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hov20191031_10k.htm
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K/A
(Amendment No. 2)
 
☒  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended October 31, 2020
 
☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 1-8551
 
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
22-1851059
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
90 Matawan Road, Fifth Floor, Matawan, NJ
 07747
(Address of Principal Executive Offices)
(Zip Code)
  
  
732-747-7800
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Class A Common Stock $0.01 par value per share
HOV
New York Stock Exchange
Preferred Stock Purchase Rights(1)
N/A
New York Stock Exchange
Depositary Shares each representing
1/1,000th of a share of 7.625% Series A
Preferred Stock
HOVNP
Nasdaq Global Market
 
(1) Each share of Common Stock includes an associated Preferred Stock Purchase Right. Each Preferred Stock Purchase Right initially represents the right, if such Preferred Stock Purchase Right becomes exercisable, to purchase from the Company one ten-thousandth of a share of its Series B Junior Preferred Stock for each share of Common Stock. The Preferred Stock Purchase Rights currently cannot trade separately from the underlying Common Stock.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes ☐ No ☒
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐  No ☒
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer ☐
Accelerated Filer ☒ 
Nonaccelerated Filer ☐  
Smaller Reporting Company ☐
Emerging Growth Company ☐
          
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒
 
The aggregate market value of the voting and nonvoting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of April 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was $64,080,000.
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 5,520,359 shares of Class A Common Stock and 622,201 shares of Class B Common Stock were outstanding as of December 11, 2020.
--10-31 2020 FY
 
1
 
 
HOVNANIAN ENTERPRISES, INC.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Part III — Those portions of the registrant’s definitive proxy statement filed pursuant to Regulation 14A in connection with registrant’s annual meeting of stockholders to be held on March 30, 2021, which are responsive to those parts of Part III, Items 10, 11, 12, 13 and 14 as identified herein.
 
2
 
 
EXPLANATORY NOTE
 
This Amendment No. 2 on Form 10-K/A (“Amendment No. 2”) amends the Annual Report on Form 10-K for the year ended October 31, 2020 of Hovnanian Enterprises, Inc. (“HEI”), which HEI filed with the Securities and Exchange Commission (“SEC”) on December 22, 2020 and which was amended by Amendment No. 1 filed with the SEC on December 23, 2020 (as amended by Amendment No. 1, the “Original Form 10-K”). HEI is filing this Amendment No. 2 to amend Item 15 of the Original Form 10-K to include the consolidated financial statements and the related reports of the independent auditors of its equity method investees, Port Imperial Partners, LLC and Hovsite Holdings III LLC, as of and for the years ended December 31, 2020, 2019 and 2018 (the “financial statements”), in accordance with Rule 3-09 of Regulation S-X, and also to include the related consents of independent auditors. The financial statements were not included in the Original Form 10-K because Port Imperial Partners, LLC’s and Hovsite Holdings III LLC’s fiscal years ended on December 31, 2020, which was after the date of the filing of the Original Form 10-K. 
 
This Amendment No. 2 includes new certifications under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 by our Chief Executive Officer and Chief Financial Officer as Exhibits 31(a), 31(b), 32(a) and 32(b). Except as otherwise described above, this Amendment No. 2 does not modify or update in any way (i) the consolidated balance sheets, the consolidated statements of operations, equity and cash flows of HEI or (ii) the disclosures in or exhibits to the Original Form 10-K; nor does it reflect events occurring after the filing of the Original Form 10-K. Accordingly, this Amendment No. 2 should be read in conjunction with the Original Form 10-K and HEI’s other filings made with the SEC subsequent to the filing of the Original Form 10-K.
 
3
 
 
ITEM 15
 
Exhibits: 
 
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
4(m)
4(n)
4(o)
4(p)
4(q)
 
4(r)
 
4
 
 
4(s)
4(t)
4(u)
4(v)
4(w)
4(x)
4(y)
4(z)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
10(m)
 
5
 
 
10(n)*
10(o)*
10(p)*
10(q)*
Management Agreement dated August 12, 1983, for the management of properties by K. Hovnanian Investment Properties, Inc (Incorporated by reference to Exhibits to Registration Statement (No. 2-85198) on Form S-1 of the Registrant).
10(r)*
10(s)*
10(t)*
10(u)*
10(v)*
10(w)*
10(x)*
10(y)*
10(z)*
10(aa)*
10(bb)*
10(cc)*
10(dd)*
10(ee)*
 
