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Item 9A. Controls and Procedures

2022-12-19 compared with 2022-01-04 · 679 added, 893 removed, 1557 unchanged (50% of the section changed)

55 unchanged sentences

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information called for by Item 12, is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 29, 2022.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of October 31, 2022 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.

Number of Class A common stock securities to be issued upon exercise of outstanding options, warrants and rights (1)(4)

Number of Class B common stock securities to be issued upon exercise of outstanding options, warrants and rights (1)(4)

Weighted average exercise price of outstanding Class A common stock options, warrants and rights (2)

Weighted average exercise price of outstanding Class B common stock options, warrants and rights (3)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in columns (a)) (5)

Plan Category

Equity compensation plans approved by security holders:

Equity compensation plans not approved by security holders:

(1) Includes the maximum number of shares that are potentially issuable under the market share units granted in fiscal years 2018 and 2019 under the Company's 2012 Amended and Restated Stock Incentive Plan, subject to vesting.

Also includes the maximum number of shares that are potentially issuable under the performance share units granted in fiscal years 2020 through  

2022 and the maximum number of shares that are potentially issuable under the 2021  and 2022  Long-Term Incentive program s  

unde r the Amended and Restated 2020 Hovnanian Enterprises, Inc.

Stock Incentive Plan.

(2) Does not take into account 476,869 shares that may be issued upon the vesting of restricted stock and performance-based awards discussed in (1) above, nor 28,549 shares of restricted stock vested  but not yet issued  nor  

118,983 shares of restricted stock deferred due to mandatory hold requirements, in each case, because they have no exercise price.

(3) Does not take into account 493,088 shares that may be issued upon the vesting of the performance-based awards discussed in (1) above nor 18,744 shares of restricted stock vested but not yet issued nor  

47,500 shares of restricted stock deferred due to mandatory hold requirements, in each case, because they have no exercise price.

(4) These shares include 6,399 shares of Class A common stock and 12,000 shares of Class B common stock  

that may be issued upon exercise of outstanding options with exercise prices greater than $150.00 per share.

(5) Under the Company ’

s equity compensation plans, securities may be issued in either Class A common stock or Class B common stock.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

1 unchanged sentence

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by Item 14 is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 29, 2022.

Our independent registered public accounting firm is Deloitte & Touche LLP (PCAOB ID No.

Further information called for by Item 14 is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 28, 2023.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

2 unchanged sentences

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at October 31, 2021 and 2020

Consolidated Statements of Operations for the years ended October 31, 2021, 2020 and 2019

Consolidated Statements of Changes in Equity Deficit for the years ended October 31, 2021, 2020 and 2019

Consolidated Statements of Cash Flows for the years ended October 31, 2021, 2020 and 2019

Consolidated Balance Sheets at October 31, 2022 and 2021

Consolidated Statements of Operations for the years ended October 31, 2022, 2021 and 2020

Consolidated Statements of Changes in Equity (Deficit) for the years ended October 31, 2022, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended October 31, 2022, 2021 and 2020

Notes to Consolidated Financial Statements

No schedules have been prepared because the required information of such schedules is not present, is not present in amounts sufficient to require submission of the schedule, or because the required information is included in the financial statements and notes thereto.

Exhibits: 

Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibits to Current Report of the Registrant on Form 8-K filed on March 29, 2019).

Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed December 3, 2018).

Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2021 of the Registrant).

Specimen Class A Common Stock Certificate (Incorporated by reference to Exhibits to Current Report of the Registrant on Form 8-K filed on March 29, 2019).

10 unchanged sentences

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 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed January 19, 2021).

Indenture, dated as of February 1, 2018, relating to the 13.5% Senior Notes due 2026 and 5.0% Senior Notes due 2040, by and among K.

4(h) Indenture, dated as of February 1, 2018, relating to the 13.5% Senior Notes due 2026 and 5.0% Senior Notes due 2040, by and among K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as Trustee, including the forms of 13.5% Senior Notes due 2026 and 5.0% Senior Notes due 2040 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed February 2, 2018).

19 unchanged sentences

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed December 3, 2019).

Tenth Supplemental Indenture, dated as of December 6, 2019, relating to the 10.500% Senior Secured Notes due 2024, by and among K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent (Incorporated by reference to Exhibits to Current Report on form 8-K of the Registrant filed December 6, 2019).

Indenture, dated as of October 31, 2019, relating to the 11.25% Senior Secured 1.5 Lien Notes due 2026, among K.

4 unchanged sentences

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent, including the form of 10.000% Senior Secured 1.75 Lien Notes due 2025 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed December 11, 2019).

Description of the Registrant’s securities.(Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2019 of the Registrant).

Fourth Supplemental Indenture, dated as of March 25, 2020, relating to the additional 11.25% Senior Secured 1.5 Lien Notes due 2026, among K.

Description of the Registrant’s securities.

4(w) Fourth Supplemental Indenture, dated as of March 25, 2020, relating to the additional 11.25% Senior Secured 1.5 Lien Notes due 2026, among K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the subsidiary guarantors named therein and Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of the additional 11.25% Senior Secured 1.5 Lien Notes due 2026 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant field on March 26, 2020).

Credit Agreement, dated as of October 31, 2019, by and among K.

Hovnanian Enterprises Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto, Wilmington Trust, National Association, as Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).

First Amendment, dated as of November 27, 2019, to the Credit Agreement, dated as of October 31, 2019, among Hovnanian Enterprises, Inc., K.

Hovnanian Enterprises Inc., the subsidiary guarantors party thereto, the lenders party thereto and Wilmington Trust, National Association, as administrative agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed December 3, 2019).

Second Amendment, dated as of August 19, 2022, to the Credit Agreement, dated as of October 31, 2019, among K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the subsidiary guarantors named therein, Wilmington Trust, National Association, as Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on August 22, 2022).

Security Agreement, dated as of October 31, 2019, relating to Senior Secured Revolving Credit Facility, made by K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.

and the other guarantors party thereto in favor of Wilmington Trust, National Association, as Administrative Agent and Joint First Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).

$212,500,000 Credit Agreement, dated as of January 29, 2018, by and among K.

4 unchanged sentences

Hovnanian Enterprises Inc., the subsidiary guarantors party thereto, the lenders party thereto and Wilmington Trust, National Association, as administrative agent (Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2019 of the Registrant).

Third Amended and Restated Mortgage Tax Collateral Agency Agreement, dated as of October 31, 2019, among K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as Mortgage Tax Collateral Agent, Notes Collateral Agent and Junior Joint Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).

Pledge Agreement, dated as of October 31, 2019, relating to Senior Secured Revolving Credit Facility, given by K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.

and the other guarantors party thereto to Wilmington Trust, National Association, as Administrative Agent and Joint First Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).

Credit Agreement, dated as of December 10, 2019, relating to the 1.75 Lien Term Loans, among K.

3 unchanged sentences

Hovnanian (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2012 the Registrant).

Amended and Restated 2008 Hovnanian Enterprises, Inc.

Stock Incentive Plan (Incorporated by reference to Appendix A to the Registrant’s definitive Proxy Statement on Schedule 14A of the Registrant filed on February 1, 2010).

Management Agreement dated August 12, 1983, for the management of properties by K. Hovnanian Investment Properties, Inc (Incorporated by reference to Exhibits to Registration Statement (No.

Management Agreement dated August 12, 1983, for the management of properties by K. Hovnanian Investment Properties, Inc.

(Incorporated by reference to Exhibits to Registration Statement (No.

2-85198) on Form S-1 of the Registrant).

Management Agreement dated December 15, 1985, for the management of properties by K. Hovnanian Investment Properties, Inc (Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2003 of the Registrant).

Executive Deferred Compensation Plan as amended and restated on January 1, 2014 (Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2018 of the Registrant).

Management Agreement dated December 15, 1985, for the management of properties by K. Hovnanian Investment Properties, Inc.

(Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2003 of the Registrant).

Executive Deferred Compensation Plan as amended and restated on January 1, 2022.

Death and Disability Agreement between the Registrant and Ara K. Hovnanian, dated February 2, 2006 (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2006 of the Registrant).

Form of Nonqualified Stock Option Agreement (Class B shares) (Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2008 of the Registrant).

Form of Stock Option Agreement for Directors (Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2008 of the Registrant).

Form of 2018 Long-Term Incentive Program Award Agreement (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2018 of the Registrant).

Form of 2016 Long Term Incentive Program Award Agreement (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2016 of the Registrant).

Form of Change in Control Severance Protection Agreement entered into with Brad G.

O’Connor (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2012 of the Registrant).

Form of Amendment to Outstanding Stock Option Grants (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended April 30, 2012 of the Registrant.).

Form of Amendment to 2011 Non-Qualified Stock Option Agreement for Ara K.

Hovnanian (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended April 30, 2012 of the Registrant.).

Form of Amendment to 2011 Incentive Stock Option Agreement for J.

Larry Sorsby (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended April 30, 2012 of the Registrant.).

Form of Incentive Stock Option Agreement (2012) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2012 of the Registrant).

Form of Stock Option Agreement (2012) for Directors (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2012 of the Registrant).

Form of Letter Agreement entered into with Lucian Theon Smith III (Incorporated by reference to Annual Report on Form 10-K for the year ended October 31, 2017 of the Registrant).

Amendment to Form of Letter Agreement entered into with Lucian Theon Smith III (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2018 of the Registrant).

Form of Incentive Stock Option Agreement (2014 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014 of the Registrant).

Form of Restricted Share Unit Agreement (2014 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014 of the Registrant).

Form of Stock Option Agreement for Directors (2014 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014 of the Registrant).

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O’Connor (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2015 of the Registrant).

Market Share Unit Agreement Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).

Market Share Unit Agreement Class B (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).

Market Share Unit Agreement (Gross Margin Performance Vesting) Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).

Market Share Unit Agreement (Gross Margin Performance Vesting) Class B (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).

Market Share Unit Agreement (Debt Reduction Performance Vesting) Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).

Market Share Unit Agreement (Debt Reduction Performance Vesting) Class B (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).

Premium-Priced Incentive Stock Option Agreement Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).

3 unchanged sentences

Director Restricted Share Unit Agreement Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).

Market Share Unit Agreement (Pre-tax Profit performance Vesting) Class A (2017 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 of the Registrant).

Market Share Unit Agreement (Pre-tax Profit performance Vesting) Class B (2017 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 of the Registrant).

Market Share Unit Agreement (Gross Margin Improvement Performance Vesting) Class A (2017 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 of the Registrant).

Market Share Unit Agreement (Gross Margin Improvement Performance Vesting) Class B (2017 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 of the Registrant).

Market Share Unit Agreement Class A (Pre-tax Profit Performance Vesting) (2018 grants and thereafter) (Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).

8 unchanged sentences

Non-Qualified Stock Option Agreement Class B (2018 grants and thereafter) (Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).

Director Stock Option Agreement Class A (2018 grants and thereafter) (Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).

Retirement Agreement, dated as of May 18, 2020, between Hovnanian Enterprises, Inc.

and Lucian T.

Smith III (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended April 30, 2020 of the Registrant).

Amended and Restated 2020 Hovnanian Enterprises, Inc.

Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 filed on March 30, 2021).

Security Agreement, dated as of October 31, 2019, relating to Senior Secured Revolving Credit Facility, made by K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.

Pledge Agreement, dated as of October 31, 2019, relating to Senior Secured Revolving Credit Facility, given by K.

Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.

Trademark Security Agreement, dated as of October 31, 2019, relating to Senior Secured Revolving Credit Facility, made by K.

43 unchanged sentences

2, dated as of December 10, 2019, to the First Lien Intercreditor Agreement and First Lien Collateral Agency Agreement, each dated as of October 31, 2019, among Wilmington Trust, National Association, as Administrative Agent and 1.75 Pari Passu Lien Collateral Agent, with acknowledged receipt by the Senior Credit Agreement Administrative Agent, 1.125 Lien Trustee, 1.125 Lien Collateral Agent, 1.25 Lien Trustee, 1.25 Lien Collateral Agent, 1.5 Lien Trustee, 1.5 Lien Collateral Agent and Joint First Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed December 11, 2019).

Form of 2020 Performance Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

Form of 2020 Performance Share Unit Agreement (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

Form of 2020 Associate Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

Form of 2020 Associate Restricted Share Unit Agreement (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

Form of Director Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

Form of 2021 Performance Share Unit Agreement - EBIT (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

Form of 2021 Performance Share Unit Agreement - EBIT (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

Form of 2021 Performance Share Unit Agreement - Relative EBIT ROI (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

Form of 2021 Performance Share Unit Agreement - Relative EBIT ROI (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

Form of 2021 Long-Term Incentive Program Award Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

Form of 2021 Long-Term Incentive Program Award Agreement (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

10(aaa)* Form of 2020 Performance Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

10(bbb)* Form of 2020 Performance Share Unit Agreement (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

10(ccc)* Form of 2020 Associate Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

10(ddd)* Form of 2020 Associate Restricted Share Unit Agreement (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

10(eee)* Form of Director Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).

10(fff)* Form of 2021 Performance Share Unit Agreement - EBIT (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

10(ggg)* Form of 2021 Performance Share Unit Agreement - EBIT (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

10(hhh)* Form of 2021 Performance Share Unit Agreement - Relative EBIT ROI (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

10(iii)* Form of 2021 Performance Share Unit Agreement - Relative EBIT ROI (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

10(jjj)* Form of Director Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

10(kkk)* Form of 2021 Long-Term Incentive Program Award Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

10(lll)* Form of 2021 Long-Term Incentive Program Award Agreement (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).

10(mmm)* Form of 2022 Long-Term Incentive Program Award Agreement (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2022 of the Registrant).

10(nnn)* Form of 2022 Long-Term Incentive Program Award Agreement (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2022 of the Registrant).

10(ooo)* Second Amended and Restated 2020 Hovnanian Enterprises, Inc.

Stock Incentive Plan (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on March 29, 2022).

10(ppp)* Form of 2022 Performance Share Unit Agreement –

EBIT (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(qqq)* Form of 2022 Performance Share Unit Agreement –

EBIT (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(rrr)* Form of 2022 Performance Share Unit Agreement –

EBIT ROI (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(sss)* Form of 2022 Performance Share Unit Agreement –

EBIT ROI (Class B) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(ttt)* Form of 2022 Performance Share Unit Agreement –

Land Light Performance Vesting (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(uuu)* Form of 2022 Performance Share Unit Agreement –

National Contracts Savings Performance Vesting (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(vvv)* Form of 2022 Performance Share Unit Agreement –

KHDS Savings Performance Vesting (Class A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(www)* Restricted Share Unit Agreement Class A (2022 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(xxx)* Director Restricted Share Unit Agreement Class A (2022 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).

10(yyy)* Form of 2019 Associate Market Share Unit Agreement (Class A).

10(zzz)* Form of 2019 Associate Market Share Unit Agreement (Class A).

10(aaaa)* Form of 2019 Associate Market Share Unit Agreement - Pre-tax Profit Performance Vesting (Class A).

10(bbbb)* Form of 2019 Associate Market Share Unit Agreement - Pre-tax Profit Performance Vesting (Class B).

10(cccc)* Form of 2019 Associate Market Share Unit Agreement –

Community Count Performance Vesting (Class A).

10(dddd)* Form of 2019 Associate Market Share Unit Agreement –

Community Count Performance Vesting (Class B).

10(eeee)* Form of 2019 Associate Incentive Stock Option Agreement –

Premium Priced (Class A).

10(ffff)* Form of 2019 Associate Non-Qualified Stock Option Agreement –

Premium Priced (Class B).

10(gggg)* Form of 2019 Associate Incentive Stock Option Agreement (Class A).

10(hhhh)* Form of 2019 Associate Non-Qualified Stock Option Agreement (Class B).

10(iiii)* Form of 2019 Restricted Share Unit Agreement (Class A).

10(jjjj)* Form of 2019 Director Restricted Share Unit Agreement (Class A).

10(kkkk)* Form of 2016 Non-Qualified Stock Option Agreement (Class B).

10(llll)* Form of 2021 Associate Restricted Share Unit Agreement (Class A).

Subsidiaries of the Registrant.

Consent of Deloitte & Touche LLP.

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

2 unchanged sentences

Section 1350 Certification of Chief Financial Officer.

Financial Statements of GTIS –

HOV Holdings V, L.L.C.

Financial Statements of GTIS –

HOV Holdings VI, L.L.C.

The following financial information from our Annual Report on Form 10-K for the year ended October 31, 2022, formatted in inline Extensible Business Reporting Language (Inline XBRL):

10 unchanged sentences

Officer and President

January 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on January 4, 2022, and in the capacities indicated.

December 19, 2022

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on December 19, 2022, and in the capacities indicated.

Chairman of the Board, Chief Executive Officer, President and Director

20 unchanged sentences

Consolidated Balance Sheets at October 31, 2022 and 2021

Consolidated Statements of Operations for the years ended October 31, 2021, 2020 and 2019

Consolidated Statements of Changes in Equity Deficit for the years ended October 31, 2021, 2020 and 2019

Consolidated Statements of Cash Flows for the years ended October 31, 2021, 2020 and 2019

Consolidated Statements of Operations for the years ended October 31, 2022, 2021 and 2020

Consolidated Statements of Changes in Equity (Deficit) for the years ended October 31, 2022, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended October 31, 2022, 2021 and 2020

Notes to Consolidated Financial Statements

33 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Income Taxes —

Realizability of Deferred Tax Assets —

Refer to Note 11 in the financial statements

Valuation of inventory:

sold and unsold homes and lots under development and land held for future development or sale –

Refer to Notes 3 and 12 in the financial statements

Critical Audit Matter Description

The Company recognizes deferred income taxes for 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 against future taxable income.

A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Future realization of deferred tax assets depends on the existence of sufficient taxable income of the appropriate character.

Sources of taxable income include future reversals of existing taxable temporary differences, expected future taxable income, taxable income in prior carryback years if permitted under the tax law, and tax planning strategies.

Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize its deferred tax assets except for a portion related to state deferred tax assets.

The Company’s deferred tax assets as of October 31, 2021, were $425.7 million.

We identified management’s determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred tax assets as a critical audit matter because of the significant judgments and estimates management makes related to taxable income.

This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates of taxable income.

Sold and unsold homes and lots under development includes all construction, land, capitalized interest and land development costs related to started homes and land under development in the Company’s active communities.

Land held for future development or sale includes all costs related to land in the Company’s communities in planning or mothballed communities.

Inventories are recorded at cost unless the inventory is determined to be impaired, in which case the inventory is written down to its fair value.

Management assesses inventory for indicators of impairment at the individual community level on a quarterly basis.

In conducting the review for impairment indicators, management evaluates certain qualitative and quantitative factors at the community levels.

This includes, but is not limited to, decreases in local housing market values, decreases in gross margins or sales absorption rates, decreases in net sales prices (base sale price net of sale incentives), or actual or projected operating or cash flow losses.

Given the subjectivity in determining whether further impairment analysis is required for a community, management exercises significant judgment when evaluating indicators of impairment and the undiscounted cash flow analyses, as applicable.

Accordingly, auditing management’s judgments regarding the identification of impairment indicators and the key assumptions used in the undiscounted cash flow analyses involved especially subjective auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred tax assets included the following, among others:

We tested the effectiveness of controls over deferred tax assets, including management’s controls over the estimates of taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized.

We evaluated the reasonableness of the methods, assumptions, and judgments used by management to determine whether a valuation allowance was necessary.

With the assistance of our income tax specialists, we evaluated whether the sources of management’s estimated taxable income were of the appropriate character and sufficient to utilize the deferred tax assets under the relevant tax law.

We evaluated management’s ability to accurately estimate taxable income by comparing actual results to management’s historical estimates and evaluating whether there have been any changes that would affect management’s ability to continue accurately estimating taxable income.

We tested the reasonableness of management’s estimates of taxable income by comparing the estimates to:

Internal budgets.

Historical taxable income, as adjusted for nonrecurring items.

Internal communications to management and the Board of Directors.

Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.

Management’s history of carrying out its stated plans and its ability to carry out its plans considering contractual commitments, available financing, or debt covenants.

We evaluated whether the estimates of future taxable income were consistent with evidence obtained in other areas of the audit.

Our audit procedures related to the Company’s identification of impairment indicators and undiscounted cash flows analyses included the following, among others:

We tested the effectiveness of controls over management’s evaluation of the impairment indicator analysis, including controls over key inputs into the analysis such as management’s forecast, and controls over management’s review of any undiscounted cash flows analyses for communities identified with impairment indicators, if applicable.

We evaluated management's process for identifying qualitative and quantitative impairment indicators by community and whether management appropriately considered such indicators.

We conducted a completeness assessment to determine whether additional impairment indicators were present during the period that were not identified by management.

We evaluated the reasonableness of the key assumptions and estimates used in management’s undiscounted cash flow analyses by comparing the assumptions to historical information, if applicable.

For any communities without historical information available, we compared management’s estimates to historical estimates for similar communities, taking into consideration factors such as location, size, and type of community.

