	)
Reserves		124,913		126,888		(1,975	)		134,823		134,089		734
Accrued expenses		12,632		17,913		(5,281	)		14,350		12,900		1,450
Accrued compensation		38,738		44,715		(5,977	)		21,874		47,209		(25,335	)
Other liabilities		7,715		18,788		(11,073	)		10,867		12,015		(1,148	)
Total	$	331,048	$	369,228	$	(38,180	)	$	289,099	$	335,057	$	(45,958	)

The decrease in accounts payable was primarily due to the lower volume of deliveries in the ~~third~~first quarter of fiscal ~~2017~~2018 compared to the fourth quarter of fiscal ~~2016.~~ Reserves decreased during the period as payments for warranty related claims exceeded new accruals primarily for general liability insurance. The decrease in accrued expenses was primarily due to the amortization of abandoned lease space accruals, along with a decrease in accrued property tax.2017. The decrease in accrued compensation was primarily due to the payment of our fiscal year ~~2016~~2017 bonuses during the first quarter of ~~2017,~~fiscal 2018, partially offset by the ~~new accruals for bonuses for nine months~~accrual of the first quarter fiscal 2017. The decrease in other liabilities is primarily due to the recognition of deferred income from municipality reimbursements for infrastructure costs and development fees related to work performed under a bond issuance in one of our communities in the West.

~~Customers’ deposits increased $0.4 million to $37.9 million at July 31, 2017. The slight increase was primarily related to the slight increase in backlog during the period.~~2018 bonuses.

Liabilities from inventory not owned decreased $~~51.7~~23.1 million to ~~$98.5~~$68.0 million at ~~July~~January 31, ~~2017.~~2018. The decrease was primarily due to a decrease in land banking activity during the period, along with a decrease in the sale and leaseback of certain model homes, both accounted for as financing transactions as described above.

Financial Services (liabilities) decreased $~~82.8~~60.3 million from ~~$172.4~~$141.9 million at October 31, ~~2016,~~2017, to ~~$89.6~~$81.6 million at ~~July~~January 31, ~~2017.~~2018. The decrease is primarily due to a decrease in our mortgage warehouse lines of credit, and directly correlates to the decrease in the volume of mortgage loans held for sale during the period.

~~Accrued interest decreased $18.9 million to $13.5 million at July 31, 2017. The decrease is primarily due to the purchase in tender offers and the satisfaction and discharge~~

Table of ~~all of our~~ 7.25% Senior Secured Notes due 2020, 9.125% Senior Secured Notes due 2020 and 10.0% Senior Secured Notes due 2018 in the third quarter of fiscal 2017 (as discussed above), whereby all accrued and unpaid interest related to these notes was paid upon consummation of these transactions.

~~Income taxes payable increased $285.4 million from a receivable of $28~~3.6 million at October 31, 2016 to a payable of $1.8 million at July 31, 2017. The increase is due to the increase in the valuation allowance against our deferred tax assets during the period, as discussed in Note 15 to the Condensed Consolidated Financial Statements.

Contents

RESULTS OF OPERATIONS FOR THE THREE ~~AND~~ ~~NINE~~ MONTHS ENDED ~~JULY~~JANUARY 31, ~~2017~~2018 COMPARED TO THE THREE ~~AND NINE~~ MONTHS ENDED ~~JULY~~JANUARY 31, ~~2016~~2017

Total ~~revenues~~Revenues

Compared to the same prior period, revenues decreased as follows:

Three Months Ended

(Dollars in thousands)

July 31,
2017

July 31,
2016

Dollar
Change

Percentage
Change

Homebuilding:

Sale of homes
$ 574,282 $ 640,386 $ (66,104
)
(10.3
)%

Land sales and other revenues
2,760 59,979 (57,219
)
(95.4
)%

Financial services
14,993 16,485 (1,492
)
(9.1
)%

Total revenues
$ 592,035 $ 716,850 $ (124,815
)
(17.4
)%

											Three Months Ended
	Nine Months Ended
(Dollars in thousands)	July 31, 2017		July 31, 2016		Dollar Change			Percentage Change			January 31, 2018		January 31, 2017		Dollar Change			Percentage Change
Homebuilding:
Homebuilding:
Sale of homes	$	1,673,250	$	1,823,318	$	(150,068	)		(8.2	)%	$	401,577	$	531,415	$	(129,838	)		(24.4	)%


Land sales and other revenues		14,393		72,146		(57,753	)		(80.1	)%		4,701		7,745		(3,044	)		(39.3	)%

Financial services		42,336		51,714		(9,378	)		(18.1	)%		10,888		12,849		(1,961	)		(15.3	)%

Total revenues	$	1,729,979	$	1,947,178	$	(217,199	)		(11.2	)%	$	417,166	$	552,009	$	(134,843	)		(24.4	)%

Homebuilding

For the three ~~and~~ ~~nine~~ months ended ~~July~~January 31, ~~2017,~~2018, sale of homes revenues decreased ~~$66.1~~$129.8 million, or ~~10.3%~~24.4%, ~~and $150.1 million or 8.2%, respectively,~~ as compared to the same ~~periods~~period of the prior year. ~~These decreases were primarily~~This decrease was due to the number of home deliveries decreasing ~~14.2% and 13.0%~~20.5% for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017, respectively, as~~2018 compared to the ~~prior year periods, partially offset by increases~~three months ended January 31, 2017, along with a 4.9% decrease in the average price per home. The decrease in the number of deliveries ~~is primarily~~was due to the ~~result of a reduction~~decrease in ~~community count by 19.0%.~~active selling communities year over year. The average price per home ~~increased~~decreased to ~~$425,000~~$391,782 in the three months ended ~~July~~January 31, ~~2017~~2018 from ~~$407,000~~$411,949 in the three months ended ~~July~~January 31, ~~2016.~~2017. The ~~average price per home increased to $419,000 in the nine months ended July 31, 2017 from $397,000 in the nine months ended July 31, 2016. The increase~~decrease in average price was ~~primarily~~ the result of the geographic and community mix of our deliveries, as opposed to home price ~~increases~~decreases (which we increase or decrease in communities depending on the respective ~~community's~~community’s performance). Land sales are ancillary to our homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. For further details on the ~~changes in segment revenues see “Homebuilding Operations by Segment” below. For further details on the~~ decrease in land sales and other revenues, see the section titled “Land Sales and Other Revenues” below.

Table of Contents

Information on homes delivered by segment is set forth below:

	Three Months Ended July 31,							Nine Months Ended July 31,							Three Months Ended January 31,
(Dollars in thousands)	2017		2016		% Change			2017		2016		% Change			2018		2017		% Change

Northeast:
Dollars	$	40,015	$	66,308		(39.7	)%	$	138,839	$	192,659		(27.9	)%	$	20,192	$	52,907		(61.8	)%
Homes		86		136		(36.8	)%		289		395		(26.8	)%		40		104		(61.5	)%

Mid-Atlantic:
Dollars	$	113,111	$	111,579		1.4	%	$	313,390	$	295,004		6.2	%	$	71,009	$	100,159		(29.1	)%
Homes		194		228		(14.9	)%		600		628		(4.5	)%		135		204		(33.8	)%

Midwest:
Dollars	$	40,620	$	56,643		(28.3	)%	$	126,065	$	225,276		(44.0	)%	$	40,517	$	43,651		(7.2	%)
Homes		127		193		(34.2	)%		411		706		(41.8	)%		140		150		(6.7	)%

Southeast:
Dollars	$	68,408	$	56,471		21.1	%	$	178,799	$	146,895		21.7	%	$	56,674	$	56,386		0.5	%
Homes		166		145		14.5	%		431		417		3.4	%		132		138		(4.3	)%

Southwest:
Dollars	$	209,041	$	248,228		(15.8	)%	$	617,199	$	725,721		(15.0	)%	$	128,204	$	183,260		(30.0	)%
Homes		581		671		(13.4	)%		1,751		1,954		(10.4	)%		384		531		(27.7	)%

West:
Dollars	$	103,087	$	101,157		1.9	%	$	298,958	$	237,763		25.7	%	$	84,981	$	95,052		(10.6	%)
Homes		196		201		(2.5	)%		516		494		4.5	%		194		163		19.0	%

Consolidated total:
Dollars	$	574,282	$	640,386		(10.3	)%	$	1,673,250	$	1,823,318		(8.2	)%	$	401,577	$	531,415		(24.4	)%
Homes		1,350		1,574		(14.2	)%		3,998		4,594		(13.0	)%		1,025		1,290		(20.5	)%

Unconsolidated joint ventures(1)
Unconsolidated joint ventures (1)
Dollars	$	62,127	$	30,714		102.3	%	$	212,983	$	76,477		178.5	%	$	58,099	$	64,641		(10.1	)%
Homes		117		53		120.8	%		364		146		149.3	%		116		108		7.4	%

(1) Represents housing revenues and home deliveries for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 17 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.

As discussed above, the overall decrease in consolidated housing revenues during the three ~~and~~ ~~nine~~ months ended ~~July~~January 31, ~~2017~~2018 as compared to the same period of the prior year was ~~primarily~~ attributed to a decrease in deliveries as our community count has decreased year over year.

