HOVNANIAN ENTERPRISES INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

 Beginning during the second half of our fiscal year ended October 31, 2006, the U.S. housing market has been impacted by declining consumer confidence, increasing home foreclosure rates and large supplies of resale and new home inventories. The result has been weakened demand for new homes, slower sales, higher than normal cancellation rates and increased price discounts and other sales incentives to attract homebuyers. Additionally, the availability of certain mortgage financing products became more constrained starting in February 2007 when the mortgage industry began to more closely scrutinize subprime, Alt-A, and other nonprime mortgage products, and over the past few years, many lenders have significantly tightened their underwriting standards. The overall economy has weakened significantly and fears of further prolonged economic weakness are still present due, among other factors, to high unemployment levels, further deterioration in consumer confidence and the reduction in extensions of credit and consumer spending. As a result, we experienced significant decreases in our revenues and gross margins during 2007, 2008, and 2009 compared with prior years. During 2010 and 2011, the homebuilding market exhibited a large degree of choppiness. Signs of this choppiness can be seen in key measures, such as our gross margin, cancellation rates and total deliveries each quarter in 2010 and 2011. We continued to see declines in deliveries and revenues during fiscal 2011, and our gross margin percentage decreased to 15.6% for the year ended October 31, 2011 from 16.8% for the year ended October 31, 2010; however, our contract cancellation rate of 21% in the fourth quarter of fiscal 2011 was consistent with more normalized levels, as seen in fiscal 2003 and 2004. Active selling communities remained flat at 192 compared with the same period a year ago and net contracts per average active selling community decreased to 21.3 for the year ended October 31, 2011 compared to 23.1 in the same period in the prior year. Although we remain cautiously optimistic, several challenges such as persistently high unemployment levels, economic weakness and uncertainty, and the threat of more foreclosures continue to hinder a recovery in the housing market.                                          23

--------------------------------------------------------------------------------   Over the course of this multiple year downturn in the homebuilding market, we have recorded $2.4 billion in inventory impairment and option walkaway charges from the first quarter of fiscal 2006 through fiscal 2011. We have exposure to additional impairments of our inventories, which, as of October 31, 2011, have a book value of $968.1 million, net of $787.2 million of impairments recorded on 150 of our communities. This includes $30.3 million of cash invested in 9,913 lots under option as of October 31, 2011. In addition, we had $1.7 million in letters of credit deposits on optioned lots as of October 31, 2011. We will record a write-off for the amounts associated with an option if we determine it is probable we will not exercise it. As of October 31, 2011, we had total investments in, and advances to, unconsolidated joint ventures of $57.8 million. Each of our joint ventures assesses its inventory and other long-lived assets for impairment and we separately assess our investment in joint ventures for other than temporary declines, which has resulted in total reductions in our investment in joint ventures of $119.1 million from the second half of fiscal 2006, the first period in which we had impairments on our joint ventures, through October 31, 2011. There were no write downs of our investment in unconsolidated joint ventures during fiscal 2011 or fiscal 2010 however, one of our joint ventures in the Northeast recorded an asset impairment in the fourth quarter of fiscal 2011. We recorded our proportionale share of this impairment charge as part of our  share of the net loss of the venture. We still have exposure to future write-downs of our investment in unconsolidated joint ventures if conditions continue to deteriorate in the markets in which our joint ventures operate.  As the market for new homes declined, we adjusted our approach to land acquisition and construction practices and shortened our land pipeline, reduced production volumes, and balanced home price and profitability with sales pace. We delayed and cancelled planned land purchases and renegotiated land prices and significantly reduced our total number of controlled lots owned and under option. Additionally, we significantly reduced our total number of speculative homes put into production over the past several years. Since January 2009, however, we have begun to see more opportunities to purchase land at prices that make economic sense in light of the current sales prices and sales paces and plan to continue pursuing such land acquisitions. New land purchases at pricing that we believe will generate appropriate investment returns and drive greater operating efficiencies are needed to return to profitability. During fiscal 2011, we decreased our controlled lots by 3,865 and we opened 87 new communities. During fiscal 2011, we purchased approximately 2,900 lots within 134 newly identified communities (which we define as communities that were controlled subsequent to January 31, 2009). In addition, we optioned approximately 6,700 lots in 112 newly identified communities during fiscal 2011. As a result of new land purchases, in the third quarter of fiscal 2010 compared to the second quarter of fiscal 2010, we had an increase in active selling communities in consecutive quarters. This was the first consecutive quarter increase in active selling community count since the second quarter of fiscal 2007. This trend continued into the fourth quarter of fiscal 2010 where we had an increase in active selling communities from the third quarter of fiscal 2010. During 2011, our active selling communities have fluctuated, but at the end of fiscal 2011 we had the same number of active selling communities as the end of fiscal 2010. We have also continued to closely evaluate and make reductions in selling, general and administrative expenses, including corporate general and administrative expenses, reducing these expenses $26.8 million from $238.2 million in fiscal 2010 to $211.4 million in fiscal 2011 due in large part to a 78.3% reduction in head count at the end of fiscal 2011 from our peak in June 2006. Given the persistence of these difficult market conditions, improving the efficiency of our selling, general and administrative expenses will continue to be a significant area of focus. For the year ended October 31, 2011, homebuilding selling, general and administrative costs declined 9.5% to $161.5 million compared to the year ended October 31, 2010.  

Critical Accounting Policies

Management believes that the following critical accounting policies require its most significant judgments and estimates used in the preparation of the consolidated financial statements:

  Income Recognition from Home and Land Sales - We are primarily engaged in the development, construction, marketing and sale of residential single-family and multi-family homes where the planned construction cycle is less than 12 months. For these homes, in accordance with ASC 360-20, "Property, Plant and Equipment - Real Estate Sales" ("ASC 360-20"), revenue is recognized when title is conveyed to the buyer, adequate initial and continuing investments have been received, and there is no continued involvement. In situations where the buyer's financing is originated by our mortgage subsidiary and the buyer has not made an adequate initial investment or continuing investment as prescribed by ASC 360-20, the profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor has been completed.                                          24 --------------------------------------------------------------------------------   Income Recognition from Mortgage Loans - Our Financial Services segment originates mortgages, primarily for our homebuilding customers. We use mandatory investor commitments and forward sales of mortgage-backed securities ("MBS") to hedge our mortgage-related interest rate exposure on agency and government loans.  We elected the fair value option for our loans held for sale for mortgage loans originated subsequent to October 31, 2008 in accordance with ASC 825, "Financial Instruments", which permits us to measure 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. In addition, we recognize the fair value of our rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in loans held for sale. Fair value of the servicing rights is determined based on values in the Company's servicing sales contracts.  Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage market on a servicing released, nonrecourse basis, although the Company remains liable for certain limited representations, such as fraud, and warranties related to loan sales. Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on mortgages we have sold based on claims that we breached our limited representations and warranties. We believe there continues to be an industry-wide issue with the number of purchaser claims in which purchasers purport to have found inaccuracies related to the sellers' representations and warranties in particular loan sale agreements. To date, we have not made significant payments to the purchasers of our loans and we have established reserves for probable losses. Included in mortgage loans held for sale at October 31, 2011 is $1.0 million of mortgage loans, which represent the fair value of loans that cannot currently be sold at reasonable terms in the secondary mortgage market. These loans are serviced by a third party until such time that they can be liquidated via alternative mortgage markets, foreclosure or repayment.  Inventories - Inventories consist of land, land development, home construction costs, capitalized interest, construction overhead and property taxes. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land, land development, and common facility costs are allocated based on buildable acres to product types within each community, then charged to cost of sales equally based upon the number of homes to be constructed in each product type.  We record inventories in our consolidated balance sheets at cost unless the inventory is determined to be impaired, in which case the inventory is written down to its fair value. Our inventories consist of the following three components: (1) sold and unsold homes and lots under development, which includes all construction, land, capitalized interest, and land development costs related to started homes and land under development in our active communities; (2) land and land options held for future development or sale, which includes all costs related to land in our communities in planning or mothballed communities; and (3) consolidated inventory not owned, which includes all costs related to specific performance options, variable interest entities, and other options, which consists primarily of model homes financed with an investor and inventory related to structured lot options.  We have decided to mothball (or stop development on) certain communities where we have determined the current market conditions do not justify further investment at this time. When we decide to mothball a community, the inventory is reclassified from "Sold and unsold homes and lots under development" to "Land and land options held for future development or sale". As of October 31, 2011, the book value of the 59 mothballed communities was $150.7 million, net of impairment charges of $498.8 million. We regularly review communities to determine if mothballing is appropriate. During fiscal 2011, we mothballed eight communities, re-activated four communities and sold three communities which were previously mothballed.                                          25 --------------------------------------------------------------------------------   The recoverability of inventories and other long-lived assets are assessed in accordance with the provisions of ASC 360-10, "Property, Plant and Equipment - Overall" ("ASC 360-10"). ASC 360-10 requires long-lived assets, including inventories, held for development to be evaluated for impairment based on undiscounted future cash flows of the assets at the lowest level for which there are identifiable cash flows. As such, we evaluate inventories for impairment at the individual community level, the lowest level of discrete cash flows that we measure.  We evaluate inventories of communities under development and held for future development for impairment when indicators of potential impairment are present. Indicators of impairment include, but are not limited to, decreases in local housing market values, decreases in gross margins or sales absorption rates, decreases in net sales prices (base sales price net of sales incentives), or actual or projected operating or cash flow losses. The assessment of communities for indication of impairment is performed quarterly, primarily by completing detailed budgets for all of our communities and identifying those communities with a projected operating loss for any projected fiscal year or for the entire projected community life. For those communities with projected losses, we estimate the remaining undiscounted future cash flows and compare those to the carrying value of the community, to determine if the carrying value of the asset is recoverable.  

The projected operating profits, losses, or cash flows of each community can be significantly impacted by our estimates of the following:

                            · future base selling prices;                              · future home sales incentives;                 · future home construction and land development costs; and                   · future sales absorption pace and cancellation rates.    These estimates are dependent upon specific market conditions for each community. While we consider available information to determine what we believe to be our best estimates as of the end of a quarterly reporting period, these estimates are subject to change in future reporting periods as facts and circumstances change. Local market specific conditions that may impact our estimates for a community include:  

· the intensity of competition within a market, including available home sales

prices and home sales incentives offered by our competitors, including

foreclosed homes where they have an impact on our ability to sell homes;

· the current sales absorption pace for both our communities and competitor

    communities;   

· community-specific attributes, such as location, availability of lots in the

market, desirability and uniqueness of our community, and the size and style

    of homes currently being offered;      · potential for alternative product offerings to respond to local market     conditions;   