We evaluated the significant assumptions used in the Company’s evaluation of impairment by comparing the assumptions to actual recent home sales and closings in that community along with external analyst and industry reports for the respective geography.

/s/ DELOITTE & TOUCHE LLP

New York, New York

January 4, 2022

December 19, 2022

We have served as the Company's auditor since 2009.

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CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

Homebuilding:

23 unchanged sentences

39,934  

Property, plant and equipment, net

Property and equipment, net

25,819  

13 unchanged sentences

$ 2,562,030  

$ 2,320,508  

LIABILITIES AND EQUITY

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Hovnanian Enterprises, Inc.

stockholders' equity deficit:

stockholders' equity:

Preferred stock, $ 0.01 par value - authorized 100,000 shares;

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( 352,413 )  

( 1,175,045 )

Treasury stock - at cost –

470,430 shares of Class A common stock and 27,669 shares of Class B common stock at October 31, 2021 and October 31, 2020

782,901 shares of Class A common stock at October 31, 2022 and 470,430 shares at October 31, 2021;

27,669 shares of Class B common stock at October 31, 2022 and October 31, 2021

( 127,582 )  

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stockholders’

equity (deficit)

383,036  

174,897  

Noncontrolling interest in consolidated joint ventures

Total equity (deficit)

383,051  

175,384  

Total liabilities and equity

36 unchanged sentences

74,330  

Inventory impairment loss and land option write-offs

Inventory impairments and land option write-offs

14,076  

Total cost of sales

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103,801  

Other operations

Other expenses, net

Total expenses

2 unchanged sentences

2,318,400  

(Loss) gain on extinguishment of debt

(Loss) gain on extinguishment of debt, net

( 6,795 )  

( 3,748 )  

13,337  

Income from unconsolidated joint ventures

1 unchanged sentence

16,565  

Income (loss) before income taxes

Income before income taxes

319,753  

189,861  

State and federal income tax (benefit) provision:

55,403  

State and federal income tax provision (benefit):

34,199  

( 82,348 )  

60,064  

( 335,608 )  

Total income taxes

94,263  

Net income (loss)

( 417,956 )  

$ 225,490  

$ 607,817  

$ 50,928  

preferred stock dividends

10,675  

Net income available to common stockholders

$ 214,815  

$ 607,817  

$ 50,928  

Per share data:

Net income (loss) per common share

Net income per common share

$ 30.31  

$ 87.50  

$ 7.48  

Weighted-average number of common shares outstanding

Assuming dilution:

Net income (loss) per common share

Net income per common share

$ 29.00  

$ 85.86  

$ 7.03  

Weighted-average number of common shares outstanding

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Preferred Stock

(Dollars In thousands)

(In thousands, except share data)

Noncontrolling

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14,310  

( 126 )  

Issuance of shares for debt

178,427  

Conversion of Class B to Class A common stock

2 unchanged sentences

50,928  

Balance, October 31, 2020

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Stock options, amortization and issuances

42,204  

( 41 )  

Restricted stock amortization, issuances and forfeitures

33,564  

31,708  

Conversion of Class B to Class A common stock

3 unchanged sentences

607,817  

Balance, October 31, 2021

5 unchanged sentences

$ ( 115,360 )  

$ ( 436,094 )

Stock options, amortization and issuances

$ 175,384  

Stock options, amortization and issuances

Preferred dividend declared ( $476.56 per share)

( 10,675 )  

6 unchanged sentences

( 472 )  

Share repurchases

( 312,471 )  

( 12,222 )  

225,490  

Balance, October 31, 2022

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Cash flows from operating activities:

Net income (loss)

$ 607,817  

$ 50,928  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Compensation from stock options and awards

Amortization of bond discounts, premiums and deferred financing costs

Loss (gain) on sale and retirement of property and assets

( 81 )  

Adjustments to reconcile net income to net cash provided by operating activities:

Stock-based compensation

Amortization of debt discounts, premiums and deferred financing costs

(Gain) loss on sale of property and assets

Income from unconsolidated joint ventures

( 8,849 )  

( 16,565 )  

Distributions of earnings from unconsolidated joint venture

35,387  

29,919  

Loss (gain) on extinguishment of debt

( 13,337 )  

42,436  

Noncontrolling interest in consolidated joint ventures

Inventory impairment and land option write-offs

Inventory impairments and land option write-offs

(Increase) decrease in assets:

Receivables, deposits and notes

Origination of mortgage loans

( 1,490,099 )  

( 1,306,279 )  

( 1,089,825 )

Sale of mortgage loans

1,443,355  

1,367,903  

1,054,535  

Receivables, prepaids, deposits and other assets

( 3,016 )  

20,519  

( 35,514 )  

87,897  

Deferred tax assets

( 425,678 )  

Increase (decrease) in liabilities:

State income tax payable

Accounts payable, accrued interest and other liabilities

Customers’

20,009  

12,414  

Accounts payable, accrued interest and other accrued liabilities

71,370  

33,576  

Net cash provided by (used in) operating activities

210,213  

292,828  

State income tax payable

Net cash provided by operating activities

Cash flows from investing activities:

Proceeds from sale of property and assets

Purchase of property, equipment, and other fixed assets and acquisitions

( 5,942 )  

( 3,380 )  

Investment in and advances to unconsolidated joint ventures

( 16,550 )  

( 19,924 )  

Purchase of property, equipment, and other fixed assets

Investment in and advances to unconsolidated joint ventures, net of reimbursements

Distributions of capital from unconsolidated joint ventures

31,456  

25,332  

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Proceeds from mortgages and notes

252,930  

278,577  

318,462  

Payments related to mortgages and notes

( 262,609 )  

( 348,371 )  

Proceeds from model sale leaseback financing programs

19,200  

33,188  

Payments related to model sale leaseback financing programs

( 23,677 )  

( 23,646 )  

Proceeds from land bank financing programs

35,282  

68,060  

104,961  

Payments related to land bank financing programs

( 88,458 )  

( 73,999 )  

Proceeds from partner distributions to consolidated joint venture

Payments for partner distributions to consolidated joint venture

( 818 )  

Net proceeds (payments) related to mortgage warehouse lines of credit

47,744  

( 53,077 )  

27,101  

Net (payments) proceeds related to mortgage warehouse lines of credit

Net borrowings from senior secured credit facility

125,000  

Payments related to senior secured credit facility

( 125,000 )  

Proceeds from senior secured notes, net of discount

578,231  

Payments related to senior secured notes, net of discount

( 182,726 )  

( 21,240 )  

Payments related to senior secured notes

Preferred dividends paid

Repurchases of common stock

Deferred financing costs from land banking financing programs and note issuances

( 2,587 )  

( 13,278 )  

Net cash (used in) provided by financing activities

( 217,273 )  

( 167,774 )  

206,708  

Net increase (decrease) in cash and cash equivalents, and restricted cash and cash equivalents

127,194  

Net cash used in financing activities

Net increase in cash and cash equivalents, and restricted cash and cash equivalents

Cash and cash equivalents, and restricted cash and cash equivalents balance, beginning of period

309,460  

182,266  

232,992  

Cash and cash equivalents, and restricted cash and cash equivalents balance, end of period

$ 311,396  

$ 309,460  

$ 182,266  

Supplemental disclosures of cash flows:

1 unchanged sentence

Interest, net of capitalized interest (see Note 3 to the Consolidated Financial Statements)

$ 87,227  

$ 89,484  

$ 109,107  

$ 7,669  

$ 3,013  

$ 3,483  

Reconciliation of Cash, cash equivalents and restricted cash

1 unchanged sentence

Cash and cash equivalents

$ 245,970  

$ 262,489  

$ 130,976  

Homebuilding:

Restricted cash and cash equivalents

16,089  

14,731  

20,905  

Financial Services:

2 unchanged sentences

Restricted cash and cash equivalents, included in financial services assets

43,518  

27,386  

24,807  

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

$ 311,396  

$ 309,460  

$ 182,266  

Total cash, cash equivalents and restricted cash shown in the statements of cash flows

See notes to consolidated financial statements.

1 unchanged sentence

In the third and fourth quarters of fiscal 2021,  we acquired the remaining assets of certain of our unconsolidated joint ventures, resulting in a $ 26.6 million reduction in our investment in the joint ventures and a corresponding increase to inventory.

In accordance with the adoption of ASU 2016 - 02, in the first quarter of fiscal 2020, we recorded a beginning right-of-use asset of $ 23.3 million and a right-of-use lease liability of $ 24.4 million. 

In accordance with the adoption of Accounting Standards Codification ("ASC") 842, "Leases" ("ASC 842" ), in the first quarter of fiscal 2020, we recorded a beginning operating right-of-use lease asset ("ROU asset") of $ 23.3 million and an operating right-of-use lease liability of $ 24.4 million. 

In the first quarter of fiscal 2020, K.

Hovnanian, the issuer of our notes, completed a debt for debt exchange whereby it issued $ 158.5 million aggregate principal amount of 10.0 % 1.75 Lien Notes due 2025 in exchange for $ 23.2 million in aggregate principal amount of its outstanding 10.0 % Senior Secured Notes due 2022 and $ 141.7 million in aggregate principal amount of its outstanding 10.5 % Senior Secured Notes due 2024.

Hovnanian also exchanged $ 163.0 million in aggregate principal amount of its unsecured term loans for $ 81.5 million in aggregate principal amount of 1.75 Lien secured term loans made under a new Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028. 

See Note 9 for further information.

In the second  quarter of fiscal 2020, K.

Hovnanian, the issuer of the notes, completed a debt for debt exchange whereby it issued $ 59.1 million aggregate principal amount of additional 11.25 % 1.5 Lien Notes due 2026 in exchange for $ 59.1 million aggregate principal amount of 10.0 % Senior Secured Notes due 2022 Notes.

See Note 9 for further information.

In the fourth quarter of fiscal 2019, we completed a partial debt for debt exchange of existing 10.0 % Senior Secured Notes due 2022 and 10.5 % Senior Secured Notes due 2024 for a combination of cash and newly issued 7.75 % 1.125  Lien Notes due 2026 and 11.25 % 1.5  Lien Notes due 2026.

See Note 9 for further information.

HOVNANIAN ENTERPRISES, INC.

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Basis of Presentation

Basis of Presentation - The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and include Hovnanian Enterprises, Inc.’s (“HEI”) accounts and those of all its consolidated subsidiaries, after elimination of all intercompany balances and transactions.

The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.

GAAP”) and include Hovnanian Enterprises, Inc.’s (“HEI”) accounts and those of all its consolidated subsidiaries, after elimination of all intercompany balances and transactions.

HEI’s fiscal year ends October 31.

Noncontrolling interest represents the proportionate equity interest in a consolidated joint venture that is not 100% owned by the Company.

One of HEI's subsidiaries owns a 99 % controlling interest in the consolidated joint venture and therefore HEI is required to consolidate the joint venture within its Consolidated Financial Statements.

The 1 % that we do not own is accounted for as noncontrolling interest.

Noncontrolling interest represents the proportionate equity interest in a consolidated joint venture that is not 100% owned by HEI, directly or indirectly.

One of HEI's subsidiaries owned a 99 % controlling interest in a consolidated joint venture and therefore HEI was required to consolidate the joint venture within its Consolidated Financial Statements.

The 1 % that we did not own was accounted for as a noncontrolling interest.

On October 31, 2022, HEI purchased the 1 % interest from the equity partner, resulting in 100 % ownership as of October 31, 2022.

Another one of HEI's subsidiaries owns an 80 % controlling interest in a consolidated joint venture, and therefore HEI is required to consolidate the joint venture within its Consolidated Financial Statements.

The 20 % that the Company does not own is accounted for as noncontrolling interest. 

HEI conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the “Company”, “we”, “us”

The 20 % that HEI does not own is accounted for as a noncontrolling interest. 

HEI conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the “Company,”

“we,”

“us”

or “our”

1 unchanged sentence

Our operations consist of homebuilding, financial services and corporate.

Our homebuilding operations are made up of six reportable segments defined as Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West.

Homebuilding operations comprise the substantial part of our business, representing approximately 97 % of consolidated revenues for each of the years ended October 31, 2021 , 2020  and 2019.

HEI is a Delaware corporation, which through its subsidiaries, was building and selling homes in Arizona, California, Delaware, Florida, Georgia, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina, Texas, Virginia, Washington, D.C. and West Virginia, including in 124 consolidated active selling communities at October 31, 2021 . Our homebuilding subsidiaries offer a wide variety of homes that are designed to appeal to first -time buyers, first and second -time move-up buyers, luxury buyers, active lifestyle buyers and empty nesters.

Historically, the Company had seven reportable segments consisting of six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and its financial services segment.

During the fourth quarter of fiscal 2022, we reevaluated our reportable segments as a result of changes in the business and our management thereof.

In particular, we considered the fact that, since our segments were last established, the Company had exited the Minnesota, North Carolina and Tampa markets and is currently in the process of exiting the Chicago market.

Applying the principles set forth under ASC 280 "Segment Reporting", including that our business trends are reflective of economic conditions in markets with general geographic proximity, we realigned our homebuilding operating segments and determined that, in addition to our financial services segment, we now had three reportable homebuilding segments comprised of ( 1 ) Northeast, ( 2 ) Southeast and ( 3 ) West.

All prior period amounts related to the segment change have been retrospectively reclassified to conform to the new presentation.

Homebuilding operations comprise the substantial part of our business, representing approximately 98 % of consolidated revenues for the year ended October 31, 2022 and 97 % for each of the years ended October 31, 2021 and 2020.

HEI is a Delaware corporation, which through its subsidiaries, was building and selling homes in Arizona, California, Delaware, Florida, Georgia, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia, including in 121 consolidated active selling communities at October 31, 2022 . Our homebuilding subsidiaries offer a wide variety of homes that are designed to appeal to first -time buyers, first and second -time move-up buyers, luxury buyers, active lifestyle buyers and empty nesters.

Our financial services operations, which are a reportable segment, provide mortgage banking and title services to the homebuilding operations’

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Summary of Significant Accounting Policies

Use of Estimates - The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates and these differences could have a significant impact on the financial statements.

Use of Estimates - The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates and these differences could have a significant impact on the Consolidated Financial Statements.

Income Recognition from Home and Land Sales - We are primarily engaged in the development, construction, marketing and sale of residential single-family and multi-family homes where the planned construction cycle is less than 12  months.

For these homes, in accordance with Accounting Standards Codification (“ASC”) 606 - 10, “

Revenue from Contracts with Customers,”

For these homes, in accordance with ASC 606, “Revenue from Contracts with Customers,”

revenue is recognized when control is transferred to the buyer, which occurs when the buyer takes title to and possession of the home and there is no continuing involvement.

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which permits us to measure our loans held for sale at fair value.

Management believes that the election of the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions.

Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage market on a servicing released, nonrecourse basis, although the Company remains liable for certain limited representations, such as fraud, and warranties related to loan sales. Mortgage investors could seek to have us buy back loans or compensate them from losses incurred on mortgages we have sold based on claims that we breached our limited representations and warranties. We have established reserves for probable losses.  

Cash and Cash Equivalents - Cash represents cash deposited in checking accounts. Cash equivalents include certificates of deposit, Treasury bills and government money–market funds with maturities of 90 days or less when purchased. Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our cash in major financial institutions. At October 31, 2021 and 2020 , $ 15.7  million and $ 15.5  million, respectively, of the total cash and cash equivalents was in cash equivalents and restricted cash equivalents, the book value of which approximates fair value.

Management believes that the election of the fair value option for loans held for sale improves financial reporting because it mitigates volatility in reported earnings and by measuring the fair value of loans and the derivative instruments used to economically hedge them, we do not have to apply complex hedge accounting provisions.

Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage market on a servicing released, nonrecourse basis, although the Company remains liable for certain limited representations, such as fraud, and warranties related to loan sales. Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on mortgages we have sold based on claims that we breached our limited representations and warranties. We have established reserves for probable losses.

Cash and Cash Equivalents - Cash equivalents include certificates of deposit, U.S.

Treasury bills and government money–market funds with maturities of 90 days or less when purchased. Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our cash in major financial institutions.

At October 31, 2022 and 2021 , $ 13.4  million and $ 15.7 million, respectively, of the total cash and cash equivalents was in cash equivalents and restricted cash equivalents.

Fair Value of Financial Instruments - The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate.

Our financial instruments consist of cash and cash equivalents, restricted cash and cash equivalents, receivables, deposits and notes, accounts payable and other liabilities, customer deposits, mortgage loans held for sale, nonrecourse mortgages, mortgage warehouse lines of credit, senior secured revolving credit facility, accrued interest, senior secured term loan, senior unsecured term loan credit facility, senior secured notes and senior notes. The fair value of the senior secured credit facility, senior secured term loan, senior unsecured term loan credit facility, senior secured notes and senior notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities or when not available, are estimated based on third -party broker quotes or management's estimate of the fair value based on available trades for similar debt instruments. The fair value of all of our other financial instruments approximates their carrying amounts.

Our financial instruments consist of cash and cash equivalents, restricted cash and cash equivalents, receivables, deposits and notes, accounts payable and other liabilities, customers' deposits, mortgage loans held for sale, nonrecourse mortgages, mortgage warehouse lines of credit, senior secured revolving credit facility, accrued interest, senior secured term loan, senior unsecured term loan credit facility, senior secured notes and senior notes. The fair value of the senior secured revolving credit facility, senior secured term loan, senior unsecured term loan credit facility, senior secured notes and senior notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities or when not available, are estimated based on third -party broker quotes or management's estimate of the fair value based on available trades for similar debt instruments. The fair value of all of our other financial instruments approximates their carrying amounts.

Inventories - Inventories consist of land, land development, home construction costs, capitalized interest, construction overhead and property taxes.

Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods.

Land, land development and common facility costs are allocated based on buildable acres to product types within each community, then charged to cost of sales equally based upon the number of homes to be constructed in each product type.

We record inventories in our consolidated balance sheets at cost unless the inventory is determined to be impaired, in which case the inventory is written down to its fair value.

Our inventories consist of the following three components:

Construction costs are accumulated during the period of construction and charged to cost of sales under the specific identification method.

We record inventories on our Consolidated Balance Sheets at cost unless the inventory is determined to be impaired, in which case the inventory is written down to its fair value.

Our inventories consist of the following components:

( 1 ) sold and unsold homes and lots under development, which includes all construction, land, capitalized interest and land development costs related to started homes and land under development in our active communities;

( 2 ) land and land options held for future development or sale, which includes all costs related to land in our communities in planning or mothballed communities;

and ( 3 ) consolidated inventory not owned, which includes all costs related to variable interest entities, and other options, which consists primarily of model homes financed with an investor and inventory related to land banking arrangements accounted for as financings.

and ( 3 ) consolidated inventory not owned, which consists of model homes financed with an investor and inventory related to land banking arrangements accounted for as financings.

We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified on our Consolidated Balance Sheets from “Sold and unsold homes and lots under development”

to “Land and land options held for future development or sale.” During fiscal 2021, we did not mothball any additional communities, but we sold four  previously mothballed communities and we re-activated two previously mothballed communities and portions of two previously mothballed communities. As of October 31, 2021 

and 2020, the net book value associated with our 6  and 12  total mothballed communities was $ 4.3  million and $ 11.4  million, respectively, which was net of impairment charges recorded in prior periods of $ 57.5  million and $ 122.2  million, respectively.

to “Land and land options held for future development or sale.” During fiscal 2022, we re-activated four previously mothballed communities. As of October 31, 2022 and 2021 , the net book value associated with our two  and six total mothballed communities were $ 1.4  million and $ 4.3 million, respectively, which was net of impairment charges recorded in prior periods of $ 20.3  million and $ 57.5 million, respectively.

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 606, these sale and leaseback transactions are considered a financing rather than a sale.

Therefore, for purposes of our Consolidated Balance Sheets, at October 31, 2021 and 2020 , inventory of $ 32.5  million and $ 48.8  million, respectively, was recorded to “Consolidated inventory not owned,”

with a corresponding amount of $ 31.5  million and $ 47.2  million, respectively, recorded to “Liabilities from inventory not owned”

Our Consolidated Balance Sheets, at October 31, 2022 and 2021 , included inventory of $ 48.5  million and $ 32.5 million, respectively, recorded to “Consolidated inventory not owned”

with a corresponding amount of $ 51.2  million and $ 31.5 million, respectively, recorded to “Liabilities from inventory not owned”

for the amount of net cash received from the transactions.

1 unchanged sentence

Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 606, these transactions are considered a financing rather than a sale.

For purposes of our Consolidated Balance Sheets, at October 31, 2021 and 2020 , inventory of $ 66.2  million and $ 133.4  million, respectively, was recorded to “Consolidated inventory not owned,”

with a corresponding amount of $ 31.3  million and $ 84.0  million, respectively, recorded to “Liabilities from inventory not owned”

Our Consolidated Balance Sheets, at October 31, 2022 and 2021 , included inventory of $ 260.1  million and $ 66.2 million, respectively, recorded to “Consolidated inventory not owned”

with a corresponding amount of $ 151.3  million (net of debt issuance costs) and $ 31.3 million, respectively, recorded to “Liabilities from inventory not owned”

for the amount of net cash received from the transactions.