Table of Contents

An important indicator of our future results are recently signed contracts and our home contract backlog for future deliveries. Our sales contracts and homes in contract backlog by segment are set forth below:

	Net Contracts (1) for the				Net Contracts (1) for the
	Three Months Ended July 31,				Nine Months Ended July 31,				Contract Backlog as of July 31,				Net Contracts (1) for the Three Months Ended January 31,				Contract Backlog as of January 31,
(Dollars in thousands)	2017		2016		2017		2016		2017		2016		2018		2017		2018		2017

Northeast:
Dollars	$	26,648	$	61,945	$	94,611	$	176,456	$	55,284	$	130,800	$	25,363	$	38,045	$	56,949	$	84,649
Homes		52		128		201		362		116		260		46		83		104		183

Mid-Atlantic:
Dollars	$	97,017	$	97,338	$	322,308	$	368,603	$	257,891	$	312,698	$	63,213	$	102,246	$	185,939	$	251,062
Homes		173		208		589		753		419		566		125		190		318		416

Midwest:(2)(4)
Midwest:
Dollars	$	48,257	$	54,318	$	155,312	$	191,332	$	133,775	$	128,381	$	49,416	$	45,566	$	107,869	$	106,443
Homes		170		176		511		599		474		464		165		145		407		369

Southeast:(3)
Southeast:
Dollars	$	73,896	$	59,242	$	175,924	$	234,166	$	142,296	$	159,489	$	50,455	$	46,451	$	114,163	$	135,236
Homes		172		142		421		560		322		355		127		108		280		302

Southwest:
Dollars	$	177,285	$	225,929	$	575,669	$	696,915	$	244,114	$	393,906	$	141,458	$	170,884	$	191,071	$	273,268
Homes		522		638		1,678		1,929		690		1,008		411		485		536		717

West:
Dollars	$	103,342	$	99,284	$	330,287	$	317,862	$	211,470	$	186,986	$	69,397	$	84,423	$	158,379	$	169,512
Homes		232		175		684		607		454		316		153		162		359		285

Consolidated total:
Consolidated total:
Dollars	$	526,445	$	598,056	$	1,654,111	$	1,985,334	$	1,044,830	$	1,312,260	$	399,302	$	487,615	$	814,370	$	1,020,170
Homes		1,321		1,467		4,084		4,810		2,475		2,969		1,027		1,173		2,004		2,272

Unconsolidated joint ventures(5)
Unconsolidated joint ventures:(2)
Dollars	$	132,037	$	35,217	$	299,654	$	105,694	$	244,234	$	168,135	$	137,221	$	80,300	$	354,038	$	173,222
Homes		212		70		509		181		405		263		223		139		542		291

(1) Net contracts are defined as new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period.

(2) ~~The Midwest net contracts include~~ 4 homes and 65 homes, respectively, and $1.9 million and $27.4 million, respectively, for the three and nine months ended July 31, 2016 from Minneapolis, MN. Contract backlog as of July 31, 2016 reflects the reduction of 64 homes and $24.1 million, related to the sale of our land portfolio in Minneapolis, MN.

~~(3) The Southeast net contracts include~~ 70 homes and $31.6 million for the nine months ended July 31, 2016 from Raleigh, NC. There were no net contracts for Raleigh, NC, for the three months ended July 31, 2016. Contract backlog as of July 31, 2016 reflects the reduction of 67 homes and $33.7 million, related to the sale of our land portfolio in Raleigh, NC.

~~(4) Contract backlog as of July 31, 2016 excludes 9 homes that were sold to one of our joint ventures at the time of the joint venture formation.~~

~~(5)~~ Represents net contract dollars, net contract homes and contract backlog dollars and homes for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 17 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.

In the ~~nine months~~first quarter of ~~2017,~~2018, our open for sale community count ~~decreased~~increased to ~~141~~140 from ~~167~~130 at October 31, ~~2016,~~2017, which is the net result of opening 4618 new communities, closing 7110 communities and ~~transferring one community to~~purchasing two communities from an existing joint venture since the beginning of fiscal ~~2017.~~2018. Our reported level of sales contracts (net of cancellations) decreased as a result of our lower community count ~~for~~in the ~~nine months ended July 31, 2017~~first quarter of fiscal 2018 as compared to the same period of the prior year. ~~However, as a sign of improvement~~In addition to the decrease in ~~our sales absorption,~~community count, net contracts per average active selling community for the ~~nine~~three months ended ~~July~~January 31, ~~2017 was 26.7~~2018 decreased slightly to 7.3 compared to ~~23.9~~7.5 for the same period ofin the prior year. ~~Net contracts per active selling community increased to 9.4 for the three months ended July 31, 2017 from 8.4 for the three months ended July 31, 2016.~~

Table of Contents

Cancellation rates represent the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation rates, excluding unconsolidated joint ventures:

Quarter	2017		2016		2015		2014		2013		2018			2017			2016			2015			2014

First		19%		20%		16%		18%		16%		18	%		19	%		20	%		16	%		18	%
Second		18%		19%		16%		17%		15%					18	%		19	%		16	%		17	%
Third		19%		21%		20%		22%		17%					19	%		21	%		20	%		22	%
Fourth				20%		20%		22%		23%					22	%		20	%		20	%		22	%

Another common and meaningful way to analyze our cancellation trends is to compare the number of contract cancellations as a percentage of beginning backlog. The following table provides this historical comparison, excluding unconsolidated joint ventures:

Quarter	2017		2016		2015		2014		2013		2018			2017			2016			2015			2014

First		12%		13%		11%		11%		12%		12	%		12	%		13	%		11	%		11	%
Second		16%		14%		14%		17%		15%					16	%		14	%		14	%		17	%
Third		13%		12%		13%		13%		12%					13	%		12	%		13	%		13	%
Fourth				11%		12%		14%		14%					12	%		11	%		12	%		14	%

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~~’sbuyer’s failure to qualify for a mortgage, which generally occurs during the first few weeks after signing. As shown in the tables above, contract cancellations over the past several years have been within what we believe to be a normal range. However, market conditions are uncertain and it is difficult to predict what cancellation rates will be in the future.

Total cost of sales on our Condensed 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 homebuilding gross margin is set forth below.

Homebuilding gross margin before cost ofof sales interest expense and land charges is a non-GAAP financial measure. This measure should not be considered as an alternative to homebuilding gross margin determined in accordance with GAAP as an indicator of operating performance.

Management ~~believes~~believes this non-GAAP measure enables investors to better understand our operating performance. This measure is also useful internally, helping management evaluate our operating results on a consolidated basis and relative to other companies in our industry. In particular, the magnitude and volatility of land charges for the Company, and for other homebuilders, have been significant and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding land charges, as well as interest amortized to cost of sales, and other similar presentations prepared by analysts and other companies are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in ~~companies~~’companies’ respective level of impairments and levels of debt.

Table of Contents

	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended January 31,
(Dollars in thousands)	2017			2016			2017			2016			2018			2017

Sale of homes	$	574,282		$	640,386		$	1,673,250		$	1,823,318		$	401,577		$	531,415

Cost of sales, excluding interest expense and land charges		478,069			532,116			1,391,966			1,521,704			329,527			439,917

Homebuilding gross margin, before cost of sales interest expense and land charges		96,213			108,270			281,284			301,614			72,050			91,498

Cost of sales interest expense, excluding land sales interest expense		18,397			23,108			55,284			61,291			12,292			16,574

Homebuilding gross margin, after cost of sales interest expense, before land charges		77,816			85,162			226,000			240,323
Homebuilding gross margin, after cost of sales interest expense, before land charges														59,758			74,924

Land charges		4,197			1,565			9,334			22,915			414			3,184

Homebuilding gross margin	$	73,619		$	83,597		$	216,666		$	217,408		$	59,344		$	71,740

Gross margin percentage		12.8	%		13.1	%		12.9	%		11.9	%		14.8	%		13.5	%

Gross margin percentage, before cost of sales interest expense and land charges		16.8	%		16.9	%		16.8	%		16.5	%		17.9	%		17.2	%

Gross margin percentage, after cost of sales interest expense, before land charges		13.6	%		13.3	%		13.5	%		13.2	%		14.9	%		14.1	%

Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:

Three Months Ended
July 31,

Nine Months Ended
July 31,

2017

2016

2017

2016

Sale of homes
100
%
100
%
100
%
100
%
Cost of sales, excluding interest expense and land charges:

Housing, land and development costs
74.0
%
73.3
%
73.4
%
73.4
%
Commissions
3.5
%
3.4
%
3.4
%
3.4
%
Financing concessions
1.2
%
1.3
%
1.2
%
1.4
%
Overheads
4.6
%
5.1
%
5.2
%
5.3
%
Total cost of sales, before interest expense and land charges
83.3
%
83.1
%
83.2
%
83.5
%
Cost of sales interest
3.2
%
3.6
%
3.3
%
3.3
%
Land charges
0.7
%
0.2
%
0.6
%
1.3
%

Gross margin percentage
12.8
%
13.1
%
12.9
%
11.9
%
Gross margin percentage, before cost of sales interest expense and land charges
16.8
%
16.9
%
16.8
%
16.5
%
Gross margin percentage, after cost of sales interest expense, before land charges
13.6
%
13.3
%
13.5
%
13.2
%

	Three Months Ended January 31,
	2018			2017

Sale of homes		100.0	%		100.0	%

Cost of sales, excluding interest expense and land charges:
Housing, land and development costs		71.6	%		72.6	%
Commissions		3.6	%		3.4	%
Financing concessions		1.2	%		1.2	%
Overheads		5.7	%		5.6	%
Total cost of sales, before interest expense and land charges		82.1	%		82.8	%
Cost of sales interest		3.0	%		3.1	%
Land charges		0.1	%		0.6	%

Gross margin percentage		14.8	%		13.5	%
Gross margin percentage, before cost of sales interest expense and land charges		17.9	%		17.2	%
Gross margin percentage, after cost of sales interest expense and before land charges		14.9	%		14.1	%

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 ~~decreased~~increased to ~~12.8%~~14.8% during the three months ended ~~July~~January 31, ~~2017~~2018 compared to ~~13.1% for the same period last year and increased to 12.9% during the nine months ended July 31, 2017 compared to 11.9%~~13.5% for the same period last year. The ~~decrease~~increase in gross margin percentage for the three months ended ~~July~~January 31, ~~2017~~2018 is primarily due to ~~increased~~the mix of communities delivering and decreased land charges compared to the same period of the prior year. ~~The increase in gross margin percentage for~~For the ~~nine~~three months ended ~~July~~January 31, 2017 is primarily due to decreased land charges as compared to the prior year because of the impairments recorded in the prior year, which related to the sale of our land portfolio in Minneapolis, MN. For the nine months ended July 31, 20172018 and ~~2016,~~2017, gross margin was favorably impacted by the reversal of prior period inventory impairments of ~~$48.6~~$14.5 million and ~~$42.2~~$10.2 million, respectively, which represented ~~2.9%~~3.6% and ~~2.3%~~1.9%, respectively, of “Sale of homes” revenue. Gross margin percentage, before cost of sales interest expense and land charges, increased ~~slightly~~ from ~~16.5% for the nine months ended July 31, 2016 to 16.8% for the nine months ended July 31, 2017, but decreased slightly from 16.9%~~17.2% for the three months ended ~~July~~January 31, ~~2016~~2017 to ~~16.8%~~17.9% for the three months ended ~~July~~January 31, ~~2017. These minor changes in gross margin are a result of~~2018, primarily due to the mix of communities delivering homes ~~rather than significant changes~~ in ~~prices or costs.~~each period.