        · changes by management in the sales strategy of the community; and    

· current local market economic and demographic conditions and related trends

     and forecasts.    These and other local market-specific conditions that may be present are considered by management in preparing projection assumptions for each community. The sales objectives can differ between our communities, even within a given market. For example, facts and circumstances in a given community may lead us to price our homes with the objective of yielding a higher sales absorption pace, while facts and circumstances in another community may lead us to price our homes to minimize deterioration in our gross margins, although it may result in a slower sales absorption pace. In addition, the key assumptions included in our estimate of future undiscounted cash flows may be interrelated. For example, a decrease in estimated base sales price or an increase in homes sales incentives may result in a corresponding increase in sales absorption pace. Additionally, a decrease in the average sales price of homes to be sold and closed in future reporting periods for one community that has not been generating what management believes to be an adequate sales absorption pace may impact the estimated cash flow assumptions of a nearby community. Changes in our key assumptions, including estimated construction and development costs, absorption pace and selling strategies, could materially impact future cash flow and fair-value estimates. Due to the number of possible scenarios that would result from various changes in these factors, we do not believe it is possible to develop a sensitivity analysis with a level of precision that would be meaningful.                                          26 --------------------------------------------------------------------------------   If the undiscounted cash flows are more than the carrying value of the community, then the carrying amount is recoverable, and no impairment adjustment is required. However, if the undiscounted cash flows are less than the carrying amount, then the community is deemed impaired and is written-down to its fair value. We determine the estimated fair value of each community by determining the present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community, or in limited circumstances, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale), and recent bona fide offers received from outside third parties. Our discount rates used for all impairments recorded from October 31, 2006 to October 31, 2011 range from 13.5% to 20.3%. The estimated future cash flow assumptions are virtually the same for both our recoverability and fair value assessments. Should the estimates or expectations used in determining estimated cash flows or fair value, including discount rates, decrease or differ from current estimates in the future, we may be required to recognize additional impairments related to current and future communities. The impairment of a community is allocated to each lot on a relative fair value basis.  From time to time, we write off deposits and approval, engineering and capitalized interest costs when we determine that it is no longer probable that we will exercise options to buy land in specific locations or when we redesign communities and/or abandon certain engineering costs. In deciding not to exercise a land option, we take into consideration changes in market conditions, the timing of required land takedowns, the willingness of land sellers to modify terms of the land option contract (including timing of land takedowns), and the availability and best use of our capital, among other factors. The write-off is recorded in the period it is deemed probable that the optioned property will not be acquired. In certain instances, we have been able to recover deposits and other pre-acquisition costs that were previously written off. These recoveries have not been significant in comparison to the total costs written off.  Inventories held for sale, which are land parcels where we have decided not to build homes, represented $22.8 million of our total inventories at October 31, 2011, and are reported at the lower of carrying amount or fair value less costs to sell. In determining the fair value of land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.  Insurance Deductible Reserves - For homes delivered in fiscal 2011 and 2010, our deductible under our general liability insurance is $20 million per occurrence for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2011 and 2010 is $0.1 million up to a $5 million limit. Our aggregate retention in 2011 is $21 million for construction defect, warranty and bodily injury claims. Our aggregate retention in 2010 was $21 million for construction defect and warranty claims, and $20 million for bodily injury claims. We do not have a deductible on our worker's compensation insurance in fiscal 2011 and 2010. Reserves for estimated losses for construction defects, warranty, bodily injury and worker's compensation claims have been established using the assistance of a third-party actuary. We engage a third-party actuary that uses our historical warranty and construction defect data, worker's compensation data, and other industry data to assist our management in estimating our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and worker's compensation programs. The estimates include provisions for inflation, claims handling and legal fees. These estimates are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of products we build, claim settlement patterns, insurance industry practices, and legal interpretations, among others. Because of the high degree of judgment required in determining these estimated liability amounts, actual future costs could differ significantly from our currently estimated amounts.  Land Options - Costs incurred to obtain options to acquire improved or unimproved home sites are capitalized. Such amounts are either included as part of the purchase price if the land is acquired or charged to "Inventory impairments loss and land option write-offs" if we determine we will not exercise the option. If the options are with variable interest entities and we are the primary beneficiary, we record the land under option on the Consolidated Balance Sheets under "Consolidated inventory not owned" with an offset under "Liabilities from inventory not owned". The evaluation of whether or not we are the primary beneficiary can require significant judgment. Similarly, if the option obligation is to purchase under specific performance or has terms that require us to record it as financing, then we record the option on the Consolidated Balance Sheets under "Consolidated inventory not owned" with an offset under "Liabilities from inventory not owned". In accordance with ASC 810-10, "Consolidation - Overall" ("ASC 810-10"), we record costs associated with other options on the Consolidated Balance Sheets under "Land and land options held for future development or sale."                                          27 --------------------------------------------------------------------------------   Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated homebuilding and land development joint ventures are accounted for under the equity method of accounting. Under the equity method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or homes to third parties. Our ownership interests in joint ventures vary but our voting interests are generally 50% or less. In determining whether or not we must consolidate joint ventures where we are the managing member of the joint venture, we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the significant operating and capital decisions of the partnership, including budgets, in the ordinary course of business. The evaluation of whether or not we control a venture can require significant judgment. In accordance with ASC 323-10, "Investments - Equity Method and Joint Ventures - Overall" ("ASC 323-10"), we assess our investments in unconsolidated joint ventures for recoverability, and if it is determined that a loss in value of the investment below its carrying amount is other than temporary, we write down the investment to its fair value. We evaluate our equity investments for impairment based on the joint venture's projected cash flows. This process requires significant management judgment and estimate. During fiscal 2009, we wrote-down certain joint venture investments by $26.4 million. There were no write-downs in fiscal 2010 and 2011.  Post-Development Completion and Warranty Costs - In those instances where a development is substantially completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover the cost of such work. In addition, we estimate and accrue warranty costs as part of cost of sales for repair costs under $5,000 per occurrence to homes, community amenities and land development infrastructure. In addition, we accrue for warranty costs over $5,000 per occurrence as part of our general liability insurance deductible expensed as selling, general, and administrative costs. Warranty accruals require our management to make significant estimates about the cost of future claims. Both of these liabilities are recorded in "Accounts payable and other liabilities" on the Consolidated Balance Sheets.  Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded for financial reporting and for income tax purposes. If the combination of future years' income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried back to prior years or carried forward to future years to recover the deferred tax assets. In accordance with ASC 740-10, "Income Taxes - Overall" ("ASC 740-10"), we evaluate our deferred tax assets quarterly to determine if valuation allowances are required. ASC 740-10 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a "more-likely-than-not" standard. See "Total Taxes" below under "Results of Operations" for further discussion of the valuation allowances.  We recognize tax liabilities in accordance with ASC 740-10, and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.                                          28

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Recent Accounting Pronouncements

  See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. There have been no accounting pronouncements that have been issued but not yet implemented that we believe will materially impact our financial statements.  

Capital Resources and Liquidity

  Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey, Pennsylvania), the Midwest (Illinois, Minnesota, Ohio), the Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia, Washington D.C.), the Southeast (Florida, Georgia, North Carolina, South Carolina), the Southwest (Arizona, Texas), and the West (California). In addition, we provide certain financial services to our homebuilding customers.  We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under our bank credit facilities and the issuance of new debt and equity securities. In light of the challenging homebuilding market conditions we have been experiencing over the past few years, we had been operating with a primary focus to generate cash flows from operations through reductions in assets during fiscal 2007, 2008 and 2009. The generation of cash flow, together with debt repurchases and exchanges at prices below par, allowed us to reduce net debt (debt less cash) over these years. In fiscal 2010 and fiscal 2011, we saw more opportunities to purchase land at prices that make economic sense given current home sales prices and sales paces. As such, in fiscal 2010 and 2011, we have acquired new land at higher levels than in the previous few years. As a result, our net debt increased during the last half of 2010 and in fiscal 2011.  Our homebuilding cash balance at October 31, 2011 decreased by $114.8 million from October 31, 2010. The significant uses of cash during the year were primarily due to spending approximately $400 million on land and land development and $15.1 million, including $1.1 million for accrued interest, for the repurchase of certain of our senior notes. These items were partially offset by the following significant sources of cash: $286.2 million of proceeds from the February 2011 issuances of Class A Common Stock, Tangible Equity Units and Senior Notes, of which approximately $161.9 million was used to repurchase or redeem certain of our senior and senior subordinated notes, net proceeds of $63.3 million during the first half of fiscal 2011 for land we previously owned and sold to a new joint venture that we entered into during the first quarter of fiscal 2011, $22.0 million from income tax refunds and $34.6 million of restricted cash that became unrestricted as the letters of credit the cash collateralized were released during fiscal 2011, with the remaining change in cash coming from normal operations.  Our cash uses during fiscal 2011 and 2010 were for operating expenses, land purchases, land deposits, land development, construction spending, state income taxes, interest payments and investments in joint ventures. We provided for our cash requirements from available cash on hand, issuances of new debt and equity securities, housing and land sales, financial service revenues, federal income tax refunds and other revenues. We believe that these sources of cash will be sufficient through fiscal 2012 to finance our working capital requirements and other needs, despite continued declines in total revenues, the termination of our revolving credit facility in fiscal 2009 and the collateralization with cash in segregated accounts to support certain of our letters of credit. We may also enter into land sale agreements or joint ventures to generate cash from our existing balance sheet. Due to a change in tax legislation that became effective on November 6, 2009, we were able to carryback our 2009 net operating loss five years to previously profitable years. As a result, we received a $274.1 million federal income tax cash refund during our second quarter of fiscal 2010 and we received the remaining $17.2 million of the refund in the first quarter of fiscal 2011. In addition, in February 2011, we completed several capital markets transactions, which resulted in aggregate net proceeds of approximately $286.2 million, approximately $101.8 million of which were used to repurchase certain of our senior and senior subordinated notes in tender offers for such notes and $60.1 million of which were used to redeem, on March 15, 2011, all such notes not tendered in the tender offers. See Notes 9 and 10 to the Consolidated Financial Statements. In May 2011, we issued an additional $12.0 million of our 10 5/8% Senior Secured Notes due 2016. The net proceeds from the offering were approximately $11.6 million which, together with cash on hand, were used to fund the redemption on June 3, 2011, of the remaining $0.5 million outstanding of our 11 1/2% Senior Secured Notes due 2013 and the remaining $11.7 million outstanding of our 18.0% Senior Secured Notes due 2017. During the fourth quarter of fiscal 2011, we completed a number of open market repurchases of our senior notes at a discount. These included $24.6 million principal amount of 11 7/8% Senior Notes due 2015, and $1.0 million principal amount of 6 1/2% Senior Notes due 2014. The aggregate purchase price for these repurchases was $14.0 million, plus accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $10.6 million, net of the write-off of unamortized discounts and fees. The gains from the repurchases are included in the Consolidated Statement of Operations as "Gain on extinguishment of debt".                                          29 --------------------------------------------------------------------------------   Our net income (loss) historically does not approximate cash flow from operating activities. The difference between net income (loss) and cash flow from operating activities is primarily caused by changes in inventory levels together with changes in receivables, prepaid and other assets, interest and other accrued liabilities, deferred income taxes, accounts payable, mortgage loans and liabilities, and noncash charges relating to depreciation, amortization of computer software costs, stock compensation awards and impairment losses for inventory. When we are expanding our operations, inventory levels, prepaids, and other assets increase causing cash flow from operating activities to decrease. Certain liabilities also increase as operations expand and partially offset the negative effect on cash flow from operations caused by the increase in inventory levels, prepaids and other assets. Similarly, as our mortgage operations expand, net income from these operations increases, but for cash flow purposes net income is offset by the net change in mortgage assets and liabilities. The opposite is true as our investment in new land purchases and development of new communities decrease, which is what happened during the last half of fiscal 2007 through fiscal 2009, allowing us to generate positive cash flow from operations during this period. Since the latter part of fiscal 2009, as a result of the new land purchases and land development we have used cash in operations as we add new communities. Looking forward, given the depressed housing market, it will become more difficult to generate positive cash flow from operations until we return to profitability. However, we will continue to make adjustments to our structure and our business plans in order to maximize our liquidity while also taking steps to return to profitability, including through land acquisitions. We continue to focus on maximizing cash flow by limiting our investment in currently owned communities that we believe will not generate positive cash flow in the near term, and by seeking to identify and purchase new land parcels generating acceptable returns based on our underwriting standards and positive cash flow.  On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares of Class A Common Stock. As of October 31, 2011, 3.4 million shares of Class A Common Stock have been purchased under this program (See Part II, Item 5 for information on equity purchases). We did not buy back any shares under this program during fiscal 2011, 2010 or 2009.  On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000. Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%. The Series A Preferred Stock is not convertible into the Company's common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares beginning on the fifth anniversary of their issuance. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of Series A Preferred Stock. The depositary shares are listed on the NASDAQ Global Market under the symbol "HOVNP". In fiscal 2011, 2010, and 2009, we did not make any dividend payments on the Series A Preferred Stock as a result of covenant restrictions in our debt instruments. We anticipate that we will continue to be restricted from paying dividends, which are not cumulative, for the foreseeable future.  On May 27, 2008, K. Hovnanian Enterprises, Inc. ("K. Hovnanian") issued $600 million ($594.4 million net of discount) of 11 1/2% Senior Secured Notes due 2013. The notes were secured, subject to permitted liens and other exceptions, by a second-priority lien on substantially all of the assets owned by us, K. Hovnanian and the guarantors to the extent such assets secured obligations under the 10 5/8% Senior Secured Notes due October 15, 2016. The notes were redeemable in whole or in part at our option at 102% of principal commencing November 1, 2010, 101% of principal commencing May 1, 2011, and 100% of principal commencing May 1, 2012. A portion of the net proceeds of the issuance were used to repay the outstanding balance under the then existing amended credit facility. These second lien notes were the subject of tender offers, and notes that remained outstanding following such tender offers were subsequently redeemed, as discussed below.  On December 3, 2008, K. Hovnanian issued $29.3 million of 18% Senior Secured Notes due 2017 in exchange for $71.4 million of various series of our unsecured senior notes. This exchange resulted in a recognized gain on extinguishment of debt of $41.3 million, net of the write-off of unamortized discounts and fees. The notes were secured, subject to permitted liens and other exceptions, by a third-priority lien on substantially all the assets owned by us, K. Hovnanian and the guarantors to the extent such assets secured obligations under our first-priority and second-priority secured notes. The notes were redeemable in whole or in part at our option at 102% of principal commencing May 1, 2011, 101% of principal commencing November 1, 2011 and 100% of principal commencing November 1, 2012. These third lien notes were the subject of tender offers, and notes that remained outstanding following the second of such tender offers were subsequently redeemed, as discussed below.  On July 21, 2009, we completed cash tender offers whereby we purchased (1) in a fixed price tender offer, approximately $17.8 million principal amount of 6% Senior Subordinated Notes due 2010 for approximately $17.5 million, plus accrued and unpaid interest, (2) in a modified "Dutch Auction," a total of approximately $49.5 million principal amount of 8% Senior Notes due 2012, 8 7/8% Senior Subordinated Notes due 2012, and 7 3/4% Senior Subordinated Notes due 2013 for approximately $36.1 million, plus accrued and unpaid interest and (3) in a modified "Dutch Auction," a total of approximately $51.9 million of 6 1/2% Senior Notes due 2014, 6 3/8% Senior Notes due 2014, 6 1/4% Senior Notes due 2015, 6 1/4% Senior Notes due 2016, 7 1/2% Senior Notes due 2016, and 8 5/8% Senior Notes due 2017 for approximately $26.9 million, plus accrued and unpaid interest. These tender offers resulted in a gain on extinguishment of debt of $37.0 million, net of the write-off of unamortized discounts and fees.  On October 20, 2009, K. Hovnanian issued $785.0 million ($770.9 million net of discount) of 10 5/8% Senior Secured Notes due October 15, 2016. The notes are secured, subject to permitted liens and other exceptions, by a first-priority lien on substantially all of the assets owned by us, K. Hovnanian and the guarantors. The notes are redeemable in whole or in part at our option at 107.969% of principal commencing October 15, 2012, 105.313% of principal commencing October 15, 2013, 102.656% of principal commencing October 15, 2014, and 100% of principal commencing October 15, 2015. In addition, we may redeem up to 35% of the aggregate principal amount of the notes before October 15, 2012 with the net proceeds from certain equity offerings at 110.625% of principal. The net proceeds from this issuance, together with cash on hand, were used to fund certain cash tender offers and consent solicitations for our 11 1/2% Senior Secured Notes due 2013 and 18.0% Senior Secured Notes due 2017 and the cash tender offers for our then outstanding second and third lien senior secured notes and certain series of our unsecured notes as discussed below. In May 2011, we issued $12.0 million of additional 10 5/8% Senior Secured Notes due 2016 as discussed below.                                          30

