SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 2 to the FORM 10-SB
WASHINGTON, D.C. 20549
GENERAL FORM FOR THE REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER
SECTION 12(b) OR 12(g) OF THE SECURITIES ACT OF 1934
HOMES FOR AMERICA HOLDINGS, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada
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(State or other jurisdiction of incorporation or organization)
88-0355448
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(I.R.S. Employer Identification Number)
One Odell Plaza, Yonkers, New York 10701
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(Address of principal executive offices) Zip Code
914-964-3000
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
None
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(Title of each class)
None
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(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, .001 par value per share
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(Title of class)
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TABLE OF CONTENTS
GLOSSARY OF TERMS........................................................ iii
PART I
ITEM 1. BUSINESS............................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................22
ITEM 3. PROPERTIES, OFFICES AND FACILITIES................................27
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....28
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.......29
ITEM 6. EXECUTIVE COMPENSATION............................................31
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................35
ITEM 8. DESCRIPTION OF SECURITIES..........................................36
PART II
ITEM 1. MARKET PRICE OF, AND DIVIDENDS ON, THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS..............................37
ITEM 2. LEGAL PROCEEDINGS..................................................38
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.....................39
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES...........................40
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS..........................41
PART F/S
ITEM 1. AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE COMPANY FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998.........................42
ITEM 2. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE COMPANY FOR
THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999.................59
ITEM 3. AUDITED FINANCIAL STATEMENTS FOR DALLAS/GLEN HILLS, L.P. FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998.............................66
ITEM 4. AUDITED FINANCIAL STATEMENTS FOR TVMJG - PUTNAM SQUARE LIMITED
PARTNERSHIP FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998.........78
ITEM 5. AUDITED FINANCIAL STATEMENTS FOR MIDDLEBURY/ELKHART, L.P. FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998.........................90
ITEM 6. STATEMENTS OF REVENUE AND CERTAIN EXPENSES FOR LAKE'S EDGE
APARTMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 (AUDITED) AND FOR
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)....................101
ITEM 7. STATEMENTS OF REVENUE AND CERTAIN EXPENSES FOR COUNTRY LAKE
APARTMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 (AUDITED) AND
FOR THE TEN MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED).............104
ITEM 8. PRO FORMA STATEMENT OF OPERATIONS FOR THE COMPANY FOR THE YEAR
ENDED DECEMBER 31, 1998...........................................107
ITEM 9. PRO FORMA STATEMENT OF OPERATIONS FOR THE COMPANY FOR THE SIX
MONTHS ENDED JUNE 30, 1999........................................109
PART III
ITEM 1. INDEX TO EXHIBITS.................................................111
PART IV
ITEM 1. SIGNATURE PAGE....................................................113
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GLOSSARY OF TERMS
Affordable Housing: any multi-family residential property in compliance
with the Restrictions of local, state or federal governmental agencies which are
designed to make the rental and occupancy affordable to Low Income Persons and,
in some cases, Moderate Income Persons. Affordable Housing, in accordance with
the Affordable Housing Act, must provide at least 20% of the apartments to
individuals or families whose incomes do not exceed 60% of the median income in
that particular census track.
Applicable Federal Rate or AFR: either the short term, medium term, or long
term interest rate for use in certain transactions as published monthly by the
Internal Revenue Service.
Area Median Income: the median income for any particular local area as
published by HUD.
Bonds or Municipal Bonds: obligations issued by state or local governmental
agencies which are generally sold to the public to raise capital for
governmental activities or governmentally approved projects. The income earned
on such Bonds may either be exempt from federal income taxation or be includable
in income for federal income tax purposes.
Compliance Period: the fifteen (15) year period commencing with the first
year in which a project actually uses Tax Credits.
Conversion: the rehabilitation of an existing Market Rate multi-family
residential Property, or the conversion to multi-family residential use through
redesign, reconstruction, and rehabilitation of a property not previously
utilized as a multi-family residential property.
Eligible Basis: the total amount of development, rehabilitation, and
construction costs which are allowed under the Internal Revenue Code in
determining the total amount of Low Income Housing Tax Credits to which an
Affordable Housing project will be entitled.
Extended Use Period: the fifteen (15) year period commencing in the first
year after the end of the Compliance Period.
HUD: the United States Department of Housing and Urban Development.
Inducement Resolution: the formal written action by the local or state
governmental agency approving the Affordable Housing project for which Tax
Exempt Bonds will be sought as part of the financing.
Low Income Housing Tax Credit or Tax Credit: a credit against federal
income tax provided by Section 42 of the Internal Revenue Code to qualified
Affordable Housing.
Low Income Housing Tax Credit Restrictions: Restrictions imposed in
connection with the allocation of Low Income Housing Tax Credits and contained
in the agreement between the owner of an Affordable Housing project and the
state agency which allocates the Tax Credits.
Low Income Person: an individual whose annual income does not exceed 80% of
the Area Median Income.
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Market Rate: a property which is not subject to Restrictions.
Moderate Income Person: an individual whose annual income does not exceed
120% of the Area Median Income.
Placed in Service: the date on which a multi-family residential property
can be lawfully occupied by tenants, which is contemporaneous with the issuance
of a certificate of occupancy by the building department of the local
jurisdiction in which the project is located.
Private Activity Bond: a Bond, the income from which is exempt from federal
income taxation because it meets the definitions set forth in Section 142(d) of
the Internal Revenue Code.
Qualified Allocation Plan or QAP: the annual housing plan adopted by each
state pursuant to Section 42 of the Internal Revenue Code, which details the
housing needs of the state and the manner in which the state will utilize its
portion of Low Income Housing Tax Credits.
Restrictions: the laws, ordinances, or regulations adopted, enacted, or
imposed by local, state or federal government agencies on, or restrictive
covenants and agreements entered into between such agencies and the owners of,
residential properties, which: (i) limits the amount of rent that may be charged
for a particular dwelling unit in a multi-family residential property; (ii)
restricts tenants to those whose annual income is less than a specified maximum,
or (iii) otherwise limits the use and/or availability of the dwelling units in a
residential project.
Set Aside: in a Low Income Housing Tax Credit Affordable Housing project,
the minimum number of units to be rented to tenants at the maximum allowable
rent which, at the owner's election, will be either: (i) 20% of the units rented
at a maximum rent of 50% of the Area Median Income; or (ii) 40% of the units
rented at a maximum of 60% of the Area Median Income.
Tax Exempt Bond: a Bond, including a Private Activity Bond, the income from
which is exempt from federal income taxation because the requirements of the
Internal Revenue Code are met.
Tax Credit Period: the ten (10) year period commencing in the first year in
which a project actually uses Tax Credits.
Volume Cap: as it relates to Low Income Housing Tax Credits under Internal
Revenue Code Section 42(h)(3)(C), $1.25 per person resident in the state in
which the Low Income Housing Tax Credits are sought. As it relates to Private
Activity Bonds under Internal Revenue Code Section 142, for each state, the
greater of $150 million or $50 per person in such state.
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PART I
ITEM 1. BUSINESS
Introduction
Homes for America Holdings, Inc. was organized on January 9, 1996 as a real
estate operating company to acquire, develop, own, rehabilitate and manage
residential properties throughout the United States. Our objective is to
identify and purchase undervalued residential properties which we renovate,
operate and manage. We rely upon the expertise and experience of our executive
officers as well as unaffiliated real estate brokers, attorneys, bankers and
property owners to assist us in identifying suitable multi-family residential
properties throughout the United States. These properties are purchased either
through a variety of government-sponsored financing arrangements exclusively
available for properties qualifying as Affordable Housing, or with traditional
financing arrangements available for Market Rate properties. In addition to the
net rental income derived from our portfolio of multi-family residential
properties, we earn a portion of revenues and profits from HUD-approved
transactional fees associated with the acquisition, financing, development and
construction of Affordable Housing.
Our operations commenced in April 1996. To date, we have purchased six
multi-family residential properties as well as undeveloped land (Royal Crest) in
Arlington, Texas. The residential properties include: Willow Pond (Dallas, TX),
Putnam Square (Bridgeport, CT), Prairie Village (Elkhart, IN), Lake's Edge
(Miami, FL), Country Lake (West Palm Beach, FL), and Briar Meadows (Dallas, TX).
Effective June 30, 2000, Homes For America Holdings, Inc. is under a contractual
obligation to proceed with the sale of the Royal Crest and Briar Meadows
properties. Currently the Company is still manages the properties.
Background
One of our primary objectives is to develop multi-family residential
properties which qualify as Affordable Housing. These properties may have
existing tax-exempt bond allocations, or the Company may apply for Tax Exempt
Bond allocations, Low Income Housing Tax Credit allocations, or both, which then
can be used to provide capital and/or financing for the purchase and
rehabilitation of the property. In return for such financing arrangements, we
must limit tenants in the Affordable Housing projects to those whose income are
within the Restrictions. We anticipate that eventually seventy-percent of our
portfolio will be Affordable Housing properties and the remainder will be Market
Rate properties which we have purchased and then either rehabilitated or
converted into residential units.
Market Rate multi-family residential properties will generally be acquired
using traditional methods of real estate financing. Residential properties which
may be reconverted are often: (i) Market Rate multi-use properties that are
purchased at a discount and then constructed or substantially rehabilitated;
(ii) non-residential properties that can be converted to residential use, such
as warehouses, industrial buildings, fire houses and vacant office buildings
that have unique architectural qualities; and (iii) existing residential
properties where rehabilitation is extensive enough to substantially alter the
quality and character of the property. Such conversions are currently popular in
redeveloping urban areas and we expect them to be a source of significant
revenue in the future.
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Affordable Housing properties for potential acquisition are identified by
maintaining regular contact with real estate brokers throughout the United
States. We inform the brokers that we are interested in acquiring property in
certain locations within a designated state for which Tax Exempt Bond and Tax
Credit financing is available. Investment decisions are made by our executive
officers with the consent of the Board of Directors. In addition, we will often
utilize the knowledge and experience of outside consultants that we retain.
Affordable Housing
Affordable Housing properties are multi-family residential properties in
excess of four units for which government sponsored financing programs are
already in place, or are available. These properties are subject to Restrictions
which govern, among other things, the income of the tenants to which the units
are rented.
Where the financing already exists, in the form of tax-exempt bonds,
transactions are relatively straightforward. We purchase the existing bonds,
resell them (at profit, where possible), and, when necessary, procure additional
financing, often in the form of taxable bonds (taxable tail) to finance
rehabilitation and repositioning of the property.
Where such Affordable Housing financing does not already exist, we identify
an area where it is available. After we have located and entered into a contract
to purchase a property qualifying as Affordable Housing, we prepare and submit
an application for a Tax Exempt Bond allocation to the appropriate governmental
agency. Once the application for Tax Exempt Bonds is approved, we then prepare
and submit an application for an allocation of Low Income Housing Tax Credits.
In connection with these applications, we must, among other things, conduct a
market study of the property, provide an architectural analysis, obtain a
property appraisal and prepare an environmental study and analysis of the
property. We also provide a proposed cost of the entire project, which includes
any HUD-approved fees and reimbursements that we receive out of the funding of
the project. We engage outside consultants and professionals operating near the
location of the subject property to assist in obtaining the required information
and in preparing these applications.
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Each Affordable Housing property in which we have an interest is owned by a
separate limited partnership or limited liability company. After the Low Income
Housing Tax Credit allocation and, if applicable, a Tax Exempt Bond allocation,
is received, the limited partnership acquires title to the Affordable Housing
property. We then offer and sell a limited partnership interest to an investor.
The investor usually acquires a 99.9% interest in the profits and losses of the
partnership for a purchase price of between $.50 and $.80 per $1.00 of Low
Income Housing Tax Credits (See "Low Income Housing Tax Credits -Value of the
Credits", and "Current Operations"). The agreement with the investor, however,
typically allows us to retain between 70% and 90% of the operating cash flow
from the property as well as 70% and 90% of the residual value of the real
estate (after return of capital). In addition, Tax Exempt Bonds are sold to
various independent bond houses. The investor who purchases the limited
partnership interest from the limited partnership is usually a limited
partnership formed by an experienced Low Income Housing Tax Credit syndicator.
We are not involved in these syndication efforts. The general partner for each
limited partnership is a newly formed, wholly owned subsidiary of Homes for
America Holdings, Inc.
The issuer of the Tax Exempt Bonds, which is usually a local government
authority, issues and sells the Bonds to finance the project through investment
bankers such as CharterMac, The Sturges Company and Greenwich Partners. The Tax
Exempt Bonds for each project are sold by the issuer to a single institutional
purchaser. For example, the bonds for Prairie Village were purchased by The
Sturges Company and the bonds for Lake's Edge were purchased by Charter Mac.
The proceeds from the sale of the Tax Exempt Bonds are loaned to Homes for
America and are used to provide funding for the acquisition of the property,
including either the construction loan, the permanent loan, or both. After
acquiring the property and finalizing the sale of the limited partnership
interests to the investor, we are entitled to receive various transaction fees
and expense reimbursements at the closing which are paid out of the funding for
the project. Transaction fees may include acquisition fees, developer fees,
rehabilitation fees, asset management fees, administrative fees, general partner
fees, and other fees associated with the acquisition, financing, development,
rehabilitation, construction, and operation of an Affordable Housing project.
The realization of these fees is dependent upon the number, type and terms of
the purchase and financing arrangements for the transaction. Following the
closing, we rehabilitate the property and lease the units.
In addition to the fees received at closing, we receive income from the
acquired property through management fees and participation in operating
profits. We also provide services to the properties including, but not limited
to, marketing, ownership property reviews, social service programs for parents,
and outreach programs for children. These may include computer learning
workshops, tutoring, and organized sports activities. Property services may be
included as a requirement to ensure municipal, state or federal financing
approval. As each municipality, county or state applies a scale in determining
whether an applicant qualifies for Tax Exempt Bond financing and/or Tax Credits,
adding services to the property for the benefit of the tenants may significantly
improve an applicant's ability to obtain financing and/or credits. We believe
that the quality of tenancy increases with the amount of services offered, and
that providing these services reduces apartment turnover, helps maintain quality
of life, and thereby controls costs.
We believe a considerable need for quality Affordable Housing exists in the
United States. Historically, demand has exceeded supply. We also believe that
there is a strong market for the conversion of undervalued market-rate
residential properties, where new construction or substantial rehabilitation is
required, and in the conversion of non-residential property to unique
residential and loft-type living. Moreover, our founders are experienced in
these types of conversions. We believe, but cannot assure, that we will achieve
significant revenues from this area in the future.
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As we have been in operation only since 1996, there can be no assurance we
will continue to be a commercially viable or profitable business. We have a
limited operating history and there can be no assurances that we will be
successful in the future.
Current Operations
We manage, or oversee the management and operation of, each property that
we acquire. Accordingly, we have established our own on-site management in areas
where we have a substantial investment, such as Texas, Florida and the
Northeast. In other areas, we may utilize outside management firms to assist in
the operation of the properties.
Whether we are the on-site property manager or the off-site asset manager,
we maintain responsibility for the operation of each property. Every property
that we directly manage has one of our senior managers responsible for the
property's day to day operations. Every site that we operate through an outside
management firm has one of our officers directly responsible for the property.
In addition, we engage outside auditors to provide compliance audit services to
verify key financial information and tenant certification issues. Further, each
property is visited periodically by our officers.
We currently own and manage seven properties in Texas, Connecticut, Indiana
and Florida. The following is a description of the properties.
Willow Pond Apartments
Willow Pond Apartments, formerly known as Glen Hills Apartments, located in
Dallas, Texas, is a 386-unit Affordable Housing complex purchased on March 27,
1997.
The Willow Pond complex was purchased for approximately $8,400,000, and is
owned by a limited partnership, of which we are the general partner with a .01%
interest in the profits and losses of the partnership and an approximately 90%
interest in cash flow and 80% interest in the residual value of the partnership
(after return of capital).
Through the limited partnership formed to own Willow Pond, we sold a
limited partnership interest to an investor for $2,500,000 in exchange for a
99.99% interest in the profits and losses of the limited partnership.
Notwithstanding the limited partner's 99.99% interest in the profits and losses
of the limited partnership, the general partner and the limited partner have
varying interests in the items of tax profits, losses, and tax credits,
distributions of cash available from operations, and distributions of cash
available from refinancing of the limited partnership's debt or upon sale of its
asset. Since the limited partner's primary financial motivation for purchasing
an interest in the limited partnership was the benefits it would derive from the
Low Income Housing Tax Credits and other tax losses, the limited partner has
retained 99.99% of those items. Because this allocation of Low Income Housing
Tax Credits and losses met the limited partner's yield requirements, we were
able to obtain an aggregate interest of approximately 90% in the cash available
from operations, and an aggregate interest of approximately 80% in the cash
available from sale of the partnership's asset or refinancing of its debt (after
return of capital). The limited partner has a right to the difference. The
balance of the funding was obtained through mortgages on the property.
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After we acquired the property, we renovated it and it is now 96% occupied.
In addition to the renovation, we established a computer learning facility which
provides tenants and their children with professional instruction in, among
other things, the use of the Internet and spreadsheet skills. Adults are offered
the opportunity to learn word processing and spreadsheet skills or to otherwise
improve existing skills to aid them in the workplace.
In September of 2000, the Willow Pond Apartments were refinanced for
$6,450,000 at an interest rate of 7.99% on a 12 year note with a 30 year
amortization schedule.
Glen Hills Homes for America, Inc., a wholly-owned subsidiary of Homes for
America, was incorporated on February 26, 1997 in the state of Texas and was
formed to serve as the general partner of Dallas/Glen Hills, LP, the owner and
operator of this property. Dallas/Glen Hills, LP was organized on March 27, 1997
in the state of Texas for the purpose of owning and operating this property.
Glen Hills Homes for America, the general partner, owns .01% of the profits and
losses of Dallas/Glen Hills LP (a.k.a. Willow Pond). Approximately 90% of the
cash flow from this property and 80% of the residual property value (after
return of capital), if sold, resides with the general partner. Because Homes for
America Holdings, Inc. exerts full control over the limited partnership, it is
treated as a wholly-owned subsidiary.
Putnam Square Apartments
Putnam Square Apartments is an Affordable Housing complex composed of 18
units located in Bridgeport, Connecticut. In November 1997, in return for an
indemnification against operating losses of up to $65,000 and an agreement to
operate and rehabilitate the facility, we succeeded to the interests of the
general partner of the partnership that originally owned the property. We have
substantially renovated the property and approximately 90% of the units are
currently rented.
As additional consideration for assuming the position of general partner,
the Company received a developer's note in the amount of $200,000, and 50% of a
$400,000 first mortgage, or $200,000. Under the terms of the partnership
agreement, the developer's note has first priority on the property's cash flow.
In total, the Company received notes in the amount of $400,000 for assuming the
general partner position.
The partnership has one investor limited partner who made capital
contributions of $692,065 in exchange for a 99% interest in the profits and
losses of the partnership. Under the terms of the agreement, the limited partner
is allocated 99% of partnership profit and loss, and 99% of the tax credits
earned annually. Cash flow is distributed 75% to the general partner, as payment
of the development note and thereafter as payment of a partnership
administration fee, and 25% to the limited partner.
Putnam Homes for America, Inc., a wholly-owned subsidiary of Homes for
America, was incorporated on October 14, 1997 in the state of Connecticut for
the purpose of serving as the general partner of TVMJG1996-Putnam Square, LP,
the owner and operator of Putnam Square. TVMJG1996-Putnam Square, LP was
organized on April 26, 1997 in the state of Connecticut for the purpose of
owning and operating Putnam Square. Putnam Homes for America, the general
partner, owns 1.0% of the profits and losses of TVMJG1996-Putnam Square, LP
(a.k.a. Putnam Square). Homes for America Holdings, Inc. earned a developer's
fee of $200,000, payable by a note senior to a first mortgage of $400,000, plus
an additional $200,000 representing one-half of the first mortgage note, and
retains 75% of cash flow from the property, as well as 75% of the residual value
(after return of capital), if the property is sold. Because Homes for America
Holdings, Inc. exerts full control over the limited partnership, it is treated
as a wholly owned subsidiary.
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Prairie Village Apartments
Prairie Village Apartments, a 120-unit Affordable Housing project located
in Elkhart, Indiana, was purchased on December 16, 1998 for approximately
$804,000. The project costs totaled approximately $3,950,000, which included the
establishment of a $2,200,000 restricted cash fund for current renovations from
which we will draw during the construction period, and the establishment of
reserves in the amount of approximately $425,000 for future renovations, repairs
and maintenance. This transaction included the attainment of a $2.4 million
private activity cap for Tax Exempt Bonds, $600,000 of taxable bonds and the
sale of $1,000,000 of tax credits. This transaction provided us with
reimbursement of our pre-acquisition expenses of $250,000 and developer fees of
approximately $400,000. The transaction was financed with non-recourse bonds
bearing interest at 5.9% fixed for 30 years.