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Reflected as inventory impairment loss and land option write-offs in cost of sales, we have written-off or written-down certain inventories totaling $~~4.2~~0.4 million and ~~$1.5~~$3.2 million during the three months ended ~~July~~January 31, ~~2017~~2018 and ~~2016, respectively, and $9.3 million and $22.9 million during the nine months ended July 31,~~ 2017, ~~and 2016,~~ respectively, to their estimated fair value. During the three ~~and nine~~ months ended ~~July~~January 31, ~~2017,~~2018, we wrote-off residential land options and approval and engineering costs amounting to ~~$1.0 million and $1.9~~$0.4 million compared to ~~$0.2 million and $6.5~~$0.5 million for the three ~~and nine~~ months ended ~~July~~January 31, ~~2016,~~2017, which are included in the total land charges discussed 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 our Northeast, Mid-Atlantic and West segments in the first quarter of fiscal 2018, and in our Midwest and Southeast segments ~~for~~in the first ~~three quarters~~quarter of fiscal ~~2017 and in all of our segments for~~2017. We did not record inventory impairments during the ~~first~~ three ~~quarters of fiscal 2016.~~months ended January 31, 2018. We recorded ~~$3.2 million and $1.3~~$2.7 million of inventory impairments during the three months ended ~~July~~January 31, ~~2017 and July 31, 2016, respectively, and $7.4 million and $16.4 million in inventory impairments during the nine months ended July 31, 2017 and July 31, 2016, respectively.~~2017. The impairments recorded in the first ~~nine months~~quarter of fiscal 2017 were primarily related to two communities in the ~~Northeast, one community in the Mid-Atlantic, two communities in the Southeast and two communities in the~~ West. The impairments recorded in the first nine months of fiscal 2016 were for six communities that were held for sale, mainly in the Midwest related to our exit of the Minneapolis, MN market. The Midwest inventory was written down to fair value based on offers received for the property. It is difficult to predict whether impairment levels will remain low. 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.

Land Sales and Other ~~Revenues:~~Revenues

Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below:

	Three Months Ended					Nine Months Ended
	July 31,					July 31,				Three Months Ended January 31,
(In thousands)	2017			2016		2017		2016		2018		2017

Land and lot sales	$	1,785		$	58,897	$	11,497	$	70,051	$	-	$	7,001
Cost of sales, excluding interest		817			51,667		7,387		62,275		-		5,110
Land and lot sales gross margin, excluding interest		968			7,230		4,110		7,776		-		1,891
Land and lot sales interest expense		974			5,298		2,746		5,402		-		1,748
Land and lot sales gross margin, including interest	$	(6	)	$	1,932	$	1,364	$	2,374	$	-	$	143

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~~the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult. Revenue associated with land sales can vary significantly due to the mix of land parcels sold. There were ~~three~~no land sales in the ~~three months ended July 31, 2017~~first quarter of fiscal 2018 compared to 19two land sales in the same period of the prior year, resulting in a decrease of ~~$57.1~~$7.0 million in land sales revenues. ~~There were eight and 24 land sales in the nine months ended July 31, 2017 and 2016, respectively, resulting in a decrease of $58.6 million in land sales revenue.~~

Land sales and other revenues decreased $~~57.2 million and $57.8~~$3.0 million for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017~~2018 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, proceeds from the sale of assets, cash discounts and miscellaneous one-time receipts. ~~For~~The decrease for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017,~~2018, compared to the three ~~and nine~~ months ended ~~July~~January 31, ~~2016, the decrease~~2017, was ~~mainly~~ due to the ~~fluctuation~~decrease in land sales ~~revenues noted~~discussed above, slightly offset by ~~increases~~the $3.6 million gain recognized from the sale of our corporate headquarters building in the ~~various components~~first quarter of ~~other revenue.~~fiscal 2018.

Homebuilding Selling, General and Administrative

Homebuilding selling, general and administrative ~~expenses~~ (“SGA”) expenses decreased $~~6.2~~$1.2 million ~~and $20.2~~to $43.2 million for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017, respectively,~~2018 compared to the same ~~periods~~period last ~~year mainly due~~year. The decrease can be attributed to ~~our decision to exit four markets during 2016,~~ the reduction of our community count and the decrease in insurance ~~costs and the increase of joint venture management fees received, which offset general and administrative~~costs. Despite this decrease, SGA expenses ~~as a result of more joint venture deliveries. These decreases resulted in the improvement of SGA~~ as a percentage of homebuilding revenues increased to ~~7.9% and 8.0%~~10.6% for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017, respectively, from 7.4% and~~2018 compared to 8.2% for the three ~~and nine~~ months ended ~~July~~January 31, ~~2016, respectively.~~2017, as a result of the 24.6% decline in homebuilding revenue for the same periods.

Table of Contents

HOMEBUILDING ~~OPERATIONS~~OPERATIONS BY SEGMENT

Segment Analysis

Three Months Ended July 31,

(Dollars in thousands, except average sales price)

2017

2016

Variance

Variance %

Northeast

Homebuilding revenue
$ 39,956 $ 69,989 $ (30,033
)
(42.9
)%
Loss before income taxes
$ (5,737
)
$ (995
)
$ (4,742
)
(476.6
)%
Homes delivered
86 136 (50
)
(36.8
)%
Average sales price
$ 465,289 $ 487,558 $ (22,269
)
(4.6
)%

Mid-Atlantic

Homebuilding revenue
$ 113,298 $ 111,739 $ 1,559 1.4
%
Income before income taxes
$ 3,714 $ 3,467 $ 247 7.1
%
Homes delivered
194 228 (34
)
(14.9
)%
Average sales price
$ 583,050 $ 489,382 $ 93,668 19.1
%

Midwest

Homebuilding revenue
$ 41,052 $ 72,581 $ (31,529
)
(43.4
)%
Loss before income taxes
$ (3,313
)
$ (2,452
)
$ (861
)
(35.1
)%
Homes delivered
127 193 (66
)
(34.2
)%
Average sales price
$ 319,839 $ 293,487 $ 26,352 9.0
%

Southeast

Homebuilding revenue
$ 68,435 $ 96,323 $ (27,888
)
(29.0
)%
Loss before income taxes
$ (1,580
)
$ (5,621
)
$ 4,041 71.9
%
Homes delivered
166 145 21 14.5
%
Average sales price
$ 412,098 $ 389,458 $ 22,640 5.8
%

Southwest

Homebuilding revenue
$ 209,295 $ 248,546 $ (39,251
)
(15.8
)%
Income before income taxes
$ 19,010 $ 20,532 $ (1,522
)
(7.4
)%
Homes delivered
581 671 (90
)
(13.4
)%
Average sales price
$ 359,793 $ 369,937 $ (10,144
)
(2.7
)%

West

Homebuilding revenue
$ 104,523 $ 101,158 $ 3,365 3.3
%
Income before income taxes
$ 5,873 $ 3,297 $ 2,576 78.1
%
Homes delivered
196 201 (5
)
(2.5
)%
Average sales price
$ 525,956 $ 503,269 $ 22,687 4.5
%

													Three Months Ended January 31,

	Nine Months Ended July 31,
(Dollars in thousands, except average sales price)	2017			2016			Variance			Variance %			2018			2017			Variance			Variance %

Northeast
Homebuilding revenue	$	144,481		$	196,539		$	(52,058	)		(26.5	)%	$	20,199		$	58,575		$	(38,376	)		(65.5	)%
Loss before income taxes	$	(7,553	)	$	(4,945	)	$	(2,608	)		(52.7	)%
(Loss) income before income taxes													$	(9,701	)	$	906		$	(10,607	)		(1,170.8	)%
Homes delivered		289			395			(106	)		(26.8	)%		40			104			(64	)		(61.5	)%
Average sales price	$	480,412		$	487,743		$	(7,331	)		(1.5	)%	$	504,810		$	508,726		$	(3,916	)		(0.8	)%

Mid-Atlantic
Homebuilding revenue	$	314,124		$	295,546		$	18,578			6.3	%	$	71,297		$	100,226		$	(28,929	)		(28.9	)%
Income before income taxes	$	8,514		$	7,161		$	1,353			18.9	%	$	1,952		$	3,882		$	(1,930	)		(49.7	)%
Homes delivered		600			628			(28	)		(4.5	)%		135			204			(69	)		(33.8	)%
Average sales price	$	522,317		$	469,751		$	52,566			11.2	%	$	525,988		$	490,975		$	35,013			7.1	%

Midwest
Homebuilding revenue	$	126,773		$	249,132		$	(122,359	)		(49.1	)%	$	40,579		$	43,702		$	(3,123	)		(7.1	)%
Loss before income taxes	$	(5,771	)	$	(8,034	)	$	2,263			28.2	%
(Loss) income before income taxes													$	(2,344	)	$	712		$	(3,056	)		(429.2	)%
Homes delivered		411			706			(295	)		(41.8	)%		140			150			(10	)		(6.7	)%
Average sales price	$	306,727		$	319,088		$	(12,361	)		(3.9	)%	$	289,405		$	291,007		$	(1,602	)		(0.6	)%

Southeast
Homebuilding revenue	$	181,654		$	186,873		$	(5,219	)		(2.8	)%	$	56,668		$	56,584		$	84			0.1	%
Loss before income taxes	$	(1,446	)	$	(14,710	)	$	13,264			90.2	%
(Loss) before income taxes													$	(1,661	)	$	(294	)	$	(1,367	)		(465.0	)%
Homes delivered		431			417			14			3.4	%		132			138			(6	)		(4.3	)%
Average sales price	$	414,847		$	352,268		$	62,579			17.8	%	$	429,351		$	408,594		$	20,757			5.1	%

Southwest
Homebuilding revenue	$	617,959		$	729,606		$	(111,647	)		(15.3	)%	$	128,305		$	183,409		$	(55,104	)		(30.0	)%
Income before income taxes	$	50,718		$	55,392		$	(4,674	)		(8.4	)%	$	5,511		$	11,923		$	(6,412	)		(53.8	)%
Homes delivered		1,751			1,954			(203	)		(10.4	)%		384			531			(147	)		(27.7	)%
Average sales price	$	352,484		$	371,403		$	(18,919	)		(5.1	)%	$	333,865		$	345,123		$	(11,258	)		(3.3	)%

West
Homebuilding revenue	$	301,897		$	237,831		$	64,066			26.9	%	$	85,050		$	96,531		$	(11,481	)		(11.9	)%
Income (loss) before income taxes	$	7,436		$	(6,989	)	$	14,425			206.4	%
Income (loss) before income taxes													$	8,067		$	(754	)	$	8,821			1,169.9	%
Homes delivered		516			494			22			4.5	%		194			163			31			19.0	%
Average sales price	$	579,376		$	481,301		$	98,075			20.4	%	$	438,046		$	583,140		$	(145,094	)		(24.9	)%

Homebuilding Results by Segment

Northeast - Homebuilding revenues decreased ~~42.9%~~65.5% for the three months ended ~~July~~January 31, ~~2017~~2018 compared to the same period of the prior year. The decrease for the three months ended ~~July~~January 31, ~~2017~~2018 was attributed to a ~~36.8%~~61.5% decrease in homes delivered, ~~and a 4.6% decrease in average sales price. The decrease in~~while average sales price was ~~the result of new communities delivering lower priced townhomes~~relatively flat. In addition, there was a $5.7 million decrease in lower-end submarkets of the segment in the three months ended July 31, 2017 compared to some communities that are no longer delivering that had higher priced, single family homes in higher-end submarkets of the segment in the three months ended July 31, 2016.land sales and other revenue.