The recoverability of inventories and other long-lived assets is assessed in accordance with the provisions of ASC 360 - 10, “Property, Plant and Equipment –

Overall.” ASC 360 - 10 requires long-lived assets, including inventories, held for development to be evaluated for impairment based on undiscounted future cash flows of the assets at the lowest level for which there are identifiable cash flows.

As such, we evaluate inventories for impairment at the individual community level, the lowest level of discrete cash flows that we measure.

The recoverability of inventories and other long-lived assets is assessed in accordance with ASC 360, “Property, Plant and Equipment.” ASC 360 requires long-lived assets, including inventories, held for development to be evaluated for impairment based on the undiscounted future cash flows of the assets at the lowest level for which there are identifiable cash flows.

We evaluate impairment at the individual community level, which is the lowest level of discrete cash flows that are available.

We evaluate inventories of communities under development and held for future development for impairment when indicators of potential impairment are present.

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These estimates are dependent upon specific market conditions for each community.

While we consider available information to determine what we believe to be our best estimates as of the end of a quarterly reporting period, these estimates are subject to change in future reporting periods as facts and circumstances change.

While we consider available information to determine what we believe to be our best estimates as of the end of each quarter, these estimates are subject to change in future reporting periods as facts and circumstances change.

Local market-specific conditions that may impact our estimates for a community include:

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Additionally, a decrease in the average sales price of homes to be sold and closed in future reporting periods for one community that has not been generating what management believes to be an adequate sales absorption pace may impact the estimated cash flow assumptions of a nearby community.

Changes in our key assumptions, including estimated construction and development costs, absorption pace and selling strategies, could materially impact future cash flow and fair value estimates.

Changes in our key assumptions, including estimated construction and development costs, sales absorption pace and selling strategies, could materially impact future cash flow and fair value estimates.

Due to the number of possible scenarios that would result from various changes in these factors, we do not believe it is possible to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.

If the undiscounted cash flows are more than the carrying value of the community, then the carrying amount is recoverable, and no impairment adjustment is required.

If the undiscounted cash flows are more than the carrying value of the community, then the carrying amount is recoverable, and no impairment is recorded.

However, if the undiscounted cash flows are less than the carrying amount, then the community is deemed impaired and is written down to its fair value.

We determine the estimated fair value of each community by determining the present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community, or in limited circumstances, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale), and recent bona fide offers received from outside third parties.

Our discount rates used for all impairments recorded from October 31, 2019  to October 31, 2021 ranged from 17.3 % to 19.3 %.

We determine the estimated fair value of each community by calculating the present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community, or in limited circumstances, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale), and recent bona fide offers received from third parties.

The estimated future cash flow assumptions are virtually the same for both our recoverability and fair value assessments.

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The impairment of a community is allocated to each lot on a relative fair value basis.

From time to time, we write off deposits and approval, engineering and capitalized interest costs when we determine that it is no longer probable that we will exercise options to buy land in specific locations or when we redesign communities and/or abandon certain engineering costs.

From time to time, we write off deposits, approval, engineering and capitalized interest costs when we determine that it is no longer probable that we will exercise options to buy land in specific locations or when we redesign communities and/or abandon certain engineering costs.

In deciding not to exercise a land option, we take into consideration changes in market conditions, the timing of required land takedowns, the willingness of land sellers to modify terms of the land option contract (including timing of land takedowns), and the availability and best use of our capital, among other factors.

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These recoveries have not been significant in comparison to the total costs written off.

Inventories held for sale are land parcels ready for sale in their current condition, where we have decided not to build homes but are instead actively marketing for sale.

These land parcels represented $ 2.0  million of our total inventories at 

October 31, 2020  and are reported at the lower of carrying amount or fair value less costs to sell.

Inventories held for sale are land parcels ready for sale in their current condition, where we have decided not to build homes but are instead actively marketing the land.

Land held for sale is recorded at the lower of carrying amount or fair value less costs to sell.

There were no inventories held for sale at 

October 31, 2021 .

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.

October 31, 2022 and 2021 .

Warranty Costs and Construction Defect Reserves  - We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible.

This accrual is expensed as selling, general and administrative costs. For homes delivered in fiscal 2021 and 2020 , our deductible under our general liability insurance was a $ 20 million aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2021 and 2020  was $ 0.25 million, up to a $ 5 million limit. Our aggregate retention for construction defect, warranty and bodily injury claims was $ 20 million for fiscal 2021 and 2020 . We do not have a deductible on our worker's compensation insurance.

This accrual is expensed as selling, general and administrative costs. For homes delivered in fiscal 2022 and 2021 , our deductible under our general liability insurance was $ 25.0 million and $ 20.0 million, respectively, aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2022 and 2021  was $ 0.5 million, up to a $ 5.0 million limit in California and $ 0.25 million, up to a $ 5.0 million limit in all other states. Our aggregate retention for construction defect, warranty and bodily injury claims was $ 25.0 million for fiscal 2022 and $ 20.0 million for fiscal 2021 . We do not have a deductible on our worker's compensation insurance.

Reserves for estimated losses for construction defects, warranty and bodily injury claims have been established using the assistance of a third -party actuary.

We engage a third -party actuary that uses our historical warranty and construction defect data 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 third -party actuary uses our historical warranty and construction defect data to assist 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.

These estimates are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of products we build, claim settlement patterns, insurance industry practices and legal interpretations, among others.

Because of the high degree of judgment required in determining these estimated liability amounts, actual future costs could differ significantly from our currently estimated amounts.

Because of the high degree of judgment required in determining these estimated liabilities, actual future costs could differ significantly from our currently estimated amounts.

In addition, we establish a warranty accrual for lower cost-related issues to cover home repairs, community amenities and land development infrastructure that are not covered under our general liability and construction defect policy.

We accrue an estimate for these warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer.

See Note 16 for additional information on the amount of warranty costs recognized in cost of goods sold and administrative expenses.

Interest - Interest attributable to properties under development during the land development and home construction period is capitalized and expensed along with the associated cost of sales as the related inventories are sold.

Interest incurred in excess of interest capitalized, which occurs when assets qualifying for interest capitalization are less than our outstanding debt balances, is expensed as incurred in “Other interest.”

Interest costs incurred, expensed and capitalized were:

We accrue an estimate for these warranty costs as part of cost of sales at the time each home is closed and control is transferred to the buyer.

Interest - Interest attributable to properties under development during the land development and home construction period is capitalized and then expensed in cost of sales as the related inventories are sold.

Interest that does not qualify for capitalization is expensed as incurred in “Other interest.”

Interest costs incurred, expensed and capitalized were as follows:

(In thousands)

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( 84,100 )  

70,725  

Less other interest expensed(2)(3)

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( 77,716 )  

90,056  

Less interest contributed to unconsolidated joint venture(4)

( 3,667 )  

Plus interest acquired from unconsolidated joint venture(5)

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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 $ 28.6 million, $ 57.1 million and $ 61.9 million for the years ended October 31, 2022, 2021 and 2020 , 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 $ 18.8 million, $ 20.6 million and $ 41.9 million for the years ended October 31, 2022, 2021 and 2020 , respectively.

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Interest paid by our mortgage and finance subsidiaries

Decrease (increase) in accrued interest

( 16,482 )  

(Increase) decrease in accrued interest

( 4,261 )  

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Land Options - Costs incurred to obtain options to acquire improved or unimproved home sites are capitalized.

Such amounts are either included as part of the purchase price if the land is acquired or charged to “Inventory impairments loss and land option write-offs”

Such amounts are either included as part of the purchase price if the land is acquired or charged to “Inventory impairments and land option write-offs”

if we determine we will not exercise the option.

In accordance with ASC 810 - 10 “Consolidation –

Overall,”

In accordance with ASC 810, “Consolidation,”

we record costs associated with other options on the Consolidated Balance Sheets under “Land and land options held for future development or sale.”

If the options are with variable interest entities and we are the primary beneficiary, we record the land under option on the Consolidated Balance Sheets under “Consolidated inventory not owned”

with an offset under “Liabilities from inventory not owned.” If the option has terms that require us to record it as financing, then we record the option on the Consolidated Balance Sheets under “Consolidated inventory not owned”

If the options are with variable interest entities ("VIEs") and we are the primary beneficiary or the options have terms that require us to record it as financing, then we record the land under option on the Consolidated Balance Sheets under “Consolidated inventory not owned”

with an offset under “Liabilities from inventory not owned.”

Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated homebuilding and land development joint ventures are accounted for under the equity method of accounting.

Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated homebuilding and land development joint ventures are accounted for under the equity method.

Under the equity method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or homes to third parties.

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In determining whether or not we must consolidate joint ventures where we are the managing member of the joint venture, we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture.

In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the significant operating and capital decisions of the partnership, including budgets, in the ordinary course of business. The evaluation of whether or not we control a venture can require significant judgment.

In accordance with ASC 323 - 10, “Investments - Equity Method and Joint Ventures –

Overall,”

we assess our investments in unconsolidated joint ventures for recoverability, and if it is determined that a loss in value of the investment below its carrying amount is other than temporary, we write down the investment to its fair value.

In accordance with ASC 323, “Investments - Equity Method and Joint Ventures,”

we assess our investments in unconsolidated joint ventures for recoverability quarterly, and if it is determined that a loss in value of the investment below its carrying amount is other than temporary, we write down the investment to its fair value.

We evaluate our equity investments for impairment based on the joint venture’s projected cash flows.

This process requires significant management judgment and estimates.

There were no write-downs in fiscal 2021 or 2020.

During fiscal 2019, we wrote down certain unconsolidated joint venture investments by $ 0.9 million.

There were no write-downs for any periods presented.

Deferred Bond Issuance Costs - Costs associated with borrowings under our credit facilities and term loans and the issuance of senior secured and senior notes are capitalized and amortized over the term of each note’s issuance.

The capitalized costs are recorded as a contra liability within our debt balances, except for the revolving credit facility costs, which are recorded as a prepaid asset.

Debt Issued At a Discount /Premium - Debt issued at a discount or premium to the face amount is amortized up or down, as applicable, to its face amount utilizing the effective interest method over the term of the note and recorded as a component of interest on the Consolidated Statements of Operations.

Advertising Costs - Advertising costs are expensed as incurred.

During the years ended October 31, 2021, 2020 and 2019 , advertising costs expensed totaled $ 9.8  million, $ 12.9  million and $ 17.1  million, respectively.

Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded for financial reporting and for income tax purposes.

Debt Issuance Costs - Costs associated with borrowings under our credit facilities and term loans and the issuance of senior secured and senior notes are capitalized and amortized over the term of each note’s issuance.

The capitalized costs are recorded as a contra liability within our debt balances, except for the revolving credit facility costs, which are recorded as a prepaid expense.

Debt Issued at a Discount /Premium - Debt issued at a discount or premium to the face amount is amortized utilizing the effective interest method over the term of the note and recorded as a component of "Other interest" in the Consolidated Statements of Operations.

Advertising Costs - Advertising costs are expensed as incurred, primarily to "Selling, general and administrative" homebuilding expense in the Consolidated Statements of Operations.

During the years ended October 31, 2022, 2021 and 2020 , advertising expenses totaled $ 10.6  million, $ 9.8 million and $ 12.9 million, respectively.

Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded for financial reporting and income tax purposes.

If the combination of future years’

income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried forward to future years to recover the deferred tax assets.

In accordance with ASC 740 - 10, “Income Taxes –

Overall,”

income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried forward to future years to recover deferred tax assets.

In accordance with ASC 740, “Income Taxes,”

we evaluate our deferred tax assets quarterly to determine if valuation allowances are required.

ASC 740 - 10 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more-likely-than- not”

In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in accordance with ASC 740 - 10, for more likely than not exposures. We re-evaluate the exposures associated with our tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity by taxing authorities, and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.

Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate. Any such changes will be reflected as increases or decreases to income tax expense in the period in which they are determined.

Prepaid Expenses - Prepaid expenses which relate to specific housing communities (model setup, architectural fees, homeowner warranty program fees, etc.) are amortized to cost of sales as the applicable inventories are sold.

ASC 740 requires an assessment of whether valuation allowances should be established based on the consideration of all available evidence using a “more-likely-than- not”

In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in accordance with ASC 740, for more-likely-than- not exposures. We re-evaluate the exposures associated with our tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity by taxing authorities and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and the income tax provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.

Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate. Any such changes will be reflected as increases or decreases to "Income taxes" in the Consolidated Statement of Operations for the period in which they are determined.

In addition, we record interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Prepaid Expenses - Prepaid expenses that relate to specific housing communities (model setup, architectural fees, homeowner warranty program fees, interest rate buydowns, etc.) are amortized to cost of sales as the applicable inventories are sold.

All other prepaid expenses are amortized over a specific time period or as used and charged to overhead expense.

Allowance for Doubtful Accounts –

We regularly review our receivable balances, which are included in Receivables, deposits and notes on the Consolidated Balance Sheets, for collectability and record an allowance against a receivable when it is deemed that collectability is uncertain.

Allowance for Credit Losses –

We regularly review our receivable balances, which are included in "Receivables, deposits and notes" on the Consolidated Balance Sheets, for collectability.

These receivables include receivables from our insurance carriers, receivables from municipalities related to the development of utilities or other infrastructure, and other miscellaneous receivables.

The balance for allowance for doubtful accounts was $ 10.5  million and $ 12.0  million at October 31, 2021 and 2020 , respectively, which primarily related to allowances for receivables from municipalities and an allowance for a receivable for a prior year land sale.

During fiscal 2021 and 2020 , we recorded $ 1.5  million and $ 0.2  million, respectively, in recoveries.

There were no write-offs in fiscal 2021 and 2020.

Stock Options - We account for our stock options under ASC 718 - 10, “Compensation - Stock Compensation –

Overall,”

which requires the fair-value based method of accounting for stock awards granted to employees and measures and records the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Compensation cost arising from nonvested stock granted to employees and from nonemployee stock awards is based on the fair value of the awards at the grant date recognized as expense using the straight-line method over the vesting period.

Per Share Calculations - Basic earnings per share is computed by dividing net income (loss) (the “numerator”) by the weighted-average number of common shares outstanding, adjusted for nonvested shares of restricted stock (the “denominator”) for the period.

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. Any options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation.  

All outstanding nonvested shares that contain nonforfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two -class method.

Allowances are maintained for potential credit losses based on historical experience, present economic conditions and other factors considered relevant by the Company.

The allowance for credit losses were $ 12.7  million and $ 10.5 million at October 31, 2022 and 2021 , respectively, which primarily related to allowances for receivables from municipalities and an allowance for a receivable for a prior year land sale.

During fiscal 2022 and 2021 , we recorded $ 0.3  million and $ 1.5 million, respectively, in recoveries.

During fiscal 2022, we recorded $ 2.5 million of additional reserves.

There were no additional reserves recorded in fiscal 2021.

 There were no write-offs in fiscal 2022  and 2021.

Stock-Based Compensation - We account for our stock-based awards under ASC 718, “Compensation - Stock Compensation,”

which requires a fair-value based method to determine the estimated cost of an award.

Compensation cost for stock-based awards is measured on the grant date.

We recognize compensation cost for time-based awards ratably over the vesting period and performance-based awards ratably over the vesting period when it is probable that the stated performance target will be achieved.

Forfeitures of stock-based awards are recognized as they occur.

Per Share Calculations - Basic earnings per share is computed by dividing net income (loss) (the "numerator") by the weighted-average number of common shares outstanding, adjusted for participating securities (the "denominator") for the period.

Contingently issuable shares are included in basic earnings per share as of the date that all necessary vesting conditions have been satisfied.

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 stock options and nonvested shares of restricted stock units ("RSUs"). Any stock options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation.  

All shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in earnings per share pursuant to the two -class method.

The two -class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings in periods where we have net income.

The Company’s restricted common stock (“nonvested shares”) are considered participating securities.

Recent Accounting Pronouncements  

In March 2020, the FASB issued ASU 2020 - 04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020 - 04”

ASU 2020 - 04 provides companies with optional guidance to ease the potential accounting burden associated with reference rate reform on financial reporting.

Recent Accounting Pronouncements - In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2020 - 04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020 - 04”

ASU 2020 - 04 provides companies with optional expedients to ease the potential accounting burden on contracts affected by the discontinuation of the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued.

This guidance was effective for the Company beginning on March 12, 2020, and we may elect to apply the amendments prospectively from now through December 31, 2022.

The Company has not yet adopted this guidance and is currently evaluating the potential impact of adoption on our Consolidated Financial Statements.

We lease certain office space for use in our operations.

We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842 “Leases”

("ASC 842" ).

The Company is currently evaluating the potential impact, but we do not expect the adoption of this guidance to have material impact on our Consolidated Financial Statements.

We rent certain office space for use in our operations.

We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842.

In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration.

We recognize lease expense for these leases on a straight-line basis over the lease term and combine lease and non-lease components for all leases.

Our office lease terms are generally from three to five years and generally contain renewal options.

In accordance with ASC 842, our lease terms include those renewals only to the extent that they are reasonably certain to be exercised.

We recognize lease expense on a straight-line basis over the lease term and combine lease and non-lease components for all leases.

Our office lease terms are typically from three to five years and generally contain renewal options.

In accordance with ASC 842, our lease terms include renewals only to the extent that they are reasonably certain to be exercised.

The exercise of these lease renewal options is generally at our discretion.

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In determining the incremental borrowing rate, we consider the lease period and our collateralized borrowing rates.

Our lease population at October 

31, 2021 is comprised of operating leases where we are the lessee and these leases are primarily real estate for office space for our corporate office, division offices and design centers.

As allowed by ASC 842, we adopted an accounting policy election to not record leases with lease terms of twelve months or less on our Consolidated Balance Sheets. 

Lease cost included in our Consolidated Statements of Operations in Selling, general and administrative expenses and payments on our lease liabilities are presented in the table below.

Our lease population at October 31, 2022  is comprised of operating leases where we are the lessee, primarily for our corporate office and division offices.

As allowed by ASC 842, we made an accounting policy election to not record leases with an initial term of 12 months or less on our Consolidated Balance Sheets. 

Lease costs are included in our Consolidated Statements of Operations, primarily in "Selling, general and administrative" homebuilding expenses and payments on our lease liabilities are presented in the table below.

Our short-term lease costs and sublease income are de minimis.

Year Ended October 31,

(In thousands)

Operating lease cost

Operating lease costs

$ 10,483  

$ 10,521  

$ 10,507  

Cash payments on lease liabilities

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$ 9,598  

ROU assets are classified within Prepaids and other assets on our Consolidated Balance Sheets, while lease liabilities are classified within Accounts payable and other liabilities on our Consolidated Balance Sheets.

The Company recorded a net increase to both its ROU assets and lease liabilities of $ 6.8  million as a result of new leases and lease renewals that commenced during the year ended October 31, 2021 .

$ 9,257  

ROU assets are classified within "Prepaid expenses and other assets" on our Consolidated Balance Sheets, while lease liabilities are classified within "Accounts payable and other liabilities." The Company recorded a net increase to both its ROU assets and lease liabilities of $ 9.9  million as a result of new leases and lease renewals that commenced during the year ended October 31, 2022 .

The following table contains additional information about our leases:

(In thousands)

At October 31, 2021

At October 31, 2020

$ 17,899  

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Weighted-average remaining lease term (in years)

Weighted-average discount rate (incremental borrowing rate)

Weighted-average discount rate

Maturities of our operating lease liabilities as of October 31, 2022 are as follows:

Year ending October 31,

Fiscal Year Ended October 31,

(In thousands)

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2027 and thereafter

Total payments

Total operating lease payments (1)

23,753  

imputed interest

Present value of lease liabilities

Present value of operating lease liabilities

$ 18,862  

Property, Plant and Equipment

Homebuilding property, plant, and equipment consists of land, land improvements, buildings, building improvements, furniture and equipment used to conduct day-to-day business and are recorded at cost less accumulated depreciation.

Property, plant, and equipment balances as of October 31, 2021 and 2020 were as follows:

( 1 ) Lease payments exclude $ 13.7 million of legally binding minimum lease payments for office leases signed but not yet commenced as of October 31, 2022.

The related ROU asset and operating lease liability are not reflected on the Company's balance sheet as of October 31, 2022.

Property and Equipment

Homebuilding property and equipment consists of land and land improvements, buildings, building improvements, furniture and equipment used to conduct day-to-day business and are recorded at cost less accumulated depreciation.