Prairie Village Apartments is owned by a limited partnership in which our
wholly owned subsidiary is the general partner. Through this limited
partnership, we sold a limited partnership interest to an investor for
$1,060,510 in exchange for 99.90% interest in the profits and losses of the
limited partnership. Notwithstanding the limited partner's 99.90% interest in
the profits and losses of the limited partnership, the general partner and the
limited partner have varying interests in the items of tax profits, losses, and
tax credits, distributions of cash available from operations, and distributions
of cash available from refinancing of the partnership's debt or upon sale of its
asset. Since the limited partner's primary financial motivation for purchasing
an interest in the partnership was the benefits it would derive from the Low
Income Housing Tax Credits and other tax losses, the limited partner has
retained 99.90 % of those items. Because this allocation of Low Income Housing
Tax Credits and losses met the limited partner's yield requirements, we were
able to obtain an aggregate interest of approximately 80% in the cash available
from operations, and an aggregate interest of approximately 70% to 90% in the
cash available from a future sale of the limited partnership's asset or
refinancing of its debt (after return of capital). The limited partner has a
right to the difference. The balance of the funding was obtained through Tax
Exempt and taxable bonds on the property.
Rehabilitation is currently underway and will consist of new facades and
exteriors, new kitchens, windows, insulation, air conditioning, carpeting,
landscaping and noise attenuation. During this rehabilitation period, existing
tenants will be moved from non-renovated units into fully renovated units at no
additional cost. Further, we are creating a computer learning facility on the
premises, which will be available to all rent paying residents and their
families. Classes in computer skills such as word processing, spreadsheets and
compiling databases will be offered free of charge.
Prairie Village Homes for America, Inc., a wholly-owned subsidiary of Homes
for America, was incorporated on July 17, 1997 in the state of Indiana for the
purpose of serving as the general partner of Middlebury/Elkhart LP, which owns
and operates Prairie Village. Middlebury/Elkhart, LP was organized on July 16,
1997 in the state of Indiana for the purpose of owning and operating Prairie
Village. Prairie Village Homes for America, the general partner, owns 0.1% of
the profits and losses of Middlebury/Elkhart LP (a.k.a. Prairie Village).
Approximately 90% of the cash flow from this property and 70% to 90% of the
residual property value (after return of capital) if sold, resides with the
general partner. Because Homes for America Holdings, Inc. exerts full control
over the limited partnership, it is treated as a wholly-owned subsidiary.
Briar Meadows Apartments
We purchased the Briar Meadows Apartments, a 118-unit residential complex
located in Dallas, Texas for $1,050,000 on December 18, 1998. The project has
been financed with a first mortgage in the amount of $840,000 and a second
mortgage of $500,000. A rehabilitation escrow in the amount of $250,000 has been
established from the proceeds of the mortgages. Rehabilitation is now complete.
This is a Market Rate transaction and we will not utilize any government
guarantee programs.
Homes For America Holdings, Inc. refinanced the Briar Meadows property in
Dallas, Texas. This property carried an $825,000 first mortgage from Beal Bank
of Texas, and a $500,000 second mortgage from USA Capital of Nevada.
Upon receipt of a $1.5-million loan from Key Bank, both of the
aforementioned mortgage holders were repaid, leaving Key Bank with a first
position on the property. Subsequently, the Company received a $400,000 second
mortgage from Frost Bank. The proceeds of this loan were used substantially as
deposit money on pending transactions. The Company borrowed $1.6-million from
USA Capital, Palm Beach, Florida, of which $400,000 was used to pay the Frost
Bank second mortgage. In consideration for this loan, the Company granted USA
Capital a second position on the Briar Meadows property, and pledged the stock
of several wholly-owned subsidiaries.
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A wholly-owned subsidiary of Homes for America, Briar Meadows Homes for
America, Inc. is the 100% owner of the Briar Meadows property. The subsidiary
was incorporated on November 20, 1998 in the state of Texas for the purpose of
owning and operating this property. However, effective June 30, 2000, Homes For
America Holdings, Inc. is under a contractual obligation to proceed with the
sale of the Briar Meadows property, together with the Royal Crest property
(below) for $3,800,000.
Arlington - Royal Crest
On December 18, 1998, we purchased 17 acres of undeveloped land located in
Arlington, Texas for $1,200,000. The purchase was financed with a first mortgage
on the property in the amount of $1,200,000. We recognized transaction fees of
approximately $287,000 on this purchase.
A wholly-owned subsidiary of Homes for America, Arlington Homes for
America, Inc., is the 100% owner of the Royal Crest property. The subsidiary was
incorporated on December 9, 1998 in the state of Texas for the purpose of
developing the Arlington property. However, effective June 30, 2000, Homes For
America Holdings, Inc. is under a contractual obligation to proceed with the
sale of the Royal Crest property together with the Briar Meadows property
(above) for $3,800,000.
Lake's Edge Apartments
On June 30, 1999, the Company acquired Lake's Edge Apartments, a 400 unit
apartment complex located in North Miami, Florida for $14,025,000. Approximately
$1,400,000 of improvements to this property are now 90% complete. Including
project costs at closing, the total project cost is approximately $16,500,000.
Acquisition, including project costs and improvements, has been completely
financed with a combination of Tax Exempt and taxable Bonds. Approximately
$400,000 in transaction fees were realized on this purchase, and gain on sale of
Bonds totaled approximately $825,000, for a total revenue gain of $1,200,000.
Current occupancy is 96%.
We own 100% of the property and do not plan to sell any partnership
interests in it. Lake's Edge Homes for America, Inc., a wholly-owned subsidiary
of Homes for America, was incorporated on March 25, 1999 in the state of Florida
for the purpose of owning and operating this property.
Homes for America is also the sole owner of LEHH, Inc., which was formed
for the sole purpose of purchasing outstanding bonds and subsequently reselling
the bonds to an institutional investor in connection with the Lake's Edge
transaction. LEHH was incorporated on March 25, 1999 in the state of Florida.
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Country Lake Apartments
On November 5, 1999, the Company acquired Country Lake Apartments, a 192
unit apartment complex located in West Palm Beach, Florida, for $10,100,000.
Approximately $450,000 of improvements to this property were completed.
Including the payment of pre-acquisition costs at closing, the total project
cost is approximately $11,800,000. Acquisition, including project costs and
planned improvements, has been financed with a combination of Tax Exempt and
taxable Bonds in the amount of $8,795,000, and a bridge loan of $1,800,000. The
difference of $1,205,000 represents the Company's equity investment in this
property. Current occupancy is 96%.
We own 100% of the property and do not plan to sell any partnership
interests in it. Country Lake Homes for America, Inc., a wholly-owned subsidiary
of Homes for America, was incorporated on April 5, 1999 in the state of Florida
for the purpose of owning and operating this property.
Homes for America is also the sole owner of CLHH, Inc., which was formed
for the sole purpose of purchasing outstanding bonds and subsequently reselling
the bonds to an institutional investor in connection with the Country Lake
transaction. CLHH was incorporated on April 5, 1999 in the state of Florida.
Proposed Properties
Amherst Gardens/Williamsville, New York
Homes For America Holdings, Inc. has signed a Purchase and Sale Agreement
on October 15, 2000 to acquire Amherst Gardens, a 201-unit affordable housing
complex located in Williamsville, New York for $4,950,000. The Company intends
to apply for tax exempt bonds, in which case the Company would earn tax credits.
The Company anticipates closing this transaction in 2001.
Lake Crystal/West Palm Beach, Florida
Homes For America Holdings, Inc. intends to sign a Purchase and Sale
Agreement in November, 2000 to acquire Lake Crystal, a 640-unit property
consisting of an affordable housing segment and a market rate segment located in
West Palm Beach, Florida for $33 million. The Company intends to obtain a new
conventional mortgage for the market rate segment and Freddie Mac financing for
the affordable housing segment. The Company anticipates closing this transaction
in 2001.
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<PAGE>
Additional Information on Certain Owned and Proposed Properties
The following tables set forth certain information concerning the foregoing
properties.
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Willow Pond
--------------------------------------------------------------------------------
Location: 6003 Abrams Road, Dallas Texas 75231
General Character: Two-story garden style apartments
Present Use: Multi-family residential
Suitability for Use: Excellent; certificate of occupancy
is complete and property is rented
Owned/Intended Purchase: Owned
Mortgages, liens, etc.: 1st Mortgage
Term: 12 years
Principal Amount: $6,450,000
Interest: 7.99%
Amortization Provisions: Yes
Prepayment Provisions: Yes
Maturity Date: 2012
Balance due at Maturity $5,407,723
Terms of any lease: None
Options to sell: None
Renovations Description: Property is stabilized. No major
renovation is planned.
Estimated Cost: N/A
Method of Financing: N/A
Competitive Conditions: Property is in a mature urban area that
provides stable occupancy and is
comparable to other properties in the
vicinity.
State of Insurance: Property is adequately covered for
casualty and liability
Occupancy Rates: 2000 1999 1998 1997 1996
----------------------------------------
96% 96% 95% 91% 87%
Tenants occupying 10% or more: None
Nature of tenant: Residential
Principal Business: Multi-family, residential rental
Principal Provisions of leases: 12 month residential lease-non-renewable
Effective Annual Rental per Unit: 2000 1999 1998 1997 1996
----------------------------------------
Efficiency $3,428 $3,426 $3,244 $3,049 $2,896
1 Bedroom 6,001 5,995 5,677 5,336 5,069
2 Bedroom 7,714 7,709 7,299 6,861 6,517
3 Bedroom 9,772 9,764 9,245 8,690 8,259
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<PAGE>
Lease Expirations
Tenants whose leases will expire: All leases expire in 12 months
Area in square feet covered by
such leases: 288,020
Annual rental represented by such
leases: $2,468,853
Percentage of gross annual revenue
represented by such leases: 98%, balance is laundry, late fees,
misc. charges
Property Depreciation
Federal Tax Basis: In accordance with SFAS No. 109
Rate: Deferred
Method: Straight-line method
Life claimed with respect to
property or component Building improvements: 27 1/2 - 40 years
Furniture: 7 years
Realty Tax Rate: N/A
Annual Realty Taxes: N/A
Estimated Taxes on any proposed
improvements: N/A
--------------------------------------------------------------------------------
Lake's Edge
--------------------------------------------------------------------------------
Location: 950 NW 214th St., Miami, Florida 33169
General Character: Two- and three-story garden style
apartments
Present Use: Multi-family residential
Suitability for Use: Excellent; certificate of occupancy
is complete and property is rented
Owned/Intended Purchase: Owned
Mortgages, liens, etc.: 1st Mortgage 2nd Mortgage
Term: 40 years 10 years
Principal Amount: $14,824,884 $1,374,884
Interest: 6.90% 11.00%
Amortization Provisions: Yes Yes
Prepayment Provisions: Yes Yes
Maturity Date: 2035 2010
Balance due at Maturity $0 $0
Terms of any lease: None
Options to sell: None
Renovations Description: Carpet, tile, landscaping, lighting,
vinyl siding, paving
Estimated Cost: $1,400,000
Method of Financing: Mortgage proceeds
Competitive Conditions: Property, once renovated, has a slight
competitive edge over other properties
in the area
State of Insurance: Property is adequately covered for
casualty and liability
Occupancy Rates: 2000 1999 1998 1997 1996
----------------------------------------
95% 90% 87% 85% 83%
Page 10
<PAGE>
Tenants occupying 10% or more: None
Nature of tenant: Residential, Individual families
Principal Business: Multi-family, residential rental
Principal Provisions of leases: 12 month residential lease-non-renewable
Effective Annual Rental per Unit: 2000 1999 1998 1997 1996
----------------------------------------
1 Bedroom $7,509 $6,721 $6,049 $5,565 $5,120
2 Bedroom 9,386 8,401 7,561 6,956 6,401
3 Bedroom 11,263 10,082 9,073 8,349 7,680
Lease Expirations
Tenants whose leases will expire: All leases expire in 12 months
Area in square feet covered by
such leases: 388,000
Annual rental represented by such
leases: $3,641,804
Percentage of gross annual revenue
represented by such leases: 98%, balance is laundry, late fees,
misc. charges
Property Depreciation
Federal Tax Basis: In accoudance with SFAS No. 109
Rate: Deferred
Method: Straight-line method
Life claimed with respect to
property or component Building improvements: 27 1/2 - 40 years
Furniture: 7 years
Realty Tax Rate: N/A
Annual Realty Taxes: N/A
Estimated Taxes on any proposed
improvements: N/A
--------------------------------------------------------------------------------
Country Lake
--------------------------------------------------------------------------------
Location: 6010 Sherwood Glen Way, West Palm Beach,
Florida 33415
General Character: Two-story garden style apartments
Present Use: Multi-family residential
Suitability for Use: Excellent; certificate of occupancy
is complete and property is rented
Owned/Intended Purchase: Owned
Mortgages, liens, etc.: 1st Mortgage 2nd Mortgage 3rd Mortgage
Term: 30 years 20 years 18 months
Principal Amount: $6,255,000 $2,540,000 $1,800,000
Interest: 6.00% 13.00% 16.00%
Amortization Provisions: No No No
Prepayment Provisions: No No No
Maturity Date: 2027 2018 2001
Balance due at Maturity $6,255,000 $2,540,000 $1,800,000
Terms of any lease: None
Options to sell: None
Page 11
<PAGE>
Renovations Description: New perimeter fencing, 60 carports, lake
fountains, painting, landscaping
Estimated Cost: $400,000
Method of Financing: Mortgage proceeds and equity
Competitive Conditions: Property is above average for area
State of Insurance: Property is adequately covered for
casualty and liability
Occupancy Rates: 2000 1999 1998 1997 1996
----------------------------------------
95% 94% 91% 93% 93%
Tenants occupying 10% or more: None
Nature of tenant: Residential, Individual families
Principal Business: Multi-family, residential rental
Principal Provisions of leases: 12 month residential lease-non-renewable
Effective Annual Rental per Unit: 2000 1999 1998 1997 1996
----------------------------------------
1 Bedroom $7,318 $6,741 $6,134 $5,582 $5,079
2 Bedroom 9,504 8,755 7,967 7,250 6,597
3 Bedroom 10,397 9,577 8,715 7,930 7,217
Lease Expirations
Tenants whose leases will expire: All leases expire in 12 months
Area in square feet covered by
such leases: 200,200
Annual rental represented by such
leases: $1,786,722
Percentage of gross annual revenue
represented by such leases: 98%, balance is laundry, late fees,
misc. charges
Property Depreciation
Federal Tax Basis: In accoudance with SFAS No. 109
Rate: Deferred
Method: Straight-line method
Life claimed with respect to
property or component Building improvements: 27 1/2 - 40 years
Furniture: 7 years
Realty Tax Rate: N/A
Annual Realty Taxes: N/A
Estimated Taxes on any proposed
improvements: N/A
Page 12
<PAGE>
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Lake Crystal
--------------------------------------------------------------------------------
Location: West Palm Beach, Florida
General Character: Two-story garden style apartments
Present Use: Multi-family residential
Suitability for Use: Excellent
Owned/Intended Purchase: Intended Purchase
Mortgages, liens, etc.: N/A
Term: N/A
Principal Amount: N/A
Interest: N/A
Amortization Provisions: N/A
Prepayment Provisions: N/A
Maturity Date: N/A
Balance due at Maturity N/A
Terms of any lease: None
Options to sell: None
Renovations Description: New roofs, road repair, landscaping,
carpet, appliances, painting
Estimated Cost: $3,000,000
Method of Financing: Conventional mortgage and equity
Competitive Conditions: Property is comparable to other
communities in the area. Renovation
will create a slight competitive edge
over other properties in the area.
State of Insurance: Property is adequately covered for
casualty and liability
Occupancy Rates: 2000 1999 1998 1997 1996
----------------------------------------
85% 84% 84% 84% 85%
Tenants occupying 10% or more: None
Nature of tenant: Residential, Individual families
Principal Business: Multi-family, residential rental
Principal Provisions of leases: 12 month residential lease-non-renewable
Effective Annual Rental per Unit: 2000 1999 1998 1997 1996
----------------------------------------
1 Bedroom $6,417 $5,454 $4,909 $4,467 $4,110
2 Bedroom 8,091 6,878 6,190 5,633 5,182
3 Bedroom 9,830 8,355 7,520 6,843 6,296
Lease Expirations
Tenants whose leases will expire: All leases expire in 12 months
Area in square feet covered by
such leases: 587,620
Annual rental represented by such
leases: $5,348,298
Percentage of gross annual revenue
represented by such leases: 98%, balance is laundry, late fees,
misc. charges
Page 13
<PAGE>
Property Depreciation
Federal Tax Basis: In accoudance with SFAS No. 109
Rate: Deferred
Method: Straight-line method
Life claimed with respect to
property or component Building improvements: 27 1/2 - 40 years
Furniture: 7 years
Realty Tax Rate: N/A
Annual Realty Taxes: N/A
Estimated Taxes on any proposed
improvements: N/A
--------------------------------------------------------------------------------
Amherst Gardens
--------------------------------------------------------------------------------
Location: 6724 Main Street, Williamsville, NY
General Character: N/A- Intended Purchase in 3rd Q 2001
Present Use: Multi-family residential
Suitability for Use: Excellent
Owned/Intended Purchase: Intended Purchase
Mortgages, liens, etc.: N/A- Intended Purchase in 3rd Q 2001
Term: N/A- Intended Purchase in 3rd Q 2001
Principal Amount: N/A- Intended Purchase in 3rd Q 2001
Interest: N/A- Intended Purchase in 3rd Q 2001
Amortization Provisions: N/A- Intended Purchase in 3rd Q 2001
Prepayment Provisions: N/A- Intended Purchase in 3rd Q 2001
Maturity Date: N/A- Intended Purchase in 3rd Q 2001
Balance due at Maturity: N/A- Intended Purchase in 3rd Q 2001
Terms of any lease: None
Options to sell: None
Renovations Description: N/A- Intended Purchase in 3rd Q 2001
Estimated Cost: N/A- Intended Purchase in 3rd Q 2001
Method of Financing: N/A- Intended Purchase in 3rd Q 2001
Competitive Conditions: N/A- Intended Purchase in 3rd Q 200101
State of Insurance: Property is adequately covered for
casualty and liability
Occupancy Rates: 2000 1999 1998 1997 1996
----------------------------------------
N/A- Intended Purchase in 3rd Q 2001
Tenants occupying 10% or more: None
Nature of tenant: Residential, Individual families
Principal Business: Multi-family, residential rental
Principal Provisions of leases: 12 month residential lease-non-renewable
Effective Annual Rental per Unit: 2000 1999 1998 1997 1996
----------------------------------------
1 Bedroom N/A- Intended Purchase in 3rd Q 2001
2 Bedroom N/A- Intended Purchase in 3rd Q 2001
3 Bedroom N/A- Intended Purchase in 3rd Q 2001
Page 14
<PAGE>
Lease Expirations
Tenants whose leases will expire: All leases expire in 12 months
Area in square feet covered by
such leases: N/A- Intended Purchase in 3rd Q 2001
Annual rental represented by such
leases: N/A- Intended Purchase in 3rd Q 2001
Percentage of gross annual revenue
represented by such leases: N/A- Intended Purchase in 3rd Q 20011
Property Depreciation
Federal Tax Basis: In accoudance with SFAS No. 109
Rate: Deferred
Method: Straight-line method
Life claimed with respect to
property or component Building improvements: 27 1/2 - 40 years
Furniture: 7 years
Realty Tax Rate: N/A
Annual Realty Taxes: N/A
Estimated Taxes on any proposed
improvements: N/A
--------------------------------------------------------------------------------
New Business Ventures
Homes for America Real Estate Services, Inc., a wholly-owned subsidiary of
Homes for America, was incorporated on July 6, 1999 in the state of Texas. This
company was organized to serve as a management company for Homes For America
Holdings' properties, as well as properties owned by third parties and is
seeking such contracts.
MasterBuilt America, Inc. was formed as a joint venture on July 1, 1999 in
the state of Virginia between Homes for America and MasterBuilt Companies, Inc.,
a commercial building company located in Virginia. MasterBuilt America may be
engaged by Homes for America to construct and/or rehabilitate some of the
apartments owned and operated by Homes for America and its affiliates.