--------------------------------------------------------------------------------   The 10 5/8% Senior Secured Notes due 2016 are secured by a first-priority lien, subject to permitted liens and other exceptions, on substantially all the assets owned by us, K. Hovnanian (the issuer of the senior secured notes) and the guarantors. At October 31, 2011, the aggregate book value of the real property collateral securing these notes was approximately $675.6 million, which does not include the impact of inventory investments, home deliveries, or impairments thereafter and which may differ from the appraised value. In addition, cash collateral securing these notes was $184.8 million as of October 31, 2011, which includes $57.7 million of restricted cash collateralizing certain letters of credit. Subsequent to such date, cash uses include general business operations and real estate and other investments.  On October 20, 2009, we completed cash tender offers and consent solicitations whereby we purchased (1) in a fixed price tender offer approximately $599.5 million principal amount of 11 1/2% Senior Secured Notes due 2013 for approximately $635.5 million, plus accrued and unpaid interest, (2) in a fixed price tender offer approximately $17.6 million principal amount of 18.0% Senior Secured Notes due 2017 for approximately $17.6 million, plus accrued and unpaid interest, and (3) in a fixed price tender offer for certain series of our unsecured notes, a total of approximately $125.4 million principal amount of 8% Senior Notes due 2012, 6 1/2% Senior Notes due 2014, 6 3/8% Senior Notes due 2014, 6 1/4% Senior Notes due 2015, and 7 1/2% Senior Notes due 2016 for approximately $100.0 million, plus accrued and unpaid interest. These tender offers resulted in a loss on extinguishment of debt of $36.4 million, net of the write-off of unamortized discounts and fees.  During the year ended October 31, 2009, we repurchased in open market transactions $11.3 million principal amount of 8% Senior Notes due 2012, $64.4 million principal amount of 6 1/2% Senior Notes due 2014, $40.6 million principal amount of 6 3/8% Senior Notes due 2014, $71.7 million principal amount of 6 1/4% Senior Notes due 2015, $88.9 million principal amount of 6 1/4% Senior Notes due 2016, $78.5 million principal amount of 7 1/2% Senior Notes due 2016, $41.8 million principal amount of 8 5/8% Senior Notes due 2017, $68.6 million principal amount of 6% Senior Subordinated Notes due 2010, $80.1 million principal amount of 8 7/8% Senior Subordinated Notes due 2012, and $82.6 million principal amount of 7 3/4% Senior Subordinated Notes due 2013. The aggregate purchase price for these repurchases was $255.4 million, plus accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $368.0 million during the year ended October 31, 2009, net of the write-off of unamortized discounts and fees. The gains from the exchanges and repurchases are included in the Consolidated Statement of Operations as "Gain on extinguishment of debt".  On January 15, 2010, the remaining $13.6 million of our 6% Senior Subordinated Notes due 2010 matured and was paid. During the year ended October 31, 2010, we repurchased in open market transactions $27.0 million principal amount of 6 1/2% Senior Notes due 2014, $54.5 million principal amount of 6 3/8% Senior Notes due 2014, $29.5 million principal amount of 6 1/4% Senior Notes due 2015, $1.4 million principal amount of 8 7/8% Senior Subordinated Notes due 2012, and $11.1 million principal amount of 7 3/4% Senior Subordinated Notes due 2013. The aggregate purchase price for these repurchases was $97.9 million, plus accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $25.0 million for the year ended October 31, 2010, net of the write-off of unamortized discounts and fees.  On February 9, 2011, we issued 13,512,500 shares of our Class A Common Stock, including 1,762,500 shares issued pursuant to the over-allotment option granted to the underwriters, at a price of $4.30 per share.  Also on February 9, 2011, we issued of an aggregate of 3,000,000 7.25% Tangible Equity Units (the "Units"), and on February 14, 2011, we issued an additional 450,000 Units pursuant to the over-allotment option granted to the underwriters. Each Unit initially consists of (i) a prepaid stock purchase contract (each a "Purchase Contract") and (ii) a senior subordinated amortizing note due February 15, 2014 (each, an "Amortizing Note"). The Amortizing Notes have an aggregate principal amount of $13.3 million as of October 31, 2011. On each February 15, May 15, August 15 and November 15, commencing on May 15, 2011, K. Hovnanian will pay holders of Amortizing Notes equal quarterly cash installments of $0.453125 per Amortizing Note (except for the May 15, 2011 installment payment, which was $0.483334 per Amortizing Note), which cash payments in the aggregate will be equivalent to 7.25% per year with respect to each $25 stated amount of Units. Each installment constitutes a payment of interest (at a rate of 12.072% per annum) and a partial repayment of principal on the Amortizing Note, allocated as set forth in the amortization schedule provided in the indenture under which the Amortizing Notes were issued. The Amortizing Notes have a scheduled final installment payment date of February 15, 2014. If we elect to settle the Purchase Contracts early, holders of the Amortizing Notes will have the right to require K. Hovnanian to repurchase such holders' Amortizing Notes, except in certain circumstances as described in the indenture governing Amortizing Notes.                                          31 --------------------------------------------------------------------------------   Unless settled earlier, on February 15, 2014 (subject to postponement under certain circumstances), each Purchase Contract will automatically settle and we will deliver a number of shares of Class A Common Stock based on the applicable market value, as defined in the purchase contract agreement, which will be between 4.7655 shares and 5.8140 shares per Purchase Contract (subject to adjustment). Each Unit may be separated into its constituent Purchase Contract and Amortizing Note after the initial issuance date of the Units, and the separate components may be combined to create a Unit. The Amortizing Note component of the Units is recorded as debt, and the Purchase Contract component of the Units is recorded in equity as additional paid in capital. We have recorded $68.1 million, the initial fair value of the Purchase Contracts, as additional paid in capital. As of October 31, 2011, 0.7 million Purchase Contracts have been converted into 3.4 million shares of our Class A Common Stock.  On February 14, 2011, K. Hovnanian issued $155.0 million aggregate principal amount of 11 7/8% Senior Notes due 2015, which are guaranteed by us and substantially all of our subsidiaries.  The net proceeds from the issuances of the 11 7/8% Senior Notes due 2015, Class A Common Stock and Units were approximately $286.2 million, a portion of which were used to fund the purchase through tender offers, on February 14, 2011, of the following series of K. Hovnanian's senior and senior subordinated notes: approximately $24.6 million aggregate principal amount of 8% Senior Notes due 2012, $44.1 million aggregate principal amount of 8 7/8% Senior Subordinated Notes due 2012 and $29.2 million aggregate principal amount of 7 3/4% Senior Subordinated Notes due 2013. On February 14, 2011, K. Hovnanian called for redemption on March 15, 2011 all outstanding notes of such series that were not tendered in the tender offers for an aggregate redemption price of approximately $60.1 million. Such redemptions were funded with proceeds from the offerings of the Class A Common Stock, the Units and the 11 7/8% Senior Notes due 2015. In both transactions, we paid a premium, incurred fees, and wrote off discounts and prepaid costs that we were amortizing over the term of notes. On June 3, 2011, we redeemed early the remainder of certain of our senior secured notes. These transactions resulted in a loss of $3.1 million during the year ended October 31, 2011.  On May 4, 2011, K. Hovnanian issued $12.0 million of additional 10 5/8% Senior Secured Notes due 2016 resulting in net proceeds of approximately $11.6 million. On June 3, 2011, we used these net proceeds together with cash on hand, to fund the redemption of the remaining outstanding principal amount ($0.5 million) of our 11 1/2% Senior Secured Notes due 2013 and the remaining outstanding principal amount ($11.7 million) of our 18.0% Senior Secured Notes due 2017.  At October 31, 2011, K. Hovnanian had $797.0 million of outstanding senior secured notes ($786.6 million, net of discount), comprised of $797.0 million 10 5/8% Senior Secured Notes due 2016. We also had $807.1 million of outstanding senior notes ($802.9 million, net of discount), comprised of $53.4 million 6 1/2% Senior Notes due 2014, $29.2 million 6 3/8% Senior Notes due 2014, $52.7 million 6 1/4% Senior Notes due 2015, $173.2 million 6 1/4% Senior Notes due 2016, $172.3 million 7 1/2% Senior Notes due 2016, $195.9 million 8 5/8% Senior Notes due 2017 and $130.4 million 11 7/8% Senior Notes due 2015. In addition, we had outstanding $13.3 million Amortizing Notes.  On November 1, 2011, K. Hovnanian issued $141.8 million aggregate principal amount of 5.0% Senior Secured Notes due 2021 and $53.2 million aggregate principal amount of 2.0% Senior Secured Notes due 2021 in exchange for $195.0 million of K. Hovnanian's unsecured senior notes as follows: $16.7 million in aggregate principal amount of 6 1/2% Senior Notes due 2014, $26.2 million in aggregate principal amount of 6 3/8% Senior Notes due 2014, $67.6 million in aggregate principal amount of 11 7/8% Senior Notes due 2015, $31.3 million in aggregate principal amount of 6 1/4% Senior Notes due 2015, $13.3 million in aggregate principal amount of 6 1/4% Senior Notes due 2016, $20.7 million in aggregate principal amount of 7 1/2% Senior Notes due 2016 and $19.2 million in aggregate principal amount of 8 5/8% Senior Notes due 2017. Holders of the senior notes due 2014 and 2015 that were exchanged in the exchange offer also received an aggregate of approximately $14.2 million in cash payments and all holders of senior notes that were exchanged in the exchange received accrued and unpaid interest (in the aggregate amount of approximately $3.3 million). The 5.0% Senior Secured Notes and the 2.0% Senior Secured Notes were issued as separate series under an indenture, but have substantially the same terms other than with respect to interest rate and related redemption provisions, and will vote together as a single class. These secured notes are guaranteed by each of Hovnanian's subsidiaries, except for its home mortgage subsidiaries, certain of its joint ventures, joint venture holding companies (other than members of the "Secured Group" (as defined below)), and certain of its title insurance subsidiaries. The guarantees of K. Hovnanian JV Holdings, L.L.C. and its subsidiaries other than certain joint ventures and joint venture holding companies (collectively, the "Secured Group"), are secured, subject to permitted liens and other exceptions, by a first-priority lien on substantially all of the assets of the members of the Secured Group. As of October 31, 2011, the collateral securing the guarantees primarily included $135.9 million of cash and cash equivalents and equity interest in guarantors that are members of the Secured Group. Subsequent to such date, cash uses include general business operations and real estate and other investments. Members of the Secured Group also own equity in joint ventures, either directly or indirectly through ownership of joint venture holding companies, with a book value of $47.8 million as of October 31, 2011; this equity is not pledged to secure, and is not collateral for, these senior secured notes. Members of the Secured Group are "unrestricted subsidiaries" under K. Hovnanian's other senior and senior secured notes and Amortizing Notes and thus have not guaranteed such indebtedness. These senior secured notes are redeemable in whole or in part at our option at any time, at 100.0% of the principal amount plus the greater of 1% of the principal amount and an applicable "Make-Whole Amount." In addition, we may redeem up to 35% of the aggregate principal amount of the notes before November 1, 2014 with the net cash proceeds from certain equity offerings at 105.0% (in the case of the 5.0% Secured Notes) and 102.0% (in the case of the 2.0% Secured Notes) of principal. The accounting for the exchange is being treated as a Troubled Debt Restructuring. Under this accounting, the Company would not recognize any gain or loss on extinguishment of debt. See Note 24 to the Consolidated Financial Statements for further discussion.                                          32 --------------------------------------------------------------------------------   After the above November 1, 2011 exchange offer, we had $992.0 million of outstanding senior secured notes ($967.4 million, net of discount), comprised of $797.0 million 10 5/8% Senior Secured Notes due 2016, $53.2 million 2.0% Senior Secured Notes due 2021 and $141.8 million 5.0% Senior Secured Notes due 2021. We also had $612.1 million of outstanding senior notes ($609.5 million, net of discount), comprised of $36.7 million 6 1/2% Senior Notes due 2014, $3.0 million 6 3/8% Senior Notes due 2014, $21.4 million 6 1/4% Senior Notes due 2015, $159.9 million 6 1/4% Senior Notes due 2016, $151.5 million 7 1/2% Senior Notes due 2016, $176.8 million 8 5/8% Senior Notes due 2017 and $62.8 million 11 7/8% Senior Notes due 2015. In addition, we had outstanding $13.3 million Amortizing Notes.  Separate from the above, in November 2011, we repurchased approximately $44 million principal amount of our unsecured senior notes for an aggregate purchase price of approximately $19 million in cash, excluding cash paid for interest, resulting in an approximate gain on extinguishment of debt of $25 million.  Except for K. Hovnanian, the issuer of the notes, our home mortgage subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, certain of our title insurance subsidiaries and our foreign subsidiary, we and each of our subsidiaries are guarantors of the senior secured, senior and senior subordinated notes outstanding at October 31, 2011 (see Note 22 to the Consolidated Financial Statements). In addition, the 5.0% Senior Secured Notes due 2021 and the 2.0% Senior Secured Notes due 2021 are guaranteed by the Secured Group. Members of the Secured Group do not guarantee K. Hovnanian's other indebtedness. The indentures governing the notes do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the Company's ability and that of certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness (other than certain permitted indebtedness, refinancing indebtedness and non-recourse indebtedness), pay dividends and make distributions on common and preferred stock, repurchase senior and senior subordinated notes (with respect to the senior secured first-lien notes indenture), make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets and enter into certain transactions with affiliates. The indentures also contain events of default which would permit the holders of the notes to declare the notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the notes or other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy, and insolvency and, with respect to the indentures governing the senior secured notes, the failure of the documents granting security for the senior secured notes to be in full force and effect and the failure of the liens on any material portion of the collateral securing the senior secured notes to be valid and perfected. As of October 31, 2011, we believe we were in compliance with the covenants of the indentures governing our outstanding notes.  Under the terms of the indentures, we have the right to make certain redemptions and, depending on market conditions and covenant restrictions, may do so from time to time. We also continue to evaluate our capital structure and may also continue to make debt purchases and/or exchanges from time to time through tender offers, open market purchases, private transactions, or otherwise or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.  If our consolidated fixed charge coverage ratio, as defined in the indentures governing our senior secured and senior notes, is less than 2.0 to 1.0, we are restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness, and non-recourse indebtedness. As a result of this restriction, we are currently restricted from paying dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. If current market trends continue or worsen, we will continue to be restricted from paying dividends for the foreseeable future. Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our bond indentures or otherwise affect compliance with any of the covenants contained in the bond indentures.  In connection with the issuance of our 10 5/8% Senior Secured Notes due 2016 in the fourth quarter of fiscal 2009, we terminated our revolving credit facility and refinanced the borrowing capacity thereunder. Also in connection with the refinancing, we entered into certain stand alone cash collateralized letter of credit agreements and facilities under which there were a total of $54.1 million and $89.5 million of letters of credit outstanding as of October 31, 2011 and October 31, 2010, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. As of October 31, 2011 and October 31, 2010, the amount of cash collateral in these segregated accounts was $57.7 million and $92.3 million, respectively, which is reflected in "Restricted cash" on the Consolidated Balance Sheets.  Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC ("K. Hovnanian Mortgage"), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. ("Chase Master Repurchase Agreement") is a short-term borrowing facility that provides up to $50 million through April 4, 2012. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly on outstanding advances at the current LIBOR subject to a floor of 1.625% plus the applicable margin ranging from 2.50% to 3.0% based on the takeout investor and type of loan. As of October 31, 2011, the aggregate principal amount of all borrowings under the Chase Master Repurchase Agreement was $49.7 million. We had a secured Master Repurchase Agreement with Citibank, N.A. ,which was terminated on April 5, 2011.                                          33 --------------------------------------------------------------------------------   The Chase Master Repurchase Agreement requires K. Hovnanian Mortgage to satisfy and maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few weeks), the immateriality to us on a consolidated basis of the size of the facilities, the levels required by these financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the agreement, we do not consider any of these covenants to be substantive or material. As of October 31, 2011, we believe we were in compliance with the covenants of the Chase Master Repurchase Agreement.  