Property and equipment balances as of October 31, 2022 and 2021 were as follows:

(In thousands)

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36,467  

67,295  

Property and equipment

77,721  

Less accumulated depreciation

67,295  

accumulated depreciation

( 51,902 )  

Property and equipment, net

$ 25,819  

$ 18,736  

Restricted Cash and Deposits

Homebuilding - Restricted cash and cash equivalents on the Consolidated Balance Sheets totaled $ 16.1  million and $ 14.7  million as of October 31, 2021 and 2020 , respectively, which primarily consists of cash collateralizing our letter of credit agreements and facilities as discussed in Note 9.

Financial services restricted cash and cash equivalents, which are included in Financial services other assets on the Consolidated Balance Sheets, totaled $ 43.5  million and $ 27.4  million as of October 31, 2021 and 2020 , respectively.

Restricted Cash and Customers' Deposits

Homebuilding "Restricted cash and cash equivalents" on the Consolidated Balance Sheets totaled $ 13.4  million and $ 16.1  million as of October 31, 2022 and 2021 , respectively, which primarily consists of cash collateralizing our letter of credit agreements and facilities (see Note 9 ).

Financial services restricted cash and cash equivalents, which are included in "Financial services" assets on the Consolidated Balance Sheets, totaled $ 36.1  million and $ 43.5  million as of October 31, 2022 and 2021 , respectively.

Included in these balances were ( 1 ) financial services customers’

deposits of $ 40.7  million at October 31, 2021 and $ 25.4  million as of October 31, 2020 , which are subject to restrictions on our use, and ( 2 ) $ 2.8  million at  

October 31, 2021 and $ 2.0 million as of October 31, 

2020 of restricted cash under the terms of our mortgage warehouse lines of credit.

Total Homebuilding Customers’

deposits of $ 29.7  million and $ 40.7 million as of October 31, 2022 and 2021, respectively, which are subject to restrictions on our use, and ( 2 ) restricted cash under the terms of our mortgage warehouse lines of credit of $ 6.4  million and $ 2.8 million as of October 31, 2022  and 2021, respectively.

Homebuilding "Customers’

deposits" are shown as a liability on the Consolidated Balance Sheets.

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Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property.

We have elected the fair value option to record loans held for sale and therefore these loans are recorded at fair value with the changes in the value recognized in the Consolidated Statements of Operations in “Revenues:

Financial services.”

We currently use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to third -party purchasers to protect us from interest rate fluctuations.

These short-term instruments, which do not require any payments to be made to the counterparty or 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 Consolidated Statements of Operations in “Revenues:

Financial services.”

At October 31, 2021 and 2020 , $ 136.5  million and $ 87.9  million, respectively, of mortgages held for sale were pledged against our mortgage warehouse lines of credit (see Note 8 ).

We may incur losses with respect to mortgages that were previously sold that are delinquent and which had underwriting defects, but only to the extent the losses are not covered by mortgage insurance or resale value of the home.

The reserves for these estimated losses are included in the “Financial services”

balances on the Consolidated Balance Sheets.

As of October 31, 2021 and 2020 , we had reserves specifically for 14  and 15  identified mortgage loans, respectively, as well as reserves for an estimate for future losses on mortgages sold but not yet identified to us. 

Loans held for sale are recorded at fair value with the changes in the value recognized in the Consolidated Statements of Operations in “Financial services”

We currently use forward sales of 

MBS, interest rate commitments from borrowers and mandatory and/or best-efforts forward commitments to sell loans to third -party purchasers to protect us from interest rate fluctuations.

These short-term instruments do not require any payments to be made to the counterparty or purchaser in connection with the execution of the commitments.

At October 31, 2022 and 2021 , $ 92.5  million and $ 136.5  million, respectively, of mortgage loans held for sale were pledged against our mortgage warehouse lines of credit (see Note 8 ).

The reserves for these estimated losses are included in “Financial services”

liabilities on the Consolidated Balance Sheets.

At both 

October 31, 2022 and 2021 , we had reserves specifically for 14  identified mortgage loans, as well as reserves for an estimate of future losses on mortgages sold but not yet identified to us. 

The activity in our loan origination reserves in fiscal 2022 and 2021 was as follows:

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( 18 )  

Payments/settlements

Loan origination reserves, end of period

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$ 1,632  

Nonrecourse .

We have nonrecourse mortgage loans for certain communities totaling $ 144.8  million and $ 125.1  million, net of debt issuance costs, at October 31, 2022 and 2021 , respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $ 418.9  million and $ 448.5  million, respectively.

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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.

Such mortgage loans and related servicing rights are generally sold in the secondary mortgage market within a short period of time.

Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in "Financial services" liabilities on the Consolidated Balance Sheets.

Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A.

(“Chase Master Repurchase Agreement”) is a short-term borrowing facility that provides up to $ 50.0 million through its maturity on June 30, 2022.

The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly on outstanding advances at an adjusted LIBOR rate, which was 0.875 % at October 31, 2021 , plus the applicable margin of 2.5 %.

(“Chase Master Repurchase Agreement”) is a short-term borrowing facility that provides up to $ 50.0 million through its maturity on July 31, 2023.

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 Secured Overnight Financing Rate ("SOFR"), which was 3.81 % at October 31, 2022 , plus the applicable margin of 2.25 % to 2.375 %.

As of October 31, 2022 and 2021 , the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $ 14.1  million and $ 45.7  million, respectively.

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Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master Repurchase Agreement”) which is a short-term borrowing facility that provides up to $ 50.0 million through its maturity on March 8, 2023.

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 2.125 % to 4.75 % based on the type of loan and the number of days outstanding on the warehouse line.

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 Bloomberg Short Term Bank Yield Index ("BSBY") rate, plus the applicable margin ranging from 2.125 % to 4.5 % based on the type of loan and the number of days outstanding on the warehouse line.

As of October 31, 2022 and 2021 , the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $ 43.1  million and $ 40.5  million, respectively.

Hovnanian Mortgage also has a secured Master Repurchase Agreement with Comerica Bank (“Comerica Master Repurchase Agreement”) which is a short-term borrowing facility through its maturity on June 28, 2022.

The Comerica Master Repurchase Agreement provides up to $ 60.0 million on the 15th day of the last month of the Company's fiscal quarters, and reverts back to up to $ 50.0 million 30 days thereafter. 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 1.875 % or 3.25 % based upon the type of loan.

Hovnanian Mortgage also has a secured Master Repurchase Agreement with Comerica Bank (“Comerica Master Repurchase Agreement”) which was amended on August 8, 2022 to extend the maturity date and is a short-term borrowing facility through its maturity on July 7, 2023.

The Comerica Master Repurchase Agreement provides up to $ 60.0 million on the 15th day of the last month of the Company's fiscal quarters and reverts back to up to $ 50.0 million 30 days thereafter. 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 daily adjusting BSBY rate, subject to a floor of 0.50 %, plus the applicable margin of 1.875 % or 3.25 % based upon the type of loan.

As of October 31, 2022 and 2021 , the aggregate principal amount of all borrowings outstanding under the Comerica Master Repurchase Agreement was $ 37.1  million and $ 48.7  million, respectively.

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Senior Secured Notes:

10.0 % Senior Secured Notes due July 15, 2022

$ 111,214  

10.5 % Senior Secured Notes due July 15, 2024

69,683  

10.0% Senior Secured 1.75 Lien Notes due November 15, 2025

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Senior Secured Revolving Credit Facility (2)

Subtotal notes payable

Subtotal senior notes and credit facilities

$ 1,154,852  

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$ 10,769  

Net debt issuance costs

Unamortized debt issuance costs

$ ( 12,384 )  

Total notes payable, net of discounts, premiums and debt issuance costs

Total senior notes and credit facilities, net of discounts, premiums and unamortized debt issuance costs

$ 1,146,547  

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( 1 ) $ 26.0 million of 8.0 % Senior Notes due 2027 (the "8.0% 2027 Notes") are owned by a wholly owned consolidated subsidiary of HEI.

Therefore, in accordance with GAAP, such notes are not reflected on the Consolidated Balance Sheets of HEI.

On November 1, 2019, the maturity of the 8.0% 2027 Notes was extended to November 1, 2027.

( 2 ) At October 31, 2021 , provides for up to $ 125.0 million in aggregate amount of senior secured first lien revolving loans.

Availability thereunder will terminate on December 28, 2022.

Therefore, in accordance with U.S.

GAAP, such notes are not reflected on the Consolidated Balance Sheets of HEI.

( 2 ) At October 31, 2022 , provides for up to $ 125.0 million in aggregate senior secured first lien revolving loans.

In the fourth quarter of fiscal 2022, we amended our Secured Credit Facility, which amendments became effective in the first quarter of fiscal 2023.

As amended, the revolving loans thereunder have a maturity of June 30, 2024 and borrowings bear interest, at K.

Hovnanian ’

s option, at either (i) a term secured overnight financing rate (subject to a floor of 1.00 %) plus an applicable margin of 4.50 % or (ii) an alternate base rate plus an applicable margin of 3.50 %.

In addition, K.

Hovnanian will pay an unused commitment fee on the undrawn revolving commitments at a rate of 1.00 % per annum.

As of October 31, 2022 , future maturities of our borrowings were as follows (in thousands):

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171,618  

$ 1,154,852  

( 1 ) Does not include our $ 125.0 million Senior Secured Revolving Credit Facility under which there were no borrowings outstanding as of October 31, 2022 .

Except for K.

Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes 

and senior notes outstanding (except for the 8.0% 2027 Notes which are not guaranteed by K.

Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company) at October 31, 2022 ( collectively, the “Notes Guarantors”).

The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at October 31, 2022 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including K.

Hovnanian, to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and refinancing indebtedness), pay dividends and make distributions on common and preferred stock, repay/repurchase certain indebtedness prior to its respective stated maturity, repurchase (including through exchanges) 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 of their assets and enter into certain transactions with affiliates.

Hovnanian, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repay/repurchase certain indebtedness prior to its respective stated maturity, repurchase (including through exchanges) 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 of their assets and enter into certain transactions with affiliates.

The Debt Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below) (the “Unsecured Term Loans”), loans made under the Secured Term Loan Facility (defined below) (the “Secured Term Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving Loans”) or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or 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 Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected.

As of October 31, 2022, we believe we were in compliance with the covenants of the Debt Instruments.

If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends (in even such case, our secured debt leverage ratio must also be less than 4.0 to 1.0 ), and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness and nonrecourse indebtedness.

As of October 31, 2021, as a result of our improved operating results, our fixed coverage ratio is above 2.0 to 1.0 and our secured debt leverage ratio is below 4.0 to 1.0, therefore we are no longer restricted from paying dividends.

As such, on December 3, 2021 our Board of Directors authorized a dividend payment of $ 2.7 million to preferred shareholders of record on January 1, 2022 and which will be paid on January 15, 2022.

Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time.

We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to do so with the right opportunity.

If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends (in each such case, our secured debt leverage ratio must also be less than 4.0 to 1.0 ), and from incurring indebtedness other than certain permitted indebtedness an d nonrecourse indebtedness.

Beginning as of October 31, 2021, as a result of our improved operating results, our fixed coverage ratio was above 2.0 to 1.0 and our secured debt leverage ratio was below 4.0 to 1.0, therefore we were no longer restricted from paying dividends.

As such, we made dividend payments of $ 2.7 million to preferred shareholders in each quarter of fiscal 2022.

Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time.

We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce lev erage, interest rates and/or extend maturities, and will seek to do so with the right opportunity.

We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.

On April 29, 2022, K.

Hovnanian redeemed $ 100.0 million aggregate principal amount of its 7.75 % Senior Secured 1.125 Lien Notes due 2026 (the "1.125 Lien Notes").

The aggregate purchase price for this redemption was $ 105.5 million, which included accrued and unpaid interest and which was funded with cash on hand.

This redemption resulted in a loss on exting uishment of debt of $ 6.8 million for the year ended October 31, 2022, net of the write-off of unamortized financing costs and fees.

The loss from the redemption is included in the Consolida ted Statement of Operations as "(Loss) gain on extinguishment of debt, net".

On August 19, 2022, the Company, K.

Hovnanian, and other subsidiaries of the Company as guarantors entered into the Second Amendment (the “Second Amendment”) to the Credit Agreement, dated as of October 31, 2019, as amended by the First Amendment, dated as of November 27, 2019, by and among K.

Hovnanian, the Company, the other guarantors party thereto, Wilmington Trust, National Association, as administrative agent, and the lenders party thereto, which provides for up to $ 125.0 million in aggregate amount of senior secured first lien revolving loans (the “Revolving Credit Facility”).

The Second Amendment became effective in the first quarter of fiscal 2023 and (i) extends the final scheduled maturity of the Revolving Credit Facility from December 28, 2022 to June 30, 2024, ( ii) replaces the 7.75 % fixed interest rate with a floating interest rate based on the SOFR and (iii) provides for certain technical and clarifying amendments.

Borrowings under the Revolving Credit Facility will bear interest, at K.

Hovnanian’s option, at either (i) a term SOFR rate (subject to a floor of 1.00 %) plus an applicable margin of 4.50 % or (ii) an alternate base rate plus an applicable margin of 3.50 %.

In addition, K.

Hovnanian will pay an unused commitment fee on the undrawn revolving commitments at a rate of 1.00 % per annum.

On July 30, 2021, K.

Hovnanian redeemed in full all of the $ 111.2 million aggregate principal amount of 10.0 % Senior Secured Notes due 2022 (the "10.0% 2022 Notes").

The aggregate purchase price for this redemption was $ 111.7 million, which included accrued and unpaid interest and which was funded with cash on hand.

The aggregate purchase price for this redemption was $ 111.7 million, which included accrued and unpaid interest that was funded with cash on hand.

This redemption resulted in a loss on extinguishment of debt of $ 0.3 million for the year ended October 31, 2021, net of the write-off of unamortized financing costs and fees.

The loss from the redemption is included in the Consolidated Statement of Operations as "Loss on extinguishment of debt".

The loss from the redemption is included in the Consolidated Statement of Operations as "(Loss) gain on extinguishment of debt, net".

On August 2, 2021, K.

Hovnanian redeemed in full all of the $ 69.7 million aggregate principal amount of 10.5 % Senior Secured Notes due 2024 (the "10.5% 2024 Notes").

The aggregate purchase price for this redemption was $ 71.9 million, which included accrued and unpaid interest and which was funded with cash on hand.

The aggregate purchase price for this redemption was $ 71.9 million, which included accrued and unpaid interest that was funded with cash on hand.

This redemption resulted in a loss on extinguishment of debt of $ 3.4 million for the year ended October 31, 2021, net of the write-off of unamortized discounts, financing costs and fees.

The loss from the redemption is included in the Consolidated Statement of Operations as "Loss on extinguishment of debt".

The loss from the redemption is included in the Consolidated Statement of Operations as "(Loss) gain on extinguishment of debt, net".

On December 10, 2019, K.

Hovnanian consummated an exchange offer (the "1.75 Lien Exchange Offer") pursuant to which it issued $ 158.5 million aggregate principal amount of 10.0 % 1.75 Lien Notes due 2025 (the “1.75 Lien Notes”) in exchange for $ 23.2 million in aggregate principal amount of its outstanding 10.0 % 2022 Notes and $ 141.7 million in aggregate principal amount of its outstanding 10.5 % 2024 Notes (together with the 10.0 % 2022 Notes, the “Second Lien Notes”).

Hovnanian also exchanged $ 163.0 million in aggregate principal amount of its Unsecured Term Loans for $ 81.5 million in aggregate principal amount of Secured Term Loans made under a new Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 ( the “Secured Term Loan Facility”).

There was no cash consideration in these exchanges.

These secured notes and term loan exchanges were accounted for in accordance with ASC 470 - 60, resulting in a carrying value of $ 164.9 million and $ 148.8 million, respectively, for the $158.5 million of 1.75 Lien Notes and $81.5 million of Secured Term Loans, respectively, and a net gain on extinguishment of debt of $ 9.2  million, which is included in “Gain on extinguishment of debt”

These secured notes and term loan exchanges were accounted for in accordance with ASC 470 - 60, resulting in a carrying value of $ 164.9 million and $ 148.8 million, respectively, for the $ 158.5 million of 1.75 Lien Notes and $ 81.5 million of Secured Term Loans, respectively, and a net gain on extinguishment of debt of $ 9.2  million, which is included in “(Loss) gain on extinguishment of debt, net”

on the Consolidated Statement of Operations.

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The 1.75 Lien Notes have a maturity of November 15, 2025.

The 1.75 Lien Notes are redeemable in whole or in part at K.

Hovnanian’s option at any time prior to November 15, 2021 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 November 15, 2021 and prior to November 15, 2022, K.

Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to 105.00 % of their principal amount, at any time and from time to time after November 15, 2022 and prior to November 15, 2023, K.

At any time and from time to time after November 15, 2022 and prior to November 15, 2023, K.

Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to 102.50 % of their principal amount and at any time and from time to time after November 15, 2023, K.

Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to 100.0 % of their principal amount.

In addition, K.

Hovnanian may also redeem up to 35.0 % of the aggregate principal amount of the 1.75 Lien Notes prior to November 15, 2021 with the net cash proceeds from certain equity offerings at 110.00 % of principal.

The Secured Term Loans and the guarantees thereof are secured on a pari passu basis with the 1.75 Lien Notes by the same assets that secure the 1.75 Lien Notes, subject to permitted liens and certain exceptions.

The Secured Term Loans bear interest at a rate equal to 10.0% per annum and will mature on January 31, 2028, with interest payable in arrears on the last business day of each fiscal quarter.

The Secured Term Loans may be voluntarily prepaid in whole or in part at K.

Hovnanian’s option at any time prior to November 15, 2021 at a prepayment price equal to 100.0 % of their principal amount plus any applicable “Make-Whole Amount”.

At any time and from time to time on or after November 15, 2021 and prior to November 15, 2022, K.

Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a prepayment price equal to 105.00 % of their principal amount, at any time and from time to time after November 15, 2022 and prior to November 15, 2023, K.

At any time and from time to time after November 15, 2022 and prior to November 15, 2023, K.

Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a prepayment price equal to 102.50 % of their principal amount and at any time and from time to time after November 15, 2023, K.

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On March 25, 2020, K.

Hovnanian consummated a private exchange (the “Exchange”) pursuant to which it issued $ 59.1 million aggregate principal amount of additional 1.5 Lien Notes (defined below) (the “Additional 1.5 Lien Notes”) in exchange for $59.1 million aggregate principal amount of 10.0 % 2022 Notes held by certain participating bondholders (the “Exchange Holders”) pursuant to an Exchange Agreement, dated March 25, 2020 ( the “Exchange Agreement”), among the K.

Hovnanian consummated a private exchange (the “Exchange”) pursuant to which it issued $ 59.1 million aggregate principal amount of additional 1.5 Lien Notes (defined below) (the “Additional 1.5 Lien Notes”) in exchange for $59.1 million aggregate principal amount of second lien notes held by certain participating bondholders (the “Exchange Holders”) pursuant to an Exchange Agreement, dated March 25, 2020 ( the “Exchange Agreement”), among K.

Hovnanian, the Notes Guarantors, the Exchanging Holders and certain holders of the Initial 1.5 Lien Notes (defined below) (the “Consenting Holders”).

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Hovnanian, the Notes Guarantors, the Trustee and the Collateral Agent.

The Supplemental Indenture also amends the Indenture in accordance with the Consents to permit K.

The Supplemental Indenture also amended the Indenture in accordance with the Consents to permit K.

Hovnanian and the Notes Guarantors to secure up to $ 162.3 million of 1.5 Lien Obligations (as defined in the Indenture).

As of March 25, 2020, after giving effect to the issuance of the Additional 1.5 Lien Notes, $ 162.3 million aggregate principal amount of 1.5 Lien Obligations, which consist of the 1.5 Lien Notes, were outstanding. 

For a discussion of the 1.5 Lien Notes see “—Secured Obligations”

For a discussion of the 1.5 Lien Notes see “Secured Obligations”

During the year ended October 31, 2020, the Company repurchased in open market transactions $ 25.5 million aggregate principal amount of the 10.0 % 2022  Notes.

1 unchanged sentence

These repurchases resulted in a gain on extinguishment of debt of $ 4.1 million for the year ended October 31, 2020, net of the write-off of unamortized financing costs and fees.

The gains from the repurchases are included in the Consolidated Statement of Operations as "Gain on extinguishment of debt".

On January 15, 2019, 

Hovnanian issued $ 25.0 million in aggregate principal amount of additional 10.5 % 2024 Notes to GSO Capital Partners LP (“GSO”) or one or more funds managed, advised or sub-advised by GSO (collectively, the “GSO Entities”) at a discount for a purchase price of $ 21.3 million in cash.

The additional 10.5% 2024 Notes were issued as additional notes of the same series as the 10.5% 2024 Notes.

On October 31, 2019, K.

Hovnanian, HEI, the Notes Guarantors, Wilmington Trust, National Association, as administrative agent, and affiliates of certain investment managers (the “Investors”), as lenders, entered into a credit agreement (the “Secured Credit Agreement”

and, together with the Unsecured Term Loan Facility and the Secured Term Loan Facility, the “Credit Facilities”) providing for up to $ 125.0 million in aggregate amount of Secured Revolving Loans to be used for general corporate purposes, upon the terms and subject to the conditions set forth therein.