Page 15
<PAGE>
Financing
Affordable Housing Financing
We purchase Affordable Housing properties through the use of relatively
small amounts of our own capital, the sale of Tax Credit benefits to Tax Credit
investors, conventional debt, government agency loans, and, in some cases, the
use of low-interest Tax Exempt and taxable Bonds. In addition, we often purchase
Affordable Housing properties with relatively small amounts of capital through
the use of low interest rate, non-recourse bonds, thereby preserving capital for
other transactions. Aside from the equity that we provide, the balance of the
equity for the purchase of an Affordable Housing property is obtained through
the sale for cash of a limited partnership interest to an investor/limited
partner ("Limited Partner") formed specifically to own the Affordable Housing
property. The Limited Partner's interest entitles it to share in the tax credit
and cash benefits associated with the property. From the transaction, we may
receive: (i) reimbursement of expenses; (ii) BSPRA or developer's fee (up to
15%); (iii) acquisition fees (up to 5% of the acquisition); (iv) rehabilitation
fees (up to 10% of any rehabilitation or construction); (v) management fees (up
to 6% of total income); (vi) retention of approximately 70% to 90% of all
operational cash flow; and (vii) 80-90% of the cash available for distribution
upon sale or refinancing.
An Affordable Housing project's financing may consist of some or all of the
following: (i) equity, the majority of which is provided mainly through the sale
of Low Income Housing Tax Credits to a single outside investor and the minority
of which is provided by us as the developer, (ii) conventional debt, which will
consist of conventional loans provided by financial institutions such as banks
and insurance companies, (iii) government agency loans provided by local
government agencies at lower than market interest rate and repayable solely out
of a portion of the project's available cash flow, if any, in lieu of a fixed
monthly payment, (iv) government agency grants awarded to the project which do
not need to be repaid, and (v) debt generated by the sale of Bonds (see "Tax
Exempt Bonds"). The amount of conventional debt available as financing to an
Affordable Housing project depends entirely upon the net operating income
available to make payments of principal and interest. Net operating income is
the amount of money available after the payment of operating expenses.
Conventional lenders require a ratio of net operating income to principal and
interest payments from as low as 1.10:1 to as high as 1.35:1. Thus, the lower
rents required by Restrictions reduce the availability of conventional debt for
Affordable Housing projects and increase the need for the government financing
described above.
In general, the Limited Partner investors in limited partnerships owning
Affordable Housing projects are primarily seeking the benefits generated by the
Low Income Housing Tax Credits and the other tax losses, and give less
consideration to cash distributions as a means of obtaining a desired yield from
an investment. Therefore, the limited partnerships typically grant the general
partner up to 90% of the cash flow from operations and up to 90% of residual
interest in the properties.
Although approximately one-half of our business relies on HUD or other
government financing, once a transaction is closed, it is not subject to
re-negotiation or termination. Therefore, after closing, the government agency
may neither elect to renegotiate our agreed upon profits nor terminate our
contracts or subcontracts.
Page 16
<PAGE>
Conversions Financing
Market Rate purchases of undervalued residential or non-residential
property that we substantially rehabilitate or convert may be financed by a
capital investment of up to 10-20% of the project's costs, with the balance
furnished by debt financing. The Company believes that such level of financing
is generally available and was used for the purchase of Briar Meadows
Apartments. These properties are generally well situated and/or architecturally
unique, and can frequently be purchased at low prices due to the need for
significant rehabilitation. Unit costs will vary region by region. Replacement
costs are determined by regional industry standards and are supported by
appraisals and feasibility studies. Although costs vary by region, we believe
that this method of acquisition, rehabilitation and financing is much more cost
effective than the approximate cost of between $25,000 and $60,000 to construct
comparable new units. HUD is the ultimate determinant of replacement costs and
HUD loans are based upon the lowest of four test criteria: (1) Letter of credit
service by income; (2) market value based on the HUD appraisal; (3) a statutory
allowance; or (4) replacement cost.
Low Income Housing Tax Credits
A significant portion of our housing portfolio is financed through the use
of Low Income Housing Tax Credits (the "Tax Credits").
Tax Credits were created by the Tax Reform Act of 1986, which established a
single program of Tax Credits benefiting the owners of rental housing
developments specifically targeted to a defined group of lower income
households. Tax Credits can be utilized by the owner of the development and
constitute a dollar for dollar reduction of the owner's federal tax liability.
In the case of pass-through tax entities such as limited partnerships and
limited liability companies, each owner of the entity (i.e., the partners in the
case of a limited partnership or the members in the case of a limited liability
company) is allocated a proportionate share of the Tax Credits which may be used
as a direct reduction of an individual's or corporation's federal income tax
liability.
State Allocation of Tax Credits
State housing agencies are responsible for the allocation of Low Income
Housing Tax Credits and for monitoring program compliance. Pursuant to the
Volume Cap applicable to Low Income Housing Tax Credits, each state annually may
allocate Low Income Housing Tax Credits to Affordable Housing projects up to an
amount equal to $1.25 per state resident. Without reducing the amount of Low
Income Housing Tax Credits that a state has available annually to allocate under
the Low Income Housing Tax Credit Volume Cap, a state may also allocate Tax
Credits to Affordable Housing projects financed with Bonds that are subject to
the separate Volume Cap applicable to Bonds. In other words, Low Income Housing
Tax Credits allocated to Affordable Housing Projects financed with Bonds do not
reduce the amount of Low Income Housing Tax Credits available to Affordable
Housing projects that are not financed with Bonds.
Qualifying for Tax Credits
Credits are obtained through an application to the responsible state
agency, and are allocated to developments which meet certain threshold
requirements set forth in the Internal Revenue Code and the particular State
Agency's Qualified Allocation Plan ("QAP"). Bond allocation applicants, because
they are not part of this Volume Cap, do not compete for the Tax Credits. Once a
Bond allocation development has received its allocation of bonding authority, it
will receive a Tax Credit allocation if that applicant meets the minimum
threshold standards for a Tax Credit allocation.
Page 17
<PAGE>
Volume Cap Tax Credits and Bond allocation Tax Credits are allocated to
developments involving either new construction or rehabilitation of existing
housing developments. In addition, Volume Cap Tax Credits and Bond allocation
Tax Credits may also be awarded for the acquisition of an existing development
if that development qualifies for the rehabilitation Tax Credits.
The amount of Tax Credits allocated for a new development will be the
equivalent of 70% of the present value of the eligible basis, which includes
costs of construction and other permissible fees and expenses, as provided by
Section 42(b)(2)(B) of the Internal Revenue Code. Ten percent of the Tax Credits
may be applied against tax liabilities each year for ten years. The amount of
Tax Credits allocated for a rehabilitation development will be the equivalent of
70% of the present value (determined over a ten-year period) of the cost of the
rehabilitation. The amount of Tax Credits allocated for qualified acquisitions
will be the equivalent of 30% of the acquisition cost. If any portion of the
permanent financing for the development is provided at below market interest
rates by or through the federal government, with certain exceptions, the amount
of the Tax Credit allocated will be the equivalent of 30% of the present value
(determined over a ten-year period) of the cost of new construction or
rehabilitation.
The amount of Tax Credits allocated in Bond allocation developments is the
equivalent of 30% of the present value (determined over a ten-year period) of
the cost of new construction or rehabilitation, as the case may be, and 30% of
the cost of acquisition if the development also receives rehabilitation credits.
The amount of Tax Credits allocated to a development is also a function of
eligible costs of construction or rehabilitation ("Eligible Basis"), the number
of housing units in the development which are deemed to be qualified low income
units, and the applicable federal rate ("AFR"), which is the factor used to
arrive at the present value of the Tax Credits over ten years. The number of
qualified low income units is determined by the number of rental units in the
development which are rented to qualified low income tenants at appropriate low
income rents. A development must elect a low income set aside test ("Set Aside")
which is (i) 40% of the units rented to tenants whose income is 60% of the area
median income, or (ii) 20% of the units rented to tenants whose income is 50% of
the area median income. Area median income is determined for all localities in
the United States by HUD. The Set Aside is a threshold for Tax Credit Allocation
qualification, but due to the intense competition for Tax Credits, state
agencies have successfully required developments to set aside more units at
significantly lower rent. For a housing unit to be considered a low income unit,
it must be rented at no more than 30% of the tenant's income, with the rental
amount adjusted for family size.
Utilization and Loss of Tax Credits
Tax Credits are taken over a period beginning in the year in which the
development is first occupied by tenants ("Placed in Service") and ending ten
years later ("Tax Credit Period"). Developments must remain in compliance with
their initial low rent levels and initial low income occupancy levels for a
minimum of 15 years ("Compliance Period"), but in order to qualify for Tax
Credits in the first instance, developments must agree to remain in compliance
with rent levels and low income occupancy levels for an additional 15 years
beyond the Compliance Period agreement (the "Extended Use Agreement"). The
additional time period contemplated thereby is referred to as the Extended Use
Period.
Page 18
<PAGE>
The Extended Use Agreement extends the Compliance Period for an additional
15 years, making the Affordable Housing Project subject to the Low Income
Housing Tax Credit Restrictions for a total of 30 years (the initial 15 years of
the Compliance Period plus the 15 years of the Extended Use Period). The
Extended Use Agreement does not alter the owner's ability to operate the
property, since the owner must contemplate the 30 year period of restrictions
when the investment is initially acquired. Only if, under circumstances
contemplated by Section 42(h)(6)(E) of the Internal Revenue Code, the 30 year
period is reduced to 15 years, will the operation of the property be affected.
If the 30 year period is reduced so that there are no Low Income Housing Tax
Credit Restrictions applicable to the project, and if no other Restrictions
exist which limit the rents and the tenant's income, the project can then be
operated as a Market Rate residential project, with the likelihood that it could
generate higher operating income.
Developments are subject to tax credit recapture during the Compliance
Period if: (i) they fall below the required number of low income units; (ii) the
rental amounts exceed the required rates; (iii) units are rented to tenants
whose incomes exceed the maximum allowed; or (iv) they are transferred to third
parties. In years 1-11 of the Compliance Period, the amount of the recapture is
equal to one-third of all prior Tax Credits claimed by the taxpayer. In years
12-15 of the Compliance Period, the amount of the recapture is one-fifteenth of
all prior Tax Credits claimed by the taxpayer.
Disposition of Tax Credit Developments
Generally, Tax Credit developments can be disposed of at any time. When and
how the disposition occurs controls whether there will be Tax Credit recapture,
and whether the development will remain subject to the Extended Use Agreement.
Value of the Credits; Sale to Investors and Relationship with Investors
Tax Credits result in a dollar for dollar reduction of a taxpayer's federal
tax liability. They represent the equivalent of cash in the amount of the tax
savings. The market for Tax Credits enables owners of Affordable Housing
projects which have received an allocation of Low Income Housing Tax Credits to
sell the credits as interests in limited partnerships for cash. There is no
secondary market, or after-market, for the limited partnership interests. Tax
Credit purchasers and investors in this market are long term. The value of the
Tax Credits and other benefits are allocated between the partners based upon an
agreed upon percentage for each of the items of benefit such as Tax Credits and
cash flow. The range of Tax Credit prices we receive is between fifty cents and
eighty cents per Low Income Housing Tax Credit dollar.
Every Tax Credit purchaser has different investment criteria, required
rates of return, and exit strategies. Generally, we can expect to receive a
portion of the proceeds from the purchaser during construction or rehabilitation
of the development, a portion when the development is substantially complete and
the remainder when the development has achieved predetermined stabilized rent
and occupancy levels. The partnership agreement between us and the Tax Credit
purchaser will contain many provisions which govern the operation of the
development, including: (i) regular periodic reporting; (ii) providing the Tax
Credit purchaser with certain remedies if the development falls out of Tax
Credit compliance; and (iii) providing the Tax Credit purchaser with an exit
strategy after 15 years.
We do not sell Tax Credits to individual purchasers. The Tax Credits are
purchased by institutions such as The Related Capital Company, Inc., The Sturges
Company and Greenwich Partners. These institutions are specialists in the
purchase of Tax Credits.
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<PAGE>
Tax-Exempt Bonds
Of the three types of Tax Exempt Bonds available for Affordable Housing, we
generally employ Private Activity Bonds issued under Section 142(d) of the
Internal Revenue Code. Private Activity Bonds are subject to a Volume Cap for
each state equal to the greater of $150 million or $50 per person, whichever is
higher. These Volume Cap Private Activity Bonds are the Bonds that qualify for
Bond allocation Tax Credits. (See "Low Income Housing Tax Credits"). Tax Exempt
Bonds provide a low interest rate source of debt financing for housing
developments.
Once a local or state agency has passed a resolution (the "Inducement
Resolution"), the owner of the development can apply to the appropriate agency
for a Bond allocation. At the same time, the owner of the development may apply
for a credit enhancement from HUD that guarantees repayment of the bonds to the
bondholders. The HUD credit enhancement guarantees repayment of bonds, thereby
enabling the issuer of the Bonds to charge a lower rate of interest on the loan.
Once the credit enhancement is obtained, the issuer can sell its bonds and lend
the money to the development. The revenues of the development are used to make
the monthly payments of principal and interest on the mortgage which are used to
repay the principal and interest on the Bonds.
Utilization of Tax Exempt Bonds adds time to the development process
because of the regulatory approvals necessary and requires compliance with
Internal Revenue Service regulations in order to maintain the Bonds' Tax Exempt
status. In all other respects, the employment of Tax Exempt Bonds to provide
debt financing differs little from the use of conventional mortgage financing.
Government Regulations
In addition to the government financing requirements referred to above, we
are subject to environmental and other governmental regulations. Compliance with
laws and regulations governing our business can be complicated, expensive, and
time-consuming and may require significant managerial and legal supervision.
Failure to comply with such laws and regulations could have a materially adverse
effect on our business. Further, any changes in any of these laws and
regulations could materially and adversely affect our business. There is no
assurance that we will be able to secure on a timely basis, or at all, necessary
regulatory approvals in the future. These regulations and related considerations
include, but are not limited to, federal government Tax Exempt Bond laws and
regulations, allocations of specific amounts of Bonds to the various states,
state regulations, state political decisions as to how to use the allocations,
obtaining Bond Inducement Resolutions from state and municipal agencies and the
continued availability of HUD insurance where necessary. In addition, we are
often dependent on Bond ratings offered to finance real estate purchases.
Environmental compliance issues do not have a material effect on the
management and earnings of our properties. However, we cannot obtain financing
or close a transaction without certifying that there are no environmental
hazards present on the property.
The primary costs relating to the environmental compliance are
pre-acquisition inspections. These costs typically range from $5,000 to $20,000
per project. In the event that there is an environmental problem, mortgage
financing would be obstructed and we would be unable to acquire the property
The compliance and costs associated with the Americans with Disability Act
("ADA") are always included in the cost of renovating a residential property. In
many cases, if little or no renovation is required, the new owner is not
required to meet current ADA requirements. This is referred to as being
"grandfathered" under a previous set of rules or housing codes.
Page 20
<PAGE>
As a general rule, Homes for America will not consider a property for
purchase if local zoning regulations do not conform with the Company's intended
use of the property. Inasmuch as the majority of transactions involve
pre-existing multi-family structures in appropriately zoned areas, such
regulations and the potential for neighborhood opposition are nonexistent. In
the rare circumstance where this is not the case, the Company would stipulate at
contract that closing be contingent upon obtaining necessary variances,
easements or changes in regulations. Feasibility of compliance would be
determined in the due diligence phase of the transaction, as would the potential
for and severity of neighborhood opposition. If either issue were determined to
have an ultimately adverse effect upon performance of the property, the pending
transaction would be terminated.
Competition
All of our currently owned properties, or properties under agreement to be
purchased, are located in developed areas. There are numerous other multifamily
properties and real estate companies, many of which have greater financial and
other resources than us within the market area of each of these properties, and
which will compete with us for tenants and development and acquisition
opportunities. The number of competitive multifamily properties and real estate
companies in such areas could have a material effect on: (i) our ability to rent
the apartments; (ii) the rents charged; and (iii) development and acquisition
opportunities. The activities of these competitors could cause us to pay a
higher price for a new property than we otherwise would have paid, or may
prevent us from purchasing a desired property at all, which could have a
material adverse effect on our business. In addition, there is intense
competition for Tax Credit and Tax Exempt Bond allocations, and many of these
competitors have greater financial resources and longer operating histories than
do we. Accordingly, there can be no assurance that we will be able to
successfully compete in the future.
Employees
We employ approximately 52 full-time employees, including executive
officers. No employees are covered by a collective bargaining agreement. We
believe that our relations with our employees are satisfactory.
Page 21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Homes for America Holdings, Inc. is a real estate investment, development
and operations company owning and operating a portfolio of apartment complexes
primarily located in the Southwestern and Northeastern United States. Homes was
originally incorporated on January 9, 1996 as GELT Enterprises, Inc. and on
February 26, 1996 the name of the corporation was changed to Homes For America
Holdings, Inc. In addition to net rental income derived from the operation of
these properties, the Company earns a significant portion of its revenues and
profits from transactional fees associated with the acquisition and financing of
its properties.
Presently, the Company's portfolio consists of affordable housing and
market rate acquisitions. The affordable housing acquisitions include: 1) the
purchase of existing properties with tax-exempt bond financing already in place,
and 2) the purchase of existing property, or land for construction, and the
subsequent procurement of tax-exempt bond allocations by the Company. In the
case of the first type of transaction, although the Company earns no fees, it is
often possible to purchase the tax-exempt bonds below face value and renegotiate
them for profit. In the case of the second type of transaction, the Company, in
procuring the tax-exempt bond allocation, receives the benefits of tax-exempt
bond financing. These types of transactions also frequently include the
procurement of Affordable Low Income Housing Tax Credit (ALIHTC) allocations and
the formation of ALIHTC partnerships. Investors in these partnerships may gain
various tax benefits, including tax credits, as provided for in Section 42 of
the Internal Revenue Service Code. In turn, the Company acts as general partner
in the various partnerships, receiving most or all of the operating cash flow
and residual value. In addition, the Company may provide certain operating
deficit guarantees to the lenders. These guarantees are typical of those
generally provided by general partners.
In addition to affordable housing, the Company is also the owner of record
of two market rate properties - Briar Meadows and Royal Crest (land). (However,
Homes For America Holdings, Inc. is under contractual obligation, effective June
30, 2000, to sell the two properties.)
Expectations are to develop a portfolio diversity approximating 70%
affordable housing and 30% market rate properties. Plans are for the Company to
continue to own and operate its apartment complexes. Accordingly, no cash flow
from dispositions nor gains or losses from the sale of assets is anticipated.
The Company's revenue stream is generated primarily in two ways: 1) from
rental and related income, and 2) from transaction fees earned in accordance
with certain property purchasing and financing agreements. Rental income and
related revenues (vending, parking, late fees, etc.) result from the ongoing
operation of the Company's rental properties. Cash receipts from these sources
occur on a relatively even basis throughout the year, though fluctuations
resulting from seasonal changes in occupancy levels can occur. In addition to
rental and related income, transactional fees, determined by buyer-seller
agreements, contribute to the Company's revenue stream. Transaction fees may
include the Builder's Special Profit and Risk Assessment (BSPRA) allowed by HUD,
fees derived from the sale of tax credits, development fees, administrative fees
and management fees.
The Company presently is under contract to purchase $4,950,000 worth of
property in New York. This transaction could earn a variety of transaction fees,
and should also generate rental and related income. The Company will continue to
utilize tax exempt bonds and regulatory financing to finance the purchases,
where appropriate.
Page 22
<PAGE>
The Company was formed in 1996, and had no revenues that year. Accordingly,
a net loss of $324,800 was posted for 1996. Expenses were limited to
administrative costs related to formation and start-up. In 1997, the Company
acquired a 386-unit affordable housing property, Willow Pond, in Dallas, Texas.
Tax benefits associated with the property were sold for $2.5 million. In
November 1997, the Putnam Square apartment complex in Bridgeport, Connecticut
was acquired, though operations there did not actually begin until January 1998.
In December, 1998, the Company acquired three additional properties: the
118-unit Briar Meadows apartments in Dallas, Texas; a 120-unit affordable
housing property in Elkhart, Indiana for which the sale of tax credits earned
the Company $1,060,506; and the 17.7 acre Arlington site, where approval to
construct 210 market rate units has been secured. In June, 1999, the Company
acquired the 400-unit Lake's Edge apartments in North Miami, Florida. In
addition to $73,631.00 in development fees, the sale of tax-exempt bonds in
conjunction with this transaction earned the Company $825,000. In November,
1999, the Company acquired the 192-unit Country Lake apartments in West Palm
Beach, Florida. Effective June 30, 2000 Homes For America is under a contractual
obligation to sell Briar Meadows and Royal Crest for $3,800,000.