10(ff)*
10(gg)*
10(hh)*
10(ii)*
10(jj)*
10(kk)*
10(ll)*
10(mm)*
10(nn)*
10(oo)*
10(pp)*
10(qq)*
10(rr)*
10(ss)*
10(tt)*
 
6
 
 
10(uu)*
10(vv)*
10(ww)*
10(xx)*
10(yy)*
10(zz)*
10(aaa)*
10(bbb)*
10(ccc)*
10(ddd)*
10(eee)*
10(fff)*
10(ggg)*
10(hhh)*
10(iii)*
10(jjj)*
10(kkk)*
10(lll)*
10(mmm)*
10(nnn)*
10(ooo)
10(ppp)
10(qqq)
10(rrr)
10(sss)
10(ttt)
10(uuu)
10(vvv)
 
10(www)
 
7
 
 
10(xxx)
10(yyy)
10(zzz)
10(aaaa)
10(bbbb)
10(cccc)
10(dddd)
10(eeee)
10(ffff)
10(gggg)
10(hhhh)*
10(iiii)*
10(jjjj)*
10(kkkk)*
10(llll)*
21
23(a)
23(b)
23(c)
23(d) Consent of Deloitte & Touche LLP.
23(e) Consent of Deloitte & Touche LLP.
31(a)
31(b)
32(a)
32(b)
99(a)
99(b)
99(c) Financial Statements of Port Imperial Partners, LLC.
99(d) Financial Statements of Hovsite Holdings III LLC.
101 The following financial information from our Annual Report on Form 10-K for the year ended October 31, 2020, formatted in inline Extensible Business Reporting Language (Inline XBRL): (i) the Consolidated Balance Sheets at October 31, 2020 and October 31, 2019, (ii) the Consolidated Statements of Operations for the years ended October 31, 2020, 2019 and 2018, (iii) the Consolidated Statements of Changes in Equity Deficit for years ended October 31, 2020, 2019 and 2018 (iv) the Consolidated Statements of Cash Flows for the years ended October 31, 2020, 2019 and 2018, and (v) the Notes to Consolidated Financial Statements (incorporated by reference to the Annual Report on Form 10-K for the year ended October 31, 2020 of the Registrant).
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
 
* Management contracts or compensatory plans or arrangements.
 
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs at the date they were made or at any other time.
 
8
 
  
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 to Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
HOVNANIAN ENTERPRISES, INC.
 
 
 
 
 
 
By:
/s/ BRAD G. O'CONNOR
 
 
 
Brad G. O'Connor
 
 
 
Senior Vice President, Treasurer and Chief Accounting Officer
 
 
 
March 24, 2021
 
  
 
 
 
9
 
 
ex_235619.htm

Exhibit 23(d)

 

CONSENT OF INDEPENDENT AUDITORS

 

 

We consent to the incorporation by reference in the following Registration Statements of our report dated March 26, 2019, relating to the consolidated financial statements of Port Imperial Partners, LLC and its subsidiaries appearing in this Amendment No. 2 to the Annual Report on Form 10-K of Hovnanian Enterprises, Inc. for the year ended October 31, 2020:

 

 

 

1.

Registration Statements Nos. 333-113758, 333-106756, and 333-92977 on Form S-8 pertaining to the Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan (which superseded and replaced the Amended and Restated 1999 Hovnanian Enterprises, Inc. Stock Incentive Plan), and Hovnanian Enterprises. Inc. Senior Executive Short-Term Incentive Plan, as amended and restated;

 

 

 

2.

Registration Statement No. 333-56972 on Form S-8 pertaining to the Hovnanian Enterprises, Inc. 1983 Stock Option Plan as amended and restated;

 

 

 

3.

Registration Statement No. 333-56640 on Form S-8 pertaining to the Washington Homes Employee Stock Option Plan;

 

 

 

4.

Registration Statement No. 333-180668 on Form S-8 pertaining to the 2012 Hovnanian Enterprises, Inc. Stock Incentive Plan;

 

 

 

5.

Registration Statement Nos. 333-194542, 333-210218 and 333-230417 on Form S-8 pertaining to the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan; and

 

 

 

6.

Registration Statement No. 333-239045 on Form S-8 pertaining to the 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan.