During fiscal 2011 and thereafter, Fitch Ratings ("Fitch"), Moody's Investor Services ("Moody's") and Standard and Poor's ("S&P"), took certain rating actions as follows:

· On June 28, 2011, S&P downgraded our corporate credit rating from CCC+ to CCC.

· On September 8, 2011, Moody's downgraded our corporate family and probability

of default ratings to Caa2 from Caa1. Moody's also lowered the rating on

our 10 5/8% senior secured notes to B2 from B1 and our senior unsecured notes

to Caa3 from Caa2. The rating on our preferred stock was affirmed at Ca, and

    our speculative grade liquidity assessment remained SGL-3.   

· On October 5, 2011, S&P downgraded our corporate credit ratings and its

ratings on our 10 5/8% senior secured notes to "CC" from "CCC". S&P also

    lowered the rating on our 10 5/8% senior unsecured notes to C from CC.   

· On October 20, 2011, Moody's changed our probability of default ratings to

Caa2/LD from Caa2 and also lowered the rating on our 10 5/8% senior secured

notes to B3 from B2 and assigned a rating of B3 to our 2.0% and 5.0% senior

secured notes (issued in November 2011). Subsequently, on October 25, 2011,

    the LD designation on our probability of default ratings was removed.   

· On October 29, 2011, S&P lowered our corporate credit rating to Selective

    Default ("SD") from CC.   

· On November 2, 2011, Fitch lowered our Issuer Default Rating ("IDR") to

Restricted Default ("RD") from CCC. Subsequently, on November 14, 2011, Fitch

    raised our IDR from RD back to CCC.   

· On November 3, 2011, S&P raised the Company's corporate credit rating to CCC-

from SD. S&P also raised our ratings on 10 5/8% our senior secured notes to

CCC- from CC and our senior unsecured notes to CC from D.

    Downgrades in our credit ratings do not accelerate the scheduled maturity dates of our debt or affect the interest rates charged on any of our debt issues or our debt covenant requirements or cause any other operating issue. A potential risk from negative changes in our credit ratings is that they may make it more difficult or costly for us to access capital. However, due to our available cash resources, the downgrades and revisions to our credit ratings in 2011 discussed above have not impacted management's operating plans, or our financial condition, results of operations or liquidity.  Total inventory, excluding consolidated inventory not owned, increased $25.5 million during the year ended October 31, 2011. Total inventory, excluding consolidated inventory not owned, increased in the Mid-Atlantic $25.8 million, in the Midwest $15.7 million, in the Southeast $24.9 million and in the Southwest $4.5 million. These increases were offset by decreases in the Northeast of $33.0 million and the West of $12.4 million. During fiscal 2011, we incurred $77.5 million in impairments, the majority of which related to three properties that were transitioned from inventory held for development to held for sale, five communities in the Northeast that have had meaningful price reductions in order to maintain reasonable sales pace, and five communities in the West where we continue to see pricing pressure. In addition, we wrote-off costs in the amount of $24.3 million during fiscal 2011 related to land options that expired or that we terminated, as the communities' forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. Despite these write-downs and inventory reductions due to deliveries, as well as the sale of certain inventory to a new joint venture during the first two quarters of fiscal 2011, total inventory increased $25.5 million, excluding consolidated inventory not owned, because we spent approximately $400 million on land purchases and land development during fiscal 2011. Also contributing to the increase in inventory during the period was the consolidation of a joint venture in the first quarter of fiscal 2011, whereby our partner in a land development joint venture transferred its interest in the venture to us. In the last two years, we have been able to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions. There can be no assurances that this trend will continue in the near term. Substantially all homes under construction or completed and included in inventory at October 31, 2011 are expected to be closed during the next 12 months. Most inventory completed or under development was/is partially financed through debt and equity issuances.                                          34 --------------------------------------------------------------------------------   The total inventory increase discussed above excluded the decrease in consolidated inventory not owned of $59.3 million consisting of specific performance options, and options with variable interest entities, and other options that were added to our balance sheet in accordance with ASC 470-40, "Debt-Product Financing Arrangements", ASC 840-40, "Leases-Sales-Leaseback Transactions", and variable interest entities in accordance with ASC 810-10. See Note 19 to the Consolidated Financial Statements for additional information on ASC 810-10. Specific performance options inventory decreased $18.6 million during fiscal 2011. This decrease was primarily due to lot take downs in the Northeast, Southwest and West during the period. Variable interest entity options inventory decreased $32.7 million due to the revised guidance by the FASB for determining which entity is the primary beneficiary of a variable interest entity (see Note 19 to the Consolidated Financial Statements). As a result of adoption of this revised guidance, we deconsolidated land previously attributed to variable interest entities and reported such land as inventory not owned. Other options inventory decreased $8.0 million for fiscal 2011. Other options consist of inventory financed via a model home program. Model home inventory financed through the model lease program decreased $8.0 million because we have terminated the use of models in certain communities where models were no longer needed and also terminated the option to purchase those models.  We usually option property for development prior to acquisition. By optioning property, we are only subject to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is reduced. The costs associated with optioned properties are included in "Land and land options held for future development or sale inventory". Also included in "Land and land options held for future development or sale inventory" are amounts associated with inventory in mothballed communities. We mothball (or stop development on) certain communities when we determine the current performance does not justify further investment at this time. That is, we believe we will generate higher returns if we decide against spending money to improve land today and save the raw land until such times as the markets improve. As of October 31, 2011, we have mothballed land in 59 communities. The book value associated with these communities at October 31, 2011 was $150.7 million, net of impairment charges of $498.8 million. We continually review communities to determine if mothballing is appropriate. During fiscal 2011, we mothballed eight communities, re-activated four communities and sold three communities which were previously mothballed. Our inventory representing "Land and land options held for future development or sale" at October 31, 2011, on the Consolidated Balance Sheets, decreased by $102.9 million compared to October 31, 2010. The decrease is due to additional impairments taken primarily in the Northeast and the West in fiscal 2011, offset by an increase due to the acquisition of new land in all segments as land prices became more attractive during fiscal 2011.  The following table summarizes home sites included in our total residential real estate. The decrease in total home sites available in 2011 compared to 2010 is attributable to the delivery of homes during fiscal 2011, partially offset by new lots controlled via option or purchase during 2011                                                                                        Remaining                                                          Total       Contracted            Home                                                           Home              Not           Sites                                                          Sites        Delivered       Available October 31, 2011: Northeast                                                4,739              265           4,474 Mid-Atlantic                                             5,592              325           5,267 Midwest                                                  2,099              226           1,873 Southeast                                                2,846              124           2,722 Southwest                                                5,527              331           5,196 West                                                     7,502              116           7,386 Consolidated total                                      28,305            1,387          26,918 Unconsolidated joint ventures                            2,731              276           2,455 Total including unconsolidated joint ventures           31,036            1,663          29,373 Owned                                                   18,277            1,141          17,136 Optioned                                                 9,913              131           9,782 Construction to permanent financing lots                   115              115               - Consolidated total                                      28,305            1,387          26,918 Lots controlled by unconsolidated joint ventures         2,731              276           2,455 Total including unconsolidated joint ventures           31,036            1,663          29,373  October 31, 2010: Northeast                                                6,007              236           5,771 Mid-Atlantic                                             6,716              262           6,454 Midwest                                                  1,805              222           1,583 Southeast                                                4,062               82           3,980 Southwest                                                5,361              337           5,024 West                                                     8,249              110           8,139 Consolidated total                                      32,200            1,249          30,951 Unconsolidated joint ventures                            2,072              145           1,927 Total including unconsolidated joint ventures           34,272            1,394          32,878 Owned                                                   17,676              993          16,683 Optioned                                                14,379              111          14,268 Construction to permanent financing lots                   145              145               - Consolidated total                                      32,200            1,249          30,951 Lots controlled by unconsolidated joint ventures         2,072              145           1,927 Total including unconsolidated joint ventures           34,272            1,394          32,878                                             35