The following discussion should be read in conjunction with the
consolidated financial statements appearing elsewhere in this form. In
accordance with SFAS 131, the Company aggregates the operations of its various
operating properties into a single segment for financial reporting purposes.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" may constitute forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Although the Company believes that the
expectations reflected in such forward looking statements are based on
reasonable assumptions, such statements are subject to risks and uncertainties,
including those discussed elsewhere in this form, that could cause actual
results to differ from those projected.
Results of Operations for the
Twelve Months Ended December 31, 1999
Compared to December 31, 1998
Revenues
Revenues of $4,233,867 reported in 1998 are for the combined activities of
five properties. Two of these, Dallas/Willow Pond and Putnam Square, reflect a
full 12 months of activity. The remaining three, Dallas/Briar Meadows,
Elkhart/Prairie Village and Arlington, Texas were acquired in the month of
December. Revenues from these three properties are primarily transactional.
(Since the properties were acquired at the end of the year, there is very little
operational income.)
Revenues in 1999 of $7,756,665, an increase of $3,522,798 (83%) over 1998,
are for the combined activities of seven properties. Five of these
(Dallas/Willow Pond, Bridgeport/Putnam Square, Dallas/Briar Meadows,
Elkhart/Prairie Village and Arlington (land), Texas) reflect a full 12 months of
activity. Miami/Lake's Edge was acquired in the month of June, and reflects only
six months of activity. West Palm Beach/Country Lake was acquired in November,
and reflects only one month's activity.
Page 23
<PAGE>
Transactional fees earned by the Company, including acquisition fees,
rehabilitation fees, general partner fees, and other fees associated with the
financing and purchase of property totaled $1,722,211 in 1998 and $595,674 in
1999, as per the breakdowns indicated below:
Transactional Fees
---------------------------------------------------------------------
1998 1999
---------------------------------------------------------------------
Putnam Square $ 138,500
Arlington, Texas 287,498
Prairie Village (BSPRA) 235,707
Prairie Village 1.060,506
Lake's Edge $ 173,631
Prairie Village 422,043
---------------------------------------------------------------------
$1,722,211 $ 595,674
Expenses
Reported expenses for 1998 of $2,316,789 include a full twelve months of
operating costs for both Dallas/Willow Pond and Bridgeport/Putnam Square, as
well as corporate administrative expenses. Inasmuch as the Dallas/Briar Meadows,
Elkhart/Prairie Village and Arlington, Texas properties were all acquired in the
final month of 1998, any expenses incurred in the operation of these sites is
minimal, reflecting less than one month's activity.
Reported expenses for 1999 of $4,504,384 include a full twelve months of
operating costs for Dallas/Willow Pond, Bridgeport/Putnam Square, Dallas/Briar
Meadows, Elkhart/Prairie Village and Arlington, Texas. Miami/Lake's Edge,
acquired in June, reflects six months of operating costs. West Palm
Beach/Country Lake, acquired in November, reflects only one month's operating
costs. The Company remains committed to reducing expenses through effective
management practices at its present sites, and to extending those practices to
future acquisitions.
Real estate expenses include repairs and maintenance, utilities, on-site
payroll, insurance, property taxes and other direct expenses. Administrative
expenses comprise corporate overhead and other items not directly chargeable to
the rental properties. These include expenses such as corporate salaries,
outside professionals' fees, travel and expenses such as telephones, supplies
and other office expenses.
For the year ended December 31, 1998, total operating expenses were
$2,316,789 before interest, depreciation and taxes. For the year ended December
31, 1999, total operating expenses before interest, depreciation and taxes were
$4,504,384. The increase of $2,187,595 (94%) is directly attributable to the
additional expenses of operating the three properties acquired in December,
1998, as well as the June, 1999 acquisition of Miami/Lake's Edge and the
November, 1999 acquisition of Country Lake.
Depreciation and amortization of $415,665 in 1998 reflects a full year's
expenses on both Dallas/Willow Pond and Bridgeport/Putnam Square. Depreciation
and amortization of $1,042,189 in 1999, an increase of $626,542 (151%) from
1998, reflects a full year's expenses on Dallas/Willow Pond, Bridgeport/Putnam
Square, Dallas/Briar Meadows, Elkhart/Prairie Village and Arlington, Texas, as
well as six month's expenses on Miami/Lake's Edge and one month's expenses on
West Palm Beach/Country Lake. The Company utilizes accelerated methods of
depreciation over a seven (7) year life for personal property. Realty is
depreciated by the straight-line method over lives ranging from 25 to 27.5
years.
Page 24
<PAGE>
The 1998 interest expense of $558,293 was incurred on outstanding mortgages
at both Dallas/Willow Pond and Bridgeport/Putnam Square, as well as on certain
additional notes incurred in 1998. The 1999 interest expense of $1,428,908, an
$870,615 increase (156%) over 1998, was incurred on outstanding mortgages at all
seven of the Company's properties.
Results of Operations for the
Six Months Ended June 30, 1999
Compared to June 30, 2000
Revenues
Revenues of $2,751,324 for the six months ended June 30, 1999 are fully
reported in the attached Consolidated Statement of Operations, and reflect
rental and other operating income from the following properties: Dallas/Willow
Pond, Bridgeport/Putnam Square, Dallas/Briar Meadows, and Elkhart/Prairie
Village.
Revenues of $5,920,626 for the six months ended June 30, 2000, an increase
of $3,169,302 (115%) over the same period in 1999, are fully reported in the
attached Consolidated Statement of Operations, and reflect rental and other
operating income from the following properties: Dallas/Willow Pond,
Bridgeport/Putnam Square, Dallas/Briar Meadows, Elkhart/Prairie Village,
Miami/Lake's Edge and West Palm Beach/Country Lake.
Expenses
Expenses of $1,608,733 for the six months ended June 30, 1999 are fully
reported in the attached Consolidated Statement of Operations, and include the
costs of operating Dallas/Willow Pond, Bridgeport/Putnam Square, Dallas/Briar
Meadows, and Elkhart/Prairie Village, well as corporate administrative expenses.
Expenses of $2,478,796 for the six months ended June 30, 2000, an increase
of $870,063 (54%) over the same period in 1999, are fully reported in the
attached Consolidated Statement of Operations, and include the costs of
operating Dallas/Willow Pond, Bridgeport/Putnam Square, Dallas/Briar Meadows,
Elkhart/Prairie Village, Miami/Lake's Edge and West Palm Beach/Country Lake as
well as corporate administrative expenses.
The increase in expenses for the six months ended June 30, 2000 over the
six months ended June 30, 1999 arise from the additional corporate personnel in
place in 2000, and from the administrative expenses incurred at two properties
owned in 2000 that were not owned in the first six months of 1999.
Administrative expenses comprise corporate overhead and other items not directly
chargeable to the rental properties. These include expenses such as corporate
salaries, outside professionals' fees, travel and expenses such as telephones,
supplies and other office expenses.
Interest expenses of $318,896 for the first six months of 1999 consisted of
the interest incurred only on the Dallas/Willow Pond, Bridgeport/Putnam Square,
Dallas/Briar Meadows, Elkhart/Prairie Village, Arlington/Royal Crest and
Miami/Lake's Edge mortgages, and interest incurred on debt at the corporate
level. Interest expenses of $1,459,959 for the first six months of 2000, an
increase of $1,141,063 (358%) over the same period in 1999 include interest
related to the mortgages on all seven of the Company's properties, and interest
incurred on debt at the corporate level.
Depreciation, similarly, reflects six operating properties in the first six
months of 2000, as opposed to depreciation on only five properties for the first
six months of 1999.
Liquidity and Capital Resources
Unrestricted cash on hand was $579,018 at December 31, 1999 and $547,187 at
June 30, 2000.
Short-term liquidity fluctuates with the Company's acquisition cycles.
Typically, as the Company proceeds to acquire new properties, significant
expenditures related to due diligence and pre-acquisition costs are incurred.
These costs may require the use of material amounts of the Company's working
capital up to and through the close of the purchase. Subsequently, the Company
receives fees and reimbursements earned at closing, and working capital is
replenished.
Page 25
<PAGE>
Long-term liquidity needs include sufficient working capital to develop and
support the infrastructure necessary to continue the Company's growth. Also, as
the Company undertakes the execution of multiple simultaneous transactions, need
for additional working capital will increase.
In anticipation of these needs, Homes For America Holdings, Inc. has signed
an exclusive agreement with A.G. Edwards & Sons, Inc. of St. Louis, Missouri to
act as the Company's financial advisor and placement agent, providing general
financial advisory services and assistance in the evaluation of various
strategic transactions. These services will include advising and assisting the
Company in evaluating and structuring debt or equity financing alternatives.
A.G. Edwards & Sons will also act as exclusive financial advisor in
connection with the structuring and issuance of to-be-authorized common stock,
preferred stock or equity-linked securities, and any initial public offering of
securities by the Company.
Future growth depends upon the Company's ability to secure adequate capital
to consummate acquisitions. While there can be no guarantee that these capital
needs will be met, the Company believes that bond financing, sale of tax
credits, stock issues and traditional sources of equity and debt financing will
be adequate to meet its capital requirements.
Page 26
<PAGE>
ITEM 3. PROPERTIES, OFFICES AND FACILITIES
In New York, we entered into a 3-year lease with Mack-Cali Realty, 100
Clearbrook Road, Elmsford, New York, 10523, commencing in April 1999 for 2200
square feet of executive office space located at One Odell Plaza in Yonkers, New
York, 10701. The rent for these premises is $3,009 per month.
At 4550 Montgomery Avenue, Suite 906N, in Bethesda, Maryland, 20814, we
rent 825 square feet where property operations and acquisitions offices are
located. This lease provides for a monthly base rent of $1890, and may be
terminated at our option. This Bethesda, Maryland office, just outside of
Washington, DC, affords convenient access to legislators and attorneys drafting
the legislative programs under which we obtain financing for Affordable Housing,
and provides a central location along the Eastern Seaboard, where we plan to
expand.
We also maintain an office at 6003 Abrams Road, Dallas, Texas, 75231,
located on property which we own and manage.
Page 27
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of June 30, 2000 by: (i) each person who we
know to own beneficially more than 5% of our outstanding Common Stock; (ii) each
of our directors and officers; and (iii) all of our directors and officers as a
group. As of June 30, 2000, there were 9,717,131 shares of Common Stock issued
and outstanding.
OWNER SHARES OWNED PERCENTAGE
-----------------------------------------------------------------------------
Robert MacFarlane (1) 2,688,000 27.7%
c/o Daniel G. Hayes, Esq.
83 Boutwell Trust (1)
9324 West St., Suite 101
Manassas, VA 20110
-----------------------------------------------------------------------------
Robert M. Kohn (2) 2,312,000 23.8%
International Business and Realty
Consultants, LLC
c/o Daniel G. Hayes, Esq.
9324 West St., Suite 101
Manassas, VA 20110
-----------------------------------------------------------------------------
R. Karim Chowdhury (3) 0 0.0%
One Odell Plaza
Yonkers, NY 10701
-----------------------------------------------------------------------------
Joel Heffron 200,000 2.1%
c/o Risk Management Corp.
P.O. Box 3685
Beverly Hills, CA 90212
-----------------------------------------------------------------------------
Daniel G. Hayes, Esq. 0 0.0%
9324 West St., Suite 101
Manassas, VA 20110
-----------------------------------------------------------------------------
Robert Pozner
454 Stevens Avenue
Ridgewood, NJ 07450 650,000 6.7%
-----------------------------------------------------------------------------
Officers and Directors Group 5,850,000 60.3%
Total (5 persons)
-----------------------------------------------------------------------------
Notes
(1) 83 Boutwell Trust is an irrevocable trust in which Robert MacFarlane, the
Chief Executive Officer of Homes for America Holdings, Inc., retains voting
control.
(2) IBRC is solely owned by Ms. Christine Kohn, the wife of Mr. Robert Kohn, a
Director and the Chief Acquisition Officer of the Company. IBRC performs
services for the Company and owns all of the indicated shares. Mr. Kohn
disclaims beneficial interest in the shares held by IBRC
(3) Excludes options to purchase no less than 25,000 shares of Common Stock.
Page 28
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
Our executive officers and directors are as follows:
NAME AGE OFFICE
---------------------------------- ------------------------------------------
Robert A. MacFarlane 56 Chairman of the Board, President, and
Chief Executive Officer
---------------------------------- ------------------------------------------
R. Karim Chowdhury 43 Director, Secretary/Treasurer and
Chief Financial Officer
---------------------------------- ------------------------------------------
Robert M. Kohn 49 Director and Chief Acquisition Officer
---------------------------------- ------------------------------------------
Joel Heffron 62 Director
---------------------------------- ------------------------------------------
Daniel G. Hayes 42 Director
---------------------------------- ------------------------------------------
All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualify. Officers are elected annually
by, and serve at the discretion of, the Board of Directors. There are no
familial relationships between or among any of our officers or directors.
Robert A. MacFarlane has served as the Company's Chief Executive
Officer and Chairman of the Board since 1996. From 1989 to 1991, Mr. MacFarlane
was an independent tax-exempt bond and tax credit consultant. From 1992 to 1996,
he was Senior Property Acquisitions Officer of the Boutwell Company, a company
representing a Rockefeller Family Trust, and receiving all of its funds from
that Trust. In this capacity, Mr. MacFarlane was responsible for the acquisition
of residential and commercial properties. Mr. MacFarlane was directly
responsible for the closing of more than one half-billion dollars worth of real
estate transactions in Texas alone, two of which were turnaround, value-added
acquisitions totaling $300 million.
R. Karim Chowdhury has been the Company's Chief Financial Officer since
January 10, 2000. From 1997 to 2000, Mr. Chowdhury was Chief Financial Officer
for Westbury Transport, Inc. Prior to that, he served as Chief Financial Officer
of New York-based JRD Management Corporation from 1986 to 1997. Mr. Chowdhury is
a member of the Institute of Real Estate Management, and he holds an M. B.A.
from Indiana University. His fields of expertise include real estate investment,
management and development, strategic planning, analysis and forecasting, and
corporate financial management.
Robert M. Kohn has been a director of the Company since 1998. From 1979
to 1996, he was the President of Alfred Kohn Realty Corporation and Schuyler
Realty. He has orchestrated the financing and acquisition of thousands of
multi-family housing units, converted rental properties and warehouses into
residential lofts, and managed more than 22,000 apartments in the New York
metropolitan area. Mr. Kohn graduated cum laude from Ohio University with a B.S.
in economics.
Page 29
<PAGE>
Daniel Hayes, Esq., has had an individual law practice since 1990. From
1987 to 1990, he was General Counsel to the Rojac Group, Inc., a real estate
development company. He is admitted to the bars of Virginia, the District of
Columbia, and Illinois, and holds a J.D. from Cornell Law School.
Joel Heffron, Esq., has been President of Risk Management Corporation,
a company assisting businesses in conversion and disposal of assets, since 1994.
From 1987 to 1994, he was President of Westminster Equities, and from 1983 to
1987, he was President of Whitney Stores, Inc. From 1966 to 1983, Mr. Heffron
was a partner in the law firm of Sohn, Gross, and Findlay & Heffron in New York.
He holds a Bachelor of Laws degree from New York University.
Committees of the Board of Directors
The Board of Directors has two committees, Audit and Compensation.
Members of the Audit Committee are Daniel Hayes and Joel Heffron. The
Audit Committee acts to: i) acquire a complete understanding of our audit
functions; ii) review with management our finances, financial condition and
interim financial statements; iii) review with our independent auditors the
year-end financial statements; and iv) review implementation, with the
independent auditors and management, any action recommended by the independent
auditors.
Members of the Compensation Committee are Daniel Hayes and Joel
Heffron. Compensation Committee functions include administration of our 1998
Employee Stock Option Plan and Non-Executive Director Stock Option Plan, as well
as negotiation and review of all our employment agreements with our executive
officers.
Meetings of the Board of Directors
During the fiscal year ended December 31, 1999, our Board of Directors met
and voted by unanimous written consent on two occasions. During the period from
January 1, 2000 to June 30, 2000, our Board of Directors met on two occasions
and voted by unanimous written consent. No member of the Board of Directors
attended less than 75% of the aggregate number of: i) the total number of
meetings of the Board of Directors or; ii) the total number of meetings held by
all committees of the Board of Directors.
Page 30
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following Table provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation that we
awarded, granted, or paid during the Year ended December 31, 1999 to each of our
named executive officers.
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation
Long Term Compensation Awards For Fiscal Year 1999
<CAPTION>
Name/Principal Salary/Bonus Other Annual Restricted Stock No. of Securities
Compensation Awards Underlying Options
<S> <C> <C> <C> <C>
--------------------------------- --------------- -------------- ------------------ --------------------
Robert A. MacFarlane
Chairman of the Board, President,
and Chief Executive Officer $186,000 0 0 0
--------------------------------- --------------- -------------- ------------------ --------------------
R. Karim Chowdhury
Chief Financial Officer $ 0(1) 0 0 0
--------------------------------- --------------- -------------- ------------------ --------------------
Robert M. Kohn
Director and Chief Acquisition
Officer 0 $410,000(2) 0 0
--------------------------------- --------------- -------------- ------------------ --------------------
</TABLE>
(1) R. Karim Chowdhury commenced employment with us on January 10, 2000.
(2) Compensation received includes commissions and fees earned for providing
consulting services to us. During fiscal 1999, Mr. Kohn received
commissions of $221,000 and consulting fees of $189,000.
Page 31
<PAGE>
Stock Option Grants
No stock options were granted during the year ended December 31, 1999.
Employment Agreements
The Company has employment contracts with certain of its employees.
Following is a brief description of each of these contracts.
Robert A. MacFarlane
In August 1998, we entered into a five-year employment agreement with Mr.
MacFarlane providing for a base salary at the rate of $186,000 per year for a
period covering August 1998 through December 1999. Thereafter, Mr. MacFarlane's
base salary will be determined annually by the Board of Directors, with a
minimum annual increase in base salary of 5%. The contract provides for the
reimbursement of all reasonable expenses incurred by Mr. MacFarlane on our
behalf. The contract is subject to termination provisions, and includes a two
year non-competition provision. Mr. MacFarlane (or an affiliated entity) is
entitled to receive separate compensation in the form of consulting and/or
broker fees for sales of Tax Credits in the execution of our transactions.
This employment agreement was restated at a meeting of the Board of
Directors held March 3, 2000. A new commencement date of January 1, 2000 was
established, as was provision for additional reimbursement for health and
disability insurance.
Compensation of Directors
Directors were not compensated for their services as such during the last
fiscal year. The Directors receive options to purchase 15,000 shares of our
stock for each year of service under the Non-Executive Director Stock Option
Plan, and are reimbursed for expenses incurred in order to attend meetings of
the Board of Directors.
Stock Option Plans
In September, 1998, we adopted the 1998 Employee Stock Option Plan (the
"Plan"), which provided for the grant of options to purchase up to 750,000
shares of Common Stock. Under the terms of the 1998 Plan, options granted
thereunder may be designated as options which qualify for incentive stock option
("ISO") treatment under Section 422A of the Code, or as options which do not
qualify ("Non ISO").
The 1998 Plan is administered by the Compensation Committee designated by
the Board of Directors. The Compensation Committee has the discretion to
determine eligible employees to whom, and the times and the price at which,
options will be granted. Whether such options shall be ISOs or Non ISOs, the
periods during which each option shall be exercisable, and the number of shares
subject to each option shall be determined by the Committee. The Board or
Committee shall have full authority to interpret the 1998 Plan, and to establish
and amend rules and regulations pertaining thereto.
Page 32
<PAGE>
Under the 1998 Plan, the exercise price of an option designated ISO shall
not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated ISO is granted to
a ten-percent stockholder (as defined in the 1998 Plan), such exercise price
shall be at least 110% of such fair market value. Exercise prices of Non ISO
options may be less than such fair market value. The aggregate value of shares
subject to options designated ISO and granted to a participant, that become
exercisable in any calendar year shall not exceed $100,000. "Fair market value"
will be the closing Nasdaq bid price or, if our Common Stock is not quoted by
Nasdaq, will be as reported by the National Quotation Bureau, Inc., or a market
maker of the our Common Stock or, if the Common Stock is not quoted by any of
the above, by the Board of Directors acting in good faith.
The Compensation Committee may, at its sole discretion, grant bonuses or
authorize loans to or guarantee loans obtained by an optionee, to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1998 Plan will expire in 2008.