Secured Revolving Loans are to be borrowed by K.

Hovnanian and guaranteed by the Notes Guarantors.

Availability under the Secured Credit Agreement will terminate on December 28, 2022.

The Secured Revolving Loans bear interest at a rate per annum equal to 7.75%, and interest is payable in arrears, on the last business day of each fiscal quarter.

In connection with the entering into of the Secured Credit Agreement, K.

Hovnanian terminated the 2018 Secured Credit Facility (as defined under "- Fiscal 2018" ). 

On October 31, 2019, K.

Hovnanian completed private placements of senior secured notes as follows:

Hovnanian issued an aggregate of $ 350.0 million of 7.75 % Senior Secured 1.125 Lien Notes due 2026 (the “1.125 Lien Notes”) in part pursuant to a Note Purchase Agreement, dated October 31, 2019, among K.

Hovnanian, the Notes Guarantors and certain Investors as purchasers thereof (the “1.125 Lien Notes Purchase Agreement”) and in part pursuant to the Exchange Agreement (as defined below), with the proceeds from the sale of 1.125 Lien Notes under the 1.125 Lien Notes Purchase Agreement used to fund the cash payments to certain Exchanging Holders (as defined below) under the Exchange Agreement;

Hovnanian issued an aggregate of $ 282.3 million of 10.5 % Senior Secured 1.25 Lien Notes due 2026 (the “1.25 Lien Notes”), pursuant to a Note Purchase Agreement (the “1.25 Lien Notes Purchase Agreement”), dated October 31, 2019, among K.

Hovnanian, the Notes Guarantors and certain Investors as purchasers thereof (the “1.25 Lien Notes Purchasers”), the proceeds of which were used to fund the Satisfaction and Discharge (as defined below).

In addition, on October 31, 2019, K.

Hovnanian completed private exchanges of (i) approximately $ 221.0 million aggregate principal amount of its 10.0 % 2022 Notes and approximately $ 114.0 million aggregate principal amount of its 10.5% 2024 Notes held by certain participating bondholders (the “Exchanging Holders”) for a portion of the $350.0 million aggregate principal amount of 1.125 Lien Notes described above and/or cash, and (ii) approximately $ 99.6 million aggregate principal amount of its 10.5% 2024 Notes held by certain of the Exchanging Holders for approximately $ 103.1 million aggregate principal amount of 1.5 Lien Notes (the 1.5 Lien Notes together with the 1.125 Lien Notes and the 1.25 Lien Notes, the “New Secured Notes”), pursuant to an Exchange Agreement, dated October 30, 2019 ( the “Exchange Agreement”), among K.

Hovnanian, the Notes Guarantors and the Exchanging Holders.

  On October 31, 2019, K.

Hovnanian issued notices of redemption for all of its outstanding 9.50 % Senior Secured Notes due 2020 (the “9.50% Notes”), 2.000 % Senior Secured Notes due 2021 (the “2.000% Notes”) and 5.000 % Senior Secured Notes due 2021 (the “5.000% Notes”) and deposited with Wilmington Trust, National Association, as trustee under the indenture (the “9.50% Notes Indenture”) governing the 9.50% Notes and as trustee under the indenture (the “5.000%/2.000% Notes Indenture”) governing the 5.000% Notes and the 2.000% Notes sufficient funds to satisfy and discharge (collectively, the “Satisfaction and Discharge”) (i) the 9.50% Indenture and to fund the redemption of all outstanding 9.50% Notes and to pay accrued and unpaid interest on the redeemed notes to, but not including, the November 10, 2019 redemption date and (ii) the 5.000%/2.000% Indenture and to fund the redemption of all outstanding 5.000% Notes and 2.000% Notes and to pay accrued and unpaid interest on the redeemed notes to, but not including, the November 30, 2019 redemption date.

Proceeds from the issuance of the 1.25 Lien Notes together with cash on hand were used to fund the Satisfaction and Discharge.

Upon the Satisfaction and Discharge of the 9.50% Notes Indenture, all of the collateral securing the 9.50% Notes was released and the restrictive covenants and events of default contained therein ceased to have effect and upon the Satisfaction and Discharge of the 5.000%/2.000% Notes Indenture, all of the collateral securing the 5.000% Notes and the 2.000% Notes was released and the restrictive covenants and events of default contained therein ceased to have effect as to both such series of Notes.

Hovnanian obtained the consent of certain lenders/holders under its existing debt instruments to amend such debt instruments in connection with the issuance of the New Secured Notes and the execution of the indentures governing the New Secured Notes and the Secured Credit Agreement.

Hovnanian and the guarantors also amended such debt instruments to add certain subsidiaries as guarantors thereunder and, in the case of the Second Lien Notes, to add such new guarantors as pledgors and grantors of their assets (subject to permitted liens and certain exceptions) to secure such Second Lien Notes.

The transactions that were consummated on October 31, 2019, as described, are collectively referred to herein as the “2019 Transactions.” 

The 2019 Transactions resulted in a loss of extinguishment of debt of $ 42.4 million for the year ended October 31, 2019, which is included as “Loss on Extinguishment of Debt”

on the Consolidated Statement of Operations.

The gains from the repurchases are included in the Consolidated Statement of Operations as "(Loss) gain on extinguishment of debt, net".

Secured Obligations

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Hovnanian and guaranteed by the Notes Guarantors.

Availability under the Secured Credit Agreement will terminate on December 28, 2022.

The Secured Revolving Loans bear interest at a rate per annum equal to 7.75%, and interest is payable in arrears, on the last business day of each fiscal quarter.

The 7.75% Senior Secured 1.125 Lien Notes due 2026 (the "1.125 Lien Notes") have a maturity of February 15, 2026 and bear interest at a rate of 7.75 % per annum payable semi-annually on February 15 and August 15 of each year, 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 1.125 Lien Notes are redeemable in whole or in part at our option at any time prior to February 15, 2022 at 100.0 % of their principal amount plus an applicable “Make-Whole Amount.”

In addition, up to 35 % of the original aggregate principal amount of the 1.125 Lien Notes may be redeemed with the net cash proceeds from certain equity offerings at 107.75 % of principal at any time prior to February 15, 2022.

Hovnanian may also redeem some or all of the 1.125 Lien Notes at 103.875 % of principal commencing February 15, 2022, at 101.937 % of principal commencing February 15, 2023 and at 100.0 % of principal commencing February 15, 2024.

In the fourth quarter of fiscal 2022, we amended our Secured Credit Facility, which amendments became effective in the first quarter of fiscal 2023.

As amended, the revolving loans thereunder have a maturity of June 30, 2024 and borrowings bear interest, at K.

Hovnanian’s option, at either (i) a term secured overnight financing rate (subject to a floor of 1.00 %) plus an applicable margin of 4.50 % or (ii) an alternate base rate plus an applicable margin of 3.50 %.

In addition, K.

Hovnanian will pay an unused commitment fee on the undrawn revolving commitments at a rate of 1.00 % per annum.

The 1.125 Lien Notes have a maturity of February 15, 2026 and bear interest at a rate of 7.75% per annum payable semi-annually on February 15 and August 15 of each year, 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.

Hovnanian may redeem some or all of the 1.125 Lien Notes at 103.875 % of principal commencing February 15, 2022, at 101.937 % of principal commencing February 15, 2023 and at 100.0 % of principal commencing February 15, 2024.

The 10.5% Senior Secured 1.25 Lien Notes due 2026 (the "1.25 Lien Notes") have a maturity of February 15, 2026 and bear interest at a rate of 10.5 % per annum payable semi-annually on February 15 and August 15 of each year 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 1.25 Lien Notes are redeemable in whole or in part at our option at any time prior to February 15, 2022 at 100.0 % of their principal amount plus an applicable “Make-Whole Amount.”

In addition, up to 35 % of the original aggregate principal amount of the 1.25 Lien Notes may be redeemed with the net cash proceeds from certain equity offerings at 110.5 % of principal at any time prior to February 15, 2022.

Hovnanian may also redeem some or all of the 1.25 Lien Notes at 105.25 % of principal commencing February 15, 2022, at 102.625 % of principal commencing February 15, 2023 and at 100.0 % of principal commencing February 15, 2024.

Hovnanian may redeem some or all of the 1.25 Lien Notes at 105.25 % of principal commencing February 15, 2022, at 102.625 % of principal commencing February 15, 2023 and at 100.0 % of principal commencing February 15, 2024.

The 11.25% Senior Secured 1.5 Lien Notes due 2026 (the "1.5 Lien Notes") have a maturity of February 15, 2026 and bear interest at a rate of 11.25 % per annum payable semi-annually on February 15 and August 15 of each year 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 1.5 Lien Notes are redeemable in whole or in part at our option at any time prior to February 15, 2026 at 100.0 % of their principal amount.

See “—

Fiscal 2020 ”

for a discussion of the 1.75 Lien Notes and the Secured Term Loans.

See “Fiscal 2020”

for a discussion of the 1.75 Lien Notes and the Secured Term Loan.

Each series of secured notes and the guarantees thereof, the Secured Term Loans and the guarantees thereof and the Secured Credit Agreement and the guarantees thereof are secured by the same assets.

1 unchanged sentence

Hovnanian’s other secured notes and the Secured Term Loan.

The liens securing the 1.125 Lien Notes are senior to the liens securing the 1.25 Lien Notes, 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans, the Second Lien Notes and any other future secured obligations that are junior in priority with respect to the assets securing the 1.125 Lien Notes, the liens securing the 1.25 Lien Notes are senior to the liens securing the 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the 1.25 Lien Notes, the liens securing the 1.5 Lien Notes are senior to the liens securing the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the 1.5 Lien Notes, the liens securing the 1.75 Lien Notes and the Secured Term Loans (which are secured on a pari passu basis with each other) are senior to any other future secured obligations that are junior in priority with respect to the assets securing the 1.75 Lien Notes and the Secured Term Loans, in each case, with respect to the assets securing such debt.

The liens securing the 1.125 Lien Notes are senior to the liens securing the 1.25 Lien Notes, 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the 1.125 Lien Notes, the liens securing the 1.25 Lien Notes are senior to the liens securing the 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the 1.25 Lien Notes, the liens securing the 1.5 Lien Notes are senior to the liens securing the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the 1.5 Lien Notes, the liens securing the 1.75 Lien Notes and the Secured Term Loans (which are secured on a pari passu basis with each other) are senior to any other future secured obligations that are junior in priority with respect to the assets securing the 1.75 Lien Notes and the Secured Term Loans, in each case, with respect to the assets securing such debt.

As of October 31, 2022, the collateral securing the Secured Credit Agreement, the Secured Term Loan Facility and the secured notes included ( 1 ) $ 333.2 million of cash and cash equivalents, which included $ 6.1 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);

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Interest on the 5.0% 2040 Notes is payable semi-annually on February 1 and August 1 of each year 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.

At any time and from time to time after February 1, 2021, K.

At any time and from time to time, K.

Hovnanian may redeem some or all of the 5.0 % 2040 Notes at a redemption price equal to 100.0 % of their principal amount. 

3 unchanged sentences

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.

At October 31, 2021 and October 31, 2020, the amount of cash collateral in these segregated accounts was $ 9.9 million and $ 11.6 million, respectively, which is reflected in “Restricted cash and cash equivalents”

At October 31, 2022 and October 31, 2021, the amount of cash collateral in these segregated accounts was $ 6.1 million and $ 9.9 million, respectively, which is included in “Restricted cash and cash equivalents”

on the Consolidated Balance Sheets.  

Operating and Reporting Segments

HEI’s operating segments are components of the Company’s 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 the Company's communities qualifies as an operating segment, and therefore, it is impractical to provide segment disclosures for this many segments. As such, HEI has aggregated the homebuilding operating segments into six reportable segments.

HEI’s homebuilding operating segments are aggregated into reportable segments based primarily upon geographic proximity, similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell homes.

HEI’s reportable segments consist of the following six homebuilding segments and a financial services segment noted below.

We currently have homebuilding operations in 14  states that are aggregated into reportable segments based primarily upon geographic proximity.

Historically, the Company had seven reportable segments consisting of six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and its financial services segment.

During the fourth quarter of fiscal 2022, we reevaluated our reportable segments as a result of changes in the business and our management thereof.

Applying the principles set forth under ASC 280, including that our business trends are reflective of economic conditions in markets with general geographic proximity, we realigned our homebuilding operating segments.

HEI’s reportable segments now consist of the following three homebuilding segments and a financial services segment.

Homebuilding:

Northeast (New Jersey and Pennsylvania)

Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C.

and West Virginia)

Midwest (Illinois and Ohio)

Northeast (Delaware, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and West Virginia)

Southeast (Florida, Georgia and South Carolina)

Southwest (Arizona and Texas)

West (California)

Financial Services

Operations of the 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 Financial Services segment include mortgage banking and title services provided to the homebuilding operations’

Our financial services subsidiaries do not typically retain or service mortgages that we originate but rather sell the mortgages and related servicing rights to investors. 

Corporate and unallocated primarily represents operations at our headquarters in 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 (loss) 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.  

Financial information relating to HEI’s segment operations was as follows:  

West (Arizona, California and Texas)

All prior period amounts related to the segment change have been retrospectively reclassified throughout to conform to the new presentation.

Operations of the 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 financial services segment include mortgage banking and title services provided to the homebuilding operations’

Our financial services subsidiaries do not typically retain or service mortgages that we originate but sell the mortgages and related servicing rights to investors. 

Corporate and unallocated primarily represents operations at our headquarters in New Jersey. This includes our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, 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 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 (loss) 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 corporate general and administrative expenses. 

Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent stand-alone entity during the periods presented.

Financial information relating to our reportable segments are as follows:  

Year Ended October 31,

9 unchanged sentences

1,217,086  

285,658  

232,730  

220,082  

903,178  

744,197  

629,344  

641,219  

472,889  

425,516  

Total homebuilding

11 unchanged sentences

$ 2,343,901  

Income (loss) before income taxes:

$ 22,922  

$ 30,371  

$ 20,954  

61,567  

34,570  

14,327  

18,407  

Income before income taxes:

$ 177,406  

17 unchanged sentences

( 166,705 )  

Income (loss) before income taxes

$ 189,861  

$ 55,403  

( 1 ) Corporate and unallocated for the year ended October 31, 2021 included corporate general and administrative costs of $ 106.7  million, interest expense of $ 57.1  million (a component of Other interest on our Consolidated Statements of Operations), loss on extinguishment of debt of $ 3.7  million, and $ 0.8  million of other income and expenses.

Corporate and unallocated for the year ended October 31, 2020 included corporate general and administrative costs of $ 80.5  million, interest expense of $ 61.9 million (a component of Other interest on our Consolidated Statements of Operations), gain on extinguishment of debt of $ 13.3  million, and $ 3.3  million of other income and expenses, along with the adjustment to our insurance reserves.

Corporate and unallocated for the year ended October 31, 2019 included corporate general and administrative costs of $ 66.4  million, interest expense of $ 55.5  million (a component of Other interest on our Consolidated Statements of Operations), loss on extinguishment of debt of $ 42.4  million and $ 9.0  million of other income and expenses primarily related to interest income and gain on the sale of our former corporate headquarters building, along with the adjustment to our insurance reserves.

(In thousands)

$ 133,390  

$ 107,748  

273,073  

Income before income taxes

$ 319,753  

1 unchanged sentence

$ 55,403  

( 1 ) Corporate and unallocated for the year ended October 31, 2022 included corporate general and administrative expenses of $ 102.6 million, interest expense of $ 28.6 million (a component of Other interest in our Consolidated Statements of Operations), loss on extinguishment of debt of $ 6.8 million and $ 6.5  million of other expenses.

Corporate and unallocated for the year ended October 31, 2021 included corporate general and administrative expenses of $ 106.7  million, interest expense of $ 57.1  million, loss on extinguishment of debt of $ 3.7 million and $ 0.8  million of other income.

Corporate and unallocated for the year ended October 31, 2020 included corporate general and administrative expenses of $ 80.5  million, interest expense of $ 61.9  million, gain on extinguishment of debt of $ 13.3  million and $ 3.3  million of other income.

(In thousands)

$ 530,884  

21 unchanged sentences

40,563  

66,234  

Total homebuilding

17 unchanged sentences

60,120  

28,899  

29,898  

27,731  

26,130  

30,222  

23,051  

Total homebuilding

6 unchanged sentences

61,917  

Financial services interest expense (1)

Financial services interest expense (income) (1)

( 213 )  

4 unchanged sentences

$ 178,096  

Financial services interest expenses are included in the Financial services lines on the Consolidated Statements of Operations in the respective revenues and expenses sections.

Financial services interest expense (income) is included in Financial services revenue or expense in the Consolidated Statements of Operations.

Year Ended October 31,

1 unchanged sentence

Depreciation:

$ 1,542  

$ 1,459  

$ 1,605  

Total homebuilding

7 unchanged sentences

(In thousands)

Net additions to operating properties and equipment:

Net additions to property and equipment:

$ 1,848  

$ 1,271  

$ 1,069  

Total homebuilding

1 unchanged sentence

Corporate and unallocated

Total net additions to operating properties and equipment

Total net additions to property and equipment

$ 12,592  

3 unchanged sentences

(In thousands)

Equity in earnings (losses) from unconsolidated joint ventures:

$ 3,681  

$ 11,039  

$ 19,242  

Equity in earnings from unconsolidated joint ventures:

$ 12,674  

7 unchanged sentences

Income taxes (receivable) payable, including deferred benefits, consists of the following:

Year Ended October 31,

(In thousands)

6 unchanged sentences

$ ( 341,626 )  

$ 3,832  

$ ( 421,827 )

The (benefit) provision for income taxes is composed of the following charges:

2 unchanged sentences

Current income tax expense:

13,377  

Total current income tax expense:

1 unchanged sentence

60,064  

Total deferred income tax expense:

( 335,608 )  

1 unchanged sentence

( 90,070 )  

Total deferred income tax expense (benefit):

80,886  

( 425,678 )  

$ 94,263  

$ ( 417,956 )  

$ 4,475  

The current federal income tax expense is net of the use of federal net operating losses totaling $ 306.0 million (tax effected $ 64.3 million), $ 173.8 million (tax effected $ 36.5 million) and $ 183.0 million (tax effected $ 38.4 million) for the years ended 

1 unchanged sentence

The current state income tax expense is net of the use of state net operating losses totaling $ 80.1 million, $ 55.7 million and $ 72.5 million for the years ended October 31, 2022, 2021 and 2020 , respectively.

The total benefit for the year ended October 31, 2021 was $ 418.0 million.

The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets.

The total income tax expense of $ 4.5 million and $ 2.4 million for the years ended October 31, 2020 and 2019, respectively, was primarily related to state tax expense from income generated in states where we do not have net operating loss carryforwards to offset the current year income. In addition, the expense for the year ended October 31, 2020 was primarily related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes but not for GAAP purposes, creating a permanent difference.

Our federal net operating losses of $ 1.2 billion expire between 2029 and 2038, and $ 15.7  million have an indefinite carryforward period.

The total income tax expense for the year ended October 31, 2022 was $ 94.3 million.

The expense was primarily due to federal and state tax expense recorded as a result of our income before income taxes.

The federal tax expense is not paid in cash as it is offset by the use of our existing net operating loss (“NOL”) carryforwards.

The total income tax benefit for the year ended October 31, 2021 was $ 418.0 million.

The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets (“DTAs”).

The total income tax expense of $ 4.5 million for the year ended October 31, 2020 was primarily related to state tax expense from income generated in states where we do not have NOL carryforwards to offset the current year income. In addition, the expense for the year ended October 31, 2020 was primarily related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes but not for U.S.

GAAP purposes, creating a permanent difference.

Our federal net operating losses of $ 909.6 million expire between 2029 and 2038, and $ 15.7 million have an indefinite carryforward period.

Of our $ 2.3 billion of state NOLs, $ 411.4 million expire between 2023 through 2027;

1 unchanged sentence

$ 369.7 million expire between 2033 through 2037;

$ 169.8  million expire between 2037 through 2041;

and $ 53.9  million have an indefinite carryforward period.

On December 27, 2020, the Consolidated Appropriations Act (CAA) was enacted and signed into U.S.

law to provide additional economic relief in response to the ongoing coronavirus pandemic.

The CAA did not have a material impact on the Company’s consolidated financial conditions or results of operations as of and for the year ended October 31, 2021.

We will continue to monitor additional guidance issued by the U.S.

Treasury Department, the Internal Revenue Service and various state agencies.

$ 73.7 million expire between 2038 through 2042;

and $ 51.5 million have an indefinite carryforward period.

A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Future realization of deferred tax assets depends on the existence of sufficient taxable income of the appropriate character.