 

/s/ Deloitte & Touche LLP

 

New York, New York

March 24, 2021

 
ex_235620.htm

Exhibit 23(e)

 

CONSENT OF INDEPENDENT AUDITORS

 

 

We consent to the incorporation by reference in the following Registration Statements of our report dated February 26, 2021, relating to the consolidated financial statements of Hovsite Holdings III LLC and its subsidiaries appearing in this Amendment No. 2 to the Annual Report on Form 10-K of Hovnanian Enterprises, Inc. for the year ended October 31, 2020:

 

 

 

1.

Registration Statements Nos. 333-113758, 333-106756, and 333-92977 on Form S-8 pertaining to the Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan (which superseded and replaced the Amended and Restated 1999 Hovnanian Enterprises, Inc. Stock Incentive Plan), and Hovnanian Enterprises. Inc. Senior Executive Short-Term Incentive Plan, as amended and restated;

 

 

 

2.

Registration Statement No. 333-56972 on Form S-8 pertaining to the Hovnanian Enterprises, Inc. 1983 Stock Option Plan as amended and restated;

 

 

 

3.

Registration Statement No. 333-56640 on Form S-8 pertaining to the Washington Homes Employee Stock Option Plan;

 

 

 

4.

Registration Statement No. 333-180668 on Form S-8 pertaining to the 2012 Hovnanian Enterprises, Inc. Stock Incentive Plan.

 

 

 

5.

Registration Statement Nos. 333-194542, 333-210218 and 333-230417 on Form S-8 pertaining to the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan; and

 

 

 

6.

Registration Statement No. 333-239045 on Form S-8 pertaining to the 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan.

 

/s/ Deloitte & Touche LLP

 

New York, New York

March 24, 2021

 
ex_178708.htm

CERTIFICATIONS

Exhibit 31(a)

 

I, Ara K. Hovnanian, certify that:

 

1.   I have reviewed this Amendment No. 2 to the Annual Report on Form 10-K for the year ended October 31, 2020 (the “report”) of Hovnanian Enterprises, Inc. (the “registrant”);

 

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

Date: March 24, 2021

 

/s/ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman, President and Chief Executive Officer

 

 
ex_178709.htm

 

CERTIFICATIONS

Exhibit 31(b)

 

I, J. Larry Sorsby, certify that:

 

1.   I have reviewed this Amendment No. 2 to the Annual Report on Form 10-K for the year ended October 31, 2020 (the “report”) of Hovnanian Enterprises, Inc. (the “registrant”);

 

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

Date: March 24, 2021

 

/s/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer

 

 
ex_178710.htm

Exhibit 32(a)

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with this Amendment No. 2 to the Annual Report of Hovnanian Enterprises, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ara K. Hovnanian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

Date: March 24, 2021

 

/s/ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman, President and Chief Executive Officer

 

 
ex_178711.htm

 

Exhibit 32(b)

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with this Amendment No. 2 to the Annual Report of Hovnanian Enterprises, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Larry Sorsby, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

Date: March 24, 2021

 

/s/ J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer

 

 
ex_235625.htm

 

Exhibit 99(c) 

 

 

Consolidated Financial Statements

 

Port Imperial Partners, LLC

As Of December 31, 2020 and 2019 and For The Years Ended

December 31, 2020, 2019 and 2018 With Independent

Auditors’ Report

 

 
 

 

Port Imperial Partners, LLC

 

Consolidated Financial Statements

 

As Of December 31, 2020 and 2019 and For The

Years Ended December 31, 2020, 2019 and 2018

 

Contents

 

Independent Auditors' Report

2-3
   

Consolidated Financial Statements

  
   

Consolidated Balance Sheets

4

Consolidated Statements of Operations

5

Consolidated Statements of Changes in Members’ Equity

6

Consolidated Statements of Cash Flows

7

Notes to Consolidated Financial Statements

8-12

 

 
 

 

 

INDEPENDENT AUDITORS' REPORT

 

To the Members of
Port Imperial Partners, LLC
Matawan, New Jersey

 

We have audited the accompanying consolidated financial statements of Port Imperial Partners, LLC and its subsidiaries (the "Company"), which comprise the consolidated statements of operations, changes in member’s equity, and cash flows for the year ended December 31, 2018, 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 audit. We conducted our audit 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.