In September 1998, the Board of Directors adopted the Non-Executive
Director Stock Plan (the "Director Plan"). The Director Plan provides for
issuance of a maximum of 400,000 shares of Common Stock upon the exercise of
stock options granted under the Director Plan. Options are granted until April
2008, to: i) non-executive directors as defined and; ii) members of any advisory
board we establish who are not full-time employees of us or any of our
subsidiaries. The Director Plan provides that each non-executive director will
automatically be granted an option to purchase 15,000 shares of our Common Stock
upon joining the Board of Directors, and on each September 1st thereafter,
provided such person has served as a Director for the 12 months immediately
prior to such September 1st. Similarly, each eligible director of an advisory
board will receive an option to purchase 10,000 shares of our Common Stock upon
joining the advisory board, and on each September 1st thereafter, provided such
person has served as a director of the advisory board for the preceding 12 month
period.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. The
"fair market value" will be the closing Nasdaq bid price or, if the our Common
Stock is not quoted by Nasdaq, the price as reported by the National Quotation
Bureau, Inc., or a market maker of our Common Stock or, if the Common Stock is
not quoted by any of the above, by the Board of Directors acting in good faith.
Unless and until otherwise provided in the Stock Option Plan, the exercise price
of options granted under the Director Plan must be paid at the time of exercise,
either in cash or by delivery of shares of our Common Stock, or by equivalent
combination of both. The term of each option commences on the date it is
granted, and unless terminated sooner as provided in the Director Plan, expires
five years from the date of grant. The Director Plan is administered by a
committee of the Board of Directors composed of not fewer than three persons who
are our officers (the "Committee"). The Committee has no discretion to determine
which non-executive director or advisory board member will receive options, or
the number of shares subject to the option, the term, or exercisability of the
option. However, the Committee will make all determinations of the
interpretation of the Director Plan. Options granted under the Director Plan are
not qualified for incentive stock option treatment.
Page 33
<PAGE>
In March, 2000, we adopted the 1999 Employee Stock Option Plan (the
"Plan"), which provided for the grant of options to purchase up to 800,000
shares of Common Stock. Under the terms of the 1999 Plan, options granted
thereunder may be designated as options which qualify for incentive stock option
("ISO") treatment under Section 422A of the Code, or as options which do not
qualify ("Non ISO").
The 1999 Plan is administered by the Compensation Committee designated by
the Board of Directors. The Compensation Committee has the discretion to
determine eligible employees to whom, and the times and the price at which,
options will be granted. Whether such options shall be ISOs or Non ISOs, the
periods during which each option shall be exercisable, and the number of shares
subject to each option shall be determined by the Committee. The Board or
Committee shall have full authority to interpret the 1999 Plan, and to establish
and amend rules and regulations pertaining thereto.
Under the 1999 Plan, the exercise price of an option designated ISO shall
not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated ISO is granted to
a ten-percent stockholder (as defined in the 1999 Plan), such exercise price
shall be at least 110% of such fair market value. Exercise prices of Non ISO
options may be less than such fair market value. The aggregate value of shares
subject to options designated ISO and granted to a participant, that become
exercisable in any calendar year shall not exceed $100,000. "Fair market value"
will be the closing Nasdaq bid price or, if our Common Stock is not quoted by
Nasdaq, will be as reported by the National Quotation Bureau, Inc., or a market
maker of the our Common Stock or, if the Common Stock is not quoted by any of
the above, by the Board of Directors acting in good faith.
The Compensation Committee may, at its sole discretion, grant bonuses or
authorize loans to or guarantee loans obtained by an optionee, to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1999 Plan will expire in 2009.
In March 2000, the Board of Directors adopted the Non-Employee Director
Stock Option Plan (the "Director Plan"). The Director Plan provides for issuance
of a maximum of 60,000 shares of Common Stock upon the exercise of stock options
granted under the Director Plan. Options are granted until April 2009, to: i)
non-employee directors as defined and; ii) members of any advisory board we
establish who are not full-time employees of us or any of our subsidiaries. The
Director Plan provides that each non-employee director will automatically be
granted an option to purchase 15,000 shares of our Common Stock upon joining the
Board of Directors, and on each September 1st thereafter, provided such person
has served as a Director for the 12 months immediately prior to such September
1st. Similarly, each eligible director of an advisory board will receive an
option to purchase 10,000 shares of our Common Stock upon joining the advisory
board, and on each September 1st thereafter, provided such person has served as
a director of the advisory board for the preceding 12 month period.
The exercise price for options granted under the Director Plan shall be not
less than 100% of the fair market value of the Common Stock on the date of
grant. The "fair market value" will be the closing Nasdaq bid price or, if the
our Common Stock is not quoted by Nasdaq, the price as reported by the National
Quotation Bureau, Inc., or a market maker of our Common Stock or, if the Common
Stock is not quoted by any of the above, by the Board of Directors acting in
good faith. Unless and until otherwise provided in the Stock Option Plan, the
exercise price of options granted under the Director Plan must be paid at the
time of exercise, either in cash or by delivery of shares of our Common Stock,
or by equivalent combination of both. The term of each option commences on the
date it is granted, and unless terminated sooner as provided in the Director
Plan, expires five years from the date of grant. The Director Plan is
administered by a committee of the Board of Directors composed of not fewer than
three persons who are our officers (the "Committee"). The Committee has no
discretion to determine which non-executive director or advisory board member
will receive options, or the number of shares subject to the option, the term,
or exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for incentive stock option treatment.
Page 34
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
In December 1996, we entered into a settlement agreement (the "Settlement
Agreement") with Canton Financial Services, a former financial consultant (the
"Former Consultant") to us and Homes For America, L.C., a Virginia Corporation
which is an affiliate of ours and is principally owned by our President, Chief
Executive Officer and Chairman of the Board, Mr. Robert A. MacFarlane. Among
other things, the Settlement Agreement provided for the termination of a
consulting agreement, and any other relationship, between us and the Former
Consultant. Pursuant to the Settlement Agreement, we agreed to pay the Former
Consultant the sum of $89,096.88, and to reimburse the Former Consultant
$15,891.43 for out-of-pocket expenses. The Former Consultant agreed to surrender
2,000,000 restricted shares of Common Stock it owned to Homes For America, L.C.
By unanimous written consent dated February 1997, for various financial and
consulting services, we transferred the 2,000,000 shares of our Common Stock,
represented by the Former Consultant's surrendered shares to Homes for America,
L.C. A subsequent agreement reached in March 1999 further reduced Home for
America's obligation for fees and expenses to $99,000.
We engage one of our shareholders, International Business Realty and
Consultants, LLC ("IBRC) to perform various consulting services related to the
purchase, acquisition and management of our properties. Mr. Robert M. Kohn, one
of our Directors, is also an officer of IBRC and actually performs services for
us on behalf of IBRC. IBRC is wholly owned by Mr. Kohn's spouse, Ms. Christine
Kohn. Since inception and through June 30, 2000, we have paid $721,500 to IBRC
for consulting services. We believe that all such fees, if any, paid to Mr. Kohn
are for amounts consistent with industry standards for transactions of this
type.
Page 35
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
We are authorized to issue 25,000,000 shares of Common Stock, par value
$.001 per share. As of June 30, 2000, there were 9,717,131 shares of Common
Stock issued and outstanding.
Common Stock
Holders of shares of our Common Stock are entitled to cast one vote for
each share held at all stockholders' meetings for all purposes, including the
election of Directors. Directors are elected each year at our annual meeting of
stockholders to serve for a period of one year, and until their respective
successors have been duly elected and qualified. Common stockholders have the
right to share ratably in such dividends on shares of Common Stock as may be
declared by the Board of Directors out of funds legally available therefore.
Upon liquidation or dissolution, each outstanding share of Common Stock will be
entitled to share equally in our assets that are legally available for
distribution to stockholders after the payment of all debts and other
liabilities, subject to any superior rights of the holders of Preferred Stock.
Common stockholders have no preemptive rights. There are no conversions or
redemption privileges or sinking fund provisions with respect to the Common
Stock. All of the outstanding shares of Common Stock are, and all of the shares
of Common Stock offered hereby will be, validly issued, fully paid and
non-assessable. The Common Stock does not have cumulative voting rights, so
holders of more than 50% of the outstanding Common Stock can elect 100% of the
Directors of the Company if they choose to do so.
Page 36
<PAGE>
PART II
ITEM 1. MARKET PRICE OF, AND DIVIDENDS ON,
THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
There is no established trading market for our Common Stock. We have not
paid any cash dividends and do not anticipate that we will pay cash dividends in
the foreseeable future. Payment of dividends is within the discretion of our
Board of Directors, and will depend, among other factors, upon our earnings,
financial condition and capital requirements. The Company has approximately 450
record holders of its Common Stock.
Page 37
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
In January of 2000, litigation was started for the seller of Willow
Pond/Glen Hills Apartments in Dallas, Texas in order to gain the release of
certain escrow funds. The litigation was settled in September of 2000. The
project was refinanced and the escrow funds were released to the seller.
We are currently not a party to any legal proceedings that could have a
materially adverse effect on our business.
Page 38
<PAGE>
ITEM 3. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS
In December 1998, our Board of Directors determined that it would be in our
best interests to cease our relationship with our independent accountant and
auditors, Rappaport, Steele & Company, P.C., which acted as our independent
accountant and auditors with respect to our financial statements for the
previous two fiscal years ended December 31, 1997.
The replacement of Rappaport, Steele & Company, P.C. was recommended and
approved by our Board of Directors and is not the result of any disagreement
with Rappaport, Steele & Company, P.C. on any matter of accounting principles or
practice, financial statement disclosure or auditing scope or procedure.
During the two fiscal years 1996 and 1997, no report issued by Rappaport,
Steele & Company, P.C. contained any adverse opinion or a disclaimer of opinion,
or was qualified or modified as to uncertainty, audit scope, or accounting
principles. In addition, during the two fiscal years 1996 and 1997, and
subsequent periods, there were no disagreements with Rappaport, Steele &
Company, P.C. regarding accounting principles, or practices, financial statement
disclosure, or auditing scope or procedure nor any dispute between us and
Rappaport, Steele & Company, P.C. with respect to our status as a "going
concern."
Effective December 1998, our Board of Directors determined that it would be
in our best interests to retain the services of Lazar Levine & Felix, LLP to
replace Rappaport, Steele & Company, P.C. as our independent accountant and
auditors. The firm has audited our financial statements for fiscal years 1998
and 1999.
During the last two fiscal years prior to December 31, 1998, we did not
consult with Lazar, Levine & Felix, LLP regarding accounting principles or
practices, financial statement disclosure, auditing scope or procedure or
accounting principles applicable to any specific transaction. During the two
fiscal years 1998 and 1999, no report issued by Lazar Levine & Felix, LLP
contained any adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope, or accounting principles. In addition,
during the two fiscal years 1998 and 1999, and subsequent periods, there were no
disagreements with Lazar Levine & Felix, LLP regarding accounting principles, or
practices, financial statement disclosure, or auditing scope or procedure nor
any dispute between us and Lazar Levine & Felix, LLP with respect to our status
as a "going concern."
Page 39
<PAGE>
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have sold securities in the manner set forth below,
without registration under the Securities Act of 1933, as amended (the "Act"):
In October 1996, in connection with our establishment, we issued 3,324,700
shares of Common Stock to 16 individuals and entities. This transaction was
exempt from registration under the Act, pursuant to Section 4(2) promulgated
thereunder as a transaction by an issuer not involving a public offering. No
underwriter was involved in this transaction.
During the period April 1996 through January 1997, we sold 370,000 shares
of Common Stock at an offering price of $2.00 per share. In addition, in
connection with this transaction, we issued 3,500,000 shares of common stock to
a broker-dealer for services rendered, which issuance was subsequently rescinded
on January 1, 1997. This transaction was exempt from registration under the Act,
pursuant to Rule 504 and the rules and regulations promulgated thereunder.
In July 1998, we issued a promissory note in the amount of $250,000, and
25,000 shares of Common Stock, and warrants to purchase 30,000 shares of Common
Stock to one investor in a private transaction. This transaction was exempt from
registration under the Act, pursuant to Section 4(2) promulgated thereunder as a
transaction by an issuer not involving a public offering. No underwriter was
involved in this transaction.
In September 1999, we attempted to sell up to $15,000,000 of Preferred
Stock in a private placement on a $2,250,000 minimum - $15,000,000 maximum
basis. The offering was an exempt transaction pursuant to Section 4(2) of the
Act and Rule 506 promulgated thereunder. We were unable to sell the minimum
amount of Preferred Stock to close the transaction. However, subscribers for
approximately $825,000 of the private placement loaned the Company the amount of
their subscription pending the offer and sale of a new private placement on
similar terms. The notes would be automatically convertible into the new private
placement, or if the placement was not completed, then repayable on December 1,
1999. The loans were provided by existing shareholders of Homes for America.
In December 1999, Homes For America completed a new Private Placement of
twenty units, each consisting of 30,000 shares of Series A Cumulative
Convertible Redeemable Preferred Stock. Each Series A Share was redeemable at a
conversion rate equal to the lower of $15.00 or 80% of the last ten days'
reported sales price, but not lower than $10.00, per share of common stock. This
offering is an exempt transaction pursuant to Section 4(2) of the Act and Rule
506 promulgated thereunder.
Effective June 30, 2000, Homes For America Holdings, Inc. is under a
contractual obligation to sell the Briar Meadows and Royal Crest (land)
properties and to apply the net proceeds from the sale of such assets to
repurchase all Series A Cumulative Convertible Redeemable Preferred Stock issued
in the December 1999 Private Placement.
Page 40
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Nevada provides that a corporation may
indemnify any person who was or is a party to, or is threatened to be made a
party to, any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative in nature to procure a
judgment in its favor, by reason of the fact that he is or was a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorney's fees) and, in
a proceeding not by or in the right of the corporation, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by him in
connection with such suit or proceeding, if he acted in good faith and in a
manner believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reason to believe his conduct was unlawful. Nevada law further provides that a
corporation will not indemnify any person against expenses incurred in
connection with an action by or in the right of the corporation if such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation, unless and only to the extent that
the court in which such action or suit was brought shall determine that, despite
the adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for the expenses
which such court shall deem proper.
Our By-Laws provide for indemnification of our officers and directors to
the greatest extent permitted by Nevada Law (as per Eighth Article of
Incorporation, "No officer or director shall be personally liable to the
Corporation or its shareholders for money damages except as provided in Section
78.07, Nevada Revised Statutes") for any and all fees, costs and expenses
incurred in connection with any action or proceeding, civil or criminal,
commenced or threatened, arising out of services by or on behalf of us,
providing such officer's or director's acts were not committed in bad faith. The
By-Laws also provide for advancing funds to pay for anticipated costs and
authorize the Board to enter into an indemnification agreement with each officer
or director.
In accordance with Nevada law, our Certificate of Incorporation contains
provisions eliminating the personal liability of directors, except for breach of
a director's fiduciary duty of loyalty to us or to our stockholders, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, and in respect of any transaction in which a director
receives an improper personal benefit. These provisions only pertain to breaches
of duty by directors as such, and not in any other corporate capacity (e.g., as
an officer). As a result of the inclusion of such provisions, neither Homes for
America nor our stockholders may be able to recover monetary damages against
directors for actions taken by them which are ultimately found to have
constituted negligence, or which are ultimately found to have been in violation
of their fiduciary duties, although it may be possible to obtain injunctive or
equitable relief with respect to such actions. If equitable remedies are found
not to be available to stockholders in any particular case, stockholders may not
have an effective remedy against the challenged conduct.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and therefore is unenforceable.
Page 41
<PAGE>
PART F/S
ITEM 1. AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Homes for America Holdings, Inc.
We have audited the consolidated balance sheets of Homes for America
Holdings, Inc. (a Nevada corporation) as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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, the financial statements referred to above present fairly,
in all material respects, the financial position of Homes for America Holdings,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
LAZAR LEVINE & FELIX LLP
New York, New York
March 24, 2000
Page 42
<PAGE>
HOMES FOR AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
ASSETS
<S> <C> <C>
1999 1998
-----------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 579,018 $ 766,293
Accounts receivable - tenants (Note 2j) 57,962 17,799
Accounts receivable - other fees (Note 2j) 913,970 450,840
Restricted deposits and funded reserves - current (Note 6) 5,500,304 518,645
Prepaid expenses and other current assets 494,140 53,057
Due from officer (Note 3) 27,500 -
----------- -----------
TOTAL CURRENT ASSETS 7,572,894 1,806,634
----------- -----------
INVESTMENTS IN REAL ESTATE - NET (Notes 2e, 4, 7 and 8) 38,815,081 9,842,952
----------- -----------
FIXED ASSETS - NET (Notes 2e, 5 and 9) 55,050 48,574
----------- -----------
OTHER ASSETS:
Restricted deposits and funded reserves (Note 6) 529,485 3,842,255
Deferred financing costs - net (Note 2f) 1,300,996 580,141
Deferred asset management fee - net (Note 2g) 87,170 95,750
Pre-acquisition costs (Note 2h) 279,883 191,987
Other assets 269,373 372,262
----------- -----------
2,466,907 5,082,395
----------- -----------
$48,909,932 $16,780,555
----------- -----------
</TABLE>
See accompanying notes
Page 43
<PAGE>
HOMES FOR AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Cont'd)
DECEMBER 31, 1999 AND 1998
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
1999 1998
-----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,005,578 $ 509,002
Tenants security deposits 392,824 75,011
Unearned rent (Note 2j) 43,538 9,514
Current portion - liabilities applicable to investments
in real estate (Note 7) 3,794,727 701,972
Current portion - notes payable (Note 8) 734,432 313,000
Current portion of capitalized leases payable (Note 9) 8,606 13,679
----------- -----------
TOTAL CURRENT LIABILITIES 5,979,705 1,622,178
----------- -----------
LIABILITIES APPLICABLE TO INVESTMENTS IN REAL ESTATE (Note 7) 35,030,843 10,719,347
----------- -----------
LONG-TERM LIABILITIES - NET OF CURRENT PORTION:
Notes payable (Note 8) 228,734 270,045
Capitalized leases payable (Note 9) 16,516 32,271
Deferred income taxes (Notes 2i and 12) 903,400 578,400
----------- -----------
1,148,650 880,716
----------- -----------
MINORITY INTERESTS IN SUBSIDIARIES (Note 10) 2,276,008 1,540,175
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY (Note 11):
Preferred stock, Series A, $.001 par value; 5,000,000 shares
authorized, 72,900 shares issued and outstanding 73 -
Common stock; $.001 par value; 25,000,000 shares authorized,
8,561,681 and 8,351,683 shares issued in 1999 and 1998,
respectively (Note 8) 8,562 8,352
Additional paid-in capital 2,770,525 941,955
Retained earnings 1,695,566 1,067,832
----------- -----------
4,474,726 2,018,139
----------- -----------
$48,909,932 $16,780,555
----------- -----------
</TABLE>
Page 44
<PAGE>
HOMES FOR AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
-----------------------------------------------------------------------------------------------------------
REVENUES: (Note 2j)
Rental income) $5,433,023 $2,400,036
Real estate development fees 595,674 1,722,211
Interest income 106,858 56,398
Gain on sale of bonds (Note 1) 825,000 -
Other income 796,110 55,222
----------- -----------
7,756,665 4,233,867
----------- -----------
EXPENSES:
Administrative expenses 2,134,037 1,227,421
Maintenance and operating costs 960,190 332,947
Utilities 840,337 554,915
Taxes and insurance 569,820 201,506
Interest expense 1,428,908 558,293
Depreciation and amortization 1,042,189 415,665
----------- -----------
6,975,481 3,290,747
----------- -----------
INCOME BEFORE MINORITY INTERESTS AND PROVISION
FOR INCOME TAXES 781,184 943,120
Minority interests in net loss of consolidated subsidiaries (Note 10) 171,550 243,503
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 952,734 1,186,623
Provision for income taxes (Notes 2i and 12) 325,000 398,700
----------- -----------
NET INCOME 627,734 $ 787,923
----------- -----------
BASIC INCOME PER COMMON SHARE (Note 2k):
Net income before minority interest $.05 $.08
Minority interests in net loss of subsidiaries .02 .03
----------- -----------
$.07 $.11
----------- -----------
DILUTED INCOME PER COMMON SHARE (Note 2k):
Net income before minority interest $.05 $.07
Minority interests in net loss of subsidiaries .02 .03
----------- -----------
$.07 $.10
----------- -----------
</TABLE>
Page 45
<PAGE>
HOMES FOR AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Additional Stock
Preferred Common Paid-in Subscription Retained
Stock Stock Capital Receivable Earnings Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
1997 $ - $6,549 $ 668,401 $ (211,268) $ 279,909 $ 743,591
Sale of common stock - 1,803 273,554 - - 275,357
Receipt of stock subscription - - - 211,268 - 211,268
Net income - - - - 787,923 787,923
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 1998 - 8,352 941,955 - 1,067,832 2,018,139
Sale of preferred shares 73 - 1,618,782 - - 1,618,855
Issuance of shares in lieu of
payment of accrued liabilities - 25 24,973 - - 24,998
Issuance of shares for
professional fees - 185 184,815 - - 185,000
Net income - - - - 627,734 627,734
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 1999 $73 $8,562 $2,770,525 $ - $1,695,566 $4,474,726
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Page 46
<PAGE>
HOMES FOR AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 627,734 $ 787,923
Adjustments to reconcile net income to net cash provided by operations
Depreciation and amortization 1,016,187 610,057
Compensatory shares 185,000 -
Minority interests (171,550) (243,503)
Deferred income taxes 325,000 398,700
Forgiveness of debt (13,000) -
(Increase) decrease in assets:
Accounts receivable - tenants (35,693) (8,623)
Accounts receivable - other (580,881) (346,714)
Prepaid expenses and other current assets (456,111) (52,697)
Organization costs - (47,150)
Operating escrow (497,138) (248,701)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 384,749 317
Due to related parties (214,759) -
Tenant security deposits 93,949 -
Real estate taxes payable 318,995 -
Unearned rent 30,159 (63)
----------- -----------
Net cash provided by operating activities 1,012,641 849,546
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real property (1,733,730) (650,089)
Capital expenditures (74,809) (60,000)
Due from officer (27,500) -
(Additions) to replacement reserves (750,423) (31,016)
Pre-acquisition costs (87,896) (57,577)
----------- -----------
Net cash (utilized) by investing activities (2,674,358) (798,682)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock - 486,625
Net proceeds from sale of preferred shares 1,618,855 -
Contributions from minority shareholders 362,117 746,083
Distributions to minority shareholders (115,881) -
Net proceeds from short-term loans 525,591 -
Payments of long-term debt (84,396) (245,577)
Payments of capital lease obligations (20,828) (24,680)
Payments for bond issuance costs (205,906) (203,250)
Payments for financing costs (605,110) (110,466)
----------- -----------
Net cash provided by financing activities 1,474,442 648,735
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (187,275) 699,599
Cash and cash equivalents, beginning of year 766,293 66,694
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR 579,018 $ 766,293
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $535,727 $63,363
Income taxes paid - -
</TABLE>
Page 47
<PAGE>
HOMES FOR AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - DESCRIPTION OF BUSINESS:
Homes for America Holdings, Inc., a Nevada Corporation ("the Company")
established in 1996, is engaged in the business of (a) acquiring, rehabilitating
and managing select "Affordable Housing" properties; (b) acquiring and
converting specially situated, non-residential properties into residential
rentals or condominium sales; and (c) acquiring multi-use residential real
estate. As to the Affordable Housing portion of the portfolio, the Company sells
partnership interests through newly formed subsidiaries, including "tax-credit"
benefits, according to Section 42 of the IRS Code, and depreciation and
amortization for equity, acquisition and management fees.