A valuation allowance is provided to offset DTAs if, based upon the available evidence, it is more likely than not that some or all of the DTAs will not be realized.

Future realization of DTAs depends on the existence of sufficient taxable income of the appropriate character.

The Company’s deferred tax assets as of October 31, 2021, were $ 425.7 million.

As of October 31, 2021, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our deferred federal and state income tax assets ("DTAs") was appropriate in accordance with ASC 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 we will realize a substantial portion of our DTAs and that a full valuation allowance is not necessary.

In analyzing these factors, overall the positive evidence, both objective and subjective, outweighed the negative evidence.

Based on this analysis, we determined that the current valuation allowance for deferred taxes of $ 101.6 million as of October 31, 2021, which partially reserves for our state DTAs, is appropriate.

Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize its DTAs except for a portion related to state DTAs.

As of October 31, 2020, we had a valuation allowance of $ 396.5 million of federal DTAs related to NOLs, as well as other matters, all of which was reversed during the year ended October 31, 2021.

We also had a valuation allowance of $ 181.0 million of DTAs related to state NOLs as of October 31, 2020, of which $ 78.1 million was reversed during the year ended October 31, 2021.

As of October 31, 2022, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC 740.

Overall, the positive evidence, both objective and subjective, outweighed the negative evidence.

The significant positive improvement in our operations in the last three years, coupled with our contract backlog of $ 1.3 billion as of October 31, 2022 provided positive evidence to support the conclusion that a full valuation allowance is not necessary for all of our DTAs.

As such, we used our go forward projections to estimate our usage of our existing federal and state DTAs.

Based on this analysis, we determined that the current valuation allowance for our DTAs of $ 95.7 million as of October 31, 2022 is appropriate.

As of October 31, 2022, on a tax basis, the Company had adjusted pre-tax income, which is income before income taxes excluding land-related charges and loss (gain) on extinguishment of debt, on a three -year cumulative basis.

GAAP basis, the Company had generated $ 205.6 million of cumulative pre-tax income in the three years ended October 31, 2021, with $ 189.9 million of that generated in the last twelve months.

We also generated $ 55.4 million of pre-tax income for our fiscal year ended October 31, 2020.

We believe this positive improvement over the last 24 months will continue given the strength of our contract backlog and current homebuilding market conditions.

GAAP basis, the Company had generated $ 565.0 million of cumulative income before income taxes in the three years ended October 31, 2022.

We believe these positive results will continue given the strength of our contract backlog and recent homebuilding market conditions.

(Positive Objective Evidence)

Over the last several years, we have completed a number of debt refinancing/restructuring transactions 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) 

On July 30, 2021 we paid off in full $ 111.2 million of 10.0% 2022 Notes and on August 2, 2021, we paid off in full $ 69.7 million of 10.5% 2024 Notes.

Over the last several years, we have completed a number of debt refinancing/restructuring transactions to extend our debt maturities, which will allow us to allocate cash to opportunistically grow our community count and potentially generate additional income.

(Positive Objective Evidence)

In July 2021 we paid off in full $ 111.2 million of 10.0% 2022 Notes and in August 2021, we paid off in full $ 69.7 million of 10.5% 2024 Notes.

Additionally, in April 2022 we redeemed $ 100.0 million in principal of our 7.75 % Senior Secured 1.125 Lien Notes due 2026.

These actions reduced our annual interest incurred by approximately $23 million, which will enhance our profitability going forward.

1 unchanged sentence

We incurred pre-tax losses during the housing market decline that began in 2007 and the slower than expected housing market recovery.

Given our current highly leveraged balance sheet, a downturn in the housing market, would be significantly more damaging to the Company than to other better capitalized homebuilders and make it very difficult for the Company to avoid future losses, given our high interest burden.

(Negative Objective Evidence)

We exited several geographic markets over the last few years that have historically had losses.

Given our improved but still highly leveraged Consolidated Balance Sheet, another sustained downturn in the housing market, would be significantly more damaging to the Company than to other better capitalized homebuilders and make it very difficult for us to avoid future losses, given our high interest expenses.

(Negative Objective Evidence) 

We exited several geographic markets over the last few years that have historically had pre-tax losses.

By exiting these underperforming markets, the Company has been able to redeploy capital to better performing markets, which over time should improve our profitability.

(Positive Subjective Evidence)

The historical cyclicality of the U.S.

housing market, a more restrictive mortgage lending environment compared to before the housing downturn of 2007 - 2009, the uncertainty of the overall U.S.

economy and government policies and consumer confidence, and impacts of the COVID- 19 pandemic, all or any of which could continue to hamper a sustained, stronger recovery of the housing market.

(Negative Subjective Evidence) 

The significant positive improvement in our operations in the last 24 months, which further accelerated in the fourth quarter ended October 31, 2021, coupled with our contract backlog of $ 1.6 billion as of October 31, 2021 provided positive evidence to support the conclusion that a full valuation allowance is not necessary for all of our DTAs. As such, we used our go forward projections to estimate our usage of our existing federal and state DTAs. From that review, we concluded that we no longer needed any valuation allowance for our federal DTAs. However, with respect to our state DTAs, we concluded that a valuation allowance of $ 101.6 million was still necessary related to states that have shorter carryforward periods or from states where we have significantly reduced or eliminated our operations and thus are not able to project that we will fully utilize those DTAs.

As of October 31, 2020, we had a valuation allowance of $ 396.5 million of federal deferred tax assets related to NOLs, as well as other matters, all of which has been reversed as of October 31, 2021.

We also had a valuation allowance of $ 181.0 million of deferred tax assets related to state NOLs as of October 

31, 2020, of which $ 78.1 million was reversed in the second quarter of fiscal 2021 and $ 101.6 million remains at October 31, 2021.

The deferred tax assets and liabilities have been recognized in the Consolidated Balance Sheets as follows:

Year Ended October 31,

economy, government policies and consumer confidence, all could adversely impact the housing market.

(Negative Subjective Evidence)

Deferred tax assets and liabilities have been recognized on the Consolidated Balance Sheets as follows:

(In thousands)

Deferred tax assets:

Inventory impairment loss

Inventory impairments

$ 30,772  

3 unchanged sentences

13,746  

12,464  

Deferred income

Interest expense

Restricted stock bonus

Restricted stock units

Stock options

12 unchanged sentences

527,233  

Deferred tax liabilities:

Joint venture income

( 2,565 )  

Total deferred tax liabilities

( 2,565 )  

Valuation allowance

( 95,727 )  

Net deferred income taxes

Deferred tax assets, net

$ 344,793  

The effective tax rate varied from the statutory federal income tax rate.

The effective tax rate is affected by a number of factors, the most significant of which has been the valuation allowance related to our deferred tax assets. Due to the effects of these factors, our effective tax rates for 2021 , 

2020 and 2019 are not correlated to the amount of our income or loss before income taxes.

$ 425,678  

Our effective tax rate varied from the statutory federal income tax rate.

The effective tax rate is affected by a number of factors, the most significant of which has been the valuation allowance related to our DTAs. Due to the effects of these factors, our effective tax rates for 2022 , 

2021 and 2020 are not correlated to the amount of our income before income taxes.

The sources of these factors were as follows:

7 unchanged sentences

( 248.5 )  

( 83.3 )  

Tax contingencies

2 unchanged sentences

Adjustments to prior years’

( 2.0 )  

Effective tax rate

29.5 %  

( 220.1 )%  

ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

Income tax positions must meet a more-likely-than- not recognition threshold at the effective date to be recognized upon the adoption of ASC 740 - 10 and in subsequent periods.

This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

We recognize tax liabilities in accordance with ASC 740 - 10 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available.

Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate of the tax liabilities.

These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. 

The following is a tabular reconciliation of the total amount of unrecognized tax benefits for the year (in millions) excluding interest and penalties:

Year Ended October 31,  

Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate of tax liabilities.

These differences will be reflected as increases or decreases to income tax (benefit) provision in the period in which they are determined.

We recognize interest and penalties related to unrecognized tax benefits within income taxes in the Consolidated Statement of Operations. Accrued interest and penalties are included within "Income taxes payable" line on the Consolidated Balance Sheets. 

The following is a tabular reconciliation of the total amount of unrecognized tax benefits excluding interest and penalties:

(In millions)

Unrecognized tax benefit—November 1,

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Unrecognized tax benefit—October 31,

Related to the unrecognized tax benefits noted above, as of both October 

31, 2021 and 2020, we recognized a liability for interest and penalties of $0.3 million. For the years ended October 31, 2021 and 2020, we recognized $ 84 thousand and $ 60  thousand, respectively, of interest and penalties in net income tax benefit.

For the year ended October 

31, 2019, we recognized $ 32 thousand of interest and penalties in income tax expense.

It is likely that, within the next year, the amount of the Company's unrecognized tax benefits will decrease by $ 0.3 million, excluding penalties and interest. This reduction is expected primarily due to the expiration of the statutes of limitation.

Related to the unrecognized tax benefits noted above, as of October 31, 2022 and 2021, we recognized a liability for interest and penalties of $ 0.1 million and $0.3 million, respectively. For the years ended October 31, 2022, 2021 and 2020, we recognized $ 128 thousand, $ 84  thousand and $ 60 thousand, respectively, of interest and penalties in income taxes (benefits).

It is likely that, within the next 12 months, the amount of the Company's unrecognized tax benefits will decrease by $ 0.2 million, excluding interest and penalties. This reduction is expected primarily due to the expiration of certain statutes of limitation.

The portion of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate (excluding any related impact to the valuation allowance) is $ 0.2 million and $ 0.5 million for the years ended October 31, 2022 and 2021.

The recognition of unrecognized tax benefits could have an impact on the Company’s deferred tax assets.

The recognition of unrecognized tax benefits could have an impact on the Company’s DTAs.

The consolidated federal tax returns have been audited through October 31, 2021 and these years are closed.

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The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit, appeal, and in some cases, litigation process.

As each audit is concluded, adjustments, if any, are appropriately recorded in the period determined. To provide for potential exposures, tax reserves are recorded, if applicable, based on reasonable estimates of potential audit results. However, if the reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of operations. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2017 –

As each audit is concluded, adjustments, if any, are recorded in the period determined. To provide for potential exposures, tax reserves are recorded, if applicable, based on reasonable estimates of potential audit results. However, if the reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of operations. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2018 - 2021.

  Reduction of Inventory to Fair Value

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. For the year ended October 31, 2021, our discount rate used for the impairments recorded ranged from 18.3 % to 19.3 %, for the year ended October 31, 2020, our discount rate used for the impairments recorded was 17.3 %, and for the year ended October 31, 2019, our discount rates used for the impairments recorded ranged from 17.3 % to 18.3 %.

Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments. 

During the years ended October 31, 2021 and 2020 , we evaluated inventories of all 374 and 354 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.

We performed undiscounted future cash flow analyses for three of those communities (i.e., those with a projected operating loss or other impairment indicators) during the years ended October 31, 2021 and 2020 , with an aggregate carrying value of $ 11.5 million and $ 5.4 million, respectively.

As a result of our undiscounted future cash flow analyses, we performed discounted cash flow analyses for three of those communities for the fiscal year ended 

October 31, 2021 , resulting in aggregate impairment losses of $ 2.0 million.

During the year ended October 31, 2020, two communities that required discounted cash flow analyses were impaired, which resulted in recording aggregate impairment losses of $ 2.0 million.

The one community that did not require a discounted cash flow analysis to be performed during the year ended 

October 31, 2020 had an aggregate carrying value of $ 0.6 million and did not have undiscounted future cash flows that exceeded the carrying amount by less than 20 %.

The pre-impairment value in the table below represents the carrying value, net of prior period impairments, if any, at the time of recording the impairments.

Our aggregate impairment losses are included in the Consolidated Statement of Operations on the line entitled “Homebuilding:

Inventory impairment loss and land option write-offs”

and deducted from inventory.

We had 374 communities under development and held for future development or sale at both October 31, 2022 and 2021, and 354 communities under development and held for future development or sale at October 31, 2020, which we evaluated for impairment indicators.

We had an indicator of impairment on one community during the year ended October 31, 2022, with a carrying value of $ 10.6 million.

We performed an impairment analysis on the community which included increased land development costs from previous projections.

The increased land development costs, along with the recent downturn in the market, resulted in an impairment of $ 8.4 million for the year ended October 31, 2022.

We performed undiscounted future cash flow analyses for three communities (i.e., those with a projected operating loss or other impairment indicators) during the year ended October 31, 2021, with an aggregate carrying value of $ 11.5 million.

As a result of our undiscounted future cash flow analyses, we performed discounted cash flow analyses for all three of those communities, resulting in impairments of $ 2.0 million.

We performed undiscounted future cash flow analyses for three communities during the year ended October 31, 2020, with an aggregate carrying value of $ 5.4 million.

As a result of our undiscounted future cash flow analyses, we performed discounted cash flow analyses for two of those communities, resulting in impairments of $ 2.0 million.

The one community that did not require a discounted cash flow analysis to be performed during the year ended October 31, 2020 had an aggregate carrying value of $ 0.6 million and did not have undiscounted future cash flows that exceeded the carrying amount by less than 20 %.

Our discount rates used for all impairments recorded during fiscal 2021 and fiscal 2020 ranged from 

17.3 % to 19.3 %.

Our aggregate impairment charges are included within "Inventory impairments and land option write-offs" in the Consolidated Statement of Operations and deducted from inventory.

The following table represents impairments by segment for fiscal 2022 , 

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Year Ended October 31, 2021

$ 11.5  

(Dollars in millions)

Year Ended October 31, 2020

$ 17.5  

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

The Consolidated Statements of Operations line entitled “Homebuilding:

Inventory impairment loss and land option write-offs”

also includes write-offs of options and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not exercise options in various locations because the communities’

pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. The total aggregate write-offs related to these items were $ 1.6 million, $ 6.8 million and $ 3.6 million for the years ended October 31, 2021, 2020 and 2019 , respectively.

Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs. Historically, these recoveries have not been significant in comparison to the total costs written off.

Write-offs of options, engineering and capitalized interest costs are also recorded in "Inventory impairments and land option write-offs" when we redesign communities, abandon certain engineering costs or do not exercise options in various locations because the pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. The total aggregate write-offs related to these items were $ 5.7 million, $ 1.6 million and $ 6.8 million for the years ended October 31, 2022, 2021 and 2020 , respectively.

Occasionally, these write-offs are offset by recovered deposits, sometimes through legal action, which had been written off in a prior period as walk-away costs. Historically, these recoveries have not been significant in comparison to the total costs written off.

The following table represents write-offs of such costs by segment for fiscal 2022 , 

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Per Share Calculations

Basic earnings per share is computed by dividing net income (loss) (the “numerator”) by the weighted-average number of common shares outstanding, adjusted for nonvested shares of restricted stock (the “denominator”) for the period. 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. 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.   

The Company’s restricted common stock (“nonvested shares”) are considered participating securities.  

Basic and diluted earnings per share for the periods presented below were calculated as follows:

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(In thousands, except per share data)

Net earnings (loss) attributable to Hovnanian

$ 225,490  

$ 607,817  

undistributed earnings allocated to nonvested shares

$ 50,928  

preferred stock dividends

( 10,675 )  

Numerator for basic earnings (loss) per share

undistributed earnings allocated to participating securities

( 19,702 )  

( 57,676 )  

undistributed earnings allocated to nonvested shares

Numerator for basic earnings per share

$ 195,113  

undistributed earnings reallocated to nonvested shares

$ 550,141  

$ 46,276  

Numerator for diluted earnings (loss) per share

undistributed earnings allocated to participating securities

19,702  

57,676  

Denominator for basic earnings per share

undistributed earnings reallocated to participating securities

( 19,717 )  

( 58,687 )  

Numerator for diluted earnings per share

$ 195,098  

$ 549,130  

$ 46,276  

Denominator for basic earnings per share –

weighted average shares outstanding

Effect of dilutive securities:

Share-based payments

Stock-based payments

Denominator for diluted earnings per share –

weighted-average shares outstanding

Basic earnings (loss) per share

Basic earnings per share

$ 30.31  

$ 87.50  

Diluted earnings (loss) per share

$ 7.48  

Diluted earnings per share

$ 29.00  

Incremental shares attributed to nonvested stock and outstanding options to purchase common stock of 0.3 million for the year ended October 31, 2019, were excluded from the computation of diluted earnings per share because we had a net loss for the period, and any incremental shares would not be dilutive. 

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 25 thousand for the year ended October 31, 2021 and 0.2 million for each of the years ended October 31, 2020 and 2019, because to do so would have been anti-dilutive for the periods presented.

$ 85.86  

$ 7.03  

In addition, 26 thousand, 25 thousand and 0.2 million shares related to out-of-the money stock options, which could potentially dilute basic earnings per share in the future, were not included in the computation of diluted earnings per share for the years ended October 31, 2022, 2021 and 2020, respectively, because to do so would have been anti-dilutive for each period.

Capital Stock

Common Stock - Each share of Class A Common Stock entitles its holder to one vote per share, and each share of Class B Common Stock generally entitles its holder to ten votes per share.

Each share of Class A common stock entitles its holder to one vote per share, and each share of Class B common stock generally entitles its holder to ten votes per share.

The amount of any regular cash dividend payable on a share of Class A common stock will be an amount equal to 110 % of the corresponding regular cash dividend payable on a share of Class B common stock.

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On August 

4, 2008, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”), which was amended on January 11, 2018 and January 18, 2021, designed to preserve shareholder value and the value of certain tax assets primarily associated with net operating loss (NOL) carryforwards and built-in losses under Section 

4, 2008, the Board of Directors (the "Board") adopted a shareholder rights plan (the “Rights Plan”), which was amended on January 11, 2018 and January 18, 2021, designed to preserve shareholder value and the value of certain tax assets primarily associated with NOLs and built-in losses under Section 

382 of the Internal Revenue Code.

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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.

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, 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 approval of the Board's decision to adopt the Rights Plan may be terminated by the Board at any time, prior to the Rights being triggered.

The Rights Plan will continue in effect until August 

14, 2024, unless it expires earlier in accordance with its terms.

The approval of the Board of Directors’

decision to initially adopt the Rights Plan and the amendments thereto were approved by shareholders.

Our stockholders also 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 

The approval of the Board's decision to initially adopt the Rights Plan and the amendments thereto were approved by shareholders.

Our shareholders also 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.

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or (iii) create a new “public group”

(as defined in the applicable United States Treasury regulations).

(as defined in the applicable U.S.

Treasury regulations).

Transfers included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage ownership (direct or indirect) of common stock would exceed the 5 % thresholds discussed above, or to persons whose direct or indirect ownership of common stock would by attribution cause another person (or public group) to exceed such threshold.

On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 0.2 million shares of Class A Common Stock. There were no shares purchased during the year ended October 31, 2021 . As of October 31, 2021 , the maximum number of shares of Class A Common Stock that may yet be purchased under this program is 22 thousand.

On July 3, 2001, the Board authorized a stock repurchase program to purchase up to 0.2 million shares of Class A common stock. On September 1, 2022, the Board terminated our prior repurchase program and authorized a new program for the repurchase of up to $ 50.0 million of our Class A common stock.

Under the new repurchase program, repurchases may be made from time to time in open market transactions, in privately negotiated transactions or otherwise.

The timing and the actual dollar amount repurchased will depend on a variety of factors, including legal requirements, price, future tax implications and economic and market conditions.

The repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date.

As of October 31, 2022, $ 37.8  million of our Class A common stock is available to repurchase under the stock repurchase program.

On October 31, 2020, in connection with the issuance of the 7.75 % Senior Secured 1.25 Lien Notes due 2026, we issued and sold an aggregate of 178,427 shares of Class A common stock, par value $ 0.01 per share (and associated Preferred Stock Purchase Rights), to the purchasers of such Notes for an aggregate purchase price of $ 1,784.27 .

The issuance was exempt from registration under Section 4 (a)( 2 ) of the Securities Act of 1933.

Preferred Stock - On July 

Preferred Stock

On July 

12, 2005, we issued 5,600 shares of 7.625 % Series A preferred stock, with a liquidation preference of $ 25,000 per share.

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The depositary shares are listed on the NASDAQ Global Market under the symbol “HOVNP.”

In fiscal 2021 , 

2020 and 2019 , we did not pay any dividends on the Series A Preferred Stock due to covenant restrictions in our debt instruments.

Retirement Plan - We have established a tax-qualified, defined contribution savings and investment retirement plan (a 401 (k) plan). All associates are eligible to participate in the retirement plan, and employer contributions are based on a percentage of associate contributions and our operating results. Plan costs charged to operations were $ 7.0  million, $ 7.4  million and $ 7.3  million for the years ended October 31, 2021, 2020 and 2019 , respectively.

There were no stock option grants during the years ended October 31, 2021 or 

 The fair value of option awards is established at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the year ended October 31, 2019:

risk free interest rate of 

dividend yield of zero;

historical volatility factor of the expected market price of our common stock of 

a weighted-average expected life of the option of 7.98 years;

and an estimated forfeiture rate of 7.84 %. 