--------------------------------------------------------------------------------  The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities:                                     October 31, 2011                            October 31, 2010                             Unsold                                      Unsold                              Homes         Models         Total          Homes         Models         Total Northeast                       86             18           104            109             15           124 Mid-Atlantic                    73             30           103             72             26            98 Midwest                         45             38            83             44             27            71 Southeast                       58             30            88             80             20           100 Southwest                      431             81           512            421            107           528 West                           118             52           170             60             81           141 Total                          811            249         1,060            786            276         1,062 Started or completed unsold homes and models per active selling communities(1)                 4.2            1.3           5.5            4.1            1.4           5.5   

(1) Active selling communities, which are communities that are open for sale

with 10 or more home sites available, were 192 at both October 31, 2011, and

     2010.    Total unsold homes at October 31, 2011 is virtually unchanged compared to the prior year. Investments in and advances to unconsolidated joint ventures increased $19.8 million during the fiscal year ended October 31, 2011. The increase is primarily due to an investment in a new joint venture during 2011, to which we contributed property previously reflected in consolidated inventory, as well as increases resulting from additional investments in joint ventures offset by a decrease in our investment in a joint venture in the Northeast, due to a write-down of the joint venture's assets in the fourth quarter of fiscal 2011. As of October 31, 2011, we had investments in nine homebuilding joint ventures and three land development joint ventures. Other than guarantees limited only to performance and completion of development, environmental warranties and indemnification and standard indemnification for fraud and misrepresentation and other similar actions, including a voluntary bankruptcy filing, we have no guarantees associated with unconsolidated joint ventures.  Receivables, deposits and notes decreased $8.7 million since October 31, 2010 to $52.3 million at October 31, 2011. The decrease is due to a decrease in receivables for home closings as a result of cash in transit from various title companies at the end of the respective periods, as well as reimbursements from our insurance carriers for certain warranty claims. Also contributing to the decrease is the receipt of final payment of a note in our Southwest segment in conjunction with the acquisition of the property that collateralized the note.  

Property, plant and equipment decreased $9.5 million during the twelve months ended October 31, 2011 primarily due to depreciation and a small amount of disposals, which were offset by minor additions for leasehold improvements during the period.

Prepaid expenses and other assets were as follows as of:

 (In thousands)                                         October 31, 2011       October 31, 2010       Dollar Change Prepaid insurance                                    $            1,808     $            1,346     $           462 Prepaid project costs                                            27,206                 41,605             (14,399 ) Senior residential rental properties                              7,374                  8,076                (702 ) Other prepaids                                                   21,699                 23,264              (1,565 ) Other assets                                                      9,611                  9,637                 (26 ) Total                                                $           67,698     $           83,928     $       (16,230 )                                            36

--------------------------------------------------------------------------------   Prepaid insurance increased due to the timing of payments for insurance premium costs and related amortization of these costs, as they are amortized over the life of the associated insurance policy, which can be one to three years. Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaids are expensed as homes are delivered. The decrease in prepaid project costs is primarily due to costs that were written-off in the fourth quarter of fiscal 2011, related to the sale of a community in the Northeast. Other prepaids decreased mainly due to the amortization of prepaid debt costs. Also contributing to the decrease were debt repurchases during fiscal 2011, which resulted in the write-off of portions of the associated prepaid debt costs.  Financial Services - Mortgage loans held for sale consist primarily of residential mortgages receivable held for sale of which $71.2 million and $85.2 million at October 31, 2011 and October 31, 2010, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. Also included "Mortgage loans held for sale" are residential mortgages receivable held for sale of $1.0 million and $1.1 million at October 31, 2011 and October 31, 2010, respectively, which represent loans that cannot currently be sold at reasonable terms in the secondary mortgage market. We may incur losses with respect to mortgages that were previously sold that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, we have incurred minimal credit losses. The decrease in mortgage loans held for sale at October 31, 2011 compared to October 31, 2010, is the direct result of a decrease in the volume of loans originated during the fourth quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010.  Nonrecourse land mortgages were $26.1 million at October 31, 2011 and $4.3 at October 31, 2010. The increase is primarily due to new purchase money mortgages for land acquisitions in the Northeast, Mid-Atlantic and West segments during fiscal 2011, offset by payments on mortgages in the Southwest and West.  

Accounts payable and other liabilities are as follows as of:

                          October 31,       October 31, (In thousands)                  2011              2010       Dollar Change Accounts payable       $      85,415     $      84,948     $           467 Reserves                     141,496           149,413              (7,917 ) Accrued expenses              43,151            44,758              (1,607 ) Accrued compensation          23,432            24,494              (1,062 ) Other liabilities             10,139            16,136              (5,997 ) Total                  $     303,633     $     319,749     $       (16,116 )    The decrease in reserves is primarily due to a consolidation of a joint venture that resulted from our partner in a land development joint venture transferring its interest in the venture to us, offset by an increase in our general liability reserves based on recent actuarial estimates. The slight decrease in accrued expenses is primarily due to timing of property tax and advertising accruals and amortization of abandoned lease space accruals.  Other liabilities decreased primarily due to a reduction in the accrual for self-insured medical claims, based on recent claim data, along with a decrease related to the timing of payments made on a short-term note.  

Customer deposits increased to $16.7 million at October 31, 2011 from $9.5 million at October 31, 2010. The increase was primarily due to lower contracts in backlog and the impact of the use of a third party escrow agent to hold deposits in the Northeast.

  Mortgage warehouse line of credit under our Chase Master Repurchase Agreement decreased $23.9 million from $73.6 million at October 31, 2010, to $49.7 million at October 31, 2011. The decrease is due to the decrease in mortgage loans held for sale from October 31, 2010 to October 31, 2011 and because the maximum borrowing amount available under the Chase Master Repurchase Agreement at October 31, 2011 is $50 million which is lower than the prior year maximum borrowing amount.  Liabilities from inventory not owned decreased $50.8 million to $2.4 million at October 31, 2011 from $53.2 million at October 31, 2010 because inventory not owned decreased as discussed previously.  Income taxes payable of $17.9 million at October 31, 2010 increased $23.9 million in the twelve months ended October 31, 2011 to $41.8 million primarily due to the settlement of certain matters with the relevant tax authorities and the related receipt of refund amounts that had been accrued in the prior fiscal year.                                          37

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  Results of Operations  Total Revenues 

Compared to the prior period, revenues (decreased) increased as follows:

                                                     Year Ended                                   October 31,        October 31,       October 31, (Dollars in thousands)                   2011               2010              2009 Homebuilding: Sale of homes                   $    (255,025 )    $    (194,970 )    $ (1,655,384 ) Land sales                             19,925            (20,430 )         (30,526 ) Other revenues                            657             (5,471 )          (9,242 ) Financial services                     (2,492 )           (3,577 )         (16,669 ) Total change                    $    (236,935 )    $    (224,448 )    $ (1,711,821 ) Total revenues percent change           (17.3 )%           (14.1 )%          (51.7 )%                                            38

--------------------------------------------------------------------------------

Homebuilding

  Compared to the same prior period, sale of homes revenues decreased $255.0 million, or 19.2%, for the year ended October 31, 2011, decreased $195.0 million, or 12.8%, for the year ended October 31, 2010 and decreased $1,655.4 million or 52.1%, for the year ended October 31, 2009. Decreased revenues in 2011, 2010 and 2009 were primarily due to the number of home deliveries also declining 19.0%, 11.8%, and 49.3%, respectively. Average price per home also decreased to $279,873 for 2011 from $280,715 in 2010 and from $283,937 in 2009. The fluctuations in average prices are a result of the geographic and community mix of our deliveries rather than price increases or decreases in individual communities. For example, for the year ended October 31, 2011, 45.0% of our deliveries came from our Southwest segment, compared to 37.4% for the same period last year. This segment had an average selling price below the company average for both periods.  

Information on homes delivered by segment is set forth below:

                                                                                  Year Ended (Housing Revenue in thousands)                         October 31, 2011       October 31, 2010       October 31, 2009 Northeast: Housing revenues                                     $          179,866     $          296,449     $          357,745 Homes delivered                                                     399                    718                    823 Average price                                        $          450,792     $          412,882     $          434,684 Mid-Atlantic: Housing revenues                                     $          199,061     $          280,132     $          296,286 Homes delivered                                                     524                    753                    788 Average price                                        $          379,887     $          372,021     $          375,997 Midwest: Housing revenues                                     $           70,465     $           91,260     $          116,990 Homes delivered                                                     360                    439                    520 Average price                                        $          195,736     $          207,882     $          224,981 Southeast: Housing revenues                                     $           79,146     $           92,712     $          113,034 Homes delivered                                                     339                    384                    489 Average price                                        $          233,469     $          241,438     $          231,153 Southwest: Housing revenues                                     $          418,631     $          391,807     $          408,746 Homes delivered                                                   1,726                  1,767                  1,867 Average price                                        $          242,544     $          221,736     $          218,932 West: Housing revenues                                     $          125,305     $          175,139     $          229,668 Homes delivered                                                     484                    668                    875 Average price                                        $          258,895     $          262,184     $          262,478 Consolidated total: Housing revenues                                     $        1,072,474     $        1,327,499     $        1,522,469 Homes delivered                                                   3,832                  4,729                  5,362 Average price                                        $          279,873     $          280,715     $          283,937 Unconsolidated joint ventures: Housing revenues                                     $          172,343     $          124,149     $          113,016 Homes delivered                                                     384                    280                    297 Average price                                        $          448,810     $          443,389     $          380,525 Total including unconsolidated joint ventures: Housing revenues                                     $        1,244,817     $        1,451,648     $        1,635,485 Homes delivered                                                   4,216                  5,009                  5,659 Average price                                        $          295,260     $          289,808     $          289,006    The decrease in housing revenues during the years ended October 31, 2011 and <chron>October 31, 2010 was primarily due to the continued weak market conditions in most of our markets. Housing revenues and average sales prices in 2011 decreased in all of our homebuilding segments combined by 19.2% and 0.3%, respectively. In our homebuilding segments, homes delivered decreased in fiscal 2011 as compared to fiscal 2010 by 44.4%, 30.4%, 18.0%, 11.7%, 2.3% and 27.5% in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West, respectively.                                          39 --------------------------------------------------------------------------------   Housing revenues and average sales prices in fiscal 2010 decreased as compared to 2009 in all of our homebuilding segments combined by 12.8% and 1.1%, respectively. In our homebuilding segments, homes delivered decreased in fiscal 2010 as compared to fiscal 2009 by 12.8%, 4.4%, 15.6%, 21.5%, 5.4% and 23.7% in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West, respectively.                                          40 --------------------------------------------------------------------------------   Quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the years ending October 31, 2011, 2010 and 2009 are set forth below:                                                                                 Quarter Ended (In thousands)                                 October 31, 2011       July 31, 2011       April 30, 2011      January 31, 2011 Housing revenues: Northeast                                     $          57,014     $        43,443     $         36,126     $          43,284 Mid-Atlantic                                             49,050              57,104               46,643                46,263 Midwest                                                  21,249              17,716               17,466                14,034 Southeast                                                29,064              17,894               16,684                15,504 Southwest                                               126,204             107,861               97,339                87,227 West                                                     30,555              32,461               32,716                29,573 Consolidated total                            $         313,136     $       276,479     $        246,974     $         235,885 Sales contracts (net of cancellations): Northeast                                     $          40,014     $        56,427     $         57,394     $          37,435 Mid-Atlantic                                             56,269              73,986               55,874                52,013 Midwest                                                  20,863              21,273               20,521                12,331 Southeast                                                20,775              28,301               23,345                15,640 Southwest                                               101,549             113,370              104,010                85,787 West                                                     38,953              38,950               32,423                22,282 Consolidated total                            $         278,423     $       332,307     $        293,567     $         225,488                                                                                   Quarter Ended (In thousands)                                 October 31, 2010       July 31, 2010       April 30, 2010      January 31, 2010 Housing revenues: Northeast                                     $          79,040     $        91,740     $         56,955     $          68,714 Mid-Atlantic                                             73,654              72,767               67,634                66,076 Midwest                                                  29,177              22,650               16,029                23,404 Southeast                                                17,472              28,522               22,041                24,677 Southwest                                               103,190             103,065              103,428                82,124 West                                                     37,043              49,333               44,406                44,358 Consolidated total                            $         339,576     $       368,077     $        310,493     $         309,353 Sales contracts (net of cancellations): Northeast                                     $          42,925     $        43,314     $         52,208     $          55,379 Mid-Atlantic                                             64,597              50,845               73,704                46,949 Midwest                                                  12,111              16,526               27,289                16,421 Southeast                                                18,965              15,264               25,334                17,236 Southwest                                               111,760              88,360              114,166                79,656 West                                                     31,571              33,313               43,857                36,041 Consolidated total                            $         281,929     $       247,622     $        336,558     $         251,682                                                                                   Quarter Ended (In thousands)                                 October 31, 2009       July 31, 2009       April 30, 2009      January 31, 2009 Housing revenues: Northeast                                     $         102,996     $        84,761     $         83,752     $          86,236 Mid-Atlantic                                             80,773              75,631               70,887                68,995 Midwest                                                  36,305              29,925               23,887                26,872 Southeast                                                23,032              23,152               32,834                34,015 Southwest                                               103,109             105,518              113,514                86,605 West                                                     68,364              48,154               56,824                56,329 Consolidated total                            $         414,579     $       367,141     $        381,698     $         359,052 Sales contracts (net of cancellations): Northeast                                     $          96,424     $        84,093     $        104,653     $          65,345 Mid-Atlantic                                             66,375              85,352               87,208                42,259 Midwest                                                  18,019              25,411               33,498                18,836 Southeast                                                24,377              27,660               31,073                20,063 Southwest                                                97,797             109,027              109,971                60,497 West                                                     65,592              55,053               69,205                30,519 Consolidated total                            $         368,584     $       386,596     $        435,608     $         237,519    Our reported level of sales contracts (net of cancellations) has been impacted by a slowdown in the pace of sales in all of the Company's segments, due to continued weak market conditions and tighter mortgage loan underwriting criteria. Contracts per average active selling community in 2011 were 21.3 compared to fiscal 2010 of 23.1, demonstrating a decrease in sales pace. Cancellation rates represent the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation rates, excluding unconsolidated joint ventures.                                          41 --------------------------------------------------------------------------------

