EX-99 16 ex99.htm EXHIBIT 99

Exhibit 99

| Consolidated Financial Statements GTIS-HOV Holdings, L.L.C. Years Ended October 31, 2014, 2013 And 2012 With Independent Auditors’ Report

GTIS-HOV Holdings, L.L.C.

Consolidated Financial Statements

Years Ended October 31, 2014, 2013 and 2012

Contents

Independent Auditors' Report | 1
Consolidated Financial Statements |
Consolidated Balance Sheets | 2
Consolidated Statements of Operations | 3
Consolidated Statements of Changes in Members’ Equity | 4
Consolidated Statements of Cash Flows | 5
Notes to Consolidated Financial Statements | 6-12

INDEPEN DENT AUDITORS' REPORT

To the Members of
GTIS-HOV Holdings, L.L.C.
Red Bank, New Jersey

We have audited the accompanying consolidated balance sheets of GTIS-HOV Holdings, L.L.C. and subsidiaries (the "Company") as of October 31, 2014 and 2013, and the related consolidated statements of operations, changes in members' equity, and cash flows for the years ended October 31, 2014, 2013 and 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing 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 over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2014 and 2013, and the results of its operations and its cash flows for the years ended October 31, 2014, 2013 and 2012, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

December 19, 2014

1

GTIS-HOV Holdings, L.L.C.

Consolidated Balance Sheets

(Dollars in Thousands)

|  | October 31, |
|  | 2014 |  |  | 2013 |
Assets |  |  |  |  |  |
Cash |  | $2,874 |  |  | $7,308 |
Restricted cash and cash equivalents |  | 4,945 |  |  | 5,085 |
Receivables and deposits |  | 1,924 |  |  | 1,917 |
Inventories: |  |  |  |  |  |
Land and land development |  | 22,802 |  |  | 37,034 |
Construction in process |  | 12,245 |  |  | 12,811 |
Consolidated inventory not owned |  | 3,530 |  |  | 4,033 |
Total inventories |  | 38,577 |  |  | 53,878 |
Prepaid expenses |  | 675 |  |  | 922 |
Total assets |  | $48,995 |  |  | $69,110 |
Liabilities and members’ equity |  |  |  |  |  |
Note payable |  | $- |  |  | $20,797 |
Construction loans |  | - |  |  | 164 |
Liabilities from inventory not owned |  | 3,068 |  |  | 3,500 |
Accounts payable and other liabilities |  | 8,180 |  |  | 11,860 |
Customers’ deposits |  | 475 |  |  | 841 |
Total liabilities |  | 11,723 |  |  | 37,162 |
Commitments and contingencies |  | - |  |  | - |
Members’ equity |  | 37,272 |  |  | 31,948 |
Total liabilities and members’ equity |  | $48,995 |  |  | $69,110 |

See notes to consolidated financial statements.

2

GTIS-HOV Holdings, L.L.C.

Consolidated Statements of Operations

(Dollars in Thousands)

|  | Years Ended October 31, |
|  | 2014 |  |  | 2013 |  |  | 2012 |
Revenue: |  |  |  |  |  |  |  |  |
Sale of homes |  | $ 77,450 |  |  | $ 157,771 |  |  | $ 125,537 |
Other revenue |  | 39 |  |  | 49 |  |  | 84 |
Total revenue |  | 77,489 |  |  | 157,820 |  |  | 125,621 |
Expenses: |  |  |  |  |  |  |  |  |
Direct costs: |  |  |  |  |  |  |  |  |
Land and land development |  | 23,349 |  |  | 50,451 |  |  | 45,630 |
Construction |  | 29,517 |  |  | 61,519 |  |  | 44,980 |
Other |  | 3,402 |  |  | 8,073 |  |  | 5,936 |
Direct cost of sales |  | 56,268 |  |  | 120,043 |  |  | 96,546 |
Cost of sales interest |  | 1,672 |  |  | 8,740 |  |  | 9,052 |
Indirect cost of sales: |  |  |  |  |  |  |  |  |
Construction and service overhead |  | 2,765 |  |  | 4,063 |  |  | 2,220 |
Other |  | 1,316 |  |  | 3,054 |  |  | 2,504 |
Total indirect cost of sales |  | 4,081 |  |  | 7,117 |  |  | 4,724 |
Gross margin |  | 15,468 |  |  | 21,920 |  |  | 15,299 |
Selling, general and administrative expense |  | 5,383 |  |  | 11,481 |  |  | 10,451 |
Interest expense |  | 761 |  |  | 6,260 |  |  | 5,485 |
Net income (loss) |  | $ 9,324 |  |  | $ 4,179 |  |  | $ (637 | )

See notes to consolidated financial statements.