The Company's wholly-owned subsidiaries are:
Glen Hills Homes for America, Inc., a Texas corporation, which is the
General Partner in Dallas/Glen Hills L. P. ("Dallas/Glen/Hills")
Prairie Village-Homes for America, Inc., an Indiana corporation, which is
the General Partner of Middlebury Elkhart, L.P. ("Prairie Village")
Putnam Homes for America Holdings, Inc., a Connecticut corporation, which
is the General Partner of TVMJG 1996-Putnam Square Limited Partnership
("Putnam")
BriarMeadows/Homes for America, Inc., a Texas corporation ("BriarMeadows")
Arlington/Homes for America, Inc., a Texas corporation ("Arlington")
Lakes Edge Homes Holdings, Inc., a Florida Corporation ("Lakes Edge")
Country Lake Homes Holding, Inc., a Florida Corporation ("Country Lake")
and
Homes For America Real Estate Services, Inc., a Texas corporation ("RES")
Glen Hills Homes for America, Inc., Prairie Village-Homes for America,
Inc., and Putnam Homes for America Holdings, Inc., ("the general partners"),
have no other operating activities.
On December 18, 1998, BriarMeadows purchased an apartment property (land
and building) located in Dallas, Texas, from an unrelated party for a cost of
$1,050,000. The Company financed the entire purchase price (see Note 7). The
operations of this rental property are included in the consolidated financial
statements from the date of acquisition.
On December 21, 1998, Arlington purchased a tract of land in Arlington,
Texas, from an unrelated party, for an aggregate cost of $1,000,000. The Company
financed the entire purchase price (see Note 7). The Company has received
approval from the City of Arlington to construct a 210-unit apartment complex
and is presently negotiating for permanent financing for this project.
Construction is expected to begin in July 2000, with completion anticipated in
April 2001.
On June 30, 1999, Lakes Edge acquired a 48% general partner interest in
Lakes Edge, L.P. Simultaneously with this transaction, Lakes Edge purchased
certain Multifamily Mortgage Revenue Bonds (issued by the Housing Finance
Authority of Dade County, Florida) and consequently, all the rights accorded the
holder of such bonds. The bonds, which were purchased with the proceeds of a
loan, were immediately sold and Lakes Edge recognized a gain of $825,000.
On November 9, 1999, Country Lake purchased certain Multifamily Mortgage
Revenue Bonds (issued by the Housing Finance Authority of Palm Beach County,
Florida) and consequently, all the rights accorded the holder of such bonds. The
bonds were purchased with the proceeds of a loan.
Page 48
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS (Continued):
During 1999, the Company established a new subsidiary, Homes for America
Real Estate Services, Inc., ("RES"). This new subsidiary will provide management
services to the Company's other subsidiaries as well as to other unrelated
entities. As of December 31, 1999, RES is inactive.
CERTAIN PROVISIONS OF LIMITED PARTNERSHIP AGREEMENTS:
Dallas/Glen Hills, L.P.:
Dallas/Glen Hills, L.P., (Dallas/Glen Hills) was formed in October 1995 and
commenced operations in February 1996. The partnership agreement was amended in
March 1997, to provide for the withdrawal or reduction in ownership interest of
the existing partners and the contribution of capital and the admittance of new
partners, with the general partner being Glen Hills Homes for America, Inc., a
wholly-owned subsidiary of the Company. Dallas/Glen Hills was organized to
purchase, rehabilitate and operate the Willow Pond Apartment Project ("the
Project") located in Dallas, Texas. The Project received an allocation of low
income housing tax credits from the Texas Department of Housing and Community
Affairs under Section 42 of the Internal Revenue Code, which regulates the use
of the Project as to occupant eligibility and unit gross rent, among other
requirements. As such, the Project is required to lease a minimum of 40% of its
units to families whose income is 60% or less of the area median gross income.
The project must meet the provisions of these regulations during each of 15
consecutive years in order to remain qualified to receive these credits.
Losses, subject to certain provisions, and tax credits are allocated .01%
to the general partner and 99.99% to the limited partners. Operating profits,
subject to certain provisions, are allocated first to the extent of losses
previously allocated then based on cash distributions already made or to be
made. However, annual distributable cash flow is first utilized to satisfy loans
and certain accrued and unpaid liabilities, in accordance with the partnership
agreement, and then to satisfy various fees and obligations to the general
partner. Finally, any distributable cash flow remaining after the general
partner's fees and obligations are satisfied, is distributed 50.1% to the
general partner and 49.9% to the limited partners. The cumulative effect of the
distribution priorities is that the general partner receives approximately 95%
of the partnership's distributable cash flow, effectively giving the general
partner control of the entity.
Middlebury Elkhart, L.P.:
Middlebury Elkhart, L. P., (Prairie Village) was formed in July 1997 and in
December 1998, acquired a 110-unit apartment building (including land) in
Elkhart, Indiana, from an unrelated party, for rental to low income tenants. The
original cost of this investment approximated $800,000 which was paid in cash.
Rehabilitation of this building is now expected to be completed in 2000. Prairie
Village has applied to receive an allocation of low income housing tax credits
from the Indiana Housing Finance Authority under Section 42 of the Internal
Revenue Code of 1986, as amended. As such, similar to Dallas/Glen Hills,
management is required to lease a minimum of 40% of Prairie Villages units to
families whose income is 60% or less of the area median gross income. Under the
terms of an amended partnership agreement dated December 1998, Prairie
Village-Homes for America, Inc., became the general partner and has a .1%
interest in the partnership.
Page 49
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS (Continued):
CERTAIN PROVISIONS OF LIMITED PARTNERSHIP AGREEMENTS (Continued):
Middlebury Elkhart, L.P. (continued):
Profits, losses and tax credits generally are allocated to the partners in
accordance with their ownership interests. However, annual distributable cash
flow is first utilized to satisfy unpaid liabilities, as set forth in the
partnership agreement, then the remainder is distributed 80% to the general
partner and 20% to the limited partners, effectively giving the general partner
control of the entity.
TVMJG 1996-Putnam Square Limited Partnership:
TVMJG 1996-Putnam Square Limited Partnership (Putnam Square) was formed in
February 1996 for the purpose of acquiring, developing and operating a 18-unit
rental housing project in Bridgeport, Connecticut. The housing project has
qualified and been allocated low income housing tax credits pursuant to Section
42 of the Internal Revenue Code of 1986. The general partner, Putnam Homes for
America Holdings, Inc., has a 1% interest in the partnership.
Profits, losses and tax credits generally are allocated to the partners in
accordance with their ownership interests. However, annual distributable cash
flow is first utilized to satisfy unpaid liabilities, as set forth in the
partnership agreement, then the remainder is distributed 75% to the general
partner and 25% to the limited partners, effectively giving the general partner
control of the entity.
General:
The general partners have also entered into guaranty agreements with the
limited partners of each partnership, whereby the general partner has agreed to
fund (i) operating deficits (as defined in each agreement) incurred during a
specific period and (ii) replacement reserve escrow accounts to meet replacement
reserve obligations during the guaranty period.
All fees paid to the general partner, according to terms of the partnership
agreements, have been eliminated upon consolidation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of Consolidation:
The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles and
include the accounts of the Company and all of its wholly owned subsidiaries
(which include the general partners). The general partners own less than 50% of
the limited partnerships but the substance of the partnership agreements provide
for control by the general partners, since their participation in distributable
cash flow is always in excess of 75%. As such, according to the provisions of
Statement of Position 78-9 "Accounting for Investments in Real Estate Ventures,"
the Company, as the controlling investor, accounts for such investments under
the principles of accounting applicable to investments in subsidiaries. See also
Note 10 re: Minority Interests.
All material intercompany balances and transactions have been eliminated.
(b) Use of Estimates:
In preparing financial statements in accordance with generally accepted
accounting principles, management makes certain estimates and assumptions, where
applicable, that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. While actual results could differ from those estimates,
management does not expect such variances, if any, to have a material effect on
the financial statements.
(c) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a remaining maturity of three months or
less to be cash equivalents.
(d) Comprehensive Income:
SFAS 130 "Reporting Comprehensive Income" is effective for years beginning
after December 15, 1997. This statement prescribes standards for reporting other
comprehensive income and its components. Since the Company currently does not
have any items of other comprehensive income, a statement of comprehensive
income is not yet required.
Page 50
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(e) Property and Equipment:
Land, buildings, furniture and equipment, including investment property,
are recorded at cost. Depreciation is computed using the straight-line method as
follows:
Buildings and improvements 27 1/2 - 40 years
Furniture and equipment 7 years
Building improvements are capitalized, while expenditures for maintenance
and repairs are charged to operations. Depreciation expense for the years ended
December 31, 1999 and 1998 aggregated $845,058 and $403,163, respectively.
(f) Deferred Financing Costs:
Costs directly associated with obtaining permanent debt financing have been
deferred and are being amortized on a straight-line basis over the term of the
permanent loans. Accumulated amortization at December 31, 1999 and 1998
aggregated $86,716 and $17,055, respectively. Amortization expense for the years
ended December 31, 1999 and 1998 aggregated $69,661 and $9,746, respectively.
(g) Deferred Asset Management Fees:
The asset management fee paid to an affiliate of the limited partner in
Dallas/Glen Hills is being amortized over the life of the 15-year agreement.
Accumulated amortization at December 31, 1999 and 1998 aggregated $23,586 and
$15,006, respectively. Amortization expense for the years ended December 31,
1999 and 1998 aggregated $8,580 and $8,575, respectively.
(h) Pre-Acquisition Costs:
Costs incurred in pursuit of new acquisitions including, but not limited
to, professional, consulting, travel and due diligence expenditures, are
deferred, pending either the acquisition of the property or the determination by
management that a particular property will not be acquired. Certain of these
costs may be reimbursed to the Company upon acquisition of the property. Costs
remaining upon the consummation of an acquisition are capitalized and become
part of the Company's investment in the related entity. Alternatively, at such
time that management determines that acquisition of the property is not
feasible, any deferred costs are charged to expense.
At December 31, 1999 and 1998, pre-acquisition costs were comprised of the
following:
1999 1998
------------------------------------------------------
UDR Portfolio $ - $ 166,487
Schenectady - 25,500
Villa Americana 249,332 -
Haverford 30,551 -
---------- ----------
$279,883 $191,987
---------- ----------
Page 51
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(i) Income Taxes:
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, which requires an asset and
liability approach in accounting for income taxes. The objective of the asset
and liability method is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled. Deferred income taxes result
principally from utilizing the accrual basis for financial reporting purposes
and the cash basis for income tax purposes. No Federal or state income taxes are
payable by the partnerships, and none have been provided for.
(j) Revenue Recognition:
Rental income is recognized as rent becomes due. Rental payments received
in advance are deferred until earned. The Company does not believe that an
allowance for doubtful accounts is necessary at this time.
When the Company acquires a rental property, which is eligible for tax
credits, it establishes a limited partnership in which individuals and entities
invest funds to purchase the use of these credits. Limited partners, by
participating in the partnership, are eligible for a proportionate share of
these credits represented by their equity interests in the limited partnership.
The Company records the receipts from the sale of these credits, as income, in
the year such credits are allocated to the rental property.
(k) Earnings Per Share:
Basic and diluted earnings per share has been computed according to the
standards of SFAS No. 128 "Earnings Per Share". The following average shares
were used for the computation of basic and diluted earnings per share:
1999 1998
------------------------------------------------------
Basic 8,456,682 7,450,325
Diluted 8,456,682 7,480,325
(l) Reclassifications:
Certain reclassifications have been made to the 1998 financial statements
to correspond to the presentation used in 1999.
NOTE 3 - DUE FROM OFFICER:
As of December 31, 1999, an officer had an outstanding loan payable to the
Company in the amount of $27,500. This loan is due on December 31, 2000 and
bears interest at an annual rate of 8%.
NOTE 4 - INVESTMENTS IN REAL ESTATE:
Investments in real estate properties, which are held primarily for
development and operation, represent the rental properties owned by the Company
and the limited partnerships and consist of the following:
1999 1998
--------------------------------------------------------------------------------
Buildings and improvements $29,776,537 $ 6,878,107
Furniture, fixtures and equipment 2,629,955 1,243,508
Construction in progress 1,689,418 132,978
------------ ------------
34,095,910 8,254,593
Less: accumulated depreciation and amortization (1,527,355) (724,411)
------------ ------------
32,568,555 7,530,182
Land 6,246,526 2,312,770
------------ ------------
$38,815,081 $9,842,952
------------ ------------
The Company periodically reviews the valuation and carrying value of its
investments in real estate to determine possible impairment due to such items as
decreases in market value, physical changes in the asset or in the properties
and significant other factors in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Through December 31, 1999, there has been no such impairment.
Page 52
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NOTE 5 - FIXED ASSETS:
Fixed assets consist of the following:
1999 1998
--------------------------------------------------------------------------------
Office equipment $ 81,610 $ 63,261
Less: accumulated depreciation (26,560) (14,687)
------------ ------------
$ 55,050 $ 48,574
------------ ------------
NOTE 6 - RESTRICTED DEPOSITS AND FUNDED RESERVES:
The terms of the partnership agreements require that various escrow
accounts be maintained in amounts and for periods as set forth in each
agreement. As of December 31, 1999 and 1998, restricted deposits and funded
reserves consist of the following:
1999 1998
--------------------------------------------------------------------------------
CURRENT ASSETS:
Tax and escrow reserves $ 465,659 $ 155,279
Rehabilitation reserves 373,000 260,000
Replacement reserves 761,714 103,366
Debt reduction escrow (Note 7) 1,500,000 -
Restricted mortgage funds (Note 7) 2,399,931 -
------------ ------------
5,500,304 518,645
------------ ------------
OTHER ASSETS:
Debt reduction escrow (Note 7) - 1,500,000
Restricted mortgage funds (Note 7) - 2,176,840
Operating reserves 529,485 165,415
------------ ------------
529,485 3,842,255
------------ ------------
TOTAL $6,029,789 $4,360,900
------------ ------------
NOTE 7 - LIABILITIES APPLICABLE TO INVESTMENTS IN REAL ESTATE:
Liabilities applicable to investments in real estate consist of the following:
1999 1998
--------------------------------------------------------------------------------
Mortgage loans payable $16,943,204 $11,127,600
Bonds payable 21,105,000 -
Note payable - 13,000
------------ ------------
38,048,204 11,140,600
Less: Non-current portion (35,030,843) (10,719,347)
------------ ------------
3,017,361 421,253
Accrued interest payable 114,838 88,801
Accounts payable - acquisition 105,184 31,553
Real estate taxes payable 557,344 160,365
------------ ------------
Current portion of liabilities $ 3,794,727 $ 701,972
------------ ------------
Dallas/Glen Hills entered into a mortgage loan agreement in February 1996,
with a bank, in the amount of $5,350,000. As of December 31, 1999, the mortgage
balance was $4,066,304. The loan bears interest at an annual rate of 8.25% and
monthly principal and interest payments of $42,182 are payable until February
2011. The mortgage loan matures in March 2011 and is collateralized by the
Dallas/Glen Hills property. The partnership has funded a debt escrow account in
the amount of $1,500,000. This amount is to be released and applied against the
outstanding loan balance upon the refinancing of this mortgage in 2000.
Page 53
<PAGE>
NOTE 7 - LIABILITIES APPLICABLE TO INVESTMENTS IN REAL ESTATE (Continued):
Prairie Village, in December 1998, entered into a $3,236,900 mortgage loan
with a lender relating to the issuance of a total of $3,230,000 in Mortgage
Revenue Refunding Bonds, issued by the City of Elkhart, Indiana. As of December
31, 1999, the Company had drawn down $2,007,023 with the balance of $1,229,877,
held in an escrow account to be released in 2000 upon completion of the
rehabilitation of this project. The loan bears interest at an annual rate of
5.85%, and requires monthly payments of interest only through June 2000.
Beginning July 2000, monthly principal and interest payments of $19,096 are
payable for 30 years. The loan agreement requires monthly payments of principal
and interest sufficient to meet sinking fund requirements for payments of
amounts due under the bonds, based on their varying maturities and interest
rates.
Putnam Square is obligated under two promissory notes aggregating $400,000.
Monthly payments of principal and interest, at 8% per annum, of $3,087 are due
to the extent of surplus cash as defined in the notes. The notes mature in
January 2014 and are secured by a mortgage on the Bridgeport, Connecticut
property. As of December 31, 1999, the outstanding balance was $400,000.
$200,000 of this note is payable to the Company (and has been eliminated in
consolidation) and the balance is due to the former general partner. The
partnership is also obligated under a promissory note payable to the Company, as
the general partner, in the amount of $200,000 in connection with the
development fee (which amount has also been eliminated in consolidation). The
note bears interest at an annual rate of 7% per annum, and is payable from cash
flow as defined in the partnership agreement. The note matures on December 31,
2006, and is unsecured.
In September 1999, Briar Meadows entered into a loan agreement with a bank
and received proceeds in the amount of $1,500,000. The proceeds from this loan
were used to repay (i) a 15.25% note in the amount of $500,000, with an original
maturity date of June 17, 2000 and (ii) the balance outstanding under a term
note in the amount of $832,463. The loan accrues interest at the lesser of the
"Applicable Rate" or the "Maximum Lawful Rate", both terms as defined in the
agreement. This note matures on January 31, 2001, and, as of December 31, 1999,
the interest rate was 8.98%.
Arlington is obligated under a promissory note in the amount of $1,200,000.
This note accrues interest at an annual rate of 15 1/2 % which is payable
monthly. The note may be prepaid under specific conditions as long as three
months of interest payments have been made. This note matures on June 17, 2000.