  Quarter    2011      2010      2009      2008      2007 First        22 %      21 %      31 %      38 %      36 % Second       20 %      17 %      24 %      29 %      32 % Third        18 %      23 %      23 %      32 %      35 % Fourth       21 %      24 %      24 %      42 %      40 %   

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

 Quarter    2011      2010      2009      2008      2007 First        18 %      13 %      22 %      16 %      17 % Second       22 %      17 %      31 %      24 %      19 % Third        20 %      15 %      23 %      20 %      18 % Fourth       18 %      25 %      20 %      30 %      26 %    Historically, most cancellations occur within the legal rescission period, which varies by state but is generally less than two weeks after the signing of the contract. Cancellations also occur as a result of a buyer's failure to qualify for a mortgage, which generally occurs during the first few weeks after signing. However, beginning in fiscal year 2007, we began experiencing higher than normal numbers of cancellations later in the construction process. These cancellations are related primarily to falling prices, sometimes due to new discounts offered by us and other builders, leading the buyer to lose confidence in their contract price and due to tighter mortgage underwriting criteria leading to some customers' inability to be approved for a mortgage loan. In some cases, the buyer will walk away from a significant nonrefundable deposit that we recognize as other revenues. While our cancellation rate based on gross sales contracts since the second quarter of fiscal 2009 has been lower than it has been for several years, and closer to more normalized levels, it is difficult to predict if this trend will continue. Also, the cancellation rate as a percentage of beginning backlog is closer to more normalized levels and down from a higher percentage in the fourth quarter of fiscal 2010.  An important indicator of our future results is recently signed contracts and our home contract backlog for future deliveries. Our consolidated contract backlog, excluding unconsolidated joint ventures, using base sales prices by segment is set forth below:  (Dollars In thousands)                                October 31, 2011      October 31, 2010      October 31, 2009 Northeast: Total contract backlog                               $         108,645     $          94,363     $         196,262 Number of homes                                                    265                   236                   457 Mid-Atlantic: Total contract backlog                               $         137,303     $         106,589     $         150,819 Number of homes                                                    325                   262                   386 Midwest: Total contract backlog                               $          44,870     $          34,188     $          46,418 Number of homes                                                    226                   222                   253 Southeast: Total contract backlog                               $          30,080     $          20,212     $          35,970 Number of homes                                                    124                    82                   135 Southwest: Total contract backlog                               $          86,388     $          88,123     $          77,418 Number of homes                                                    331                   337                   351 West: Total contract backlog                               $          32,914     $          27,304     $          52,666 Number of homes                                                    116                   110                   190 Totals: Total consolidated contract backlog                  $         440,200     $         370,779     $         559,553 Number of homes                                                  1,387                 1,249                 1,772                                            42

--------------------------------------------------------------------------------   Our net contracts for the full years of fiscal 2011 and 2010, excluding unconsolidated joint ventures, declined 4.4% and 19.5%, respectively, as compared to the prior fiscal year. The rate of decline in both net contracts and deliveries decreased from fiscal 2010 to fiscal 2011, resulting in an increase in our backlog at October 31, 2011 from October 31, 2010. In the month of November 2011, excluding unconsolidated joint ventures, we signed an additional 279 net contracts amounting to $75.9 million in contract value.  Total cost of sales on our Consolidated Statements of Operations includes expenses for consolidated housing and land and lot sales, including inventory impairment loss and land option write-offs (defined as "land charges" in the tables below). A breakout of such expenses for housing sales and housing gross margin is set forth below:                                                                         Year Ended                                                       October 31,      October 31,      October 31, (Dollars In thousands)                                       2011             2010             2009 Sale of homes                                        $  1,072,474     $  1,327,499     $  1,522,469 Cost of sales, net of impairment reversals and excluding interest expense                                905,253        1,103,872        1,382,234 Homebuilding gross margin, before cost of sales interest expense and land charges                         167,221          223,627          140,235 Cost of sales interest expense, excluding land sales interest expense                                     57,016           79,095           97,332 Homebuilding gross margin, after cost of sales interest expense, before land charges                     110,205          144,532           42,903 Land charges                                              101,749          135,699          659,475 Homebuilding gross margin, after cost of sales interest expense and land charges                    $      8,456     $      8,833     $   (616,572 ) Gross margin percentage, before cost of sales interest expense and land charges                            15.6 %           16.8 %            9.2 % Gross margin percentage, after cost of sales interest expense, before land charges                        10.3 %           10.9 %            2.8 % Gross margin percentage after cost of sales interest expense and land charges                             0.8 %         

0.7 % (40.5 )%

    Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:                                                                                  Year Ended                                                        October 31, 2011       October 31, 2010       October 31, 2009 Sale of homes                                                       100 %                  100 %                  100 % Cost of sales, net of impairment reversals and excluding interest: Housing, land and development costs                                71.9 %                 69.9 %                 75.9 % Commissions                                                         3.5 %                  3.3 %                  3.3 % Financing concessions                                               2.0 %                  2.2 %                  2.4 % Overheads                                                           7.0 %                  7.8 %                  9.2 % Total cost of sales, before interest expense and land charges                                                       84.4 %                 83.2 %                 90.8 % Gross margin percentage, before cost of sales interest expense and land charges                                  15.6 %                 16.8 %                  9.2 % Cost of sales interest                                              5.3 %                  5.9 %                  6.4 % Gross margin percentage, after cost of sales interest expense and before land charges                           10.3 %                 10.9 %                  2.8 %    We sell a variety of home types in various communities, each yielding a different gross margin. As a result, depending on the mix of communities delivering homes, consolidated gross margin may fluctuate up or down. Total homebuilding gross margins, before interest expense and land impairment and option write off charges decreased to 15.6% for the year ended October 31, 2011 compared to 16.8% for the same period last year. The declining pace of sales in our markets in 2009, 2010, and 2011 has led to intense competition in many of our specific community locations. In order to attempt to maintain a reasonable pace of absorption, we have increased incentives, reduced lot location premiums, as well as lowered some base prices, all of which have impacted our margins significantly and resulted in significant inventory impairments. However, the rate of the decline has slowed in most of our segments and in a few locations we have been able to raise prices without adversely impacting sales pace. In addition, during fiscal 2009 we delivered the final homes in some older communities where margins were lower and in fiscal 2010 and fiscal 2011 we have increased the number of deliveries from new communities where we have acquired the land at more reasonable prices, resulting in higher gross margins. Also, we have recorded impairment reversals as homes previously impaired are delivered. This has resulted in the improvement in our gross margins before cost of sales interest and land charges in fiscal 2010 from fiscal 2009.  Reflected as inventory impairment loss and land option write-offs in cost of sales ("land charges"), we have written-off or written-down certain inventories totaling $101.7 million, $135.7 million, and $659.5 million during the years ended October 31, 2011, 2010, and 2009, respectively, to their estimated fair value. See "Note 14 to the Consolidated Financial Statements" for an additional discussion. During the years ended October 31, 2011, 2010, and 2009, we wrote-off residential land options and approval and engineering costs amounting to $24.3 million, $13.2 million, and $45.4 million, respectively, which are included in the total write-offs mentioned above. When a community is redesigned or abandoned, engineering costs are written-off. Option, approval and engineering costs are written-off when a community's pro forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and we believe it is probable we will cancel the option. Such write-offs were located in all of our segments. The inventory impairments amounting to $77.5 million, $122.5 million, and $614.1 million for the years ending October 31, 2011, 2010 and 2009, respectively, were incurred because of continued downward pressure on prices in order to maintain sales pace in many of our markets. In 2011 and 2010, the majority of the impairments were in the Northeast and West segments. Impairments in the Northeast were primarily due to increased weakness in the market, primarily in Northern New Jersey and communities now classified as held for sale or sold and thus adjusted to fair value. In the West, where we have significant competition from foreclosures, we have had to continue to reduce prices in order to maintain sales pace. This is especially true in some of the more fringe markets in our West segment. Inventory impairments were lower than they have been in several years, as we have begun to see some stabilization in prices and sales pace in some of our segments. It is difficult to predict if this trend will continue, and should it become necessary to further lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.  Below is a break-down of our lot option walk-aways and impairments by segment for fiscal 2011. In 2011, in total, we walked away from 41.3% of all the lots we controlled under option contracts. The remaining 58.7% of our option lots are in communities that remain economically feasible, including a substantial number that were successfully renegotiated in the past few years.  The following table represents lot option walk-aways by segment for the year ended October 31, 2011:                     Dollar                                                            Walk-Away                    Amount       Number of            % of                            Lots as a                   of Walk       Walk-Away       Walk-Away       Total Option        % of Total (In millions)        Away            Lots            Lots            Lots(1)       Option Lots Northeast       $    13.4           1,839            26.4 %            3,496              52.6 % Mid-Atlantic          6.1           2,471            35.4 %            4,556              54.2 % Midwest               0.5             557             8.0 %            1,572              35.4 % Southeast             0.8           1,616            23.1 %            2,598              62.2 % Southwest             0.4             357             5.1 %            3,774               9.5 % West                  3.1             143             2.0 %              900              15.9 % Total           $    24.3           6,983           100.0 %           16,896              41.3 %   

(1) Includes lots optioned at October 31, 2011 and lots optioned that the Company

walked-away from in the year ended October 31, 2011.

    The following table represents impairments by segment for the year ended October 31, 2011:                       Dollar                               Pre-       % of Pre-                   Amount of              % of       Impairment      Impairment (In millions)    Impairment       Impairments            Value           Value Northeast       $      54.9              70.9 %   $      179.9            30.5 % Mid-Atlantic            3.4               4.4 %           17.3            19.7 % Midwest                 1.1               1.4 %            4.2            26.2 % Southeast               1.5               1.9 %            5.1            29.4 % Southwest               0.1               0.1 %            0.3            33.3 % West                   16.5              21.3 %           45.2            36.5 % Total           $      77.5             100.0 %   $      252.0            30.8 %                                            43

--------------------------------------------------------------------------------   Homebuilding selling, general, and administrative ("SGA") expenses decreased to $161.5 million for the year ended October 31, 2011, and decreased to $178.3 million for the year ended October 31, 2010 from $239.6 million for the year ended October 31, 2009. These decreases in SGA expenses are the result of reduced costs through headcount reduction, administrative consolidation and other cost saving measures.  