For the years ended October 31, 2021, 2020 and 2019 , total stock-based compensation expense was $ 7.7 million ($ 5.2  million post tax) , $ 2.8  million, ($ 2.6 million post tax) and $ 0.7 million, respectively.

Included in this total stock-based compensation expense was expense from stock options of $ 0.2 million, $ 0.4  million, and $ 0.8  million for the years ended October 31, 2021, 2020 and 2019 , respectively.

The total stock-based compensation expense for the years ended October 31, 2020 and 2019 includes income of $ 2.4 million and $ 2.6  million, respectively, from previously recognized expense of certain time and performance based restricted stock grants for which the performance metrics were not or are no longer expected to be satisfied. 

We have a stock incentive plan for certain officers and key employees and directors.

Beginning in fiscal 2020, restricted share units are granted by a committee appointed by the Board of Directors or its delegate in accordance with the stock incentive plan.

At the time of our annual stock grant in the third quarter of fiscal years 2021 and 2020,  each of the five  of our existing non-employee directors of the Company were granted a number of shares of restricted stock units subject to a two -year post-vesting holding period, based on the fair market value on the date of grant.

Prior to fiscal 2020, options were granted by a committee appointed by the Board of Directors or its delegate in accordance with the stock incentive plan.

The exercise price of all stock options must be at least equal to the fair market value of the underlying shares on the date of the grant. Stock options granted to officers and associates generally vest in four equal installments on the second, third, fourth and fifth anniversaries of the date of the grant.

All options expire 10 years after the date of the grant.

In fiscal 2022 we paid dividends of $ 10.7  million on the Series A preferred stock.

In fiscal 2021 and 2020 , we did not pay any dividends on the Series A preferred stock due to covenant restrictions in our debt instruments.

Retirement Plan

We have established a tax-qualified, defined contribution savings and investment retirement plan (a 401 (k) plan). All associates are eligible to participate in the retirement plan, and employer contributions are based on a percentage of associate contributions and our operating results.

401 (k) plan expenses were $ 8.3  million, $ 7.0 million and $ 7.4 million for the years ended October 31, 2022, 2021 and 2020 , respectively.

Treasury Stock

During the year ended October 31, 2022, we repurchased 312,471 shares under the new stock repurchase program, with a market value of $ 12.2  million, or $ 39.12 per share, which were added to "Treasury stock" on our Consolidated Balance Sheets as of October 

There were no shares repurchased during the years ended October 31, 2021 or 2020.

Stock-Based Compensation Plans

We have stock incentive plans for certain officers, key employees and directors that are approved by a committee appointed by the Board or its delegate.

As of October 31, 2022, we had 

0.6 million shares authorized and remaining for future issuance under our stock incentive plans.

Based on the terms of our stock incentive plans, awards that are forfeited become available to us for future grants.

Stock Options

Prior to fiscal 2020, stock options were granted.

There have been no stock option grants during fiscal years 2022, 2021 or 2020.

The exercise price of all stock options is at least equal to the fair market value of an underlying share of our Class A common stock on the date of the grant.

The fair value of each stock option is estimated using the Black-Scholes option-pricing model.

Stock options granted to officers and associates generally vest in four equal installments on the second, third, fourth and fifth anniversaries of the date of the grant.

Non-employee directors’

stock options and restricted stock units vest in three equal installments on the first, second and third anniversaries of the date of the grant.

Stock option transactions are summarized as follows:

Weighted-Average

stock options vest in three equal installments on the first, second and third anniversaries of the date of the grant.

All stock options expire on the tenth anniversary from the date of grant.

The following table summarizes stock option activity at October 31, 2022 :

Weighted-Average

Exercise Price

Options outstanding at beginning of period

289,391  

$ 47.02  

331,481  

$ 53.93  

278,569  

$ 73.76  

110,975  

$ 9.44  

77,607  

$ 35.30  

$ 14.80  

$ 26.24  

$ 53.96  

$ 48.03  

35,530  

$ 115.28  

56,025  

$ 64.41  

Options outstanding at end of period

Stock options outstanding at beginning of period

206,234  

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$ 71.97  

Options exercisable at end of period

Stock options outstanding at end of period

166,559  

$ 48.02  

Stock options exercisable at end of period

127,780  

Exercise prices for options outstanding at October 31, 2021 

ranged from $ 7.85 to $ 157.00 . The total intrinsic value of options exercised during fiscal 2021  was $ 4.8 million.

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

There were no options exercised in fiscal 2020 or fiscal 

The weighted-average fair value of grants made in fiscal 2019  was $ 4.46  per share.

Based on the fair value at the time they were granted, the weighted-average fair value of options vested in fiscal 2021, 2020 and 2019  was $ 8.82 , $ 25.34 and $ 36.07  per share, respectively.

The following table summarizes the exercise price range and related number of options outstanding at October 31, 2021 :

The total intrinsic value of stock options exercised during fiscal 2022 and 2021  was $ 0.2 million and $ 4.8 million, respectively.

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price.

There were no stock options exercised in fiscal 2020.

Based on the fair value at the time of grant, the per share weighted-average fair value of stock options vested in fiscal 2022, 2021 and 2020 was $ 16.46 , $ 8.82 and $ 25.34 , respectively.

The following table summarizes the exercise price range and related number of outstanding stock options at October 31, 2022 :

Range of Exercise Prices

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$ 66.75  

$ 71.60  

$110.25 –

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$ 48.02  

The following table summarizes the exercise price range and related number of exercisable options at October 31, 2021 :

The following table summarizes the exercise price range and related number of exercisable stock options at October 31, 2022 :

Range of Exercise Prices

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$ 66.75  

$ 71.60  

$110.25 –

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$ 59.03  

Officers and key associates who are eligible to receive equity grants are granted shares of restricted stock units.

Shares underlying restricted stock units granted to officers and associates generally vest in four equal installments on the anniversaries of the grant date. Prior to fiscal 2020, officers and key associates who were eligible to receive equity grants could elect to receive either a stated number of stock options, or a reduced number of shares of restricted stock units, or a combination thereof.

Shares underlying restricted stock units granted to officers and associates generally vest in four equal installments on the second, third, fourth and fifth anniversaries of the grant date. Participants aged 60 years or older, or aged 58 with 15  years of service, are eligible to vest in their equity awards on an accelerated basis on their retirement (which in the case of the restricted stock units only applies to a retirement that is at least one year after the date of grant).

During the years ended October 31, 2021, 2020 and 2019 , we granted 25,499 (including 8,199 units to certain of our non-employee directors), 142,231  (including 36,731  units to certain of our non-employee directors), and 107,650  (including 103,612  units to certain of our non-employee directors) restricted stock units, respectively, and also issued 13,732 , 11,503 and 8,380  units, relating to awards granted in prior fiscal years, respectively.

During the years ended 

October 31, 2021, 2020 and 2019 , 4,875 , 5,567  and 656  restricted stock units were forfeited, respectively.

For the years ended October 31, 2021 and 

2020, total compensation cost recognized in the Consolidated Statement of Operations for the annual restricted stock unit grants, market share unit grants and performance share units (both discussed below), and the stock portion of the long-term incentive plan (also discussed below) was $ 7.4  million and $ 2.4  million, respectively.

For the year ended October 31, 2019, total compensation cost recognized in the Consolidated Statement of Operations for the annual restricted stock unit grants, market share unit grants (discussed below), and the stock portion of the long-term incentive plan (also discussed below) was income of $ 0.2  million. In addition to nonvested share awards summarized in the following tables, there were 76,311 , 60,446  and 33,643  vested share awards at October 31, 2021, 2020  and 2019, respectively, which were deferred and not yet issued. 

A summary of the Company’s nonvested Time-Based share awards for the years ended October 

31, 2021 , 

2020 , and 2019 are as follows:

Weighted-Average Grant Date

RSUs and Performance Units

RSUs are measured based upon the fair value of a share of our Class A common stock on the date of grant.

Shares underlying RSUs granted to officers and associates generally vest in four equal installments on the first, second, third, and fourth anniversaries of the grant date. During fiscal year 

2022, each of our six existing non-employee directors were granted RSUs subject to a two -year post-vesting holding period.

Generally, participants aged 60 years or older, or aged 58 with 15  years of service, are eligible to vest in their awards on an accelerated basis upon their retirement (which in the case of RSUs granted prior to 2019 only applies to a retirement that is at least one year after the date of grant).

Grants of market share units ("MSUs"), performance share units ("PSUs") and the stock portion of the long-term incentive plans ("LTIPs") (each discussed below), are also awarded as compensation.

The following table summarizes nonvested time-based RSU and MSU share activity as of October 

Weighted-Average Grant Date

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$ 39.49  

142,231  

$ 19.48  

164,050  

$ 7.66  

104,253  

$ 24.33  

62,309  

$ 17.04  

21,329  

$ 45.52  

$ 26.84  

22,267  

$ 57.81  

17,106  

$ 86.96  

Nonvested time-based at end of period

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$ 33.43  

288,865  

$ 19.88  

231,210  

$ 23.01  

A summary of the Company’s nonvested Performance-Based share awards for the years ended October 

31, 2021 , 

2020 , and 2019 are as follows:

Weighted-Average Grant Date

The following table summarizes nonvested performance-based LTIP, PSU and MSU share activity as of 

October 

Weighted-Average Grant Date

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$ 73.50  

183,825  

$ 15.11  

56,400  

$ 10.10  

$ 68.52  

$ 57.22  

$ 42.69  

$ 67.00  

21,385  

$ 70.44  

12,836  

$ 93.31  

Nonvested performance-based at end of period

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$ 41.14  

294,472  

$ 24.64  

136,316  

$ 44.22  

Included in the above table are awards for the share portion of long-term incentive plans (“LTIPs”), and other share awards for certain officers and associates, which are performance based plans.

These amounts include adjustments for performance outcomes where the difference between target at the time of grant and the final share awards based on achievement of the performance metrics are reflected through adjustments in the "Granted" line in the above table at the time the performance is finalized. LTIP shares vest in the third, fourth and fifth fiscal years after grant date, subject to certain performance metrics. 

Included in the tables above are 186,136  target Performance-based Performance Share Units (“PSUs”), which were granted to certain officers in fiscal years 2021 and 2020.

The PSUs vest in four equal installments commencing on the second, third, fourth and fifth anniversary of the grant date, except that no portion of the award will vest unless the Committee determines that the Company achieved specified revenue goals. 

The fair value of the PSU grants is determined using the Finnerty model, which uses an arithmetic average strike, put option.

( 1 ) Includes 49,484 time-based vested share awards and 116,785 performance-based vested share awards which were deferred and not yet issued at October 31, 2022.

LTIP awards include share adjustments for the difference between target performance metrics at the time of grant and the final performance outcome. Share adjustments are reflected in the “Granted”

line above at the time the performance is finalized.

For LTIP awards granted prior to fiscal 2022, shares vest on the third, fourth and fifth anniversary of the grant date, subject to performance achievement.

The 2022 LTIP is subject to cliff vesting at the end of the performance period.

PSUs granted in fiscal 2020 vest in four equal installments commencing on the second, third, fourth and fifth anniversary of the grant date, except that no portion of the award will vest unless the Board determines that the Company achieved specified earnings goals.

Fiscal 2022 and 2021 PSUs are subject to cliff vesting on the third year after the grant date.

The fair value of PSUs is determined using the Finnerty model, which uses an arithmetic average strike, put option.

The strike price is based on the predetermined period average value of the underlying asset.

The following assumptions were used for 2021  PSU grants:

historical volatility factor of the expected market price of our common stock of 

112.44 % for the two -year period ending on the valuation date, and the concluded risk free rate assumption of 

0.16 % equals the continuously compounded two -year yield, and dividend yield of zero. The following assumptions were used for 2020 PSU grants:

historical volatility factor of the expected market price of our common stock of 

108.15 % for the two -year period ending on the valuation date, and the concluded risk free rate assumption of 

0.19 % equals the continuously compounded two -year yield, and dividend yield of zero.

Also included in the tables above are 55,050  target Time-based and 67,025  Performance-based Market Share Units (“MSUs”) of which 42,300  of Time-based and 56,400 Performance-based were granted to certain officers in fiscal 2019.

The following assumptions were used for the 2022  PSU grants:

historical volatility factor of 78.82 % based on the expected market price of our Class A common stock for the two -year period ending on the valuation date, concluded stock price assumption of 3.04 % equal to the continuously compounded two -year yield and a dividend yield of zero .

There were no MSUs granted in fiscal 2022, 2021 and 2020.

MSU grants from fiscal years 2015 through 2018 were reduced by 16,700 Time-based and 20,350 Performance-based MSUs in fiscal 2020, as certain performance conditions at measurement periods were not met and only a portion of the shares were vested, resulting in the reversal of $ 2.4  million of expense during the period.

Fifty percent of the MSUs will vest in four equal annual installments, commencing on the second anniversary of the grant date subject to stock price performance conditions, pursuant to which the actual number of shares issuable with respect to vested MSUs may range from 0 % to 200 % of the target number of shares covered by the MSU awards, generally depending on the growth in the 60 -day average trading price of the Company’s shares during the period between the grant date and the relevant vesting dates.

The remaining fifty percent of the MSUs are also subject to financial performance conditions in addition to the stock price performance conditions applicable to all MSUs.

These additional performance-based MSUs vest in four equal installments with the first installment vesting on January 1, three years after the MSU grant date (for example, January 1, 2022 for the 2019 MSU grant) and the remaining annual installments commencing on the third anniversary of the grant date, except that no portion of the award will vest unless the Committee determines that the Company achieved ( 1 ) for the 2019 MSU grants, specified community count improvement (as to 25% of the MSU amount) and pre-tax profit (as to 25% of the MSU amount) goals comparing the fiscal year of the grant date and the second fiscal year following the grant date (fiscal 2020 compared to fiscal 2019 ), ( 2 ) for the 2017 and 2016 MSU grants, specified gross margin improvement (as to 25% of the MSU amount) and debt reduction (as to 25% of the MSU amount) goals comparing the fiscal year of the grant date and the second fiscal year following the grant date (fiscal 2020 compared to fiscal 2018 ).

The fair value of the MSU grants is determined using the Monte-Carlo simulation model, which simulates a range of possible future stock prices and estimates the probabilities of the potential payouts.

This model uses the average closing trading price of the Company’s Class A Common Stock on the New York Stock Exchange over the 60 -calendar day period ending on the grant date.

This model also incorporates the following ranges of assumptions:

The expected volatility is based on our stock’s historical volatility commensurate with the life 2 years, 2.6 years, 3 years, 4 years and 5 years.

The risk-free interest rate is based on the U.S.

Treasury rate assumption ranging from 2 - 5 years.

The expected dividend yield is not applicable since we do not currently pay dividends.

The following assumptions were used for 2019 MSU grants:

historical volatility factor of the expected market price of our common stock of 

62.51 %, 59.60 %, 57.04 %, 60.03 % and 56.86 % for the 2 year, 2.6 year, 3 year, 4 year and 5 year vesting tranches, respectively and the concluded risk free rate assumptions of 

1.80 % and 1.81 % equals the continuously compounded 2.55 year and 4 year yield, respectively and dividend yield of zero for all time periods.

Based on the terms of our equity compensation plans, awards that are forfeited become available to us for future grants under the plan.

As of October 31, 2021 , we had 0.3  

million shares authorized and remaining for future issuance under our equity compensation plans.

In addition, as of October 31, 2021 , there were $ 12.5  mi llion of total unrecognized compensation costs related to nonvested share-based compensation arrangements.

That cost is expected to be recognized over a weighted-average period of 1.8  years. 

The fair value of MSUs is determined using the Monte-Carlo simulation model.

The first 50 % of an MSU grant vests in four equal annual installments, commencing on the second anniversary from the date of grant, subject to stock price performance conditions, pursuant to which the actual number of shares issuable with respect to vested MSUs may range from 0 % to 200 % of the target number of shares under each MSU award, generally depending on the growth in the 60 -day average trading price of the Company’s shares during the period between the grant date and the relevant vesting dates.

The remaining 50 % of an MSU grant is subject to financial performance conditions in addition to the stock price performance conditions.

These remaining MSUs vest in four equal installments with the first installment vesting on the third January 1st after the grant date, and the remaining annual installments commencing on the third anniversary from the date of grant, except that no portion of the award will vest unless the Board determines the Company achieved certain specified performance goals.

During the year-ended October 31, 2022 we issued 60,751 RSUs, 60,130 MSUs and 17,023 LTIP shares.

As of October 31, 2022 , there was $ 15.4 million of unrecognized stock-based compensation, which is primarily comprised of unrecognized expenses for RSUs, MSUs, PSUs, and the stock portion of LTIPs.

The cost is expected to be recognized over a weighted-average period of 1.6  years. 

Stock-Based Compensation Expense

For the years ended October 31, 2022, 2021 and 2020, stock-based compensation expense was $ 10.3  million ($ 7.3  million post tax), $ 7.7 million ($ 5.2 million post tax) and $ 2.8 million ($ 2.6 million post tax), respectively.

Stock-based compensation for RSUs, MSUs, PSUs, and the stock portion of LTIPs was $ 10.2  million, $ 7.4  million and $ 2.4  million for fiscal 2022, 2021 and 2020, respectively. In addition, stock option compensation expense was $ 0.1  million, $ 0.2 million and $ 0.4 million for the years ended October 31, 2022, 2021 and 2020, respectively.

Stock-based compensation expense for the year ended October 31, 2020 included income of $ 2.4 million from previously recognized expense for certain time and performance-based awards where the performance metrics were not  satisfied.

Warranty Costs

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We absorb the liability associated with their work on our homes as part of our overall general liability insurance at no additional cost to us because our existing general liability and construction defect insurance policy and related reserves for amounts under our deductible covers construction defects regardless of whether we or our subcontractors are responsible for the defect.

For the fiscal years ended October 31, 2021 and 2020 , we received $ 5.5  million and $ 4.4  million, respectively, from subcontractors related to the owner controlled insurance program, which we accounted for as reductions to inventory.

We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible.

We accrue an estimate for these warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer. Additions and charges in the warranty reserve and general liability reserve for the fiscal years ended October 31, 2021 and 2020 were as follows:

For the years ended October 31, 2022 and 2021 , we received $ 6.0  million and $ 5.5 million, respectively, from subcontractors related to the owner controlled-insurance program, which we accounted for as reductions to inventory.

Additions and charges in the warranty reserve and general liability reserve for the years ended October 31, 2022 and 2021 were as follows:

Year Ended October 31,

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$ 86,417  

Additions –

Selling, general and administrative

10,419  

Additions –

Cost of sales

13,410  

10,273  

Charges incurred during the period

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Changes to pre-existing reserves

( 988 )  

Balance, end of period

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$ 94,916  

Warranty accruals are based upon historical experience. We engage a 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.

As a result of reductions in our construction defect claims in recent years and the impact of these reductions on the actuarial analysis on our total reserves, we recorded reductions in our construction defect reserves of $ 1.6  million in the fourth quarter of fiscal 2021 and $ 2.5  million in the fourth quarter of fiscal 2020 .

These reductions are reflected in the changes to pre-existing reserves in the table above.

Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $ 0.1 million and less than $ 0.1  million for the fiscal years ended October 31, 2021 and 2020 , respectively, for prior year deliveries.

Warranty accruals are based upon historical experience.

In fiscal 

2022 , we recorded an increase of $ 4.3 million to our construction defect reserves related to specific claims.

These changes are reflected in the changes to pre-existing reserves in the table above.

Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $ 0.2  million and $ 0.1  million for the years ended October 31, 2022 and 2021 , respectively, for prior year deliveries.

Transactions with Related Parties

During the years ended October 31, 2021, 2020 and 2019 , 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 totaling $ 0.6  million, $ 0.7  million and $ 0.9  million, respectively.

During the years ended October 31, 2022, 2021 and 2020 , an engineering firm owned by Tavit Najarian, a relative of Ara K.

Hovnanian, our Chairman of the Board and our Chief Executive Officer, provided services to the Company totaling $ 1.1  million, $ 0.6  million and $ 0.7  million, respectively.

Neither the Company nor Mr.

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Alexander Hovnanian, the son of Ara K.

Hovnanian, our Chairman of the Board of Directors and our Chief Executive Officer, is employed by the Company.

Alexander Hovnanian holds the position of Executive Vice President - National Homebuilding Operations.

Hovnanian, is employed by the Company.

Alexander Hovnanian holds the position of Executive Vice President - National Homebuilding Operations. For fiscal 2022, he received cash compensation of approximately $1,684,000 and equity awards with an aggregate grant date fair value of approximately $ 531,000 .

For fiscal 2021, he received cash compensation of approximately $ 989,000 and equity awards with an aggregate grant date fair value of approximately $ 523,000 .

For fiscal 2020 and 2019 , his total compensation was approximately $ 1,152,000  and $ 609,000 , respectively.