 

2
 

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2018 in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

 

New York, New York

March 26, 2019

 

3
 

 

Port Imperial Partners, LLC
   

Consolidated Balance Sheets

(Dollars in Thousands)

 

   

December 31,

  
   

2020

    

2019

  
   

(Unaudited)

    

(Unaudited)

  

Assets

                

Cash

   $ 1,773     $ 364  

Restricted cash

     1,504       1,133  

Receivables and deposits

     3,064       2,789  

Inventories:

                

Land and land development

     7,278       14,052  

Construction in process

     43,933       85,093  

Total inventories

     51,211       99,145  
                 

Prepaid expenses

     1,706       3,250  

Total assets

   $ 59,258     $ 106,681  
                 

Liabilities and Members’ equity

                

Notes payable, net of debt issuance costs

   $ 29,326     $ 25,083  

Accounts payable and other liabilities

     1,952       2,161  

Customers’ deposits

     653       510  

Accrued interest

     149       192  

Total liabilities

     32,080       27,946  
                 

Commitments and contingencies (Note 5)

                
                 

Members’ equity

     27,178       78,735  

Total liabilities and members’ equity

   $ 59,258     $ 106,681  

 

See notes to consolidated financial statements.

 

4
 

 

Port Imperial Partners, LLC
 

Consolidated Statements of Operations

(Dollars in Thousands)

 

   

Years Ended December 31,

  
   

2020

    

2019

    

2018

  
   

(Unaudited)

    

(Unaudited)

    

(Audited)

  

Revenue:

                        

Sale of homes

   $ 69,195     $ 68,375     $ 125,265  

Other revenue

     2       1       5  

Total revenue

     69,197       68,376       125,270  
                         

Expenses:

                        

Direct costs:

                        

Land and land development

     6,817       6,452       11,392  

Construction

     38,009       33,111       57,519  

Other

     7,729       6,857       9,520  

Direct cost of sales

     52,555       46,420       78,431  
                         

Cost of sales interest

     2,425       2,557       6,883  
                         

Indirect cost of sales:

                        

Construction and service overhead

     1,141       1,329       1,476  

Other

     466       532       866  

Total indirect cost of sales

     1,607       1,861       2,342  
                         

Selling, general and administrative expense

     4,628       5,074       9,454  
                         

Interest expense

     1,898       4,643       2,680  
                         

Net income

   $ 6,084     $ 7,821     $ 25,480  

 

See notes to consolidated financial statements.

 

5
 

 

Port Imperial Partners, LLC
 

Consolidated Statements of Changes in Members’ Equity

(Dollars in Thousands)
 

For The Years Ended December 31, 2020, 2019 and 2018

 

   

K. Hovnanian

at Port Imperial

    

TRI-FIVE

          
   

Investment,

    

Port Imperial,

          
   

LLC

    

LLC

    

Total

 

Balance at January 1, 2018 (unaudited)

   $ 14,618     $ 58,471     $ 73,089  

Capital contributions

     229       916       1,145  

Capital distribution

             (21,400 )     (21,400 )

Net income

     5,096       20,384       25,480  

Balance at December 31, 2018 (audited)

     19,943       58,371       78,314  

Capital distributions

     -       (7,400 )     (7,400 )

Net income

     1,564       6,257       7,821  

Balance at December 31, 2019 (unaudited)

     21,507       57,228       78,735  

Capital distributions

     (8,950 )     (48,691 )     (57,641 )

Net income

     1,217       4,867       6,084  

Balance at December 31, 2020 (unaudited)

   $ 13,774     $ 13,404     $ 27,178  

 

See notes to consolidated financial statements.

 

6
 

 

Port Imperial Partners, LLC
 

Consolidated Statement of Cash Flows

(Dollars in Thousands)

 

   

Years Ended December 31,

  
   

2020

    

2019

    

2018

  
   

(Unaudited)

    

(Unaudited)

    

(Audited)

  

Operating activities

                        

Net income

   $ 6,084     $ 7,821     $ 25,480  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Amortization of deferred financing costs

     246       537       836  
Changes in operating assets and liabilities:                        

Depreciation

     10                  

Receivables, deposits and prepaid expenses

     1,259       1,354       1,582  

Inventories

     47,934       40,850       42,617  

Accounts payable, other liabilities and accrued interest

     (252 )     (6,152 )     (12,565 )

Customers’ deposits

     143       252       (3,740 )

Net cash provided by operating activities

     55,424       44,662       54,210  
                         

Financing activities

                        

Member contributions

     -       -       1,145  

Member distributions

     (57,641 )     (7,400 )     (21,400 )