~~Loss~~Income before income taxes ~~increased $4.7~~decreased $10.6 million compared to the prior year to a loss of ~~$5.7~~$9.7 million for the three months ended ~~July~~January 31, ~~2017.~~ ~~The increased loss~~2018, which was mainly due to the decrease in homebuilding revenue discussed above, a ~~$3.5 million increase in inventory impairment loss and land option write-offs and a~~ $1.8 million increase in loss from unconsolidated joint ~~ventures. Partially offsetting the increased loss was a $1.6 million decrease in selling, general and administrative costs~~ventures and a ~~slight increase~~decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year.

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~~Homebuilding revenues decreased 26.5% for the nine months ended July 31, 2017 compared to the same period of the prior year.~~ The decrease was attributed to a 26.8% decrease in homes delivered and a 1.5% decrease in average sales price. The decrease in average sales price was the result of new communities delivering lower priced townhomes in lower-end submarkets of the segment in the nine months ended July 31, 2017 compared to some communities that are no longer delivering that had higher priced, single family homes in higher-end submarkets of the segment in the three months ended July 31, 2016. Partially offsetting this decrease was a $1.8 million increase in land sales and other revenue.

Loss before income taxes increased $2.6 million compared to the prior year to a loss of $7.6 million for the nine months ended July 31, 2017. The increased loss was due to the decrease in homebuilding revenue discussed above and a $4.4 million increase in loss from unconsolidated joint ventures due to the start-up of new joint ventures during the period. Partially offsetting the increased loss was a $3.9 million decrease in selling, general and administrative costs and a slight increase in gross margin percentage before interest expense for the period.

Mid-Atlantic - Homebuilding revenues ~~increased 1.4%~~decreased 28.9% for the three months ended ~~July~~January 31, ~~2017~~2018 compared to the same period in the prior year. The ~~increase~~decrease was primarily due to a ~~19.1%~~33.8% decrease in homes delivered, partially offset by a 7.1% increase in average sales price ~~partially offset by a 14.9% decrease in homes delivered~~ for the three months ended ~~July~~January 31, ~~2017~~2018 compared to the same period in the prior year. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the three months ended ~~July~~January 31, ~~2017~~2018 compared to some communities delivering in the three months ended January 31, 2017 that are no longer delivering that had lower priced, entry-level single family homes and townhomes in lower-end submarkets of the ~~segment in the three months ended July 31, 2016.~~segment.

Income before income taxes ~~increased $0.2~~decreased $1.9 million ~~compared to the prior year~~ to income of ~~$3.7~~$2.0 million for the three months ended ~~July~~January 31, ~~2017, which was primarily due to~~2018 ~~the increase in homebuilding revenue discussed above. Gross margin percentage before interest expense for the period was relatively flat compared to the same period of the prior year.~~

~~Homebuilding revenues increased 6.3% for the nine months ended July 31, 2017~~ compared to the same period in the prior ~~year.~~ ~~The increase~~year, which was primarily due to ~~an 11.2% increase in average sales price, partially offset by a 4.5%~~the decrease in homes delivered for the nine months ended July 31, 2017 compared to the same period in the prior year. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the nine months ended July 31, 2017 compared to some communities that are no longer delivering that had lower priced, entry-level single family homes and townhomes in lower-end submarkets of the segment in the nine months ended July 31, 2016.

~~Income before income taxes increased $1.3 million compared to the prior year to $8.5 million for the nine months ended July 31, 2017 due primarily to the increase~~ in homebuilding revenue discussed above and a $0.9 million increase in ~~income from unconsolidated joint ventures, partially offset by a $1.6 million increase inventory impairment~~ loss ~~and land option write-offs. Gross margin percentage before interest expense for the period was~~ ~~relatively flat compared to the same period of the prior year.~~

~~Midwest~~ - Homebuilding revenues decreased 43.4% for the three months ended July 31, 2017 compared to the same period in the prior year. The decrease was due to a 34.2% decrease in homes delivered, partially offset by a 9.0% increase in average sales price for the three months ended July 31, 2017. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the three months ended July 31, 2017 compared to some communities that are no longer delivering that had lower priced, entry-level single family homes and townhomes in lower-end submarkets of the segment in the three months ended July 31, 2016. Also impacting the decrease was a $15.5 million decrease in land sales and other revenue compared to the same period of the prior year due to the sale of our land portfolio in our Minneapolis, MN division in fiscal 2016.

~~Loss before income taxes increased $0.9 million to a loss of $3.3 million for the three months ended July 31, 2017 compared to the same period in the prior year.~~ The increase in the loss for the three months ended July 31, 2017 was primarily due to the decrease in homebuilding revenue discussed above. Gross margin percentage before interest expense for the period was relatively flat compared to the same period of the prior year. Partially offsetting the increased loss was a $1.3 million decrease in selling, general and administrative costs.

~~Homebuilding revenues decreased 49.1% for the nine months ended July 31, 2017 compared to the same period in the prior year.~~ The decrease was primarily due to a 41.8% decrease in homes delivered and a 3.9% decrease in average sales price for the nine months ended July 31, 2017. The decrease in average sales price was the result of less deliveries and home sales revenue for the segment due to our decision to exit the Minneapolis, MN market in fiscal 2016, which had higher priced, single family homes delivering compared to lower priced, single family homes delivering for the remaining markets in the segment. Also impacting the decrease was a $23.1 million decrease in land sales and other revenue due to the sale of our land portfolio in our Minneapolis, MN division in fiscal 2016.

Loss before income taxes improved $2.3 million compared to the prior year to a loss of $5.8 million for the nine months ended July 31, 2017, primarily due to an $11.4 million decrease in inventory impairment loss and land option write-offs, a $4.9 million decrease in selling, general and administrative costs and a slight increase in ~~gross margin percentage before interest expense for the period. Partially offsetting this improvement was the decrease in homebuilding revenue discussed above.~~

~~Southeast~~ - Homebuilding revenues decreased 29.0% for the three months ended July 31, 2017 compared to the same period in the prior year. The decrease for the three months ended July 31, 2017 was attributed to a $39.8 million decrease in land sales and other revenue due the sale of our land portfolio in our Raleigh, NC division during the three months ended July 31, 2016. Partially offsetting this decrease is a 14.5% increase in homes delivered and a 5.8% increase in average sales price, which was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the three months ended July 31, 2017 compared to some communities that are no longer delivering that had lower priced, single family homes in lower-end submarkets of the segment in the three months ended July 31, 2016.

Loss before income taxes improved $4.0 million to a loss of $1.6 million for the three months ended July 31, 2017 primarily due to a $1.4 million decrease in inventory impairment loss and land option write-offs, a $2.4 million decrease in selling, general and administrative costs and a $1.1 million increase in income from unconsolidated joint ventures. Partially offsetting the ~~improved loss was the~~ decrease ~~in homebuilding revenue discussed above and a~~ ~~slight decrease~~is an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.

Midwest - Homebuilding revenues decreased ~~2.8%~~7.1% for the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 compared to the same period in the prior year. The decrease was due to a 6.7% decrease in homes delivered, while the average sales price was relatively flat for the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018.

Income before income taxes decreased $3.1 million to a loss of $2.3 million for the three months ended January 31, 2018 compared to the same period in the prior year, which was ~~attributed a $37.1 million decrease in land sales and other revenue~~mainly due to the ~~sale of our land portfolio~~decrease in ~~our Raleigh, NC division during~~homebuilding revenue discussed above and a decrease in gross margin percentage before interest expense.

Southeast - Homebuilding revenues increased 0.1% for the ~~nine~~three months ended ~~July~~January 31, ~~2016. Partially offsetting this decrease is~~2018 compared to the same period in the prior year. The slight increase was attributed to a ~~3.4% increase in homes delivered and a 17.8%~~5.1% increase in average sales price, ~~which~~partially offset by a 4.3% decrease in homes delivered. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 compared to some communities that ~~are~~are no longer delivering that had lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment in the ~~nine~~three months ended ~~July~~January 31, ~~2016.~~2017.

~~Loss~~Loss before income taxes ~~improved $13.3~~increased $1.4 million to a loss of ~~$1.4~~$1.7 million for the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 primarily due to a ~~$1.1~~$0.8 million decrease ~~in inventory impairment loss and land option write-offs, a $5.6 million decrease in selling, general and administrative costs and a $2.9 million increase~~ in income from unconsolidated joint ~~ventures. Partially offsetting the improved loss was the~~ventures and a decrease in ~~homebuilding revenue discussed above, while~~ gross margin percentage before interest ~~expense was flat for the nine~~ ~~months ended July 31, 2017 compared to the same period of the prior year.~~expense.

Southwest - Homebuilding revenues decreased ~~15.8%~~30.0% for the three months ended ~~July~~January 31, ~~2017~~2018 compared to the same period in the prior year. The decrease in homebuilding revenues was primarily due to a ~~13.4%~~27.7% decrease in homes delivered and a ~~2.7%~~3.3% decrease in average sales price for the three months ended ~~July~~January 31, 2018. The decrease in average sales price was the result of new communities delivering lower priced, smaller single family homes in lower-end submarkets of the segment in the three months ended January 31, 2018 compared to some communities that are no longer delivering that had higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the three months ended January 31, 2017.

Income before income taxes decreased $6.4 million to $5.5 million for the three months ended January 31, 2018. The decrease was primarily due to the decrease in homebuilding revenue discussed above, while gross margin percentage before interest expense was flat for the three months ended January 31, 2018 compared to the same period of the prior year.

