Exhibit 99(d)

 

 

 

 

Consolidated Financial Statements   Hovsite Holdings III LLC As Of December 31, 2019 And 2018 And For The Years Ended December 31, 2019, 2018 and 2017 With Independent Auditors’ Report

 

 

 

Hovsite Holdings III LLC

 

Consolidated Financial Statements

 

As Of December 31, 2019 And 2018 And For The

Years Ended December 31, 2019, 2018 and 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	7-13

 

 

 

INDEPENDENT AUDITORS' REPORT

 

To the Members of
Hovsite Holdings III LLC
Matawan, New Jersey

 

We have audited the accompanying consolidated financial statements of Hovsite Holdings III LLC and its subsidiaries (the "Company"), which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in members’ equity, and cash flows for each of the three years in the period ended December 31, 2019, 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.

 

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2019, in accordance with accounting principles generally accepted in the United States of America.

 

 

/s/ Deloitte & Touche LLP

New York, New York

February 26, 2020

 

 

Hovsite Holdings III LLC
Consolidated Balance Sheets
(Dollars in Thousands)

 

		December 31,
		2019				2018
Assets
Cash		$	3,919			$	1,618
Restricted cash and cash equivalents			1,591				1,225
Receivables and deposits			223				224
Inventories:
Land and land development			78,476				88,656
Construction in process			11,208				8,890
Consolidated inventory not owned			7,459				7,459
Total inventories			97,143				105,005
Prepaid expenses and other assets			4,283				4,037
Total assets		$	107,159			$	112,109
Liabilities and Members’ equity
Construction Loan		$	28,541			$	33,723
Liabilities from inventory not owned			6,492				6,492
Accounts payable and other liabilities			4,034				3,397
Customers’ deposits			299				268
Accrued Interest			223				273
Total liabilities			39,589				44,153
Commitments and contingencies (Note 5)
Members’ equity			67,570				67,956
Total liabilities and members’ equity		$	107,159			$	112,109

 

See notes to consolidated financial statements.

 

 

Hovsite Holdings III LLC

Consolidated Statements of Operations

(Dollars in Thousands)

 

		Years Ended December 31,
		2019				2018				2017
Revenue:
Sale of homes		$	44,341			$	25,163			$	40,312
Other revenue			184				35				148
Total revenue			44,525				25,198				40,460
Expenses:
Direct costs:
Land and land development			17,548				10,280				15,959
Construction			17,411				9,799				15,111
Other			2,089				1,327				2,271
Direct cost of sales			37,048				21,406				33,341
Cost of sales interest			981				737				105
Indirect cost of sales:
Construction and service overhead			1,550				974				1,781
Other			1,689				655				1,295
Total indirect cost of sales			3,239				1,629				3,076
Selling, general and administrative expense			1,852				2,094				3,156
Interest expense			1,791				2,743				2,605
Net loss		$	(386	)		$	(3,411	)		$	(1,823	)

 

See notes to consolidated financial statements.

 

 

Hovsite Holdings III LLC

Consolidated Statements of Changes in Members’ Equity

(Dollars in Thousands)

For The Years Ended December 31, 2019, 2018 and 2017

 

						K. Hovnanian
		GTIS HR III				Hovsite III
		Aggregator				Investment,
		LLC				LLC				Total
Balance at January 1, 2017		$	39,359			$	9,840			$	49,199
Capital contributions			7,500				14,491				21,991
Net loss			(215	)			(1,608	)			(1,823	)
Balance at December 31, 2017			46,644				22,723				69,367
Capital contributions			-				2,000				2,000
Net loss			(2,076	)			(1,335	)			(3,411	)
Balance at December 31, 2018			44,568				23,388				67,956
Net loss			(253	)			(133	)			(386	)
Balance at December 31, 2019		$	44,315			$	23,255			$	67,570

 

See notes to consolidated financial statements.

 

 

Hovsite Holdings III LLC

Consolidated Statement of Cash Flows

(Dollars in Thousands)

 

		Years Ended December 31,
		2019				2018				2017
Operating activities
Net loss		$	(386	)		$	(3,411	)		$	(1,823	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of deferred financing costs			-				71				107
Changes in operating assets and liabilities:
Receivables, deposits and prepaid expenses			(245	)			3,703				(4,681	)
Inventories			7,862				2,959				(2,675	)
Accounts payable, other liabilities and accrued interest			587				(7,095	)			6,011
Customers’ deposits			31				268				(123	)
Net cash provided by (used in) operating activities			7,849				(3,505	)			(3,184	)
Financing activities
Member contributions			-				2,000				-
Proceeds from notes payable			-				-				9,038
Payments related to notes payable			(5,182	)			(1,722	)			(1,705	)
Net cash (used in) provided by financing activities			(5,182	)			278				7,333
Net increase (decrease) in cash and restricted cash and cash equivalents			2,667				(3,226	)			4,149
Cash and restricted cash and cash equivalents balance, beginning of year			2,843				6,069				1,920
Cash and restricted cash and cash equivalents balance, end of year		$	5,510			$	2,843			$	6,069
Supplemental disclosures of cash flows:
Cash paid for interest, net of amounts capitalized		$	1,840			$	3,976			$	3,798
Reconciliation of cash and restricted cash and cash equivalents:
Cash		$	3,919			$	1,618			$	5,076
Restricted cash and cash equivalents			1,591				1,225				993
Total cash and restricted cash and cash equivalents		$	5,510			$	2,843			$	6,069

 

See notes to consolidated financial statements.

 

Supplemental disclosure of noncash financing activity: In 2017, the members agreed to convert notes payable to affiliates into capital contributions to the Company, resulting in a $4.6 million receivable and $17.4 million of notes payable to affiliates converted to capital.

 

 

 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements

 

As Of And For The Years Ended December 31, 2019, 2018 and 2017

 

1. Description of Business

 

Hovsite Holdings III LLC (with its subsidiaries, the “Company”) is a residential home developer that markets its products in Florida. All construction activity is performed by subcontractors supervised by the Company.

 

On September 29, 2014, K. Hovnanian Hovsite III Investment, LLC (“K-Hov”) (a subsidiary of K. Hovnanian Enterprises, Inc.) entered into a joint venture agreement with GTIS HR III Aggregator LLC (“GTIS”) (an affiliate of GoldenTree InSite Partners) to develop, construct, and sell residential communities. The Company purchased property in Florida from a third party seller at fair value.

 

The Company is a limited-life entity, where no additional properties are to be optioned, purchased, or developed, other than under specific circumstances as provided for under the joint venture agreement. 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, 2059. Tier One Capital, as defined in the joint venture agreement, was contributed by K-Hov and GTIS in the following proportion: 20% by K-Hov; and 80% by GTIS. The joint venture agreement specifies how profits and losses and cash distributions are allocated to the investors. Until cumulative profits allocated to the investors generate a 12% internal rate of return on Tier One Capital, allocations will generally be based on the investor’s proportionate amount of Tier One Capital. As of December 31, 2019, this threshold has not been achieved. Also in accordance with the joint venture agreement, K-Hov is the managing member, with all significant decisions shared equally by both members.

 

In February 2018, with an effective date as of December 2017, both members signed an amendment to the joint venture agreement to convert existing notes payable to affiliates into capital contributions. As a result, the amended sharing percentages as of December 31, 2018 and December 31, 2017 were 34.415% and 32.757% for the K-Hov member, respectively, and 65.585% and 67.243% for the GTIS member, respectively. Such percentages are still in effect as of December 31, 2019.

 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (continued)

 

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.

 

Revenue Recognition

 

Income from home sales is recorded when title is conveyed to the buyer, adequate cash payment has been received, and there is no continued involvement. Nonrefundable deposits received from customers upon the signing of a sales contract are recognized as other revenue if the contract is terminated by the customer.

 

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 and cash equivalents

 

Restricted cash and cash equivalents include cash collateralizing surety bonds, which is held in a money market account, as well as cash collateralizing the per home warranty service dollars discussed below.

 

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.

 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

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.

 

“Consolidated inventory not owned” consists of certain model sale leasebacks that are included on the balance sheet in accordance with GAAP. Some of the assets acquired by the Company included certain model homes sold and leased back with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of this continued involvement, for accounting purposes in accordance with Accounting Standards Codification 360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of the balance sheet, at December 31, 2019 and 2018, inventory $7.5 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $6.5 million recorded to “Liabilities from inventories not owned.”