Land Sales and Other Revenues

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

                                                                                  Year Ended (In thousands)                                         October 31, 2011       October 31, 2010       October 31, 2009 Land and lot sales                                   $           26,745     $            6,820     $           27,250 Cost of sales, net of impairment reversals and excluding interest                                                8,648                    177                 15,853 Land and lot sales gross margin, excluding interest                                                         18,097                  6,643                 11,397 Land sales interest expense                                      17,660                  5,345                  8,482 Land and lot sales gross margin, including interest                                             $              437     $            1,298     $            2,915    Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. Profits from land sales for the year ended October 31, 2011 were less than for the year ended October 31, 2010. Although we budget land sales, they are often dependent upon receiving approvals and entitlements, the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult. There were several larger land sales in the current year compared to only a few in the prior year, which resulted in the significant increase of land sales revenue.  Land sales and other revenues increased $20.6 million and decreased $25.9 million for the years ended October 31, 2011 and October 31, 2010, respectively. Other revenues include income from contract cancellations, where the deposit has been forfeited due to contract terminations, interest income, cash discounts, buyer walk-aways and miscellaneous one-time receipts. In fiscal 2011, the primary reason for the increase in other revenue by $0.7 million was due to the payoff of a note receivable owed to us from which we recognized interest income. In fiscal 2010, the primary reason for the decrease in other revenue by $5.5 million was a reduction in interest income due to lower excess cash in interest bearing accounts as well as lower interest rates in 2010 compared to 2009. In addition, as cancellation rates have come down as compared to the prior year, income from forfeited customer deposits has declined.                                          44 --------------------------------------------------------------------------------

Homebuilding Operations by Segment

Financial information relating to the Company's operations was as follows:

Segment Analysis (Dollars in thousands, except average sales price)

                                                           Years Ended October 31,                                                    Variance                     Variance                                                        2011                         2010                                                    Compared                     Compared                                          2011       to 2010           2010       to 2009            2009 Northeast Homebuilding revenue                $ 201,984     $ (96,729 )    $ 298,713     $ (66,163 )    $  364,876 Loss before income taxes            $ (99,276 )   $  (6,671 )    $ (92,605 )   $ 248,542      $ (341,147 ) Homes delivered                           399          (319 )          718          (105 )           823 Average sales price                 $ 450,792     $  37,910      $ 412,882     $ (21,802 )    $  434,684 Contract cancellation rate                 18 %          (5 )%          23 %           0 %            23 % 

Mid-Atlantic

 Homebuilding revenue                $ 199,716     $ (82,336 )    $ 282,052     $ (15,654 )    $  297,706 Loss before income taxes            $ (17,286 )   $ (12,524 )    $  (4,762 )   $  81,055      $  (85,817 ) Homes delivered                           524          (229 )          753           (35 )           788 Average sales price                 $ 379,887     $   7,866      $ 372,021     $  (3,976 )    $  375,997 Contract cancellation rate                 26 %           0 %           26 %          (8 )%           34 % 

Midwest

 Homebuilding revenue                $  70,567     $ (22,791 )    $  93,358     $ (23,950 )    $  117,308 Loss before income taxes            $  (8,977 )   $   4,249      $ (13,226 )   $  11,164      $  (24,390 ) Homes delivered                           360           (79 )          439           (81 )           520 Average sales price                 $ 195,736     $ (12,146 )    $ 207,882     $ (17,099 )    $  224,981 Contract cancellation rate                 15 %          (5 )%          20 %          (4 )%           24 % 

Southeast

 Homebuilding revenue                $  79,453     $ (14,040 )    $  93,493     $ (26,286 )    $  119,779 Loss before income taxes            $ (11,874 )   $    (655 )    $ (11,219 )   $  56,672      $  (67,891 ) Homes delivered                           339           (45 )          384          (105 )           489 Average sales price                 $ 233,469     $  (7,969 )    $ 241,438     $  10,285      $  231,153 Contract cancellation rate                 20 %           6 %           14 %          (8 )%           22 % 

Southwest

 Homebuilding revenue                $ 425,152     $  31,513      $ 393,639     $ (29,169 )    $  422,808 Income (loss) before income taxes   $  29,316     $   6,124      $  23,192     $  83,969      $  (60,777 ) Homes delivered                         1,726           (41 )        1,767          (100 )         1,867 Average sales price                 $ 242,544     $  20,808      $ 221,736     $   2,804      $  218,932 Contract cancellation rate                 22 %           1 %           21 %          (5 )%           26 % 

West

 Homebuilding revenue                $ 128,658     $ (49,822 )    $ 178,480     $ (56,260 )    $  234,740 Loss before income taxes            $ (40,599 )   $  21,170      $ (61,769 )   $ 242,770      $ (304,539 ) Homes delivered                           484          (184 )          668          (207 )           875 Average sales price                 $ 258,895     $  (3,289 )    $ 262,184     $    (294 )    $  262,478 Contract cancellation rate                 17 %          (1 )%          18 %           0 %            18 %    

Homebuilding Results by Segment

  Northeast - Homebuilding revenues decreased 32.4% in 2011 compared to 2010 primarily due to a 44.4% decrease in homes delivered offset by a 9.2% increase in average selling price. The increase in average sales prices was the result of the mix of communities delivering in fiscal 2011 compared to 2010. Loss before income taxes increased $6.7 million to a loss of $99.3 million, which was mainly due to our share of losses on two of our joint ventures in 2011.  Homebuilding revenues decreased 18.1% in 2010 compared to 2009 primarily due to a 12.8% decrease in homes delivered and a 5.0% decrease in average selling price. Loss before income taxes decreased $248.5 million to a loss of $92.6 million, which is mainly due to a $182.1 million decrease in inventory impairment loss and land option write-offs in 2010, along with a decrease in our share of net losses from unconsolidated joint ventures of $31.1million in 2009, which did not recur in fiscal 2010, as we recorded an impairment of our investment in one joint venture and wrote-off our investment in another October 31, 2009. In addition, selling, general and administrative costs were down $18.8 million due to decreased salaries from headcount reductions and other overhead cost savings. In addition, there was a modest increase in gross margin percentage before interest expense.                                          45 --------------------------------------------------------------------------------   Mid-Atlantic -Homebuilding revenues decreased 29.2% in 2011 compared to 2010 primarily due to a 30.4% decrease in homes delivered and offset by a 2.1% increase in average selling price due to increased incentives and the mix of communities that delivered in 2011 compared to 2010. Loss before income taxes increased $12.5 million to a loss of $17.3 million, due mainly to our share of losses on a new joint venture signed in fiscal 2011. Additionally, the segment also had a decrease in gross margin percentage before interest expense.  Homebuilding revenues decreased 5.3% in 2010 compared to 2009 primarily due to a 4.4% decrease in homes delivered and a 1.1% decrease in average selling price due to increased incentives and the mix of communities that delivered in 2010 compared to 2009. Loss before income taxes decreased $81.1 million to a loss of $4.8 million, of which $47.0 million is from the decrease in inventory impairment loss and land option write-offs in 2010. Additionally, the segment also had a modest increase in gross margin percentage before interest expense.  Midwest - Homebuilding revenues decreased 24.4% in 2011 compared to 2010. The decrease was primarily due to a 18.0% decrease in homes delivered, and a 5.8% decrease in average sales price. Loss before income taxes decreased $4.2 million to a loss of $9.0 million. The decrease in the loss was primarily due to a decrease of $3.1 million in inventory impairment and land option write-offs in 2011 and a decrease of $2.0 million in selling, general and administrative costs. In addition, there was a small increase in gross margin percentage before interest expense.  Homebuilding revenues decreased 20.4% in 2010 compared to 2009. The decrease was primarily due to a 15.6% decrease in homes delivered, and a 7.6% decrease in average sales price. Loss before income taxes decreased $11.2 million to a loss of $13.2 million. The decrease in the loss was primarily due to a decrease of $3.3 million in inventory impairment and land option write-offs in 2010 and a decrease of $2.9 million in selling, general and administrative costs. In addition, there was a small increase in gross margin percentage before interest expense.  Southeast - Homebuilding revenues decreased 15.0% in 2011 compared to 2010. The decrease was primarily due to a 11.7% decrease in homes delivered and a 3.3% decrease in average sales price. Loss before income taxes increased by $0.7 million to a loss of $11.9 million due to the increase of $0.8 million in inventory impairment losses and land option write-offs in 2011. In addition, there was a small decrease in gross margin percentage before interest expense.  Homebuilding revenues decreased 21.9% in 2010 compared to 2009. The decrease was primarily due to a 21.5% decrease in homes delivered. Loss before income taxes decreased $56.7 million to a loss of $11.2 million due partly to a $43.2 million decrease in inventory impairment losses and land option write-offs in 2010. Selling, general and administrative costs were down by $8.0 million, due primarily to decreased salaries from headcount reductions and other overhead cost savings. In addition, there was a modest increase in gross margin percentage before interest expense.  Southwest - Homebuilding revenues increased 8.0% in 2011 compared to 2010 primarily due to a 9.4% increase in average sales price. Income before income taxes increased $6.1 million to $29.3 million in 2011 mainly due to the increase in revenues previously mentioned, along with a $1.8 million decrease in selling, general and administrative costs.  Homebuilding revenues decreased 6.9% in 2010 compared to 2009 primarily due to a 5.4% decrease in homes delivered. Loss before income taxes decreased $84.0 million to income of $23.2 million in 2010 mainly due to a $49.9 million decrease in inventory impairment losses and land option write-offs in 2010, and a decrease in our share of net losses on an unconsolidated joint venture of $5.5 million in 2009, which did not recur in fiscal 2010, as we recorded an impairment of our investment in the joint venture at October 31, 2009. Selling, general and administrative costs were down $6.2 million due primarily to decreased salaries from headcount reductions and other overhead cost savings. In addition, there was an increase in gross margins percentage before interest expense.  West - Homebuilding revenues decreased 27.9% in 2011 compared to 2010 primarily due to a 27.5% decrease in homes delivered. The decrease in deliveries was the result of the different mix of communities delivered in fiscal 2011 compared to fiscal 2010. Loss before income taxes decreased $21.2 million to a loss of $40.6 million in 2011 due mainly to a $19.7 million decrease in inventory impairment losses and land option write offs. In addition, there was a decrease of gross margin percentage before interest expense.                                          46 --------------------------------------------------------------------------------   Homebuilding revenues decreased 24.0% in 2010 compared to 2009 primarily due to a 23.7% decrease in home deliveries. The decrease in deliveries was the result of the continued slowing of the housing market in California and reduced active communities as nearly half of our mothballed communities are in the West. Loss before income taxes decreased $242.8 million to a loss of $61.8 million in 2010 due mainly to a $198.4 million decrease in inventory impairment losses and land option write offs. Selling, general and administrative costs were down $13.2 million due primarily to decreased salaries from headcount reductions and other overhead cost savings. In addition, gross margin before interest expense had a significant increase in 2010, as we begin to stabilize prices in this market and we see the benefit of impairment reserve reversals as homes are delivered.  

Financial Services

  Financial services consist primarily of originating mortgages from our homebuyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-backed securities ("MBS") to hedge our mortgage-related interest rate exposure on agency and government loans. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. In an effort to reduce our exposure to the marketability and disposal of nonagency and nongovernmental loans, including Alt-A (FICO scores below 680 and depending on credit criteria) and sub-prime loans (FICO scores below 580 and depending on credit criteria), we no longer originate Alt-A or sub-prime loans. As Alt-A and sub-prime originations were eliminated, we have seen an increase in our level of Federal Housing Administration and Veterans Administration ("FHA/VA") loan origination from levels that historically prevailed prior to the economic downturn. For the years ended October 31, 2011, 2010 and 2009, FHA/VA loans represented 47.2%, 49.3%, and 45.9%, respectively, of our total loans. Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected.  During the years ended October 31, 2011, 2010, and 2009, financial services provided an $8.1 million, $8.9 million, and $6.3 million pretax profit, respectively.  In fiscal 2011, financial services revenue decreased $2.5 million to $29.5 million due to the decrease in the number of mortgage settlements and a decrease in the average loan amount. In fiscal 2010, financial services revenue decreased $3.6 million to $32.0 million due to a decrease in the number of mortgage settlements offset by a slight increase in the average loan amount. In fiscal 2009, we recorded expense of $3.2 million for abandoned lease space, which contributed to the increase in pretax profit from October 31, 2009 to October 31, 2010, as this expense did not recur in 2010. In the market areas served by our wholly owned mortgage banking subsidiaries, approximately 77%, 82%, and 82% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2011, 2010, and 2009, respectively. Servicing rights on new mortgages originated by us will be sold with the loans.  