West - Homebuilding revenues decreased 11.9% for the three months ended January 31, 2018 compared to the same period in the prior year. The decrease for the three months ended January 31, 2018 was primarily attributed to a 24.9% decrease average sales price and a $1.4 million decrease in land sales and other revenue. The decrease in average sales price was the result of new communities delivering lower priced, single family homes in lower-end submarkets of the segment in the three months ended ~~July~~January 31, ~~2017~~2018 compared to some communities that are no longer delivering that had higher priced, single family homes in higher-end submarkets of the segment in the three months ended ~~July~~January 31, ~~2016.~~2017. The decrease was partially offset by a 19.0% increase in homes delivered.

~~Income~~Loss before income taxes decreased ~~$1.5~~$8.8 million to ~~$19.0~~income of $8.1 million for the three months ended ~~July~~January 31, ~~2017.~~2018. The ~~decrease was primarily due to the decrease in homebuilding revenue discussed above, while gross margin percentage before interest expense was flat~~decreased loss for the three months ended ~~July~~January 31, ~~2017 compared to the same period of the prior year.~~

~~Homebuilding revenues decreased 15.3% for the nine months ended July 31, 2017 compared to the same period in the prior year.~~ ~~The decrease~~2018 was primarily due to a 10.4% decrease in homes delivered and a 5.1% decrease in average sales price for the nine months ended July 31, 2017. The decrease in average sales price was the result of new communities delivering lower priced, single family homes in lower-end submarkets of the segment in the nine months ended July 31, 2017 compared to some communities that are no longer delivering that had higher priced, single family homes in higher-end submarkets of the segment in the nine months ended July 31, 2016.

~~Income before income taxes decreased $4.7 million to $50.7 million for the nine months ended July 31, 2017.~~ ~~The decrease was due to the decrease in homebuilding revenues discussed above and a $1.1 million loss from unconsolidated joint ventures. Partially offsetting the decrease is a $3.4~~$1.9 million decrease in inventory ~~impairments~~impairment loss and land option write-offs and a $2.4 million decrease in selling, general and administrative costs, while gross margin percentage before interest expense for the nine months ended July 31, 2017 compared to the same period of the prior year remained flat.

~~West~~ - Homebuilding revenues increased 3.3% for the three months ended July 31, 2017 compared to the same period in the prior year. The increase for the three months ended July 31, 2017 was primarily attributed to a 4.5% increase average sales price and a $1.4 million increase in land sales and other revenue. The increase in average sales price was the result of new communities delivering higher priced, single family homes in higher-end submarkets of the segment in the three months ended July 31, 2017 compared to some communities that are no longer delivering that had lower priced, single family homes in lower-end submarkets of the segment in the three months ended July 31, 2016. The increase was partially offset by a 2.5% decrease in homes delivered.

~~Income before income taxes increased $2.6 million to $5.9 million for the three months ended July 31, 2017.~~ The increase for the three months ended July 31, 2017 was primarily due to the increase in homebuilding revenues discussed above and a $0.7 million decrease in selling, general and administrative costs, while gross margin percentage before interest expense was flat for the three months ended July 31, 2017 compared to the same period in the prior year.

~~Homebuilding revenues increased 26.9% for the nine months ended July 31, 2017 compared to the same period in the prior year.~~ The increase for the nine months ended July 31, 2017 was primarily attributed to a 4.5% increase in homes delivered and a 20.4% increase in average sales price. The increase in average sales price was the result of new communities delivering higher priced, single family homes in higher-end submarkets of the segment in the nine months ended July 31, 2017 compared to some communities that are no longer delivering that had lower priced, single family homes in lower-end submarkets of the segment in the nine months ended July 31, 2016. Also contributing to the increase was a $2.9 million increase in land sales and other revenue.

~~Loss before income taxes improved $14.4 million to income of $7.4 million for the nine months ended July 31, 2017.~~ ~~The improvement to income was due to the increase in homebuilding revenue discussed above and a $4.6 million decrease in selling, general and administrative costs. In addition, there was a slight~~an increase in gross margin percentage before interest ~~expense for the nine months ended July 31, 2017 compared to the same period in the prior year.~~expense.

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Financial Services

Financial services consist primarily of originating mortgages from our ~~homebuyers,~~home buyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-backed securities (“MBS”) to hedge our mortgage-related interest rate exposure on agency and government loans. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. For the first ~~nine months~~quarters of fiscal ~~2017~~2018 and ~~2016,~~2017, Federal Housing Administration and Veterans Administration (“FHA/VA”) loans represented ~~26.0%~~27.2% and ~~25.4%~~24.8%, respectively, of our total loans. The origination of FHA/VA loans have increased from the first ~~three quarters~~quarter of fiscal ~~2016~~2017 to the first ~~three quarters~~quarter of fiscal ~~2017~~2018 and our conforming conventional loan originations as a percentage of our total loans ~~decreased~~increased from ~~70.5%~~66.3% to ~~69.1%~~67.7% for these periods, respectively. The origination of loans which exceed conforming conventions have ~~increased~~decreased from ~~4.0%~~8.8% for the first ~~nine months~~quarter of fiscal ~~2016~~2017 to ~~4.9%~~5.1% for the first ~~nine months~~quarter of fiscal ~~2017.~~2018. 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 three ~~and~~ ~~nine~~ months ended ~~July~~January 31, ~~2017,~~2018, financial services provided ~~$6.1~~a $2.5 million ~~and $19.3 million of~~ pretax profit compared to ~~$7.6 million and $25.0~~$6.0 million of pretax profit for the same ~~periods~~period of fiscal ~~2016.~~2017. Revenues were down ~~9.1% and 18.1%~~15.3% for the first quarter of fiscal 2018 from the first quarter of fiscal 2017 and costs were ~~down 0.5% and 13.7%~~up 21.7% for ~~the three and nine months ended July 31, 2017 compared to the three and nine months ended July 31, 2016, respectively.~~such period. The decrease in revenues was attributable to the decrease in the number of loans originated due to a decrease in deliveries ~~and a lower mortgage capture rate~~ for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017~~2018 compared to the same period in the prior year. The ~~decrease~~increase in costs was ~~also~~ attributed to ~~the decrease in the number of loans originated for the three and nine months ended July 31, 2017 compared to the same period~~a settlement received in the prior ~~year.~~year first quarter that offset the financial services costs, which did not recur in the current year first quarter. In the market areas served by our wholly owned mortgage banking subsidiaries, ~~75.3%~~68.7% and ~~75.9%~~65.3% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the three months ended ~~July~~January 31, ~~2017~~2018 and ~~2016, respectively, and 73.6% and 75.9% of our noncash homebuyers obtained mortgages originated by these subsidiaries for the nine months ended July 31,~~ 2017, ~~and 2016,~~ 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 to $19.1 million for the three months ended January 31, 2018 compared to $15.7 million for the three months ended ~~July~~January 31, 2017, ~~compared~~primarily due to ~~$14.9~~increased legal (including litigation) fees related to our recent financing transactions and higher costs for ongoing litigations involving the Company. Additionally, there was an increase in stock compensation expense, as a result of higher stock prices for grants that are currently being expensed, along with lower expense in the first quarter of fiscal 2017, resulting from the forfeiture of compensation under our long-term incentive plan as a result of the retirement of a senior executive. Also contributing to the increase in corporate general and administrative expenses was rent expense incurred during the three months ended January 31, 2018, related to the sale and leaseback of our corporate headquarters building that was sold on November 1, 2017.

Other Interest

Other interest increased $6.5 million for the three months ended ~~July~~January 31, ~~2016, and increased~~2018 compared to ~~$47.4 million for~~ the ~~nine~~three months ended ~~July~~January 31, ~~2017 compared to $43.8 million~~2017. Our assets that qualify for ~~the nine months ended July 31, 2016. The minor increase~~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. Other interest increased for the three months ended ~~July~~January 31, 2018 compared to the three months ended January 31, 2017 ~~from the prior year period was spread among all the components of this expense. The increase in the nine months ended July 31, 2017 from the prior year period was primarily related~~mainly due to two adjustments that occurred in the prior year and which did not recur in 2017. First, reserves for self-insured medical claims were reduced based on claim estimates and second, previously recognized expense for certain performance based stock grants for which the performance metrics were no longer expected to be satisfied were reversed.

~~Loss from Unconsolidated Joint Ventures~~

~~Loss from unconsolidated joint ventures consists of our share~~more interest incurred as a result of the ~~earnings or losses of~~senior secured notes issued in July 2017 that have a higher interest rate than the senior secured notes which they refinanced. In addition, our ~~joint ventures. Loss from unconsolidated joint ventures~~qualifying assets for interest capitalization decreased by more than our debt, therefore directly expensed interest increased $~~1.5 million to a loss of $3.9 million~~ for the three months ended ~~July~~January 31, ~~2017~~2018 compared to the same period ofin the prior year. Loss from unconsolidated joint ventures increased $4.9 million to a loss of $10.1 million for the nine months ended July 31, 2017. The increase in loss for both the three and nine months is due to the recognition of our share of loss on our newly formed joint ventures, some of which have not delivered any homes and some of which have just begun delivering homes.

~~(Loss)~~ ~~gain~~Gain on Extinguishment of Debt

During the ~~nine~~three months ended ~~July~~January 31, 2017, we repurchased in open market transactions $17.5 million aggregate principal ~~amount~~amount of 7.0% Senior Notes due 2019, $14.0 million aggregate principal amount of 8.0% Senior Notes due 2019 and 6,925 6.0% Senior Exchangeable Note Units representing $6.9 million stated amount of Units. The aggregate purchase price for these transactions was $30.8 million, plus accrued and unpaid interest. These transactions resulted in a gain on extinguishment of debt of $7.8 million. This gain was slightly offset by ~~$0.4~~$0.2 million of additional costs associated with the 9.5% ~~2020~~Secured Notes issued during the fourth quarter of fiscal ~~2016 and the debt~~2016. There were no transactions during the ~~third quarter of fiscal 2017 discussed below.~~three months ended January 31, 2018.