Proceeds from notes payable

     42,835       -       30,632  

Payments related to notes payable

     (38,203 )     (39,342 )     (69,059 )

Deferred financing costs from model financing program and notes payable

     (635 )     (272 )     (191 )

Net cash used in financing activities

     (53,644 )     (47,014 )     (58,873 )
                         

Net increase (decrease) in cash and restricted cash

     1,780       (2,352 )     (4,663 )

Cash and restricted cash balance, beginning of year

     1,497       3,849       8,512  

Cash and restricted cash balance, end of year

   $ 3,277     $ 1,497     $ 3,849  
                         

Supplemental disclosures of cash flows:

                        

Cash paid for interest, net of amounts capitalized

   $ 2,182     $ 4,800     $ 2,481  
                         
Reconciliation of cash and restricted cash                        

Cash

   $ 1,773     $ 364     $ 3,071  

Restricted cash

     1,504       1,133       778  

Total cash and restricted cash

   $ 3,277     $ 1,497     $ 3,849  

 

See notes to consolidated financial statements.

 

7
 

 

Port Imperial Partners, LLC

 

Notes to Consolidated Financial Statements

 

As Of and For The Years Ended December 31, 2020 (unaudited),

2019 (unaudited) and 2018 (audited)

 

1. Description of Business

 

Port Imperial Partners, LLC (with its subsidiaries, the “Company”) is a residential home developer that markets its products in New Jersey. All construction activity is performed by a general contractor supervised by the Company.

 

On November 4, 2015, K. Hovnanian at Port Imperial Investment, LLC (“K-Hov”) (a subsidiary of K. Hovnanian Enterprises, Inc.) entered into a joint venture agreement with Tri-Five Port Imperial, LLC (“Tri Five”) (an affiliate of Tri Pacific Capital Advisors, LLC) to develop, construct, and sell single family attached condominium units. The Company purchased the property from another subsidiary of K. Hovnanian Enterprises, Inc. This property was purchased at fair value.

 

The Company is a limited-life entity. As the existing units are built and sold, operations will decline and cease when all the units within the high-rise building have been delivered. Capital was contributed by K-Hov and Tri Five in the following proportion: 20% by K-Hov; and 80% by Tri Five. 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.

 

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.

 

8
 

 

Port Imperial Partners, LLC

 

Notes to Consolidated Financial Statements (continued)

 

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.

 

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 units include all direct costs of construction, plus capitalized costs, including construction administration, property taxes, interest, and legal fees that relate to development projects. Direct construction costs, land, land development, and common facility costs are accumulated and allocated to each unit and relieved through cost of sales using the relative sales value 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 or units 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 in the years ended December 31, 2020, 2019 and 2018.

 

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.

 

9
 

 

Port Imperial Partners, LLC

 

Notes to Consolidated Financial Statements (continued)

 

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 unit at closing. These fees are deposited into a restricted cash account 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:

 

(In thousands)

  

Year Ended

December 31, 2020

    

Year Ended

December 31, 2019

  

Balance, beginning of period

   $ 1,133     $ 777  

Additions

     385       399  

Charges

     (15 )     (43 )

Balance, end of period

   $ 1,503     $ 1,133  

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs totaled $0.4 million, $0.8 million and $1.5 for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, 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.

 

10
 

 

Port Imperial Partners, LLC

 

Notes to Consolidated Financial Statements (continued)

 

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.

 

3. Related-Party Transactions

 

As the administrative and development 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

$7,000 per home sold

 

In addition, as investor member of the Company, Tri Five receives fees, which are summarized as follows:

 

Investor member charge

1% of Home Sales Revenue

 

The administrative and investor member 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 following table summarizes the related party fees incurred:

 

(In thousands)

  

Year Ended

December 31,

2020

    

Year Ended

December 31,

2019

    

Year Ended

December 31,

2018

  

Administrative charge

   $ 2,768     $ 2,703     $ 5,080  

Warranty services charge

   $ 385     $ 356     $ 777  

Investor member charge

   $ 741     $ 636     $ 1,261  

 

11
 

 

Port Imperial Partners, LLC

 

Notes to Consolidated Financial Statements (continued)

 

4. Notes Payable

 