3

GTIS-HOV Holdings, L.L.C.

Consolidated Statement of Changes in Members’ Equity

(Dollars in Thousands)

Years Ended October 31, 2014, 2013 and 2012

|  | K. Hovnanian |  |  |  |  |  |  |
|  | GT |  |  |  |  |  |  |
|  | Investment, |  |  | GTIS HovSite, |  |  |  |
|  | LLC |  |  | LP |  |  | Total |
Balance at October 31, 2011 |  | $25,477 |  |  | $2,929 |  |  | $28,406 |
Net loss |  | (561 | ) |  | (76 | ) |  | (637 | )
Balance at October 31, 2012 |  | 24,916 |  |  | 2,853 |  |  | 27,769 |
Net income |  | 3,678 |  |  | 501 |  |  | 4,179 |
Balance at October 31, 2013 |  | 28,594 |  |  | 3,354 |  |  | 31,948 |
Net income |  | 8,205 |  |  | 1,119 |  |  | 9,324 |
Distributions |  | (3,520 | ) |  | (480 | ) |  | (4,000 | )
Balance at October 31, 2014 |  | $33,279 |  |  | $3,993 |  |  | $37,272 |

See notes to consolidated financial statements.

4

GTIS-HOV Holdings, L.L.C.

Consolidated Statement of Cash Flows

(Dollars in Thousands)

|  | Years Ended October 31, |
|  | 2014 |  |  | 2013 |  |  | 2012 |
Operating activities |  |  |  |  |  |  |  |  |
Net income (loss) |  | $ 9,324 |  |  | $ 4,179 |  |  | $ (637 | )
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |  |  |  |  |  |  |  |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |  |
Restricted cash |  | (570 | ) |  | (1,520 | ) |  | (603 | )
Receivables, deposits and prepaid expenses |  | 240 |  |  | 1,267 |  |  | (1,533 | )
Inventories |  | 15,301 |  |  | 47,117 |  |  | 13,190 |
Accounts payable and other liabilities |  | (4,112 | ) |  | 7,032 |  |  | 187 |
Customers’ deposits |  | (366 | ) |  | (203 | ) |  | 499 |
Net cash provided by operating activities |  | 19,817 |  |  | 57,872 |  |  | 11,103 |
Investing activities |  |  |  |  |  |  |  |  |
Restricted cash from warranty service dollars |  | 710 |  |  | 1,761 |  |  | (700 | )
Net cash (used in) provided by investing activities |  | 710 |  |  | 1,761 |  |  | (700 | )
Financing activities |  |  |  |  |  |  |  |  |
Capital distributions |  | (4,000 | ) |  | – |  |  | – |
Principal payments on note payable |  | (20,797 | ) |  | (54,829 | ) |  | (12,590 | )
Proceeds from construction loans |  | 1 |  |  | 7,466 |  |  | 12,115 |
Payments related to construction loans |  | (165 | ) |  | (9,952 | ) |  | (13,706 | )
Net cash used in financing activities |  | (24,961 | ) |  | (57,315 | ) |  | (14,181 | )
Net (decrease) increase in cash |  | (4,434 | ) |  | 2,318 |  |  | (3,778 | )
Cash balance, beginning of year |  | 7,308 |  |  | 4,990 |  |  | 8,768 |
Cash balance, end of year |  | $ 2,874 |  |  | $ 7,308 |  |  | $ 4,990 |
Supplemental disclosures of cash flows: |  |  |  |  |  |  |  |  |
Cash paid for interest, net of amounts capitalized |  | $ 831 |  |  | $ 3,844 |  |  | $ 4,024 |

See notes to consolidated financial statements.

5

GTIS-HOV Holdings, L.L.C.

Notes to Consolidated Financial Statements

Years Ended October 31, 2014, 2013 and 2012

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, 2014, 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.

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GTIS-HOV Holdings, L.L.C.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements include the Company’s accounts and those of its wholly owned subsidiaries after elimination of all intercompany balances and transactions. Certain immaterial prior year amounts have been reclassified to conform to the current year presentation.

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, Treasury Bills with maturities of 180 days, the per home warranty service dollars discussed below, and customer deposits collected that are restricted from use.