~~On July 27, 2017, K. Hovnanian issued $440.0~~Loss from Unconsolidated Joint Ventures

Loss from unconsolidated joint ventures consists of our share of the earnings or losses of our joint ventures. Loss from unconsolidated joint ventures increased $3.5 million ~~aggregate principal amount~~to a loss of ~~10.0% 2022 Notes and $400.0~~$5.2 million aggregate principal amount of 10.5% 2024 Notes. The net proceeds from these issuances together with available cash were used to (i) purchase $575,912,000 principal amount of 7.25% First Lien Notes, $87,321,000 principal amount of 9.125% Second Lien Notes and all $75,000,000 principal amount of 10.0% Second Lien Notes that were tendered and accepted for ~~purchase pursuant~~the three months ended January 31, 2018 compared to the ~~Tender Offers and to pay related tender premiums and accrued and unpaid interest thereon~~same period of the prior year. The increase in loss is due to the ~~date~~recognition of ~~purchase and (ii) satisfy and discharge all obligations (and cause the release~~our share of the liens on the collateral securing such indebtedness) under the indentures under which the 7.25% First Lien Notes, the 9.125% Second Lien Notes and the 10.0% Second Lien Notes were issued and in connection therewith to call for redemption on October 15, 2017 and on November 15, 2017 all remaining $1,088,000 principal amount of 7.25% First Lien Notes and all remaining $57,679,000 principal amount of 9.125% Second Lien Notes, respectively, that were not validly tendered and purchased in the applicable Tender Offer in accordance with the redemption provisions of the indentures governing the 2020 Secured Notes. These transactions resulted in a loss on ~~extinguishment~~our newly formed joint ventures, some of ~~debt~~which have not delivered any homes and some of ~~$42.3 million,~~ which ~~is included as “Loss on~~ ~~extinguishment~~have just begun delivering homes and our share of ~~debt” on the Condensed Consolidated Statement~~an inventory impairment recorded in one of ~~Operations.~~our joint ventures.

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Total Taxes

The total income tax expense of ~~$287.0~~$0.3 million ~~and $286.5 million~~recognized for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017, respectively,~~2018 was primarily ~~due~~related to ~~increasing our valuation allowance to fully reserve against our deferred tax assets (“DTA”). In addition, the same periods were also impacted by~~ state tax expense from income that was generated ~~in some states, which was~~but not offset by tax benefits in other states ~~that had losses for which~~where we fully reserve the tax benefit from net operating losses.

The The total income tax expense of ~~$1.6~~$0.5 million recognized for the three months ended ~~July~~January 31, ~~2016~~2017 was primarily due to deferred taxes. The same period was also impacted by state tax expenses and state tax reserves for uncertain tax positions. The income tax benefit of $4.6 million for the nine months ended July 31, 2016 was primarily due to incremental losses with no associated valuation allowance and a federal tax benefit related to ~~receiving a specified liability loss refund~~the impact of ~~taxes paid in fiscal year 2002, partially offset by a~~ permanent ~~difference related~~differences between book income and taxable income and the conversion of deductible charitable contributions to ~~stock compensation, state tax expenses, and state tax reserves for uncertain tax positions.~~

~~See Note 15 to~~net operating losses, which increased the ~~condensed consolidated financial statements for further information on our income tax positions~~ ~~and analysis of our DTAs.~~Company’s valuation allowances.

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 and therefore limit our ability to raise home sale prices, which may result in lower gross margins.

Inflation has a lesser short-term effect, because we ~~generally~~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 ~~53.0%~~55% of our homebuilding cost of sales for the ~~nine~~three months ended ~~July~~January 31, ~~2017.~~2018.

Safe Harbor Statement

All statements in this Quarterly report on Form 10-Q 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. Such forward-looking statements include but are not limited to statements related to the ~~Company~~’sCompany’s goals and expectations with respect to its financial results for future financial periods. 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. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. 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 a sustained homebuilding downturn;
	●	Adverse weather and other environmental conditions and natural disasters;
	●	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;
	●	Changes in market conditions and seasonality of the Company’s business;
	●	The availability and cost of suitable land and improved lots;
	●	Shortages in, and price fluctuations of, raw materials and labor;
	●	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;
	●	Fluctuations in interest rates and the availability of mortgage financing;
	●	Changes in tax laws affecting the after-tax costs of owning a home;
	●	Operations through joint ventures with third parties;
	●	Government regulation, including regulations concerning development of land, the ~~home~~home building, sales and customer financing processes, tax laws and the environment;
	●	Product liability litigation, warranty claims and claims made by mortgage investors;
	●	Levels of competition;
	●	Availability and terms of financing to the Company;
	●	Successful identification and integration of acquisitions;
	●	Significant influence of the Company’s controlling stockholders;
	●	Availability of net operating loss carryforwards;
	●	Utility shortages and outages or rate fluctuations;
	●	Geopolitical risks, terrorist acts and other acts of war;
	●	Increases in cancellations of agreements of sale;
	●	Loss of key management personnel or failure to attract qualified personnel;
	●	Information technology failures and data security breaches; and
	●	Legal claims brought against us and not resolved in our favor.

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Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 ~~“Business”~~“Business” and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, ~~2016.~~2017. 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 Quarterly Report on Form 10-Q.

Item 3. 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 table sets forth as of ~~July~~January 31, ~~2017,~~2018, our principal cash payment obligations on our long-term debt obligations by scheduled maturity, weighted average interest rates and estimated fair value (“FV”).

	Long Term Debt as of July 31, 2017 by Fiscal Year of Expected Maturity Date																							Long Term Debt as of January 31, 2018 by Fiscal Year of Expected Maturity Date
(Dollars in thousands)	2017			2018			2019			2020			2021			Thereafter			Total			FV at 7/31/17		2018			2019			2020			2021			2022			Thereafter			Total			FV at 1/31/18

Long term debt (1)(2):
Long term debt(1)(2):
Fixed rate	$	335		$	108,732		$	209,082		$	237,634		$	76,825		$	1,041,566		$	1,674,174		$	1,701,707	$	52,000		$	207,546		$	235,961		$	75,000		$	635,000		$	400,000		$	1,605,507		$	1,712,958
Weighted average interest rate		8.25	%		4.10	%		7.45	%		8.00	%		9.48	%		9.10	%		8.43	%				1.97	%		7.57	%		8.00	%		9.50	%		8.21	%		10.50	%		8.53	%

(1)	Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also, does not include $~~15.~~0$11.9 million of letters of credit issued as of ~~July~~January 31,~~, 2017~~ 2018 under our $75.0 million ~~revolving~~Unsecured Revolving Credit Facility.

(2)	Does not include $$64.5~~70.8~~ million of nonrecourse mortgages secured by inventory. These mortgages have various maturities spread over the next two to three years and are paid as homes are delivered.

Item 4. 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 ~~July~~January 31, ~~2017.~~2018. 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.

There was no change in the ~~Company~~’sCompany’s internal control over financial reporting that occurred during the quarter ended ~~July~~January 31, ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Information with respect to legal proceedings is incorporated into this Part II, Item 1 from Note 7 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

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~~were purchased by or on behalf of the Company or any affiliated purchaser during the fiscal ~~third~~first quarter of ~~2017.~~2018. The maximum number of shares that may be purchased under the Company’s repurchase plans or programs is 0.5 million.

Dividends

Certain debt agreements 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 our common stockholders.

~~Item 6.~~ ~~EXHIBITS~~

Item 6.	EXHIBITS

3(a)	Restated Certificate of Incorporation of the Registrant.(2)
3(b)	Amended and Restated Bylaws of the Registrant.(3)
4(a)	Specimen Class A Common Stock Certificate.(6)
4(b)	Specimen Class B Common Stock Certificate.~~(7)~~(6)
4(c)	Certificate of Designations, Powers, Preferences and Rights of the 7.625% Series A Preferred Stock of Hovnanian Enterprises, Inc., dated January 12, 2005.(4)
4(d)	Certificate of Designations of the Series B Junior Preferred Stock of Hovnanian Enterprises, Inc., dated August 14, 2008.(1)
4(e)	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.(5)
4(f)	Amendment No. 1 to Rights Agreement, dated as of January 11, 2018, between Hovnanian Enterprises, Inc.and Computershare Trust Company, N.A. (as successor to National City Bank), as Rights Agent, which includes the amended and restated Form of Rights Certificate as Exhibit 1 and the amended and restated Summary of Rights as Exhibit 2.(7)
4(g)	Indenture, dated as of ~~July 27, 2017,~~February 1, 2018, relating to the ~~10.0%~~13.5% Senior ~~Secured~~ Notes due ~~2022~~2026 and ~~the 10.5%~~5.0% Senior ~~Secured Notes~~Note due ~~2024,~~2040, by and among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the ~~Subsidiary Guarantors named therin~~other guarantors party thereto and Wilmington Trust, National Association, as Trustee, ~~and Collateral Agent,~~ including the forms of ~~10.0%~~13.5% Senior Notes due 2026 and 5.0% Senior Notes due 2040.(8)
4(h)	Second Supplemental Indenture, dated January 16, 2018, relating to 10.500% Senior Secured ~~Note~~Notes due ~~2022~~2024, by and ~~the 10.5% Senior Secured Note due 2024.(8)~~
10(a)*	~~Market Share Unit Agreement Class A (Pre-tax Profit Performance Vesting) (2017 grants and thereafter)~~
10(b)*	~~Market Share Unit Agreement Class B (Pre-tax Profit Performance Vesting) (2017 grants and thereafter)~~
10(c)*	~~Market Share Unit Agreement Class A (Gross Margin Performance Vesting) (2017 grants and thereafter)~~
10(d)*	~~Market Share Unit Agreement Class B (Gross Margin Performance Vesting) (2017 grants and thereafter)~~
~~10(e)~~	~~Collateral Agency Agreement, dated as of July 27, 2017,~~ among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the ~~Subsidiary Guarantors named therein, Wilmington Trust, National Association, as Notes Collateral Agent~~other guarantors party thereto and Wilmington Trust, National Association, as Trustee and Collateral Agent.(9)
~~10(f)~~ 10(a)	~~Security~~Commitment Letter, dated December 28, 2017, by and among Hovnanian Enterprises, Inc., K. Hovnanian Enterprises, Inc. K. Hovnanian at Sunrise Trail III, LLC and GSO Capital Partners LP, on its own behalf and on behalf of certain funds managed, advised or sub-advised by GSO Capital Partners LP.(10)
10(b)	$125,000,000 Credit Agreement, dated as of ~~July 27, 2017,~~January 29, 2018, by and among K. Hovnanian Enterprises Inc., Hovnanian Enterprises, Inc., the ~~Subsidiary Guarantors~~subsidiary guarantors named therein, ~~and~~ Wilmington Trust, National Association, as ~~Collateral Agent.(10)~~ Administrative Agent, and the lenders party thereto.(8)
~~10(g)~~ 10(c)	~~Pledge~~$212,500,000 Credit Agreement, dated as of ~~July 27, 2017,~~January 29, 2018, by and among K. Hovnanian Enterprises Inc., Hovnanian Enterprises, Inc., the ~~Subsidiary Guarantors named therein and Wilmington Trust, National Association, as Collateral Agent.(11)~~
~~10(h)~~	~~Joinder to the Amended and Restated Intercreditor Agreement, dated as of July 27, 2017, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the Subsidiary Guarantors~~subsidiary guarantors named therein, Wilmington Trust, National Association, as ~~Trustee and Notes Collateral Agent, Wilmington Trust, National Association, as Senior Credit Agreement~~ Administrative Agent, ~~Wilmington Trust, National Association, as Junior Joint Collateral Agent~~ and ~~Wilmington Trust, National Association, as Mortgage Tax Collateral Agent.(12)~~ the lenders party thereto.(8)
~~10(i)~~ 10(d)*	~~Second Amended and Restated Mortgage Tax Collateral Agency~~Amendment to Form of Letter Agreement dated as of July 27, 2017, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the Subsidiary Guarantors named therein, Wilmington Trust, National Association, as Notes Collateral Agent, Wilmington Trust, National Association, as Senior Credit Agreement Administrative Agent, Wilmington Trust, National Association, as Junior Joint Collateral Agent and Wilmington Trust, National Association, as Mortgage Tax Collateral Agent.(13) entered into with Lucian Theon Smith III.
~~10(j)~~ 10(e)*	~~Trademark Security~~Form of 2018 Long-Term Incentive Program Award Agreement ~~dated as of July 27, 2017, between K. HOV IP II, Inc. and Wilmington Trust, National Association, as Collateral Agent.(14)~~ .
31(a)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31(b)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32(a)	Section 1350 Certification of Chief Executive Officer.
32(b)	Section 1350 Certification of Chief Financial Officer.
101	The following financial information from our Quarterly Report on Form 10-Q for the quarter ended ~~July~~January 31, ~~2017,~~2018, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets at ~~July~~January 31, ~~2017~~2018 and October 31, ~~2016,~~2017, (ii) the Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~July~~January 31, ~~2017~~2018 and ~~2016,~~2017, (iii) the Condensed Consolidated Statement of Equity for the ~~nine~~three months ended ~~July~~January 31, ~~2017,~~2018, (iv) the Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 and ~~2016,~~2017, and (v) the Notes to Condensed Consolidated Financial Statements.