The Company had a secured construction loan with American Life Insurance Company that had an original maturity of June 1, 2019. The Company had options to extend the term of the loan for two successive one-year terms, upon notice to the lender sent no earlier than January 31, 2019 or January 31, 2020, respectively, and sent no later than May 1, 2019 or April 30, 2020, respectively. The Company notified the lender of its intention to extend the loan within the notification period referred to above. As such, the maturity date was extended to June 1, 2020. As of December 31, 2019, the note had a principal balance of $25.1 million, respectively. There was $0.2 million of accrued, unpaid interest as of December 31, 2019, respectively. Interest on the loan was LIBOR plus 6.00% and, therefore, can fluctuate, but was payable monthly at a rate of 8.35% and 7.37% per annum as of December 31, 2019, which can be deferred and added to the unpaid principal balance, and thereafter, can be subject to interest at the note rate. The note was secured by all of the Company’s property and improvements. In August 2020, the Company refinanced the loan with Western Alliance Bank, at which time the existing loan was paid off. The total commitment is $42.8 million and matures on August 14, 2022. As of December 31, 2020, the note had an outstanding principal balance of $29.8 million. There was $0.1 million of accrued, unpaid interest as of December 31, 2020. Interest on the loan is payable monthly at a rate of LIBOR plus 3.75% with a floor rate of 5.25% and, therefore, can fluctuate. The note is secured by all of the Company’s property and improvements.

 

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 December 31, 2020, through March 24, 2021, 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 December 31, 2020.

 

******

 

12
ex_235633.htm

 

Exhibit 99(d)

 

 

Consolidated Financial Statements

 

Hovsite Holdings III LLC

As Of December 31, 2020 And 2019 And For The Years

Ended December 31, 2020, 2019 and 2018 With Independent

Auditors’ Report

 

 
 

 

Hovsite Holdings III LLC

 

Consolidated Financial Statements

 

As Of December 31, 2020 And 2019 And For The

Years Ended December 31, 2020, 2019 and 2018

 

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
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, 2020 and 2019, 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, 2020, 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 Hovsite Holdings III LLC and its subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2020, in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

New York, New York

February 26, 2021

 

2
 

 

Hovsite Holdings III LLC
 

Consolidated Balance Sheets

(Dollars in Thousands)

 

   

December 31,

  
   

2020

    

2019

  

Assets

                

Cash

   $ 8,557     $ 3,919  

Restricted cash and cash equivalents

     1,839       1,591  

Receivables and deposits

     -       223  

Inventories:

                

Land and land development

     64,436       78,476  

Construction in process

     10,026       11,208  

Consolidated inventory not owned

     4,432       7,459  

Total inventories

     78,894       97,143  
                 

Prepaid expenses and other assets

     4,301       4,283  

Total assets

   $ 93,591     $ 107,159  
                 

Liabilities and Members’ equity

                

Notes payable

   $ 16,100     $ 28,541  

Liabilities from inventory not owned, net of debt issuance costs

     3,780       6,492  

Accounts payable and other liabilities

     4,430       4,034  

Customers’ deposits

     1,064       299  

Accrued Interest

     157       223  

Total liabilities

     25,531       39,589  
                 

Commitments and contingencies (Note 5)

                
                 

Members’ equity

     68,060       67,570  

Total liabilities and members’ equity

   $ 93,591     $ 107,159  

 

See notes to consolidated financial statements.

 

3
 

 

Hovsite Holdings III LLC
 

Consolidated Statements of Operations

(Dollars in Thousands)

 

   

Years Ended December 31,

  
   

2020

    

2019

    

2018

  

Revenue:

                        

Sale of homes

   $ 52,373     $ 44,341     $ 25,163  

Other revenue

     45       184       35  

Total revenue

     52,418       44,525       25,198  
                         

Expenses:

                        

Direct costs:

                        

Land and land development

     20,565       17,548       10,280  

Construction

     21,102       17,411       9,799  

Other

     2,814       2,089       1,327  

Direct cost of sales

     44,481       37,048       21,406  
                         

Cost of sales interest

     1,622       981       737  
                         

Indirect cost of sales:

                        

Construction and service overhead

     1,385       1,550       974  

Other

     1,708       1,689       655  

Total indirect cost of sales

     3,093       3,239       1,629  
                         

Selling, general and administrative expense

     1,686       1,852       2,094  
                         

Interest expense

     1,046       1,791       2,743  
                         

Net income (loss)

   $ 490     $ (386 )   $ (3,411 )

 

See notes to consolidated financial statements.

