EX-99.B 17 ex_131929.htm EXHIBIT 99.B ex_131929.htm

Exhibit 99.b

 

 

 

Consolidated Financial Statements

 

GTIS-HOV Holdings VI LLC

As Of And For The Year Ended October 31, 2018 And As Of

And For The Period From February 24, 2017 (Inception)

Through October 31, 2017 And Independent Auditors’ Report

 

 

 

 

 

GTIS-HOV Holdings VI LLC

 

Consolidated Financial Statements

 

As Of And For The Year Ended October 31, 2018 And As Of And For The

Period From February 24, 2017 (Inception) through October 31, 2017

 

 

 

Contents

 

Independent Auditors' Report

1-2

 

Consolidated Financial Statements

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Changes in Members’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Consolidated Financial Statements

7-12

 

 

 

 

 

INDEPENDENT AUDITORS' REPORT

 

To the Members of
GTIS-HOV Holdings VI LLC
Matawan, New Jersey

 

We have audited the accompanying consolidated financial statements of GTIS-HOV Holdings VI LLC and its subsidiaries (the "Company"), which comprise the consolidated balance sheets as of October 31, 2018 and 2017, and the related consolidated statements of operations, changes in members' equity, and cash flows for the year ended October 31, 2018 and for the period from February 24, 2017 (date of inception) through October 31, 2017, and the related notes to the consolidated financial statements.

 

Management's Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors' Responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

1

 

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GTIS-HOV Holdings VI LLC and its subsidiaries as of October 31, 2018 and 2017, and the results of their operations and their cash flows for the year ended October 31, 2018 and for the period from February 24, 2017 through October 31, 2017, in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

 

December 20, 2018

 

2

 

 

GTIS-HOV Holdings VI LLC

 

Consolidated Balance Sheets

(Dollars in Thousands)

 

   

October 31,

 
   

2018

   

2017

 

Assets

               

Cash

  $ 4,503     $ 2,369  

Restricted cash

    328       -  

Receivables and deposits

    2,152       320  

Inventories:

               

Land and land development

    25,522       38,841  

Construction in process

    7,523       3,051  

Total inventories

    33,045       41,892  
                 

Prepaid expenses

    1,469       1,361  

Total assets

  $ 41,497     $ 45,942  
                 

Liabilities and Members’ equity

               

Notes payable, net of debt issuance costs

  $ 14,965     $ 34,531  

Accounts payable and other liabilities

    6,161       2,876  

Customers’ deposits

    1,545       1,821  

Accrued interest

    2,243       1,885  

Total liabilities

    24,914       41,113  
                 

Commitments and contingencies (Note 5)

               
                 

Members’ equity

    16,583       4,829  

Total liabilities and members’ equity

  $ 41,497     $ 45,942  

 

See notes to consolidated financial statements.

 

3

 

 

GTIS-HOV Holdings VI LLC

 

Consolidated Statements of Operations

(Dollars in Thousands)

 

   

Year Ended

October 31, 2018

   

Period From

February 24, 2017 (Inception)

Through

October 31, 2017

 

Revenue:

               

Sale of homes

  $ 70,790     $ -  

Other revenue

    7       -  

Total revenue

    70,797       -  
                 

Expenses:

               

Direct costs:

               

Land and land development

    25,167       -  

Construction

    21,540       -  

Other

    2,395       -  

Direct cost of sales

    49,102       -  
                 

Cost of sales interest

    1,793       -  
                 

Indirect cost of sales:

               

Construction and service overhead

    1,196       24  

Other

    1,485       -  

Total indirect cost of sales

    2,681       24  
                 

Selling, general and administrative expense

    5,203       439  
                 

Interest expense

    1,020       1,432  
                 

Net income (loss)

  $ 10,998     $ (1,895 )

 

See notes to consolidated financial statements.

 

 

4

 

 

GTIS-HOV Holdings VI LLC

 

Consolidated Statements of Changes in Members’ Equity

(Dollars in Thousands)

 

For The Years Ended October 31, 2018 and 2017 and The Period From

February 24, 2017 (Inception) Through October 31, 2017

 

   

K. Hovnanian

GT VI

Investment,

LLC

   

Honeywell

Parallel

Blocker LLC

   

GTIS US Residential Strategies

Fund II LP

   

Total

 

Initial Capital Contributions

  $ 6,003     $ 486     $ 235     $ 6,724  

Net loss

    (1,692 )     (137 )     (66 )     (1,895 )

Balance at October 31, 2017

    4,311       349       169       4,829  

Capital Contributions

    675       55       26       756  

Net income

    9,820       795       383       10,998  

Balance at October 31, 2018

  $ 14,806     $ 1,199     $ 578     $ 16,583  

 

See notes to consolidated financial statements.