For fiscal 2020, his total compensation was approximately $ 1,152,000 .

Carson Sorsby, the son of J.

Larry Sorsby one of our Board directors and our Chief Financial Officer, is employed by the Company.

Carson Sorsby holds the position of Account Manager in the Company’s mortgage subsidiary.

His compensation is commensurate with that of similarly situated employees in his position.

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.

The significant majority of our litigation matters are related to construction defect claims.

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.

The significant majority of our litigation matters are related to construction defect claims.

Our estimated losses from construction defect litigation matters, if any, are included in our construction defect reserves.

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 a site may vary greatly according to the community site, for example, due to the 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;

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 a site may vary greatly according to the community site, for example, due to the 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 or take corrective action, 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.

We anticipate that increasingly stringent requirements will continue to be imposed on developers and homebuilders in the future.

In addition, some of these laws and regulations that significantly affect how certain properties may be developed are contentious, attract intense political attention, and may be subject to 

significant changes over time.

In addition, some of these laws and regulations that significantly affect how certain properties may be developed are contentious, attract intense political attention, and may be subject to significant changes over time.

For example, regulations governing wetlands permitting under the federal Clean Water Act have been the subject of extensive rulemakings for many years, resulting in several major joint rulemakings by the EPA and the U.S.

Army Corps of Engineers that have expanded and contracted the scope of wetlands subject to regulation;

Army Corps of Engineers that have expanded and contracted the scope of wetlands subject to regulation;

and such rulemakings have been the subject of many legal challenges, some of which remain pending.

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.

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 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 responded to the information requests.

We responded to the EPA’s request. In August 

2013, we were notified that the EPA considers us a 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.

The EPA requested additional information in April 2014 and again in March 2017 and the Company responded to the information requests.

On May 2, 2018 the EPA sent a letter to the Company entity demanding reimbursement for 100 % of the EPA’s costs to clean-up the site in the amount of $ 2.7 million.

The Company responded to the EPA’s demand letter on June 15, 2018 setting forth the Company’s defenses and expressing its willingness to enter into settlement negotiations.

Two other PRPs identified by the EPA are now also in negotiations with the EPA and in preliminary negotiations with the Company regarding the site.

In the course of negotiations, the EPA informed the Company that the New Jersey Department of Environmental Protection ("NJDEP") has also incurred costs remediating part of the site.

The EPA has since requested that the three  PRPs present a joint settlement offer to the EPA.

The Company and the other two PRPs are parties to a series of agreements tolling the statute of limitations on the EPA's claims for reimbursement, most recently extending the date until April 20, 2022.

We believe that we have adequate reserves for this matter.

In 2015, the condominium association of the Four Seasons at Great Notch condominium community (the “Great Notch Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Passaic County (the “Court”) alleging various construction defects, design defects, and geotechnical issues relating to the community. The operative complaint (“Complaint”) asserts claims against Hovnanian Enterprises, Inc.

The Company responded to the EPA’s demand letter on June 15, 2018 setting forth the Company’s defenses and expressing its willingness to enter into settlement negotiations.

Two other PRPs identified by the EPA began negotiations with the EPA and preliminary negotiations with the Company regarding the site.

The EPA then requested that the three  PRPs present a joint settlement offer to the EPA.

In June 2022, the Company and one of the other PRPs reached an agreement with the EPA for a total settlement of $ 1.5 million (plus accrued interest), with the Company contributing approximately $ 0.8 million to the settlement, slightly below the amount we had previously accrued.

The consent decree entered into by the settling parties was submitted to the United States District Court for the District of New Jersey (where the EPA has filed a complaint seeking reimbursement of response costs) on June 14, 2022 and was signed and filed by such Court on August 9, 2022.

In 2015, the condominium association of the Four Seasons at Great Notch condominium community (the “Great Notch Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Passaic County (the “Court”) alleging various construction defects, design defects, and geotechnical issues relating to the community. The operative complaint (“Complaint”) asserts claims against Hovnanian Enterprises, Inc.

and several of its affiliates, including K.

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Hovnanian Companies, LLC.

The Complaint also asserts claims against various other design professionals and contractors. The Great Notch Plaintiff has also filed a motion, which remains pending, to permit it to pursue a claim to pierce the corporate veil of K.

Hovnanian at Great Notch, LLC to hold its alleged parent entities liable for any damages awarded against it. To date, the Hovnanian-affiliated defendants have reached a partial settlement with the Great Notch Plaintiff as to a portion of the Great Notch Plaintiff’s claims against them for an amount immaterial to the Company. On its remaining claims against the Hovnanian-affiliated defendants, the Great Notch Plaintiff has asserted damages of approximately $ 119.5 million, which amount is potentially subject to treble damages pursuant to the Great Notch Plaintiff’s claim under the New Jersey Consumer Fraud Act. The trial is currently scheduled for March 7, 2022.

Mediation was held in September 2020 with further mediation sessions anticipated in the future. The Hovnanian-affiliated defendants intend to defend these claims vigorously.

In December 2020, the NJDEP and the Administrator of the New Jersey Spill Compensation Fund (the “Spill Fund”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Union County against Hovnanian Enterprises, Inc.

in addition to other unrelated parties, in connection with contamination at Hickory Manor, a residential condominium development.

The Complaint also asserts claims against various other design professionals and contractors.

The Special Masters appointed by the Court to decide non-dispositive motions issued an opinion that (a) granted the Great Notch Plaintiff’s motion to permit it to assert a claim to pierce the corporate veil of K.

Hovnanian at Great Notch, LLC to hold its alleged parent entities liable for any damages awarded against it, and (b) further stated that the Great Notch Plaintiff is not permitted to pursue that claim until after any trial on the underlying liability claims.

To date, the Hovnanian-affiliated defendants have reached a partial settlement with the Great Notch Plaintiff as to a portion of the Great Notch Plaintiff’s claims against them for an amount immaterial to the Company. On its remaining claims against the Hovnanian-affiliated defendants, the Great Notch Plaintiff has asserted damages of approximately $ 119.5 million, which amount is potentially subject to treble damages pursuant to the Great Notch Plaintiff’s claim under the New Jersey Consumer Fraud Act. The trial is currently scheduled for April 17, 2023.

The Hovnanian-affiliated defendants intend to defend these claims vigorously.

In December 2020, the New Jersey Department of Environmental Protection ("NJDEP") and the Administrator of the New Jersey Spill Compensation Fund (the “Spill Fund”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Union County against Hovnanian Enterprises, Inc.

in addition to other unrelated parties, in connection with contamination at Hickory Manor, a residential condominium development.

Alleged predecessors of certain defendants had used the Hickory Manor property for decades for manufacturing purposes. In 1998, NJDEP confirmed that groundwater at this site was impacted from an off-site source.

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Subsequently, one of our affiliates was involved in redeveloping the property as a residential community.

The complaint asserts claims under the New Jersey Spill Act and other state law claims and alleges that the NJDEP and the Spill Fund have incurred over $ 5.3 million since 2009 to investigate vapor intrusion at the development and to install vapor mitigation systems.

The complaint asserts claims under the New Jersey Spill Act and other state law claims and alleges that the NJDEP and the Spill Fund have incurred over $ 5.3 million since 2009 to investigate vapor intrusion at the development and to install vapor mitigation systems.

Among other things, the complaint seeks recovery of the costs incurred, an order that defendants perform additional required remediation and disgorgement of profits on our affiliate’s sales of the units in the development.

No formal discovery has commenced. Hovnanian Enterprises, Inc.

intends to defend these claims vigorously.   

Discovery has commenced. Hovnanian Enterprises, Inc.

intends to defend these claims vigorously.

Variable Interest Entities

The Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes.

We enter into land and lot option purchase contracts to procure land or lots for the construction of homes.

Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms.

Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company's discretion. Under the requirements of ASC 

810, certain option purchase contracts may result in the creation of a variable interest in the entity (“VIE”) that owns the land parcel under option.

810, certain option purchase contracts may result in the creation of a VIE that owns the land parcel under option.

In compliance with ASC 

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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 during the fiscal years ended 

October 31, 2021 and 2020 , it was not the primary beneficiary of any VIEs from which it is purchasing land under option purchase contracts.

As a result of our analyses, we have concluded, the Company is not the primary beneficiary of any VIEs from which it is purchasing land under option purchase contracts.

We will continue to secure land and lots using options, some of which are with VIEs.

Including deposits on our unconsolidated VIEs, at October 31, 2021 , we had total cash deposits amounting to $ 100.1  million to purchase land and lots with a total purchase price of $ 1.5  billion.

Including deposits on our unconsolidated VIEs, at October 31, 2022 , we had total cash deposits amounting to $ 180.8 million to purchase land and lots with a total purchase price of $ 1.9 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.

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During the first  quarter of fiscal 2020, we contributed eight  communities we owned, including four active communities, to a new joint venture for $ 29.8  million of net cash.

During the third quarter of fiscal 2019, we contributed one community we owned to an existing unconsolidated joint venture, resulting in our receiving $ 15.9 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:

October 31, 2022

(Dollars in thousands)

(In thousands)

Cash and cash equivalents

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$ 615,221  

$ 1,972  

$ 611,833  

Liabilities and equity:

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$ 472,464  

$ 387,798  

Notes payable

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$ 615,221  

$ 611,833  

Debt to capitalization ratio

October 31, 2021

(Dollars in thousands)

(In thousands)

Cash and cash equivalents

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Debt to capitalization ratio

As of October 31, 2021 and 2020, we had advances outstanding of $ 2.2 million and payables outstanding of $ 1.1 million, respectively, to these unconsolidated joint ventures.

These amounts were included in the “Accounts payable and accrued liabilities”

balances in the tables above. On our Consolidated Balance Sheets, our “Investments in and advances to unconsolidated joint ventures”

As of October 31, 2022 and 2021, we had advances outstanding of $ 1.6 million and $ 2.2 million, respectively, to these unconsolidated joint ventures.

These amounts were included in “Accounts payable and accrued liabilities”

in the tables above. On our Consolidated Balance Sheets, our “Investments in and advances to unconsolidated joint ventures”

amounted to $ 74.9 million and $ 60.9 million at October 31, 2022 and 2021, respectively.

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For The Year Ended October 31, 2022

(Dollars in thousands)

(In thousands)

$ 351,767  

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For The Year Ended October 31, 2021

(Dollars in thousands)

$ 435,077  

(In thousands)

$ 347,898  

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$ 13,303  

$ 15,899  

Our share of net income

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For The Year Ended October 31, 2020

(Dollars in thousands)

(In thousands)

$ 435,077  

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$ 1,799  

$ 15,899  

Our share of net income

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“Income (loss) from unconsolidated joint ventures”

is reflected as a separate line in the accompanying Consolidated Statements of Operations and reflects our proportionate share of the income or loss of these unconsolidated homebuilding and land development joint ventures. The difference between our share of the income or loss from these unconsolidated joint ventures in the tables above compared to the Consolidated Statements of Operations is due primarily to the reclassification of the intercompany portion of management fee income from certain unconsolidated joint ventures and the deferral of income for lots purchased by us from certain unconsolidated joint ventures.

in the Consolidated Statements of Operations reflects our proportionate share of income or loss from these unconsolidated homebuilding and land development joint ventures. The difference between our share of the income or loss from these unconsolidated joint ventures in the tables above compared to the Consolidated Statements of Operations is due primarily to the reclassification of the intercompany portion of management fee income from certain unconsolidated joint ventures and the deferral of income for lots purchased by us from certain unconsolidated joint ventures.

The reason “Our share of net income”

is higher or lower than the “Joint venture net income”

shown in the tables above for the years ended October 31, 2021 and 2020, respectively, is because we have varying ownership percentages, ranging from 20 % to over 50% , in our 10 and 11 unconsolidated joint ventures for both periods, respectively.

shown in the tables above for the years ended October 31, 2022 and 2021, respectively, is because we have varying ownership percentages, ranging from 20 % to over 50% , in our seven and ten unconsolidated joint ventures for both periods, respectively.

Therefore, depending on mix, if the unconsolidated joint ventures in which we have higher sharing percentages are more profitable than our other unconsolidated joint ventures, that results in us having a higher overall percentage of income in the aggregate than would occur if all joint ventures had the same sharing percentage;

conversely, if the unconsolidated joint ventures in which we have lower sharing percentages are more profitable than our other unconsolidated joint ventures, that results in us having a lower overall percentage of income in the aggregate than would occur if all joint ventures had the same sharing percentage.

For the year ended October 31, 2022, "Our share of net income" was lower than the "Joint venture net income" due to increased income on two of our newer unconsolidated joint ventures during the year for which we currently recognize a lower profit-sharing percentage based on the joint venture agreements, a third unconsolidated joint venture which we recognize a lower profit-sharing percentage having higher profit in the current peri od, and a fourth unconsolidated joint venture that generated profit that we did not recognize due to the fact that we had previously written off our investment balance in the unconsolidated joint venture. 

For the year ended October 31, 2021, "Our share of net income" was lower than the "Joint venture net income" due to increased income on one of our newer unconsolidated joint ventures during the year for which we currently recognize no share percentage of the profit based on the joint venture agreement, and a second unconsolidated joint venture which we recognize a lower profit-sharing percentage having higher profit in the current period.

In addition, for the years ended October 31, 2021 and 2020, we had written off our investment in two of our unconsolidated joint ventures that are generating losses and therefore we currently do not recognize those losses.

Had we not fully written off our investment, our share of the net loss in these unconsolidated joint ventures would have been approximately 50 %, which would have reduced our overall share of net income across all of our unconsolidated joint ventures.

As a result, these unconsolidated joint ventures losses significantly reduce the profit when looking at all of our 10 and 11 unconsolidated joint ventures, respectively, in the aggregate, without having any impact on our share of net income or loss recorded in the applicable period.

In addition, for the year ended October 31, 2022, we had written off our investment in one of our unconsolidated joint ventures that was generating losses and therefore we currently do not recognize those losses.

For the year ended October 31, 2021, we had written off our investment in two of our unconsolidated joint ventures that were generating losses and therefore we did not recognize those losses.

Had we not fully written off our investment, our share of the net loss in this unconsolidated joint venture would have been approximately 50 %, which would have reduced our overall share of net income across all of our unconsolidated joint ventures.

As a result, these unconsolidated joint venture losses significantly reduce the profit when looking at all seven and ten of our unconsolidated joint ventures, respectively, in the aggregate, without having any impact on our share of net income or loss recorded in the applicable period.

To compensate us for the administrative services we provide as the manager of certain unconsolidated joint ventures, we receive a management fee based on a percentage of the applicable unconsolidated joint venture’s revenues.

These management fees, which totaled $ 11.6 million, $ 16.0 million and $ 16.9 million for the years ended October 31, 2021, 2020 and 2019, are recorded in “Homebuilding:

Selling, general and administrative”

on the Consolidated Statements of Operations.

These management fees, which totaled $ 12.5 million, $ 11.6 million and $ 16.0 million for the years ended October 31, 2022, 2021 and 2020, are recorded in “Selling, general and administrative”

homebuilding expenses in the Consolidated Statements of Operations.

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For some of our unconsolidated joint ventures, obtaining financing was challenging, therefore, some of our unconsolidated joint ventures are capitalized only with equity.

The total debt to capitalization ratio of all our unconsolidated joint ventures was 33 % as of October 31, 2021. 

Any unconsolidated joint venture financing is on a nonrecourse basis, with guarantees from us limited only to performance and completion of development, environmental warranties and indemnification, standard indemnification for fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing.

In some instances, the unconsolidated joint venture entity is considered a VIE under ASC 810 - 10 “Consolidation –

Overall”

due to the returns being capped to the equity holders;

In some instances, the unconsolidated joint venture entity is considered a VIE under ASC 810 due to the returns being capped to the equity holders;

however, in these instances, we have determined that we are not the primary beneficiary, and therefore we do not consolidate these entities. 

Fair Value of Financial Instruments

ASC 820, "Fair Value Measurements and Disclosures," provides a framework for measuring fair value, expands disclosures about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:

ASC 820, "Fair Value Measurements and Disclosures", provides a framework for measuring fair value and establishes a fair-value hierarchy which prioritizes the use of observable inputs when measuring fair value.

The fair value hierarchy can be summarized as follows:

                      Fair value determined based on quoted prices in active markets for identical assets.

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$ 150,952  

$ 104,350  

Interest rate lock commitments

1 unchanged sentence

$ 151,104  

( 1 )  The aggregate unpaid principal balance was $ 146.5 million and $ 100.4  million at October 31, 2021 and 2020 , respectively.

We elected the fair value option for our loans held for sale in accordance with ASC 825, “Financial Instruments,”

which permits us to measure financial instruments at fair value on a contract-by-contract basis.

Fair value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage loans with similar characteristics.

( 1 )  The aggregate unpaid principal balance was $ 110.2 million and $ 146.5 million at October 31, 2022 and 2021 , respectively.

Fair value of mortgage loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage loans with similar characteristics.

The financial services segment had a pipeline of loan applications in process of $ 583.6 million at October 31, 2022 .

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Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements.

The Financial Services segment uses investor commitments and forward sales of mandatory MBS to hedge its mortgage-related interest rate exposure.

In addition, the financial services segment uses investor commitments and forward sales of mandatory MBS to hedge its mortgage-related interest rate exposure.

These instruments involve, to varying degrees, elements of credit and interest rate risk.

Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit standards.

The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts.

At October 31, 2021 , the segment had open commitments amounting to $ 24.0 million to sell MBS with varying settlement dates through November 18, 2021.

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 and option contracts.

At October 31, 2022 , we had open commitments amounting to $ 4.0 million to sell MBS with varying settlement dates through December 13, 2022.

The assets accounted for using the fair value option are initially measured at fair value.

Gains and losses from initial measurement and subsequent changes in fair value are recognized in the Consolidated Financial Statements in “Revenues:

Financial services.” The fair values that are included in income are shown, by financial instrument and financial statement line item, below: 

Subsequent changes in fair value are recognized in the Consolidated Statements of Operations in “Financial services”

Changes in fair value that are included in income are shown, by financial instrument and financial statement line item, below: 

Year Ended October 31, 2022

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(In thousands)

Fair value included in net income all reflected in financial services revenues

$ 4,580  

Change in fair value included in financial services revenue

Year Ended October 31, 2021

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(In thousands)

Fair value included in net income all reflected in financial services revenues

Change in fair value included in financial services revenue

$ 4,580  

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(In thousands)

Fair value included in net loss all reflected in financial services revenues

Change in fair value included in financial services revenue

$ 3,928  

The Company's assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs during the fiscal years ended October 31, 2021 and 2020 . The assets measured at fair value on a nonrecurring basis are all within the Company's Homebuilding operations and are summarized below:

Nonfinancial Assets

Assets measured at fair value on a nonrecurring basis are those assets for which we have recorded valuation adjustments and write-offs during the years ended October 31, 2022 and 2021 . The assets measured at fair value on a nonrecurring basis are all within our homebuilding operations and are summarized below:

October 31, 2022

(In thousands)

Sold and unsold homes and lots under development

Land and land options held for future development or sale

$ 10,558  

1 unchanged sentence

$ 2,184  

Land and land options held for future development or sale

October 31, 2021

2 unchanged sentences

$ 11,522  

Land and land options held for future development or sale

$ ( 2,009 )  

$ 9,513  

$ 2,348  

Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments. We recorded inventory impairments, which are included in the Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs”

and deducted from inventory, of $ 2.0  million, $ 2.0 million and $ 2.7 million for the years ended October 31, 2021, 2020 and 2019 , respectively.

See Note 12 for further detail of the communities evaluated for impairment.

The fair value of our cash equivalents, restricted cash and cash equivalents and customer’s deposits approximates their carrying amount, based on Level 1 inputs.

We recorded inventory impairments, which are included in the Consolidated Statements of Operations as “Inventory impairments and land option write-offs”

and deducted from inventory of $ 8.4 million, $ 2.0 million and $ 2.0 million for the years ended October 31, 2022, 2021 and 2020 , respectively (see Note 12 ).

The fair value of our cash equivalents, restricted cash and cash equivalents and customers' deposits approximates their carrying amount, based on Level 1 inputs.

The fair value of each series of our notes and credit facilities are listed below.

Level 2 measurements are estimated based on recent trades or quoted market prices for the same issues or based on recent trades or quoted market prices for our debt of similar security and maturity to achieve comparable yields.

Level 3 measurements are estimated based on third -party broker quotes or management’s estimate of the fair value based on available trades for similar debt instruments.

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Senior Secured Notes:

10.0% Senior Secured Notes due July 15, 2022

$ 107,878  

10.5% Senior Secured Notes due July 15, 2024

67,941  

10.0% Senior Secured 1.75 Lien Notes due November 15, 2025

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$ 1,266,892  

$ 1,241,570  

The Senior Secured Revolving Credit Facility is not included in the above tables because there were no borrowings outstanding thereunder as of October 31, 2022 and 2021 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures