Exhibit 99(a)

Consolidated Financial Statements GTIS-HOV Holdings, L.L.C. Years Ended October 31, 2017, 2016 and 2015 With Independent Auditors’ Report

 

 

GTIS-HOV Holdings, L.L.C.

 

Consolidated Financial Statements

 

Years Ended October 31, 2017, 2016 and 2015

 

Contents

 

Independent Auditors' Report	1
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
GTIS-HOV Holdings, L.L.C.
Red Bank, New Jersey

 

We have audited the accompanying consolidated financial statements of GTIS-HOV Holdings, L.L.C. and its subsidiaries (the "Company"), which comprise the consolidated balance sheets as of October 31, 2017 and 2016, and the related consolidated statements of operations, changes in members' equity, and cash flows for the years ended October 31, 2017, 2016 and 2015, 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 October 31, 2017 and 2016, and the results of their operations and their cash flows for the years ended October 31, 2017, 2016 and 2015, in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

 

December 28, 2017

 

 

GTIS-HOV Holdings, L.L.C.
Consolidated Balance Sheets
(Dollars in Thousands)

 

		October 31,
		2017				2016
Assets
Cash		$	3,279			$	4,986
Restricted cash and cash equivalents			4,880				4,814
Receivables and deposits			95				93
Inventories:
Land and land development			9,688				8,156
Construction in process			2,089				2,461
Consolidated inventory not owned			934				892
Total inventories			12,711				11,509
Prepaid expenses			585				441
Total assets		$	21,550			$	21,843
Liabilities and Members’ equity
Liabilities from inventory not owned		$	746			$	746
Accounts payable and other liabilities			5,331				5,179
Customers’ deposits			205				111
Total liabilities			6,282				6,036
Commitments and contingencies (Note 4)
Members’ equity			15,268				15,807
Total liabilities and members’ equity		$	21,550			$	21,843
See notes to consolidated financial statements.

 

 

 

 

GTIS-HOV Holdings, L.L.C.
Consolidated Statements of Operations
(Dollars in Thousands)

 

		Years Ended October 31,
		2017				2016				2015
Revenue:
Sale of homes		$	17,250			$	21,627			$	50,473
Other revenue			26				31				211
Total revenue			17,276				21,658				50,684
Expenses:
Direct costs:
Land and land development			4,979				6,391				16,000
Construction			7,077				8,904				20,531
Other			823				994				2,029
Direct cost of sales			12,879				16,289				38,560
Cost of sales interest			146				377				1,471
Indirect cost of sales:
Construction and service overhead			422				857				2,049
Other			371				808				601
Total indirect cost of sales			793				1,665				2,650
Gross margin			3,458				3,327				8,003
Selling, general and administrative expense			1,407				1,658				3,325
Interest expense			90				112				300
Net income		$	1,961			$	1,557			$	4,378
See notes to consolidated financial statements.

 

 

 

 

GTIS-HOV Holdings, L.L.C.
Consolidated Statements of Changes in Members’ Equity
(Dollars in Thousands)
Years Ended October 31, 2017, 2016 and 2015

 

		K. Hovnanian
		GT
		Investment,				GTIS HovSite,
		LLC				LP				Total
Balance at October 31, 2014		$	33,279			$	3,993			$	37,272
Net income			3,853				525				4,378
Distributions			(18,216	)			(2,484	)			(20,700	)
Balance at October 31, 2015			18,916				2,034				20,950
Net income			1,370				187				1,557
Distributions			(5,896	)			(804	)			(6,700	)
Balance at October 31, 2016			14,390				1,417				15,807
Net income			1,726				235				1,961
Distributions			(2,200	)			(300	)			(2,500	)
Balance at October 31, 2017		$	13,916			$	1,352			$	15,268
See notes to consolidated financial statements.

 

 

 

 

 

 

GTIS-HOV Holdings, L.L.C.
Consolidated Statements of Cash Flows
(Dollars in Thousands)

 

		Years Ended October 31,
		2017				2016				2015
Operating activities
Net income		$	1,961			$	1,557			$	4,378
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
Restricted cash			83				(444	)			907
Receivables, deposits and prepaid expenses			(146	)			87				1,978
Inventories			(1,202	)			6,696				20,372
Accounts payable and other liabilities			152				(1,139	)			(4,184	)
Customers’ deposits			94				(94	)			(270	)
Net cash provided by operating activities			942				6,663				23,181
Investing activities
Restricted cash to warranty service dollars			(149	)			(84	)			(248	)
Net cash used in investing activities			(149	)			(84	)			(248	)
Financing activities
Capital distributions			(2,500	)			(6,700	)			(20,700	)
Net cash used in financing activities			(2,500	)			(6,700	)			(20,700	)
Net (decrease) increase in cash			(1,707	)			(121	)			2,233
Cash balance, beginning of year			4,986				5,107				2,874
Cash balance, end of year		$	3,279			$	4,986			$	5,107
Supplemental disclosures of cash flows:
Cash paid for interest, net of amounts capitalized		$	89			$	117			$	266
See notes to consolidated financial statements.

 

 

 

 

 

 

 

GTIS-HOV Holdings, L.L.C.

 

Notes to Consolidated Financial Statements

 

Years Ended October 31, 2017, 2016 and 2015

 

1. Description of Business

 

GTIS-HOV Holdings, L.L.C. (with its subsidiaries, the “Company”) is a residential home developer that markets its products in California, Maryland, Pennsylvania, and Virginia. All construction activity is performed by subcontractors supervised by the Company.

 

On December 22, 2010, K. Hovnanian GT Investment, LLC (“K-Hov”) (a subsidiary of K. Hovnanian Enterprises, Inc.) entered into a joint venture agreement with GTIS HovSite II LP (GTIS) (an affiliate of GoldenTree InSite Partners) to develop, construct, and sell residential communities. The Company purchased two properties in California from other subsidiaries of K. Hovnanian Enterprises, Inc. and one property from a third party. All properties were purchased at fair value.

 

On April 29, 2011, the Company purchased four properties from other subsidiaries of K. Hovnanian Enterprises, Inc. and one property from a third party. All properties were purchased 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, 2060. K-Hov’s initial capital contribution included $4.0 million of Tier Two Capital. Tier Two Capital is additional capital contributed at the formation of the Company that will be returned after the return of all Tier One Capital to the investors. No profits or losses are allocated to Tier Two Capital. Tier One Capital was contributed by K-Hov and GTIS in the following proportion: 88% by K-Hov; and 12% 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 an 18% 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 October 31, 2017, 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.

 

 

GTIS-HOV Holdings, L.L.C.

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements 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 and 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.

 

 

 

 

GTIS-HOV Holdings, L.L.C.

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

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 that they may be impaired and that 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 accounting principles generally accepted in the United States of America. During fiscal 2013, the Company sold and leased back certain model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of 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 both October 2017 and 2016, inventory of $0.9 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $0.7 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 warrants 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 (varies for each community) 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, LLC, to cover the cost of the warranty services after they have been incurred. Additions and charges to the warranty reserve for the year ended October 31, 2017 and 2016 were as follows:

 

 

 

 

GTIS-HOV Holdings, L.L.C.

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

		Years ended October 31,
(In thousands)		2017				2016
Balance, beginning of period		$	3,687			$	3,658
Additions			191				211
Charges			(47	)			(182	)
Balance, end of period		$	3,831			$	3,687

 

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs expensed totaled $0.2 million, $0.2 million and $0.5 million in the years ended October 31, 2017, 2016 and 2015, 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 accounting standards generally accepted in the United States 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.

 

 

 

 

 

 

 

 

GTIS-HOV Holdings, L.L.C.

 

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. In August 2015, the FASB issued ASU 2015-14 on this same topic, which defers for one year the effective date of ASU 2014-09, therefore making the guidance effective for the Company beginning November 1, 2018. Additionally, the FASB also decided to permit entities to early adopt the standard, which allows for either full retrospective or modified retrospective methods of adoption, for reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements, and have been involved in industry-specific discussions with the FASB on the treatment of certain items. However, due to the nature of our operations, we expect to identify similar performance obligations in our contracts under ASU 2014-09 compared with the deliverables and separate units of account we have identified under existing accounting standards. As a result, we expect the timing of our recognition of revenues to remain generally the same. Nonetheless, we are still evaluating the impact of specific parts of this ASU, and expect our revenue-related disclosures to change upon its adoption.

 

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 was effective for the Company as of our fiscal year ending October 31, 2017 and the adoption did not have a material impact on the Company’s 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

 

 

GTIS-HOV Holdings, L.L.C.

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

beginning November 1, 2019. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance 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, 2019. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements.

 

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	$3,391 per home sold – Northern California
	$20,236 per home sold – Southern California
	$2,188 per home sold – Maryland
	$14,942 per home sold – Pennsylvania
	$2,188 per home sold – Virginia
Warranty services charge	$4,200 per home sold – Northern California
	$3,700 per home sold – Southern California
	$4,500 per home sold – Maryland
	$5,150 per home sold – Pennsylvania
	$4,900 per home sold – Virginia

 

The administrative charge is included in Selling, general and administrative expense, the insurance 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 statements of operations.

 

 

 

 

GTIS-HOV Holdings, L.L.C.

 

Notes to Consolidated Financial Statements (continued)

 

3. Related-Party Transactions (continued)

 

The following table summarizes the related party fees incurred:

 

		Years Ended October 31,
(In thousands)		2017				2016				2015
Administrative charge		$	690			$	865			$	2,018
Insurance charge		$	85			$	96			$	200
Warranty services charge		$	191			$	211			$	450

 

 

4. Commitments and Contingencies

 

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial statements.

 

The Company has performance letters of credit approximating $0.7 and $0.8 million for October 31, 2017 and 2016, respectively that have been issued by various financial institutions on behalf of the Company to certain municipalities to guarantee the completion of certain improvements associated with various communities. No amounts have been drawn against these letters of credit as of October 31, 2017 and 2016.

 

5. Subsequent Events

 

The Company evaluated subsequent events that took place after October 31, 2017, through December 28, 2017, the date the 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, 2017.

 

 

 

 

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