 

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, which is included in accounts payable and other liabilities on the accompanying consolidated balance sheets, were as follows:

 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

(In Thousands)		Years Ended December 31,
		2019				2018
Balance, beginning of period		$	589			$	363
Additions			369				226
Charges			-				-
Balance, end of period		$	958			$	589

 

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs $0.6 million, $0.9 million and $0.4 million, for the years ended December 31, 2019, 2018 and 2017, respectively, and are included in Selling, general and administrative expense on the accompanying consolidated statements 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and these differences could have a significant impact on the consolidated financial statements.

 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

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: (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 January 1, 2019. Based on our assessment, there were no significant changes to our business processes, systems, or internal controls as a result of adopting the standard. The adoption of ASU 2014-09 did not 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 was effective for the Company’s fiscal year beginning January 1, 2018. The adoption of ASU 2016-15 did not 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 was effective for the Company’s fiscal year beginning January 1, 2018. As a result, restricted cash amounts are no longer shown within operating activities as these balances are now included in the beginning and ending cash balances within our Consolidated Statements of Cash Flows. The adoption resulted in the reclassification of restricted cash for the periods presented on our Consolidated Statements of Cash Flows. See also the reconciliation of cash and restricted cash and cash equivalents on our Consolidated Statements of Cash Flows.

 

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 do not expect any material impact of adopting the applicable guidance on our consolidated financial statements.

 

 

Hovsite Holdings III 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
Insurance charge	$4,500 per home sold
Warranty services charge	$5,500 per home sold

 

The administrative and insurance charges are included in Selling, general and administrative expense and the warranty services charge is included in Indirect cost of sales – Other on the consolidated statements of operations. The administrative charge has been suspended from being paid on the first 238 homes delivered after December 4, 2017 and will begin being paid thereafter. As a result, there was no administrative charge for the year ended December 31, 2019 and 2018.

 

The following table summarizes the related party fees incurred:

 

(In thousands)		Years Ended December 31,
		2019				2018				2017
Administrative charge		$	-			$	-			$	1,518
Insurance charge		$	302			$	185			$	293
Warranty services charge		$	369			$	226			$	357

 

 

4. Notes Payable

 

The Company has a secured promissory note with a lender that matures on November 24, 2022. As of December 31, 2019 and 2018, the note had a principal balance of $28.5 million and $33.7 million, respectively, plus $0.2 million and $0.3 million, respectively, of accrued, unpaid interest for both periods. Interest is payable monthly at a rate of 8.25%, for the first year, then the interest rate will be fixed at the Prime Interest Rate plus a margin of 500 basis points, which will be set annually on each adjustment date. The interest rate has a floor of 8.0% and a ceiling of 9.50%. The note is secured by all of the Company’s property and improvements.

 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (continued)

 

5. Commitments and Contingencies

 

The Company is not currently involved in any claims or legal actions arising in the ordinary course of its business. If the Company were to become involved in any, management would decide, based on the facts and circumstances at that time, if the ultimate disposition of these matters could have a material adverse effect or not on the Company’s consolidated financial statements and assess whether a contingent liability would be necessary.

 

6. Subsequent Events (unaudited)

 

The Company has evaluated the impact of all subsequent events through March 27, 2020, which is the date that these financial statements were available to be issued, and has determined there were no subsequent events requiring adjustment to or disclosure in the financial statements, except for the recent global outbreak of a new strain of coronavirus, COVID-19, which continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The global impact of the outbreak has been rapidly evolving, and as cases of the virus have continued to be identified in additional countries, many countries have reacted by instituting quarantines and restrictions on travel. Such actions are creating disruption in global supply chains, and adversely impacting a number of industries, such as transportation, hospitality and entertainment. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the novel coronavirus. Nevertheless, the novel coronavirus presents material uncertainty and risk with respect to the Company’s financial results. In addition to the factors described above, other factors described herein that may affect market, economic and geopolitical conditions, and thereby adversely affect the Company include, without limitation, economic slowdown in the U.S. and internationally, changes in interest rates and/or a lack of availability of credit in the U.S. and internationally, commodity price volatility and changes in law and/or regulation, and uncertainty regarding government and regulatory policy.

 

******

 

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