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.

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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 be unable 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 and land banking arrangements, other options 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 October 2014, inventory of $3.5 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $3.1 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, 2014 and 2013 were as follows:

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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) |  | 2014 |  |  | 2013 |
Balance, beginning of period |  | $2,888 |  |  | $1,563 |
Additions |  | 810 |  |  | 1,601 |
Charges |  | (256 | ) |  | (276 | )
Balance, end of period |  | $3,442 |  |  | $2,888 |

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs expensed totaled $0.7 million, $1.3 million and $1.8 million in the years ended October 31, 2014, 2013 and 2012, respectively, and are included in selling overhead 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 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 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 January 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-04, “Receivables - Troubled Debt Restructurings by Creditors,” which clarifies when an in substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan has occurred. By doing so, this guidance helps determine when the creditor should derecognize the loan receivable and recognize the real estate property. The guidance is effective for the Company beginning November 1, 2015 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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GTIS-HOV Holdings, L.L.C.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

In May 2014, the FASB issued ASU 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 ASU 605, Revenue Recognition, most industry-specific guidance in the Accounting Standards Codification. ASU 2014-09 is effective for the Company beginning November 1, 2017. Early adoption is not permitted. We are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In August 2014, the FASB issued Accounting Standards Update No. 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 is effective for the Company for our fiscal year ending October 31, 2017. Early adoption is permitted. We do not anticipate the adoption of ASU 2014-15 to have a material impact on the Company’s 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

10

GTIS-HOV Holdings, L.L.C.

Notes to Consolidated Financial Statements (continued)

3. Related-Party Transactions (continued)

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 general and administrative expense, the insurance charge is included in general and administrative expense and the warranty services charge is included in indirect cost of sales – Other on the consolidated statements of operations.

The following table summarizes the related party fees incurred:

|  | Years Ended October 31, |
(In thousands) |  | 2014 |  |  | 2013 |  |  | 2012 |
Administrative charge |  | $3,099 |  |  | $6,311 |  |  | $5,022 |
Insurance charge |  | $591 |  |  | $1,537 |  |  | $ 922 |
Warranty services charge |  | $859 |  |  | $1,635 |  |  | $1,263 |

4. Revolving Land Development and Construction Loans

The Company has two acquisition and development loans to fund the development of the land for two communities in Virginia, secured by the related property and improvements. The loan commitment for these loans is $5.5 million and $3.1 million, respectively. Interest on amounts drawn is payable monthly at a floating rate of prime, plus 1.00%, with a minimum rate of 5.25% for both loans. As of October 31, 2014 and 2013, there were no amounts drawn on the development loans. The Company also has two revolving construction loans to fund the construction of homes for the same two communities secured by the related property and improvements. The loan commitment for these loans is $4.0 million and $1.5 million, respectively. Interest on amounts drawn is payable monthly at a rate of prime plus 0.75%, with a minimum rate of 4.75% for both loans. As of October 31, 2014, there were no amounts drawn on the construction loans. As of October 31, 2013, the total amount drawn on the construction loans was $0.2 million.

5. Note Payable

The Company had a secured promissory note with a lender that is an affiliate of GTIS that matures on December 20, 2015. As of October 31, 2014, the note was paid off. As of October 31, 2013, the note had a principal balance of $20.8 million, with no accrued, unpaid interest or PIK interest. Interest is payable monthly at a rate of 18% per annum, which can be deferred and

11

GTIS-HOV Holdings, L.L.C.

Notes to Consolidated Financial Statements (continued)

5. Note Payable (continued)

added to the unpaid principal balance, and thereafter, be subject to interest at the note rate. The note was secured by all of the Company’s property and improvements except for the Virginia properties with separate secured loans described in Note 4.

6. 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 financial statements.

The Company has performance letters of credit approximating $1.2 and $5.2 million for October 31, 2014 and 2013, 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, 2014 and 2013.

7. Fair Value of Financial Instruments

The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Level 1 fair value is determined based on quoted prices in active markets for identical assets. Our Level 1 financial instruments consist of cash, restricted cash, and cash equivalents, the fair value of which is based on Level 1 inputs. Level 3 fair value is determined using significant observable inputs. Our Level 3 financial instruments consist of a note payable and construction loans. Due to the short term nature of these instruments, the book value of these financial instruments approximates fair value.

8. Subsequent Events

The Company evaluated subsequent events that took place after October 31, 2014, through December 19, 2014, 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, 2014.

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