*Management ~~contracts~~contract or compensatory plan or ~~arrangements~~arrangement

(1)

Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q (001-08551) of the Registrant for the quarter ended July 31, 2008.

(2)

Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed March 15, 2013.

(3)

Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed March 11, 2015.

(4)

Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed on July 13, 2005.

(5)

Incorporated by reference to Exhibits to the Registration Statement on Form 8-A (001-08551) of the Registrant filed August 14, 2008.

(6)

Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q (001-08551) of the Registrant for the quarter ended January 31, 2009.

	~~(7)~~	~~Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q (001-08551) of the Registrant for the quarter ended January 31, 2009.~~

	~~(8)~~ (7)	Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed ~~July 28, 2017.~~ January 11, 2018.

~~(9)~~(8)

Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed ~~July 28, 2017.~~ February 2, 2018.

~~(10)~~(9)

Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed ~~July 28, 2017.~~

January 16, 2018.

~~(11)~~(10)

Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed ~~July~~December 28, 2017.

~~(12)~~

~~Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed July 28, 2017.~~

~~(13)~~

~~Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed July 28, 2017.~~

~~(14)~~

~~Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed July 28, 2017.~~

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HOVNANIAN ENTERPRISES, INC.

(Registrant)

	DATE:	~~September~~March 9, ~~7, 2017~~2018
		/S/J. LARRY SORSBY
		J. Larry Sorsby
		Executive Vice President and
		Chief Financial Officer

	DATE:	~~September 7~~March 9, ~~2017~~2018
		/S/BRAD G. O’CONNOR
		Brad G. O~~’Connor~~O’Connor
		Vice President/Chief Accounting Officer/Corporate Controller

INDEX	PAGE NUMBER

PART I. Financial Information
Item l. Financial Statements:

Condensed Consolidated Balance Sheets (unaudited) as of ~~July~~January 31, ~~2017~~2018 and October 31, ~~2016~~2017	3

Condensed Consolidated Statements of Operations (unaudited) for the three ~~and~~ ~~nine~~ months ended ~~July~~January 31, ~~2017~~2018 and ~~2016~~2017	4

Condensed Consolidated Statement of Equity (unaudited) for the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018	5

Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~three months ended ~~July~~January 31, ~~2017~~2018 and ~~2016~~2017	6


Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	3930

Item 3. Quantitative and Qualitative Disclosures About Market Risk	6149

Item 4. Controls and Procedures	6249


PART II. Other Information
Item 1. Legal Proceedings	49

~~PART II.~~ ~~Other Information~~
~~Item 1.~~ ~~Legal Proceedings~~	62

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	6250

Item 6. Exhibits	50

~~Item 6.~~ ~~Exhibits~~Signatures	6352

~~Signatures~~	65

	July 31, 2017			October 31, 2016			January 31, 2018			October 31, 2017
	(Unaudited)			(1)			(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents	$	278,486		$	339,773		$	278,158		$	463,697
Restricted cash and cash equivalents		1,955			3,914			3,213			2,077
Inventories:
Sold and unsold homes and lots under development		867,703			899,082			807,714			744,119
Land and land options held for future development or sale		182,617			175,301			151,925			140,924
Consolidated inventory not owned		138,529			208,701			93,875			124,784
Total inventories		1,188,849			1,283,084			1,053,514			1,009,827
Investments in and advances to unconsolidated joint ventures		108,560			100,502			92,262			115,090
Receivables, deposits and notes, net		38,847			49,726			53,816			58,149
Property, plant and equipment, net		52,436			50,332			19,505			52,919
Prepaid expenses and other assets		43,464			46,762			43,544			37,026
Total homebuilding		1,712,597			1,874,093			1,544,012			1,738,785

Financial services cash and cash equivalents		7,246			6,992			4,130			5,623
Financial services other assets		102,476			190,238			97,795			156,490

Income taxes receivable - including net deferred tax benefits		-			283,633
Total assets	$	1,822,319		$	2,354,956		$	1,645,937		$	1,900,898

LIABILITIES AND EQUITY
Homebuilding:
Nonrecourse mortgages secured by inventory, net of debt issuance costs	$	70,818		$	82,115		$	64,450		$	64,512
Accounts payable and other liabilities		331,048			369,228			289,099			335,057
Customers’ deposits		37,853			37,429			34,389			33,772
Nonrecourse mortgages secured by operating properties		13,347			14,312			-			13,012
Liabilities from inventory not owned, net of debt issuance costs		98,507			150,179			68,040			91,101
Revolving credit facility		52,000			52,000			52,000			52,000
Notes payable and term loan, net of discount and debt issuance costs		1,598,543			1,605,758
Notes payable and term loan (net of discount and debt issuance costs) and accrued interest								1,545,324			1,627,674
Total homebuilding		2,202,116			2,311,021			2,053,302			2,217,128

Financial services		89,569			172,445			81,638			141,914

Income taxes payable		1,796			-			2,186			2,227

Total liabilities		2,293,481			2,483,466			2,137,126			2,361,269

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 July 31, 2017 and at October 31, 2016		135,299			135,299
Common stock, Class A, $0.01 par value - authorized 400,000,000 shares; issued 144,046,073 shares at July 31, 2017 and 143,806,775 shares at October 31, 2016		1,440			1,438

Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) - authorized 60,000,000 shares; issued 15,999,355 shares at July 31, 2017 and 15,942,809 shares at October 31, 2016		160			159
Paid in capital - common stock		707,516			706,137
Preferred stock, $0.01 par value - authorized 100,000 shares; issued and outstanding 5,600 shares with a liquidation preference of $140,000 at January 31, 2018 and at October 31, 2017								135,299			135,299
Common stock, Class A, $0.01 par value – authorized 400,000,000 shares; issued 144,403,778 shares at January 31, 2018 and 144,046,073 shares at October 31, 2017								1,444			1,440
Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) – authorized 60,000,000 shares; issued 16,162,230 shares at January 31, 2018 and 15,999,355 shares at October 31, 2017								162			160
Paid in capital – common stock								706,451			706,466
Accumulated deficit		(1,200,217	)		(856,183	)		(1,219,185	)		(1,188,376	)
Treasury stock - at cost – 11,760,763 shares of Class A common stock and 691,748 shares of Class B common stock at July 31, 2017 and October 31, 2016		(115,360	)		(115,360	)
Total stockholders’ equity deficit		(471,162	)		(128,510	)
Treasury stock – at cost – 11,760,763 shares of Class A common stock and 691,748 shares of Class B common stock at January 31, 2018 and October 31, 2017								(115,360	)		(115,360	)
Total stockholders’ equity deficit								(491,189	)		(460,371	)
Total liabilities and equity	$	1,822,319		$	2,354,956		$	1,645,937		$	1,900,898