 

4
 

 

Hovsite Holdings III LLC
 

Consolidated Statements of Changes in Members’ Equity

(Dollars in Thousands)
 

For The Years Ended December 31, 2020, 2019 and 2018

 

           

K. Hovnanian

          
   

GTIS HR III

    

Hovsite III

          
   

Aggregator

    

Investment,

          
   

LLC

    

LLC

    

Total

 

Balance at January 1, 2018

   $ 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  

Net income

     322       168       490  

Balance at December 31, 2020

   $ 44,637     $ 23,423     $ 68,060  

 

See notes to consolidated financial statements.

 

5
 

 

Hovsite Holdings III LLC
 

Consolidated Statement of Cash Flows

(Dollars in Thousands)

 

   

Years Ended December 31,

  
   

2020

    

2019

    

2018

  

Operating activities

                        

Net income (loss)

   $ 490     $ (386 )   $ (3,411 )

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

                        

Amortization of deferred financing costs

     94       -       71  

Changes in operating assets and liabilities:

                        

Receivables, deposits and prepaid expenses

     205       (245 )     3,703  

Inventories

     18,249       7,862       2,959  

Accounts payable, other liabilities and accrued interest

     330       587       (7,095 )

Customers’ deposits

     765       31       268  

Net cash provided by (used in) operating activities

     20,133       7,849       (3,505 )
                         

Financing activities

                        

Member contributions

     -       -       2,000  

Payments related to notes payable

     (12,441 )     (5,182 )     (1,722 )

Payment related to model sale leaseback financing program

     (2,806 )     -       -  

Net cash (used in) provided by financing activities

     (15,247 )     (5,182 )     278  
                         

Net increase (decrease) in cash and restricted cash and cash equivalents

     4,886       2,667       (3,226 )

Cash and restricted cash and cash equivalents balance, beginning of year

     5,510       2,843       6,069  

Cash and restricted cash and cash equivalents balance, end of year

   $ 10,396     $ 5,510     $ 2,843  
                         

Supplemental disclosures of cash flows:

                        

Cash paid for interest, net of amounts capitalized

   $ 1,112     $ 1,840     $ 3,976  

Reconciliation of cash and restricted cash and cash equivalents:

                        

Cash

   $ 8,557     $ 3,919     $ 1,618  

Restricted cash and cash equivalents

     1,839       1,591       1,225  

Total cash and restricted cash and cash equivalents

   $ 10,396     $ 5,510     $ 2,843  

 

See notes to consolidated financial statements.

 

6
 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements

 

As Of And For The Years Ended December 31, 2020, 2019 and 2018

 

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, 2020, 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, 2020.

 

7
 

 

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.

 

8
 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (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 (“ASC”) 606-10, “Revenue from Contracts with Customers,” these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of the balance sheet, at December 31, 2020 and 2019, inventory $4.4 million and $7.5 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $3.8 million and $6.5 million recorded to “Liabilities from inventories not owned, net of debt issuance costs.”

 

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:

 

 

 

(In Thousands)

  

Years Ended December 31,

  
   

2020

    

2019

  

Balance, beginning of period

   $ 958     $ 589  

Additions

     445       369  

Charges

     (63 )     -  

Balance, end of period

   $ 1,340     $ 958  

 

9
 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (continued)

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs $0.4 million, $0.6 million and $0.9 million, for the years ended December 31, 2020, 2019 and 2018, 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.

 

3. Related-Party Transactions

 

As the managing 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

 

10
 

 

Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (continued)

 

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, 2020 and 2019.

 

The following table summarizes the related party fees incurred:

 

(In thousands)

  

Years Ended December 31,

  
   

2020

    

2019

    

2018

  

Administrative charge

   $ -     $ -     $ -  

Insurance charge

   $ 365     $ 302     $ 185  

Warranty services charge

   $ 445     $ 369     $ 226  

 

4. Notes Payable

 

The Company has a secured promissory note with a lender that matures on November 24, 2022. As of December 31, 2020 and 2019, the note had a principal balance of $16.1 million and $28.5 million, respectively, plus $0.2 million 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.

 

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.

 

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Hovsite Holdings III LLC

 

Notes to Consolidated Financial Statements (continued)

 

6. Subsequent Events

 

The Company evaluated subsequent events that took place after December 31, 2020, through February 26, 2021, 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 December 31, 2020.

 

******

 

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