 

5

 

 

GTIS-HOV Holdings VI LLC

 

Consolidated Statements of Cash Flows

(Dollars in Thousands)

 

   

Year Ended

October 31, 2018

   

Period From

February 24, 2017 (Inception) Through

October 31, 2017

 

Operating activities

               

Net income (loss)

  $ 10,998     $ (1,895 )

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

               

Amortization of deferred financing costs

    157       101  

Changes in operating assets and liabilities:

               

Receivables, deposits and prepaid expenses

    (1,940 )     (1,681 )

Inventories

    8,847       (41,892 )

Accounts payable, other liabilities and accrued interest

    3,643       4,761  

Customers’ deposits

    (276 )     1,821  

Net cash provided by (used in) operating activities

    21,429       (38,785 )
                 

Investing activities

               

Restricted cash

    (328 )     -  

Net cash used in investing activities

    (328 )     -  
                 

Financing activities

               

Member contributions

    756       6,724  

Proceeds from notes payable

    24,510       34,884  

Payments related to notes payable

    (44,233 )     -  

Deferred financing costs from notes payable

    -       (454 )

Net cash (used in) provided by financing activities

    (18,967 )     41,154  
                 

Net increase in cash

    2,134       2,369  

Cash balance, beginning of year

    2,369        

Cash balance, end of year

  $ 4,503     $ 2,369  
                 

Supplemental disclosures of cash flows:

               

Cash paid for interest, net of amounts capitalized

  $ 4,098     $ 471  

 

See notes to consolidated financial statements.

 

6

 

 

GTIS-HOV Holdings VI LLC

 

Notes to Consolidated Financial Statements

 

As Of And For The Year Ended October 31, 2018 And As Of And For The

Period From February 24, 2017 (Inception) Through October 31, 2017

 

1. Description of Business

 

GTIS-HOV Holdings VI LLC (with its subsidiaries, the “Company”) is a residential home developer that markets its products in New Jersey. All construction activity is performed by subcontractors supervised by the Company.

 

On February 24, 2017, K. Hovnanian GT VI Investment, LLC (“K-Hov”) (a subsidiary of K. Hovnanian Enterprises, Inc.) entered into a joint venture agreement with Honeywell Parallel Blocker LLC and US Residential Strategies Fund II LP (collectively, “GTIS”) (both affiliates of GTIS Partners) to develop, construct, and sell residential communities. The Company purchased the property from another subsidiary of K. Hovnanian Enterprises, Inc., which was purchased at fair value.

 

The Company is a limited-life entity. As the existing lots are developed, built on, and sold, operations will decline and cease when all the homes have been delivered. In accordance with the joint venture agreement, dissolution must ultimately occur no later than December 31, 2065. Capital was contributed by K-Hov and GTIS in the following proportion: 89.2857% by K-Hov; and 7.2283% and 3.4860% by GTIS. The joint venture agreement specifies how profits and losses and cash distributions are allocated to the investors. Also in accordance with the joint venture agreement, K-Hov is the managing member, with all significant decisions shared equally by both members.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the Company’s accounts and those of its wholly owned subsidiaries after elimination of all intercompany balances and transactions.

 

Cash

 

Cash includes deposits in checking accounts. Cash balances are held at a financial institution and may, at times, exceed insurable amounts. The Company believes that it mitigates the risk by depositing the cash in a major financial institution.

 

Restricted cash

 

Restricted cash includes cash collateralizing the per home warranty service dollars discussed below.

 

7

 

 

GTIS-HOV Holdings VI LLC

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Inventories

 

Inventories are stated at cost unless the inventory is determined to be impaired, in which case the inventory is written down to its fair value. Inventories of houses include all direct costs of construction, plus capitalized costs, including construction administration, property taxes, interest, and legal fees that relate to development projects. Land, land development, and common facility costs are accumulated by development and are allocated to homes within each development based on buildable acres to product types within each community, which, along with direct construction costs, are allocated to each unit and relieved through cost of sales using the specific identification method.

 

Start-up costs incurred in connection with planned developments are expected to be recovered from the sale of homes and are capitalized. Management periodically reviews the feasibility of planned developments and expenses the costs of developments that are abandoned or which cannot be recovered through the realization of future sales revenue.

 

The Company records impairment losses on inventories related to communities under development when events and circumstances indicate they may be impaired and the Company will not be able to recover its recorded investment. The Company has not recorded any inventory impairments since inception.