	Nine Months Ended
	July 31,						Three Months Ended January 31,
	2017			2016			2018			2017
Cash flows from operating activities:
Net loss	$	(344,034	)	$	(25,108	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Net (loss)							$	(30,809	)	$	(143	)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Depreciation		3,212			2,608			790			1,013
Compensation from stock options and awards		1,606			1,777			1,039			452
Amortization of bond discounts and deferred financing costs		11,385			9,209			2,337			4,129
Gain on sale and retirement of property and assets		(123	)		(616	)		(3,628	)		(56	)
Loss from unconsolidated joint ventures		10,109			5,227			5,176			1,666
Distributions of earnings from unconsolidated joint ventures		1,260			677			-			185
Loss on extinguishment of debt		34,854			-
Gain on extinguishment of debt								-			(7,646	)
Inventory impairment and land option write-offs		9,334			22,915			414			3,184
Deferred income tax benefit		285,579			(2,462	)
Deferred income tax provision								-			20
(Increase) decrease in assets:
Origination of mortgage loans		(743,467	)		(887,281	)		(198,878	)		(229,537	)
Sale of mortgage loans		831,079			879,817			251,055			312,027
Restricted cash, receivables, prepaids, deposits and other assets		14,235			10,533			3,011			4,833
Inventories		84,901			154,909			(31,063	)		(13,526	)
(Decrease) increase in liabilities:
(Decrease) increase in liabilities:
State income tax payable		(149	)		(617	)		(41	)		291
Customers’ deposits		424			1,312			617			(1,476	)
Accounts payable, accrued interest and other accrued liabilities		(54,753	)		21,656			(82,544	)		(49,500	)
Net cash provided by operating activities		145,452			194,556
Net cash (used in) provided by operating activities								(82,524	)		25,916
Cash flows from investing activities:
Proceeds from sale of property and assets		209			643			38,170			60
Purchase of property, equipment and other fixed assets and acquisitions		(5,034	)		(5,094	)		(1,916	)		(560	)
Decrease in restricted cash related to mortgage company		1,686			88
(Increase) decrease in restricted cash related to letters of credit		(2	)		873
Decrease (increase) in restricted cash related to mortgage company								174			(2,324	)
Decrease (increase) in restricted cash related to letters of credit								9			(1	)
Investments in and advances to unconsolidated joint ventures		(33,403	)		(39,089	)		(2,032	)		(14,639	)
Distributions of capital from unconsolidated joint ventures		13,976			6,403			6,646			1,939
Net cash used in investing activities		(22,568	)		(36,176	)
Net cash provided by (used in) investing activities								41,051			(15,525	)
Cash flows from financing activities:
Proceeds from mortgages and notes		153,517			147,170			33,802			54,396
Payments related to mortgages and notes		(165,935	)		(200,273	)		(46,596	)		(63,307	)
Proceeds from model sale leaseback financing programs		10,177			24,297			746			747
Payments related to model sale leaseback financing programs		(17,544	)		(24,917	)		(16,934	)		(4,268	)
Proceeds from land bank financing programs		10,663			162,468			2,204			4,788
Payments related to land bank financing programs		(56,683	)		(70,749	)		(9,449	)		(27,650	)
Proceeds from senior secured notes		840,000			-
Payments related to senior secured, senior, senior amortizing and senior exchangeable notes		(861,976	)		(263,994	)
Borrowings from revolving credit facility		-			5,000
Net (payments) proceeds related to mortgage warehouse lines of credit		(83,525	)		6,781
Deferred financing costs from land bank financing programs and note issuances		(12,611	)		(7,866	)
Payments for senior notes and senior amortizing notes								(56,002	)		(33,086	)
Net payments related to mortgage warehouse lines of credit								(51,487	)		(86,058	)
Deferred financing costs from land bank financing program and note issuances								(1,843	)		(938	)
Net cash used in financing activities		(183,917	)		(222,083	)		(145,559	)		(155,376	)
Net decrease in cash and cash equivalents		(61,033	)		(63,703	)		(187,032	)		(144,985	)
Cash and cash equivalents balance, beginning of period		346,765			253,745			469,320			346,765
Cash and cash equivalents balance, end of period	$	285,732		$	190,042		$	282,288		$	201,780

(In thousands)	July 31, 2017		October 31, 2016		January 31, 2018		October 31, 2017

Assets:
Northeast	$	183,486	$	219,363	$	168,967	$	180,545
Mid-Atlantic		280,711		292,899		222,284		224,398
Midwest		104,962		111,596		86,909		84,960
Southeast		246,251		226,124		234,358		231,644
Southwest		335,601		341,472		325,296		294,337
West		197,816		269,400		171,372		175,347
Total homebuilding		1,348,827		1,460,854		1,209,186		1,191,231
Financial services		109,722		197,230		101,925		162,113
Corporate and unallocated~~(1)~~		363,770		696,872		334,826		547,554
Total assets	$	1,822,319	$	2,354,956	$	1,645,937	$	1,900,898

(Dollars in thousands)	October 31, 2016									October 31, 2017
	Homebuilding			Land Development			Total			Homebuilding			Land Development			Total
Assets:
Cash and cash equivalents	$	48,542		$	1,478		$	50,020		$	60,580		$	194		$	60,774
Inventories		516,947			11,010			527,957			666,017			9,162			675,179
Other assets		25,865			-			25,865			36,026			-			36,026
Total assets	$	591,354		$	12,488		$	603,842		$	762,623		$	9,356		$	771,979

Liabilities and equity:
Accounts payable and accrued liabilities	$	72,302		$	1,812		$	74,114		$	121,646		$	429		$	122,075
Notes payable		214,911			2,261			217,172			330,642			-			330,642
Total liabilities		287,213			4,073			291,286			452,288			429			452,717
Equity of:
Hovnanian Enterprises, Inc.		88,379			3,220			91,599			88,884			3,746			92,630
Others		215,762			5,195			220,957			221,451			5,181			226,632
Total equity		304,141			8,415			312,556			310,335			8,927			319,262
Total liabilities and equity	$	591,354		$	12,488		$	603,842		$	762,623		$	9,356		$	771,979
Debt to capitalization ratio		41	%		21	%		41	%		52	%		0	%		51	%

	For the Three Months Ended July 31, 2017									For the Three Months Ended January 31, 2018
(In thousands)	Homebuilding			Land Development			Total			Homebuilding			Land Development			Total

Revenues	$	62,610		$	1,789		$	64,399		$	58,565		$	1,275		$	59,840
Cost of sales and expenses		(70,411	)		(1,873	)		(72,284	)		(72,136	)		(1,158	)		(73,294	)
Joint venture net loss	$	(7,801	)	$	(84	)	$	(7,885	)
Our share of net loss	$	(3,966	)	$	(42	)	$	(4,008	)
Joint venture net (loss) income										$	(13,571	)	$	117		$	(13,454	)
Our share of net (loss) income										$	(5,199	)	$	59		$	(5,140	)

	For the Nine Months Ended July 31, 2017
(In thousands)	Homebuilding			Land Development			Total

Revenues	$	214,103		$	4,649		$	218,752
Cost of sales and expenses		(225,594	)		(4,696	)		(230,290	)
Joint venture net loss	$	(11,491	)	$	(47	)	$	(11,538	)
Our share of net loss	$	(10,230	)	$	(24	)	$	(10,254	)

	For the Nine Months Ended July 31, 2016									For the Three Months Ended January 31, 2017
(In thousands)	Homebuilding			Land Development			Total			Homebuilding			Land Development			Total

Revenues	$	77,171		$	2,836		$	80,007		$	64,937		$	1,202		$	66,139
Cost of sales and expenses		(92,904	)		(2,462	)		(95,366	)		(67,226	)		(982	)		(68,208	)
Joint venture net (loss) income	$	(15,733	)	$	374		$	(15,359	)	$	(2,289	)	$	220		$	(2,069	)
Our share of net (loss) income	$	(5,267	)	$	187		$	(5,080	)	$	(1,681	)	$	110		$	(1,571	)

	Three Months Ended July 31, 2017								Three Months Ended January 31, 2018
(In thousands)	Mortgage Loans Held For Sale			Interest Rate Lock Commitments			Forward Contracts		Mortgage Loans Held For Sale		Interest Rate Lock Commitments			Forward Contracts

Changes in fair value included in net loss all reflected in financial services revenues	$	(532	)	$	(34	)	$	206

Fair value included in net loss all reflected in financial services revenues									$	2,434	$	(248	)	$	268

	Three Months Ended July 31, 2016
(In thousands)	Mortgage Loans Held For Sale			Interest Rate Lock Commitments		Forward Contracts

Changes in fair value included in net loss all reflected in financial services revenues	$	(175	)	$	560	$	(268	)

	Nine Months Ended July 31, 2017
(In thousands)	Mortgage Loans Held For Sale			Interest Rate Lock Commitments		Forward Contracts

Changes in fair value included in net loss all reflected in financial services revenues	$	(2,911	)	$	145	$	(186	)

	Nine Months Ended July 31, 2016
(In thousands)	Mortgage Loans Held For Sale		Interest Rate Lock Commitments		Forward Contracts

Changes in fair value included in net loss all reflected in financial services revenues	$	3,654	$	590	$	(818	)

	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Nonguarantor Subsidiaries		Eliminations			Consolidated
ASSETS:
Homebuilding	$	-		$	211,869		$	1,088,088		$	412,640	$	-		$	1,712,597
Financial services								19,018			90,704					109,722
Intercompany receivable					1,216,923						13,634		(1,230,557	)		-
Investments in and amounts due from consolidated subsidiaries								380,546					(380,546	)		-
Total assets	$	-		$	1,428,792		$	1,487,652		$	516,978	$	(1,611,103	)	$	1,822,319

LIABILITIES AND EQUITY:

Homebuilding, excluding Notes payable and term loan and Revolving credit facility	$	2,756		$	1,571		$	481,863		$	65,383	$	-		$	551,573
Financial services								19,021			70,548					89,569
Income taxes (receivable) payable		(2,233	)					4,029								1,796
Notes payable and term loan and Revolving credit facility					1,648,211			1,834			498					1,650,543
Intercompany payable		153,060						1,077,497					(1,230,557	)		-
Amounts due to consolidated subsidiaries		317,579			73,936								(391,515	)		-
Stockholders’ (deficit) equity		(471,162	)		(294,926	)		(96,592	)		380,549		10,969			(471,162	)
Total liabilities and equity	$	-		$	1,428,792		$	1,487,652		$	516,978	$	(1,611,103	)	$	1,822,319

	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Homebuilding	$	-		$	-		$	595,124		$	105,241		$	-		$	700,365
Financial services								2,645			13,840						16,485
Intercompany charges					26,433									(26,433	)		-
Total revenues		-			26,433			597,769			119,081			(26,433	)		716,850

Expenses:
Homebuilding		1,277			32,225			565,447			105,491						704,440
Financial services		16						1,761			7,139						8,916
Intercompany charges								27,239			(806	)		(26,433	)		-
Total expenses		1,293			32,225			594,447			111,824			(26,433	)		713,356
Income (loss) from unconsolidated joint ventures								17			(2,418	)					(2,401	)
(Loss) income before income taxes		(1,293	)		(5,792	)		3,339			4,839			-			1,093
State and federal income tax (benefit) provision		(484	)		(6,936	)		8,987									1,567
Equity in income (loss) of consolidated subsidiaries		335			93			4,839						(5,267	)		-
Net (loss) income	$	(474	)	$	1,237		$	(809	)	$	4,839		$	(5,267	)	$	(474	)