Corporate General and Administrative

  Corporate general and administrative expenses include the operations at our headquarters in Red Bank, New Jersey. These expenses include payroll, stock compensation, facility and other costs associated with our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality, and safety. Corporate general and administrative expenses declined $10.0 million for the year ended October 31, 2011 compared to the year ended October 31, 2010, and declined $22.1 million for the year ended October 31, 2010 compared to the year ended October 31, 2009. The decrease in expenses in fiscal 2011 was due to a combination of a decrease in depreciation expense from capitalized software costs becoming fully depreciated, coupled with no new significant additions of depreciable assets, the benefit in the reduction as an accrual for self-insured medical claims, based on recent claim data, and a continued effort to tighten variable spending and reduce outside service costs. The reduction in expenses in fiscal 2010 was primarily due to the expense of $14.7 million taken in fiscal 2009 for the cancellation of stock options, which did not recur in fiscal 2010. During fiscal 2009, the Chief Executive Officer, Chief Financial Officer, each of the nonexecutive members of the Board of Directors and certain other senior executives of the Company consented to the cancellation of certain of their options (with the full understanding that the Company made no commitment to provide them with any other form of consideration in respect of the cancelled options) in order to reduce a portion of the equity reserve "overhang" under the Company's equity compensation plans represented by the number of shares of the Company's common stock remaining available for future issuance under such plans (including shares that may be issued upon the exercise or vesting of outstanding options and other rights). The $14.7 million charge to operations was a noncash charge that increased paid in capital by the same amount. Excluding this option cancellation expense, corporate, general and administrative expenses decreased $7.4 million for the year ended October 31, 2010 compared to October 31, 2009. This decrease is primarily due to reduced salaries resulting from headcount reduction and continued tightening of variable spending.                                          47

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Other Interest

  Other interest decreased $0.8 million to $97.2 million for the year ended October 31, 2011. For fiscal 2010, other interest increased $3.2 million to $97.9 million. Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore a portion of interest not covered by qualifying assets must be directly expensed. As our inventory balances for qualifying assets have increased and our debt has decreased, the amount of interest required to be directly expensed has slightly decreased.  

Other Operations

  Other operations consist primarily of miscellaneous residential housing operations expenses, senior rental residential property operations, rent expense for commercial office space, amortization of prepaid bond fees, minority interest relating to consolidated joint ventures, and corporate owned life insurance. Compared to the previous year, other operations decreased $4.9 million to $4.8 million for the year ended October 31, 2011, and decreased $13.8 million to $9.7 million for the year ended October 31, 2010. The decrease in other operations from October 31, 2010 to October 31, 2011 is primarily due to the write-off in 2010 of costs associated with an investment that we decided not to pursue and the write-off of old receivables in the prior year that were deemed uncollectible. The decrease in other operations from October 31, 2009 to October 31, 2010 is primarily due to an $18.7 million accrual for abandoned commercial lease space that occurred in fiscal 2009 and did not recur in fiscal 2010. This expense was offset by income of $5.1 million due to the reversal of an accrual related to litigation in the fourth quarter of fiscal 2009, when it was determined that payment was no longer probable.  

Gain on Extinguishment of Debt

  During the year ended October 31, 2011, our gain on extinguishment of debt was $7.5 million compared to $25.0 million for the year ended October 31, 2010. In February of 2011, we purchased a portion of our subordinated notes ($97.9 million face for $98.6 million cash in a tender offer), and redeemed early the remainder of those notes ($57.8 million in debt for $58.1 million cash). In both transactions, we paid a premium, incurred fees, and wrote off discounts and prepaid costs that we were amortizing over the term of notes. On June 3, 2011, we redeemed early the remainder of certain of our senior secured notes. These transactions resulted in a loss of $3.1 million during the year ended October 31, 2011. Offsetting this loss was a gain of $10.6 million on open market repurchases during the fourth quarter of fiscal 2011. In the fourth quarter of fiscal 2011, we repurchased in the open market a total of $25.6 million principal amount of various issues of our unsecured senior notes due 2014 through 2015 for an aggregate purchase price of $14.0 million, plus accrued and unpaid interest. The net gain of $7.5 million for the year ended October 31, 2011, is net of the write-offs of unamortized discounts and fees, related to these purchases, which represents the difference between the aggregate principal amounts of the notes purchased and the total purchase price.  During the year ended October 31, 2010, we repurchased in the open market a total of $123.5 million principal amount of various issues of our unsecured senior and senior subordinated notes due 2010 through 2017 for an aggregate purchase price of $97.9 million, plus accrued and unpaid interest. We recognized a gain of $25.0 million net of the write-off of unamortized discounts and fees related to these purchases, which represents the difference between the aggregate principal amounts of the notes purchased and the total purchase price. During the year ended October 31, 2009, we repurchased in the open market a total of $628.5 million principal amount of various issues of our unsecured senior and senior subordinated notes due 2010 through 2017 for an aggregate purchase price of $255.4 million, plus accrued and unpaid interest. We recognized a gain of $368.0 million net of the write-off of unamortized discounts and fees, related to these purchases, which represents the difference between the aggregate principal amounts of the notes purchased and the total purchase price. In addition, on December 3, 2008, we exchanged a total of $71.4 million principal amount of various issues of our unsecured senior notes due 2012 through 2017 for $29.3 million in senior secured 18% notes due 2017. This exchange resulted in a recognized gain of $41.3 million. During the year ended October 31, 2009, we completed cash tender offers whereby we purchased an aggregate of approximately $861.7 million principal amount of various issues of our secured and unsecured senior and senior subordinated notes due 2010 through 2017 for an aggregate purchase price of approximately $833.6 million, plus accrued unpaid interest. As a result of the tender offers we recognized a gain of $37.0 million in the third quarter of fiscal 2009, net of the write-off of unamortized discounts and fees and a loss of $36.4 million in the fourth quarter of fiscal 2009. The fourth quarter loss was offset by gains from open market repurchases resulting in a net loss of $17.6 million in the fourth quarter of fiscal 2009. We may continue to make additional debt purchases and/or exchanges through tender offers, open market purchases, private transactions or otherwise from time to time depending on market conditions and covenant restrictions.                                          48 --------------------------------------------------------------------------------

Income (Loss) From Unconsolidated Joint Ventures

  Income (loss) from unconsolidated joint ventures consists of our share of the earnings or losses of the joint ventures. The income decreased $9.9 million to a loss of $9.0 million for the year ended October 31, 2011 compared to the year ended October 31, 2010. The loss is mainly due to the costs incurred with the start up of a new joint venture in fiscal 2011, as well as our share of the losses from inventory impairment on one of our joint ventures. The loss decreased $47.0 million to income of $1.0 million for the year ended October 31, 2010 compared to the year ended October 31, 2009. The income in 2010 was mainly due to two joint ventures, both of which began in late 2009, that delivered homes and reported profits during fiscal 2010. We also recognized income from one of our land development joint ventures that sold a parcel of land for a profit during fiscal 2010.  In addition, in 2009, we wrote down our investment in one of our joint ventures where the full investment was determined to be impaired, as well as for our share of the losses from inventory impairments from two other joint ventures.  Total Taxes  The total income tax benefit was $5.5 million for the year ended October 31, 2011 primarily due to a decrease in tax reserves for uncertain tax positions. For the year ended October 31, 2010, the total income tax benefit was $297.9 million primarily due to the benefit recognized for a federal net operating loss carryback.  On November 6, 2009, President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009, under which the Company was able to carryback its 2009 net operating loss to previously profitable years that were not available for carryback prior to the new tax legislation. We recorded the impact of the carryback of $291.3 million in the three months ended January 31, 2010. We received $274.1 million in the second quarter of fiscal 2010 and the remaining $17.2 million in the three months ended January 31, 2011.  Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If the combination of future years' income (or loss) and the reversal of the timing differences results in a loss, such losses can be carried forward to future years to recover the deferred tax assets. In accordance with ASC 740, we evaluate our deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a "more likely than not" standard. Given the continued downturn in the homebuilding industry during 2009, 2010 and 2011, resulting in additional inventory and intangible impairments, we are in a three-year cumulative loss position as of October 31, 2011. According to ASC 740, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are realizable. Our valuation allowance for current and deferred taxes amounted to $899.4 million and $811.0 million at October 31, 2011 and October 31, 2010, respectively. The valuation allowance increased during the twelve months ended October 31, 2011 primarily due to additional reserves recorded for the federal and state tax benefits related to the losses incurred during the period.  

Off-Balance Sheet Financing

  In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduce the risks associated with land ownership and development. At October 31, 2011, we had $21.4 million in option deposits in cash and letters of credit to purchase land and lots with a total purchase price of $597.9 million. Our liability is generally limited to forfeiture of the nonrefundable deposits, letters of credit and other nonrefundable amounts incurred. We have no material third-party guarantees. However, $2.4 million of the $597.9 million in land and lot option purchase contracts contain specific performance clauses which require us to purchase the land or lots upon satisfaction of certain requirements by both the sellers and the Company. Therefore, this specific performance obligation of $2.4 million, which is the purchase price for these lots net of cash deposits already paid, is recorded on the balance sheet in "Liabilities from inventory not owned."                                          49 --------------------------------------------------------------------------------

Contractual Obligations

  The following summarizes our aggregate contractual commitments at October 31, 2011:                                                        Payments Due by Period (3)                                                 Less than                                       More than (In thousands)                      Total          1 year       1-3 years       3-5 years         5 years Long term debt(1)(4)          $ 2,349,275     $   158,008     $   363,661     $ 1,608,928     $   218,678 Operating leases                   44,702          11,790          17,554          13,091           2,267 Purchase obligations(2)             2,434           2,434 Total                         $ 2,396,411     $   172,232     $   381,215     $ 1,622,019     $   220,945   

(1) Represents our Senior Secured, Senior, and Amortizing Notes. Other Notes

    Payable and related interest payments for the life of the debt of     $712.1 million. Interest on variable rate obligations is based on rates     effective as of October 31, 2011.   

(2) Represents obligations under option contracts with specific performance

provisions, net of cash deposits.

(3) Total contractual obligations exclude our accrual for uncertain tax positions

recorded for financial reporting purposes as of October 31, 2011 because we

were unable to make reasonable estimates as to the period of cash settlement

with the respective taxing authorities.

(4) Does not include the mortgage warehouse line of credit made under our Chase

Master Repurchase Agreement.

    During November 2011, we exchanged certain senior notes, and also repurchased in the open market certain senior notes. See Note 24 to our Consolidated Financial Statements for further information.  We had outstanding letters of credit and performance bonds of approximately $54.1 million and $313.1 million, respectively, at October 31, 2011, related principally to our obligations to local governments to construct roads and other improvements in various developments. We do not believe that any such letters of credit or bonds are likely to be drawn upon.  

Inflation

  Inflation has a long-term effect, because increasing costs of land, materials, and labor result in increasing sale prices of our homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house construction costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers.  Inflation has a lesser short-term effect, because we generally negotiate fixed price contracts with many, but not all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between three to twelve months. Construction costs for residential buildings represent approximately 59.6% of our homebuilding cost of sales.                                          50 --------------------------------------------------------------------------------

Safe Harbor Statement

  All statements in this Annual Report on Form 10-K that are not historical facts should be considered as "Forward Looking Statements" within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. Such risks, uncertainties and other factors include, but are not limited to:  

· Changes in general and local economic and industry and business conditions and

    impacts of the sustained homebuilding downturn;   

· Adverse weather and other environmental conditions and natural disasters;

· Changes in market conditions and seasonality of the Company's business;

· Changes in home prices and sales activity in the markets where the Company

    builds homes;   

· Government regulation, including regulations concerning development of land,

the home building, sales and customer financing processes, tax laws, and the

    environment;   

· Fluctuations in interest rates and the availability of mortgage financing;

           · Shortages in, and price fluctuations of, raw materials and labor;              · The availability and cost of suitable land and improved lots;                                  · Levels of competition;                        · Availability of financing to the Company;                   · Utility shortages and outages or rate fluctuations;   

· Levels of indebtedness and restrictions on the Company's operations and

     activities imposed by the agreements governing the Company's outstanding     indebtedness;                           · The Company's sources of liquidity;                                · Changes in credit ratings;                    · Availability of net operating loss carryforwards;                  · Operations through joint ventures with third parties;   

· Product liability litigation, warranty claims and claims made by mortgage

     investors;                · Successful identification and integration of acquisitions;           · Changes in tax laws affecting the after-tax costs of owning a home;           · Significant influence of the Company's controlling stockholders; and                · Geopolitical risks, terrorist acts and other acts of war.                                            51

--------------------------------------------------------------------------------   Certain risks, uncertainties, and other factors are described in detail in Part I, Item 1 "Business" and Part I, Item 1A "Risk Factors" in this Annual Report on Form 10-K. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason after the date of this Annual Report on Form 10-K.  

ITEM 7A

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