 

Interest

 

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

 

Warranty Allowances

 

The Company warranties a home for most ordinary defects generally for the first year of ownership and for major structural defects for the first 10 years of ownership. All warranty services will be provided by and are the responsibility of an affiliate of K-Hov. The Company pays a fixed fee per house at closing. These fees are deposited into restricted cash accounts maintained by the Company until approvals are granted which allow for reimbursement to be paid to such affiliate, K. Hovnanian JV Services Company, L.L.C., to cover the cost of the warranty services after they have been incurred. Additions and charges to the warranty reserve were as follows:

 

8

 

 

GTIS-HOV Holdings VI LLC

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

(In thousands)

 

Year Ended

October 31, 2018

   

The Period from

February 24, 2017 Through

October 31, 2017

 

Balance, beginning of period

  $ -     $ -  

Additions

    328       -  

Charges

    (2 )     -  

Balance, end of period

  $ 326     $ -  

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs expensed totaled $0.4 million and $0.1 million in the year ended October 31, 2018 and in the period from February 24, 2017 through October 31, 2017 and are included in Selling, general and administrative expense on the accompanying consolidated statement of operations.

 

Income Taxes

 

A limited liability company is not subject to the payment of federal or state income taxes, as the components of its income and expenses flow through directly to the members. Accordingly, no provision for income taxes has been reflected in the accompanying consolidated financial statements.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and these differences could have a significant impact on the financial statements.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), (“ASU 2014-09”). ASU 2014-09 requires entities to recognize revenue that represents the transfer of promised goods or services to customers in an amount equivalent to the consideration to which the entity expects to be entitled to in exchange for those goods or services. The following steps should be applied to determine this amount:

 

9

 

 

GTIS-HOV Holdings VI LLC

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

(1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition,” and most industry-specific guidance in the Accounting Standards Codification. The FASB has also issued a number of updates to this standard. The standard is effective for us for annual and interim periods beginning November 1, 2018, and at that time, we expect to apply the modified retrospective method of adoption. We have substantially completed our evaluation of the impact of adopting ASU 2014-09. Based on our assessment, we do not expect significant changes to our business processes, systems, or internal controls as a result of adopting the standard. We also do not expect the adoption of ASU 2014-09 to have a material impact on our consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for the Company’s fiscal year beginning November 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 amends the classification and presentation of changes in restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for the Company’s fiscal year beginning November 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-18 to have a material impact on our consolidated financial statements.

 

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). ASU 2018-09 provides amendments to a wide variety of topics in the FASB’s Accounting Standards Codification, which applies to all reporting entities within the scope of the affected accounting guidance. The transition and effective date guidance are based on the facts and circumstances of each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance of ASU 2018-09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. We are currently evaluating the potential impact of adopting the applicable guidance on our consolidated financial statements.

 

10

 

 

GTIS-HOV Holdings VI LLC

 

Notes to Consolidated Financial Statements (continued)

 

3. Related-Party Transactions

 

As the administrative member of the Company, K-Hov provides certain services to the Company. In connection with providing these services, K-Hov receives fees, which are summarized as follows:

 

Administrative charge

4% of home sales revenue

 

Warranty services charge

$3,600 per home sold

 

The administrative charge is included in Selling, general and administrative expense, and the warranty services charge is included in Indirect cost of sales – Other on the consolidated statement of operations.

 

The following table summarizes the related party fees incurred:

 

(In thousands)

 

Year Ended

October 31, 2018

   

The Period from

February 24, 2017 Through

October 31, 2017

 

Administrative charge

  $ 2,699     $ -  

Warranty services charge

  $ 328     $ -  

 

4. Notes Payable

 

The Company has a secured promissory note with a lender that is an affiliate of GTIS that matures on April 30, 2023. As of October 31, 2018 and 2017, the note had a principal balance of $2.0 million and $17.3 million. Interest is payable monthly at a rate of 10% per annum plus additional interest up to an 18% internal rate of return for the lender, which can be deferred and added to the unpaid principal balance, and thereafter, be subject to interest at the note rate. The note is secured by all of the Company’s property and improvements except for properties with separate secured loans described herein. The Company also had community-specific project financing in its community, secured by the related property and improvements. The total commitment for these loans as of October 31, 2018 and 2017 was $40.0 million. Interest on amounts drawn is payable monthly at a rate of the lender’s prime with a floor of 5.0% per annum. As of October 31, 2018 and 2017, the total amount drawn on all loans was $12.8 million and $17.6 million. As of October 31, 2018 and 2017, total accrued and unpaid interest for all notes payable is $2.2 million and $1.9 million, respectively.

 

11

 

 

GTIS-HOV Holdings VI LLC

 

Notes to Consolidated Financial Statements (continued)

 

5. Commitments and Contingencies

 

The Company is not currently involved in any claims and legal actions arising in the ordinary course of business. If the Company were to become involved in any, management would decide if the ultimate disposition of these matters will have a material adverse effect or not on the Company’s consolidated financial statements.

 

6. Subsequent Events

 

The Company evaluated subsequent events that took place after October 31, 2018, through December 20, 2018, the date the consolidated financial statements were available to be issued. The Company is not aware of any subsequent events that require disclosure in or adjustments to the consolidated financial statements as of October 31, 2018.

 

******

 

 

12