In June 1999, Lakes Edge entered into a loan agreement with a mortgage
company and received proceeds in the amount of $1,400,000. Interest is payable
monthly at the rate of 11% per annum and the note matures in August 2010.
$1,170,054 is being held in an escrow account and will be released when
rehabilitation work is completed in 2000.
In connection with the acquisition of the Lakes Edge property, the Company
assumed the liability of $14,850,000 in Multifamily Mortgage Revenue Bonds 1985
Series 12 issued by the Housing Finance Authority of Dade County, Florida. These
bonds mature on May 1, 2035, and the current interest rate is 6.9% per annum.
In November 1999, Country Lakes entered into a loan agreement with a
mortgage company and received proceeds in the amount of $1,800,000. Interest is
payable monthly at the rate of 16% per annum, and principal payments of $25,000
per month begin in May 2000. This note matures in May 2001. Country Lakes also
entered into an additional agreement with another financial institution for a
term loan in the amount of $2,540,000. Interest on this loan is payable monthly
at the rate of 13% per annum until the loan matures on July 1, 2018.
Page 55
<PAGE>
NOTE 7 - LIABILITIES APPLICABLE TO INVESTMENTS IN REAL ESTATE (Continued):
In connection with the acquisition of Country Lake in November 1999, the
Company assumed the liability of $6,255,000 in Multifamily Housing Revenue Bonds
Series 1985C issued by the Housing Finance Authority of Palm Beach County,
Florida. These bonds mature on July 1, 2027 and the current interest rate is 6%
per annum.
The aggregate maturities of mortgage loans payable for the next five years
are $3,017,361; $3,247,623; $159,180; $171,660; $185,140 and $31,267,240
thereafter.
NOTE 8 - NOTES PAYABLE:
Notes payable consist of the following :
1999 1998
------------------------------------------------------------------------------
9% installment note payable secured by the rights in
Dallas/Glen Hills payable in monthly installments of
$6,772, including interest, maturing in 2004 $263,166 $ 318,045
9% note payable in equal installments of $125,000 in
January and July of 1999, plus interest, secured by
150,000 shares of the Company's common stock - 250,000
9 1/2% loan payable on July 23, 2000 225,000 -
9 1/2% notes payable, collateralized by receivables
from Putnam, payable in July 2000 475,000 -
10% note payable before December 31, 1999 - 15,000
---------- ----------
963,166 583,045
Less: current maturities 734,432 313,000
---------- ----------
$ 228,734 $ 270,045
---------- ----------
The aggregate maturities of long-term debt, existing as of December 31,
1999, for the next five years are $734,432; $64,384; $70,423; $77,029 and
$16,898, respectively.
NOTE 9 - CAPITALIZED LEASE OBLIGATIONS:
The Company is the lessee of office equipment with leases expiring in
various years through 2002. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair market value of the asset. The assets are depreciated over their estimated
productive lives. Accumulated depreciation of assets held under capitalized
leases aggregated $23,840 and $14,687 as of December 31, 1999 and 1998,
respectively.
Minimum future lease payments under capital leases as of December 31, 1999
and for each of the next four fiscal years and in the aggregate are:
2000 $14,623
2001 14,623
2002 14,117
----------
Total minimum lease payments 43,363
Less: amount representing interest 18,241
----------
$25,122
----------
The interest rates on the capitalized leases have been calculated at
approximately 20% and were based on the lessors' implicit rate of return.
Certain of the capital leases provide for a bargain purchase option at the
end of the lease.
Page 56
<PAGE>
NOTE 10 - MINORITY INTERESTS:
Three wholly-owned subsidiaries of the Company are the general partners of
three separate limited partnership entities (see Note 1). The partnerships were
established for the purpose of acquiring rental properties which are controlled
and managed by the Company. For financial reporting purposes, the financial
statements of the partnership entities are included in the Company's
consolidated financial statements (see Note 2a).
The minority interests represent the equity investment by the investor
limited partners in the limited partnerships that own specific properties. Under
the terms of the various partnership agreements, the limited partners are
typically allocated 99% of the taxable income or loss. Cash flow from the
partnership property is allocated 75% or more to the general partner, and
residual value is allocated 80% or more to the general partner. Accordingly, all
operating control of the property rests solely with the general partner. The
limited partners' interests in the partnerships have been recorded as minority
interest liabilities (net of offsets for the limited partners investment cost to
be eligible for tax credits (see Note 2k)).
NOTE 11 - SHAREHOLDERS' EQUITY:
The Company's authorized capital consists of 25,000,000 shares of common
stock, $.001 par value and 5,000,000 shares of preferred stock, $.001 par value.
During 1998, the Company received $275,357 in cash from the sale of
1,802,717 shares of its common stock.
In September 1998, the Company adopted the 1998 Employee Stock Option Plan
(the "Plan"), which provides for the grant of options to purchase up to 750,000
shares of Company common stock. Options granted under this plan may be
designated as incentive stock options and the exercise price of such options
shall not be less than the fair market value on the date of grant. Options
designated as non-incentive stock options may be granted at exercise prices,
which are less than the fair market value. As of December 31, 1999, no options
have been granted under this plan.
Also in September 1998, the Company adopted the Non-Executive Director
Stock Plan (the "Director Plan"), which provides for the issuance of a maximum
of 400,000 shares of common stock upon the exercise of options granted under
this plan. The exercise price of options granted under the Director Plan shall
be equal to the fair market value on the date of grant. As of December 31, 1999,
no options have been granted under this plan.
In addition, the Company granted options to purchase 100,000 shares of
common stock to an officer of the Company. These options, which were not granted
under either of the plans described above, vest quarterly in the first year of
the officer's employment and are exercisable at $1.00 per share. These options
were cancelled in 2000 when the officer's employment with the Company was
terminated.
During 1999, the Company sold 2.43 units, for $750,000 per unit, in a
private offering of its preferred shares and received net proceeds in the amount
of $1,618,855. Each unit consists of 30,000 shares of Series A 8% Cumulative
Convertible Redeemable Preferred Stock. Quarterly dividends which accrue from
the date of original issue are payable in cash when declared by the Company's
Board of Directors. Dividends in arrears as of December 31, 1999, aggregated
$2,285.
During the 1999, the Company issued 24,998 shares of its common stock as
payment for accrued liabilities in the amount of $24,998. The Company also
issued 185,000 shares of its common stock to a note holder as consideration for
an extension of the maturity date. These shares were valued at $1.00 per share.
Page 57
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NOTE 12 - INCOME TAXES:
The provision for income taxes consists of the following:
1999 1998
--------------------------------------------------------------------------------
Current tax expense $ - $ -
Deferred tax expense:
Federal 242,750 296,000
State 82,250 102,700
---------- ----------
$325,000 $398,700
---------- ----------
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
1999 1998
--------------------------------------------------------------------------------
Deferred asset:
Net operating loss $ - $ -
Deferred liability:
Conversion of accrual to cash (903,400) (578,400)
---------- ----------
Net deferred liability $(903,400) $(578,400)
---------- ----------
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
(a) Operating leases:
For the year ended December 31, 1998 and through April 1999, the Company
occupied office space provided by an officer of the Company. No rent was charged
or paid since the value of the office space was considered to be nominal.
On April 22, 1999, the Company entered into a three-year lease for office
space. Rental payments under said lease are as follows:
2000 $37,445
2001 39,452
2002 13,373
----------
$90,270
(b) Consulting Agreements:
The Company has entered into a five-year agreement with a corporate entity,
which owns 1,612,000 shares of the Company's common stock, for services to be
provided by an employee of this entity. This individual functions as the Chief
Acquisition Officer, primarily responsible for identifying and consummating new
acquisitions. Under the terms of the consulting agreement, which commenced
August 1, 1998 and continues to July 31, 2003, the monthly fee is $15,000
through December 31, 1998, with annual increases of not less than 5% effective
in January of each year. This agreement is renewable annually upon expiration,
at similar terms.
(c) Employment Agreements:
The Company has entered into a five-year employment agreement with an
individual and a corporation controlled by him, for his services as Chief
Executive Officer. The agreement commenced August 1, 1998 and continues to July
31, 2003. Under the terms of the agreement, the monthly compensation is $15,500
through December 31, 1998, with annual increases of not less than 5% effective
in January of each year. The individual has chosen to have such payments made to
the corporation.
Page 58
<PAGE>
ITEM 2. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE COMPANY
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Homes For America Holdings, Inc.
Consolidated Balance Sheet
June 30, 2000 and 1999
(Unaudited)
ASSETS
2000 1999
--------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 547,187 $ 422,166
Accounts receivable - Tenants 57,962 85,824
Accounts receivable - other fees 913,970 521,127
Restricted deposits and funded reserves - current 5,500,304 536,726
Prepaid expenses and other current assets 2,485,971 159,285
Due from office 27,500 -
---------- ----------
TOTAL CURRENT ASSETS 9,532,894 1,725,128
---------- ----------
INVESTMENTS IN REAL ESTATE - NET 37,288,783 26,451,703
---------- ----------
FIXED ASSETS - NET 55,050 43,257
---------- ----------
OTHER ASSETS:
Restricted deposits and funded reserves 529,485 4,201,437
Deferred financing costs - net 1,300,996 768,568
Deferred asset management fee - net 87,170 91,460
Organization costs - net - 279,738
Preacquisition costs 279,883 335,547
Other 438,720 25,381
---------- ----------
TOTAL OTHER ASSETS 2,636,254 2,702,131
---------- ----------
TOTAL ASSETS $49,512,981 $33,922,219
----------- -----------
Page 59
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Homes For America Holdings, Inc.
Consolidated Balance Sheet (Cont'd)
June 30, 2000 and 1999
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
--------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $1,005,578 $ 903,711
Tenant security deposits 392,824 341,914
Unearned rent 43,538 17,727
Current portion - liabilities applicable 3,794,727 255,000
to invest in real estate - -
Current portion - notes payable 1,934,432 535,811
Current portion of capitalized leases payable 8,606 10,200
----------- -----------
TOTAL CURRENT LIABILITIES 7,179,705 2,064,363
----------- -----------
LIABILITIES APPLICABLE TO INVESTMENT
IN REAL ESTATE 33,122,674 25,673,138
----------- -----------
LONG TERM LIABILITIES - NET OF CURRENT PORTION
Notes payable 228,734 819,221
Capitalized leases payable 16,516 24,634
Deferred income taxes 903,400 763,900
----------- -----------
1,148,650 1,607,755
----------- -----------
MINORITY INTERESTS IN SUBSIDIARIES 2,276,008 2,054,814
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock 73 -
Common stock 9,717 8,373
Additional paid in capital 3,530,525 958,287
Stock subscription receivable
Retained earnings 2,246,784 1,555,489
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 5,785,944 2,522,149
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 49,512,981 33,922,219
----------- -----------
Page 60
<PAGE>
Homes For America Holdings, Inc.
Consolidated Statement of Operations
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
2000 1999
--------------------------------------------------------------------------------
REVENUES:
Rental Income $ 4,427,852 $ 1,775,430
Real Estate Development Fees - 898,631
Interest Income 7,015 925
Other Income 55,106 76,338
Extraordinary Income 1,430,653 -
----------- -----------
5,920,626 2,751,324
----------- -----------
EXPENSES:
Administrative Expenses 1,418,758 795,952
Maintenance and Operating 432,857 282,701
Utilities 225,914 371,507
Taxes and Insurance 401,267 158,573
Interest Expense 1,459,959 318,896
Depreciation and Amortization 773,296 343,563
----------- -----------
4,712,051 2,271,192
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND PROVISION FOR INCOME TAXES 1,208,575 480,132
Minority interests in net loss (income)
Of consolidated subsidiaries 171,550 193,025
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 1,380,125 673,157
Provision for income taxes 483,044 185,500
----------- -----------
NET PROFIT (LOSS) $ 897,081 $ 487,657
----------- -----------
Page 61
<PAGE>
Homes For America Holdings, Inc.
Consolidated Statement of Changes in Shareholders' Equity
for the Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Common Additional Retained Total
Stock Paid In Earnings
Capital
--------------------------------------------------------------------------------------------
Balance at January 1, 1999 $ 8,352 $ 941,955 $ 1,067,832 $ 2,018,139
Purchase and cancellation of
common stock (4) (8,641) - (8,645)
Common stock issued in settlement
of debt 25 24,973 - 24,998
Net Income - - 487,657 487,657
----------- ----------- ----------- -----------
Balance at June 30, 1999 8,373 958,287 1,555,489 $ 2,522,149
----------- ----------- ----------- -----------
</TABLE>
Page 62
<PAGE>
Homes For America Holdings, Inc.
Consolidated Statement of Changes in Shareholders' Equity
for the Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Common Additional Stock Retained Total
Stock Stock Paid In Subscription Earnings
Capital Receivable
-------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $ 73 $ 8,562 $ 2,770,525 $ - $ 1,695,566 $ 4,474,726
Receipt of Stock Subscription - 1,155 760,000 - - 761,155
Net Income (Loss) - - - - 551,218 551,218
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 $ 73 $ 9,717 $ 3,530,525 $ - $ 2,246,784 $ 5,787,099
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Page 63
<PAGE>
Homes For America Holdings, Inc.
Consolidated Statement of Cash Flows
for the Six Months Ended June 30, 2000 and 1999
(Unaudited)
2000 1999
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 897,081 $ 487,657
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 773,296 343,563
Minority Interests (171,550) (193,025)
Deferred Income Taxes 483,044 185,500
(Increase) Decrease in Assets:
Accounts Receivable - Tenants (26,762) (68,025)
Accounts Receivable - Other - (70,287)
Prepaid Expenses and Other Current Assets (524,456) (106,228)
Loans Receivable - -
Other (1,430,653) (25,381)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses - 394,709
Tenant Security Deposits - 266,903
Prepaid Rent - 8,213
----------- -----------
Net cash provided by operating activities - 1,223,599
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real property (791,831) (16,307,891)
Pre-acquisition costs - (143,560)
Purchase of equipment - (683)
Organization Costs - -
Increase in restricted funds - (1,102,436)
----------- -----------
Net cash (utilized) by investing activities (791,831) (17,554,570)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long Term Debt - 15,744,813
Proceeds from Sale of Stock 760,000 -
Payment of Long Term Debt - (318,063)
(Additions) to Deferred Financing Costs - (196,928)
Sale of Common Stock - (4,500)
Stock Repurchase - (8,645)
Partner's capital contribution 350,000
Draw down of restricted mortgage funds - 420,127
----------- -----------
Net cash provided by financing activities 760,000 15,986,804
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (31,831) (344,167)
Cash and cash equivalents, beginning of year 579,018 766,293
----------- -----------
CASH AND CASH EQUIVALENTS,
JUNE 30, 2000 AND 1999 547,187 422,126
----------- -----------
Page 64
<PAGE>
Homes For America Holdings, Inc.
Notes to Financial Statements
June 30, 2000 and 1999
(Unaudited)
NOTE 1
On June 30, 2000, Homes For America Holdings, Inc. acquired the 400-unit
Lake's Edge apartments in North Miami, Florida. This acquisition was
accomplished through a wholly-owned subsidiary, Lakes Edge Homes Holdings, Inc.
In conjunction with this acquisition, Lakes Edge Homes Holdings purchased 6.0%
tax-exempt bonds for $14,025,000 and immediately sold them for $14,850,000,
earning $825,000 on the transaction. Simultaneously, the Lake's Edge property
was acquired for a purchase price of $14,850,000, financed by the tax-exempt
bond debt. Total investment, including related acquisition costs, was
$15,132,495. In addition to the $825,000 gain on the sale of bonds, the Company
earned and recognized $73,631 in developer's fees.
Page 65
<PAGE>
ITEM 3. AUDITED FINANCIAL STATEMENTS FOR DALLAS/GLEN HILLS, L.P.
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
INDEPENDENT AUDITORS' REPORT
To the Partners of Dallas/Glen Hills, L.P.
We have audited the accompanying balance sheets of Dallas/Glen Hills, L.P.,
(a Texas limited partnership), as of December 31, 1999 and 1998, and the related
statements of operations, partners' capital and cash flows for the years ended
December 31, 1999 and 1998. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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, the financial statements referred to above present fairly,
in all material respects, the financial position of Dallas/Glen Hills, L.P., as
of December 31, 1999 and 1998, and the results of its operations, changes in
partners' capital and cash flows for the years then ended in conformity with
generally accepted accounting principles.
Thomas Stephen & Company, LLP
March 1, 2000
Page 66
<PAGE>
DALLAS/GLEN HILLS, LP
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
--------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 2,415 $ 45,865
Accounts receivable-tenants 7,258 5,252
Accounts receivable-other - 1,385
Due from related party 77,184 -
Prepaid insurance - 20,849
---------- ----------
TOTAL CURRENT ASSETS 86,857 73,351
---------- ----------
RESTRICTED DEPOSITS
Replacement reserves 90,495 103,366
Tax and insurance escrow 153,118 155,279
Debt reduction escrow 1,500,000 1,500,000
Operating deficit escrow 104,984 100,677
---------- ----------
TOTAL RESTRICTED DEPOSITS 1,848,597 1,859,322
---------- ----------
RENTAL PROPERTY
Land 904,000 904,000
Buildings and improvements 4,529,647 4,466,835
Furniture and equipment 1,127,830 1,116,012
---------- ----------
6,561,477 6,486,847
Less accumulated depreciation (973,204) (612,595)
---------- ----------
NET RENTAL PROPERTY 5,588,273 5,874,252
---------- ----------
OTHER ASSETS
Deferred financing costs, net 99,405 108,825
Deferred asset management fees, net 87,170 95,750
---------- ----------
TOTAL OTHER ASSETS 186,575 204,575
---------- ----------
TOTAL ASSETS $7,710,302 $8,011,500
---------- ----------
See notes to financial statements.
Page 67
<PAGE>
DALLAS/GLEN HILLS, LP
BALANCE SHEETS (Continued)
December 31, 1999 and 1998
LIABILITIES AND PARTNERS' CAPITAL
1999 1998
--------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 67,920 $ 82,891
Accrued payroll - 10,701
Accrued interest 34,831 45,957
Due to related parties 25,392 -
Accrued real estate taxes 151,969 107,738
Current maturities of long-term debt 91,628 84,396
Prepaid rent 10,767 9,514
---------- ----------
TOTAL CURRENT LIABILITIES 382,507 341,197
---------- ----------
TENANT SECURITY DEPOSITS 63,616 57,003
---------- ----------
LONG-TERM LIABILITIES
Mortgage note 4,974,676 5,066,304
---------- ----------
TOTAL LONG-TERM LIABILITIES 4,974,676 5,066,304
---------- ----------
TOTAL LIABILITIES 5,420,799 5,464,504
---------- ----------
PARTNERS' CAPITAL 2,289,503 2,546,996
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $7,710,302 $8,011,500
---------- ----------
See notes to financial statements.
Page 68
<PAGE>
DALLAS/GLEN HILLS, LP
STATEMENTS OF OPERATIONS
December 31, 1999 and 1998
1999 1998
--------------------------------------------------------------------------------
REVENUES
Rental income $ 2,422,275 $ 2,281,856
Interest income 71,517 78,346
Other income 40,793 47,626
---------- ----------
Total Revenue 2,534,585 2,407,828
---------- ----------
OPERATING EXPENSES
Administrative 308,248 299,620
Utilities 511,503 520,777
Maintenance 381,312 313,707
Property management fee 98,522 93,257
Taxes 188,544 112,451
Insurance 107,569 66,375
Interest 423,027 427,915
Depreciation and amortization 378,609 370,901
---------- ----------
Total Expenses 2,397,334 2,205,003
---------- ----------
INCOME (LOSS) FROM OPERATIONS 137,251 202,825
---------- ----------
PARTNERSHIP EXPENSES
Asset management fee 24,215 23,314
Local administrative fee 5,000 5,000
Oversight fee - 140,846
Incentive management fee 88,614 88,614
Supervisory management fee 161,034 12,290
---------- ----------
NET INCOME (LOSS) $ (141,612) $ (67,239)
---------- ----------
See notes to financial statements.
Page 69
<PAGE>
DALLAS/GLEN HILLS, L.P.
STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
General Class Z Investor Special Total
Partner General Partner Limited Partner Limited Partner
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $399,990 $ - $2,286,255 $ (10) $2,686,235
Distributions - (72,000) - - (72,000)
Net Income (Loss) (14) 72,000 (139,211) (14) (67,239)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 399,976 - 2,147,044 (24) 2,546,996
---------- ---------- ---------- ---------- ----------
Distributions (24,239) (67,500) (24,137) (5) (115,881)
Net Income (Loss) (21) 67,500 (209,070) (21) (141,612)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 $375,716 $ - $1,913,837 $ (50) $2,289,503
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
Page 70
<PAGE>
DALLAS/GLEN HILLS, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
1999 1998
--------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $(141,612) $ (67,239)
----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 378,609 370,902
Increase in accrued liabilities 22,404 10,166
Increase in tenant security deposits 6,613 12,769
Decrease in accounts payable (14,971) (21,795)
(Increase) Decrease in tax and insurance escrows 2,161 (25,337)
Increase (Decrease) in prepaid rent 1,253 (63)
Increase in accounts receivable (621) (6,637)
Increase in due to related parties, net (75,934) -
Decrease (Increase) in prepaid expenses 20,849 (20,849)
Decrease (Increase) in replacement reserves 12,871 (32,516)
Increase in operating deficit escrow (4,307) (85,435)
----------- -----------
Total adjustments 348,927 201,205
----------- -----------
Net cash provided by operating activities 207,315 133,966
----------- -----------
Cash flows from investing activities
Purchase of rental property (74,630) (79,212)
----------- -----------
Net cash used in investing activities (74,630) (79,212)
----------- -----------
Cash flows from financing activities
Proceeds from partner's capital contributions - 140,846
Principal payments on long-term debt (84,396) (77,735)
Partner distributions (91,739) (72,000)
----------- -----------
Net cash provided by (used in) financing activities (176,135) (8,889)
----------- -----------
Net change in cash and cash equivalents (43,450) 45,865
----------- -----------
Cash and equivalents, beginning of year 45,865 -
----------- -----------
Cash and equivalents, end of year 2,415 45,865
----------- -----------
Supplemental disclosures of cash flow information
Cash paid during year for interest $ 421,789 $ 428,450
----------- -----------
See notes to financial statements.
Page 71
<PAGE>
DALLAS/GLEN HILLS, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION
Dallas/Glen Hills, L.P. (the "Partnership") was formed in Texas on October
18, 1995 as a Limited Partnership and commenced operations on February 9, 1996.
On March 27, 1997, the Partnership Agreement was amended to provide for the
withdrawal or the reduction in ownership interest of the existing partners and
the contribution of capital and the admittance of new partners. Under the terms
of the Amended and Restated Agreement of Limited Partnership dated March 27,
1997, as subsequently amended, (the "Partnership Agreement"), the general
partner is Glen Hills Homes For America, Inc. (the "General Partner"), the Class
Z general partner is David H. Korb (the "Class Z General Partner"), the investor
limited partner is Related Corporate Partners V, L.P. (the "Investor Limited
Partner") and the special limited partner is Related Corporate SLP L.P. (the
"Special Limited Partner").
In view of the significance of the changes in ownership and financial
position, the Partnership is being treated as a new accounting entity, and
accordingly the Partnership established a new accounting basis, where
appropriate, for its assets and liabilities based on the acquisition costs of
the new partners as of March 27, 1997.
The Partnership was organized to purchase, rehabilitate and operate the
Willow Pond Apartment (formerly Glen Hills Apartments) project (the "Project")
located in Dallas, Texas. The Project operates thereon 386 multi-family
residential units for rental to low and moderate income tenants.
The Project received an allocation of low income housing tax credits from
the Texas Department of Housing and Community Affairs under Section 42 of the
Internal Revenue Code of 1986, as amended. As such, the Project is required to
lease a minimum of 40% of its units to families whose income is 60% or less of
the area median gross income.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the partnership are prepared on the accrual
basis of accounting and in accordance with generally accepted accounting
principles.
Rental Property
Land, buildings, furniture and equipment are recorded at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets as follows:
Buildings 27.5 years
Furniture & fixtures 7 years
Equipment 5 years
Improvements are capitalized, while expenditures for maintenance and
repairs are charged to expense as incurred.
Deferred Financing Costs
Costs directly associated with obtaining permanent debt financing are
deferred and are amortized over the term of the permanent loan on a
straight-line basis over 15 years.
Deferred Asset Management Fee
Asset management fees paid to an affiliate of the limited partner for its
services in monitoring the operations of the Project are amortized over the life
of the 15 year agreement.
Income Taxes
No federal income taxes are payable by the Partnership and none have been
provided in the accompanying financial statements. The partners are to include
their respective share of Partnership income or loss in their separate tax
returns. The Partnership's tax returns are subject to examination by Federal
taxing authorities. The tax law rules and regulations governing these returns is
complex, technical and subject to varying interpretations. If an examination
required the partnership to make adjustments, the profits or losses allocated to
the partners would be adjusted accordingly. No such examination is currently in
process.
Page 72
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Rental Income
Rental income is recognized as rent becomes due. Rental payments received
in advance are deferred until earned.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents
For purposes of the statement of cash flows, the Partnership considers all
investments purchased with an original maturity of three months or less to be
cash equivalents.
Reclassification
Certain amounts in 1998 have been reclassified to conform to the 1999
presentation.
NOTE 3 - LONG-TERM DEBT
The Partnership entered into a mortgage loan agreement for $5,350,000 (the
"Mortgage Loan") dated February 9, 1996. The Mortgage Loan bears interest at a
rate of 8.25% per annum. Monthly principal and interest payments of $42,182 are
payable until February, 2011. The note matures on March 1, 2011, at which time,
the entire remaining outstanding principal and interest is due. The Mortgage
Loan is collateralized by the Partnership's real property, personal property and
other rights attached to the property. The Partnership has funded a debt
reduction escrow account in the amount $1,500,000 to be applied against the
outstanding loan balance upon refinancing.
The Mortgage Loan agreement requires "all-risk" insurance policies to be
maintained in an amount not less than the full insurable value of the property
on a replacement cost basis. Aggregate projected maturities of long-term debt
for the next five years are as follows:
December 31, 2000 $ 91,628
2001 99,480
2002 108,005
2003 117,260
2004 127,308
Thereafter 4,522,623
----------
Total $ 5,066,304
----------
The fair value of the mortgage note payable is estimated based on the
current rates offered to the Property for debt of the same remaining maturities.
At December 31, 1999 and 1998 the fair value of the mortgage approximates the
amounts recorded in the financial statements.
NOTE 4 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP
Allocations of Profits, Losses, Cash Flow, and Tax Credits
Tax credits are allocated 99.98% to the Investor Limited Partner, .01% to
the Special Limited Partner and .01% to the General Partner.
Subject to certain provisions, losses shall be allocated 99.98% to the
Investor Limited Partner, .01% to the Special Limited Partner and .01% to the
General Partner.
Subject to certain provisions, profits other than those arising from a sale
or refinancing transaction shall be allocated as follows to each partner (1) to
the extent of prior allocations of losses (2) until the profits allocated to
such partner equals the cash distributions made to such partners and (3) an
amount equal to the cash distributions that would have been made if the
Partnership had available cash.
Page 73
<PAGE>
NOTE 4 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Annual distributable cash flow shall be applied in the following order of
priority:
1. To repay loans payable to any partner other than the General Partner.
2. To the General Partner in an amount equal to any unpaid voluntary loans.
3. Due to certain preclosing requirements, the Partnership and the Class Z
General Partner were required to escrow, in the name of the Partnership, a
debt reduction deposit of $1,500,000 to be used as a prepayment of the
mortgage loan. This prepayment will be released to the mortgage lender upon
the termination of a prepayment lock out and thereby reducing the mortgage
by $1,500,000. Following the mortgage reduction, the Partnership has an
obligation upon sale or refinancing to distribute $1,500,000 to the Class Z
General Partner. In the event a refinancing is not completed, the Class Z
General Partner is entitled to receive, from cash flow, payments toward the
$1,500,000 plus interest. The Class Z General Partner has no property
foreclosure rights.
4. To pay any accrued but unpaid management fees.
5. To the Special Limited Partner for accrued annual local administrative fees
not to exceed $5,000 per year.
6. To the General Partner for contractor fees of $30,000.
7. To the General Partner, to the extent of 50% of remaining cash flow, the
difference between any operating loans and any unpaid credit reduction
payments.
8. To the General Partner to pay the difference, if positive, between $88,614
and any unpaid credit reduction payments.
9. To the General Partner to pay the difference between the Asset Management
Fee and any unpaid credit reduction payments.
10. To the extent of 40% of remaining cash flow, to the General Partner, the
difference between the Supervisory Management Fee and any unpaid credit
reduction payments.
11. Of the remainder, 49.89% to the Investor Limited Partner, 50.1% to the
General Partner and .01% to the Special Limited Partner.
Net proceeds from a sale or refinancing transaction will be paid to the
Class Z General Partner in an amount equal to the excess of (1) $1,500,000 plus
accrued interest over (2) certain previous distributions. Any remaining net
proceeds will be distributed according to specific provisions of the Partnership
Agreement.
Oversight Fee
Pursuant with terms of the First Amendment to the Amended and Restated
Agreement of Limited Partnership, the Partnership paid an oversight fee of
$140,846 to the General Partner in 1998. The oversight fee is consideration for
services provided by the General Partner in overseeing the 1998 operations of
the Partnership.
Page 74
<PAGE>
NOTE 4 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Incentive Management Fee
The Partnership paid a $88,614 non-cumulative incentive management fee to
the General Partner in 1999 and 1998 pursuant to terms of the Partnership
Agreement.
Supervisory Management Fee
The Partnership Agreement provides for a supervisory management fee equal
to 40% of the Partnership's available cash flow as defined, payable to the
General Partner, of which, $161,034 and $12,290 were paid during 1999 and 1998
respectively.
Asset Management Fee
For its services in monitoring the operations of the Project, the
Partnership is obligated to pay the General Partner an amount equal to the
lessor of (1) available cash flow as defined in the Partnership Agreement and
(2) 1% of net rental income. $24,215 and $23,314 were paid during 1999 and 1998,
respectively.
Property Management Fee
Pursuant to terms of the Property Management Agreement, the General Partner
is obligated to manage the operations of the apartment complex. The General
Partner shall receive a management fee from the Partnership in an amount not to
exceed 4% of net rental income. $98,522 and $93,257 were paid during 1999 and
1998, respectively.
Operating Deficit Guarantee Agreement
On March 27, 1997, the Partnership executed a Operating Deficit Guaranty
Agreement with the General Partner, whereby, the General Partner agreed to loan
to the Partnership any funds required to fund operating deficits (as defined in
the Agreement) of the Partnership incurred during the period commencing with the
break-even date (as defined in the Agreement) and ending on the third
anniversary of the break-even date. The guarantee amount shall not exceed 10% of
the Partnership's first Mortgage Loan, net of the balance in the deficit
reduction escrow account. The General Partner funded the escrow account $81,044
during 1998 and the account totaled $104,984 and $100,677 as of December 31,
1999 and 1998, respectively. At December 31, 1999, the General Partner is
required to fund an additional $82,516 to the operating deficit escrow.
Development Deficit Guaranty Agreement
The General Partner has entered into an agreement with the Limited
Partners, whereby, at the option of the Limited Partners, the General Partner
may be required to (1) purchase the interests of the Limited Partners upon the
occurrence of certain events described in the Development Deficit Guaranty
Agreement and (2) pay all expenses of operating and maintaining the apartment
complex in excess of the gross collections to the extent necessary to maintain
break-even operations until the break-even date (as defined in the Agreement).
Replacement Reserve Escrows
The General Partner is required under a Replacement Reserve Guaranty
Agreement to fund a replacement reserve escrow each month during the guaranty
period to meet replacement reserve obligations. At December 31, 1999 and 1998,
the Partnership held $ 90,495 and $103,366, respectively, in replacement
reserves. The Partnership funded monthly reserve payments totaling of $96,504
during 1999.
Debt Reduction Escrow
On December 29, 1996, the Partnership entered into an escrow agreement with
the Texas Department of Housing and Community Affairs (TDHCA), whereby; the
Partnership placed $1,500,000 in a bank escrow account. The bank will deliver
the entire balance to Mellon Mortgage Company to be paid toward the principal
balance of the Mortgage Loan. The funds are not to be disbursed without approval
from TDHCA. The Partnership will disburse any interest earned on this escrow
account to the Class Z General Partner.
Page 75
<PAGE>
NOTE 4 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP
(Continued)
Guarantee of Tax Credits
Under the terms of the Partnership Agreement, the General Partner has the
duty to use its best efforts to ensure that the Partnership qualifies for the
maximum lawful low-income-housing tax credits. In the event that actual
low-income-housing tax credits accruing to the benefit of the Investment Limited
Partner are less than the amount of credits that were projected at the formation
of the Partnership, the additional contributions of capital otherwise required
of the Investment Limited Partner may be reduced, or constructive advances
deemed made, in accordance with applicable procedures contained within the
Partnership Agreement.
NOTE 5 - CONCENTRATIONS OF RISK
The Partnership leases residential units under leases which require rent
payments at the beginning of each month some of which are subsidized under the
HUD Section 8 program. Each tenant is also required to make a security deposit
of a portion of one month's rent. Credit risk associated with the lease
agreements is limited to the amount of rents receivable from tenants and HUD
less security deposits.
NOTE 6 - RELATED PARTY CONTINGENCY
The Partnership Agreement provides that the permanent loan was to be
refinanced by February 28, 1999 to provide the proceeds for a priority
distribution to the Class Z General Partner of $1,500,000 plus interest. In the
event a refinancing was not completed by February 28, 1999, the Partnership is
required to utilize the debt reduction escrow to reduce the balance of the
permanent loan and if permitted by the lender, to reduce the amortization
schedule based on the reduced loan balance.
As of December 31, 1999, the permanent loan has not been refinanced nor has
the debt reduction escrow been released to the lender. The Class Z General
Partner has filed suit against the Partnership and the General Partner for
breach of contract, breach of fiduciary duty, fraud and negligent
misrepresentation. The plaintiff is claiming damages in excess of $1,500,000 and
requests rescission of the Partnership Agreement. The Partnership and the
General Partner are vigorously contesting this claim and have filed a
counterclaim for damages in excess of $1,200,000.
The parties have agreed to mediate the legal proceedings and on December
14, 1999 an agreement was reached, whereby, the Partnership will make monthly
distributions of $12,500 to the Class Z General Partner until the lawsuit is
ultimately tried, settled or dismissed. The ultimate outcome of the litigation
is uncertain. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 7 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The partnership's financial instruments consist of cash and notes payable.
The partnership estimates that the fair value of all financial instruments does
not differ materially from the aggregate carrying values of its financial
instruments recorded in the accompanying balance sheet. The estimated fair value
amounts have been determined by the partnership using available market
information and appropriate valuation methodologies. Considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value, and, accordingly, the estimates are not necessarily indicative of
the amounts that the Partnership could realize in a current market exchange.
None of the financial instruments are held for trading purposes.
NOTE 8 - PRIOR PERIOD ADJUSTMENT
An error resulting in the $61,965 understatement of previously reported
interest income and distributions to the Class Z General Partner in 1998 was
corrected in 1999. The changes have no effect on previously reported partners'
capital in aggregate. The following corrections were made to the 1998 financial
statements.
As Previously Reported As Adjusted
------------------------------------
Interest Income $6,346 $78,346
Distributions To Class Z General Partner $ 0 $72,000
Page 76
<PAGE>
NOTE 9 - RELATED PARTY TRANSACTIONS
The $77,184 due from related party on the accompanying December 31, 1999
balance sheet represents distributions made to the General Partner during 1999
in excess of amounts allowed under Partnership Agreement provisions.
The $25,392 due to related parties on the accompanying December 31, 1999
balance sheet represents a $1,250 local administrative fee payable to the
Special Limited Partner and a $24,142 distribution payable to the Limited
Partner in accordance with Partnership Agreement provisions.
Page 77
<PAGE>
ITEM 4. AUDITED FINANCIAL STATEMENTS FOR TVMJG - PUTNAM SQUARE
LIMITED PARTNERSHIP FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
INDEPENDENT AUDITORS' REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999
To the Partners of
TVMJG 1996 - Putnam Square Limited Partnership
We have audited the balance sheet of TVMJG 1996 - Putnam Square Limited
Partnership, as of December 31, 1999, and the related statements of operations,
partners' equity and cash flows for the year then ended. These financial
statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of TVMJG 1996 - Putnam Square Limited
Partnership as of December 31, 1998, were audited by other auditors whose report
dated March 11,1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TVMJG 1996 - Putnam Square
Limited Partnership, as of December 31, 1999 and the results of its operations,
changes in partners' equity and cash flows for the period then ended in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 13
to 14 is presented for purposes of additional analysis and is not a required
part of the basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Thomas Stephen & Company, LLP
February 18, 2000
Page 78
<PAGE>
INDEPENDENT AUDITORS' REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
To the Partners
TVMJG 1996 - Putnam Square Limited Partnership
We have audited the accompanying balance sheet of TVMJG 1996 - Putnam
Square Limited Partnership as of December 31, 1998, and the related statements
of operations, changes in partners' equity and cash flows for the year ended
December 31, 1998. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TVMJG 1996 - Putnam
Square Limited Partnership as of December 31, 1998, and the results of its
operations, the changes in partners' equity and cash flows for the year ended
December 31,1998, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 14
and 15 is presented for purposes of additional analysis and is not a required
part of the basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Reznick Fedder & Silverman
March 11, 1999
Page 79
<PAGE>
TVMJG 1996 Putnam Square Limited Partnership
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
--------------------------------------------------------------------------------
INVESTMENT IN REAL ESTATE
Land $ 45,000 $ 45,000
Building 1,146,261 1,140,628
Personal Property 72,199 63,000
----------- -----------
TOTAL INVESTMENT IN REAL ESTATE 1,263,460 1,248,628
Accumulated Depreciation (148,797) (110,889)
----------- -----------
NET INVESTMENT IN REAL ESTATE 1,114,663 1,137,739
----------- -----------
OTHER ASSETS
Cash 3,606 3,212
Tenant Security Deposits - Funded 9,687 6,602
Accounts Receivable - Tenants 1,479 5,945
Prepaid Expenses 3,790 3,477
Organization costs, net 7,806 12,854
----------- -----------
TOTAL OTHER ASSETS 26,368 32,090
----------- -----------
TOTAL ASSETS $ 1,141,031 $ 1,169,829
----------- -----------
See notes to financial statements.
Page 80
<PAGE>
TVMJG 1996 Putnam Square Limited Partnership
BALANCE SHEETS (Continued)
December 31, 1999 and 1998
LIABILITIES AND PARTNERS' EQUITY
1999 1998
--------------------------------------------------------------------------------
LIABILITIES APPLICABLE TO INVESTMENT IN
REAL ESTATE
Mortgage Note Payable $ 400,000 $ 400,000
Accrued Interest on Mortgage Payable 117,688 85,688
Development Note Payable - General Partner 200,000 200,000
Accrued Interest on Development Note Payable 39,036 36,516
Note Payable - 13,000
Accounts Payable-Acquisition 31,553 31,553
----------- -----------
TOTAL LIABILITIES APPLICABLE TO INVESTMENT
IN REAL ESTATE 788,277 766,757
----------- -----------
OTHER LIABILITIES
Trade Payables 8,003 11,061
Property Taxes Payable 14,344 7,717
Due to General Partner 12,371 8,590
Prepaid Rents 750 -
Tenant Security Deposits 8,055 7,163
----------- -----------
TOTAL OTHER LIABILITIES 43,523 34,531
----------- -----------
PARTNER'S EQUITY 309,231 368,541
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 1,141,031 $1,169,829
----------- -----------
See notes to financial statements.
Page 81
<PAGE>
TVMJG 1996 Putnam Square Limited Partnership
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
1999 1998
--------------------------------------------------------------------------------
INCOME
Rental income $ 89,935 $ 83,018
Miscellaneous Tenant Income 5,598 6,833
Interest Income 160 96
Gain on extinguishment of Debt 13,000 -
----------- -----------
TOTAL INCOME 108,693 89,947
----------- -----------
EXPENSES
Administrative 21,335 39,752
Utilities 34,299 33,798
Operating and Maintenance 14,691 18,615
Taxes and Insurance 19,408 17,817
Financial 47,431 49,952
Depreciation and Amortization 42,956 43,837
----------- -----------
TOTAL EXPENSES 180,120 203,771
----------- -----------
NET LOSS $(71,427) $(113,824)
----------- -----------
See notes to financial statements.
Page 82
<PAGE>
TVMJG 1996 Putnam Square Limited Partnership
STATEMENTS OF PARTNERS' EQUITY
For the Years Ended December 31, 1998 and 1999
General Limited
Partner Partner Total
--------------------------------------------------------------------------------
Partners' Equity at Dec. 31, 1997 $ (1,976) $ 375,914 $ 373,938
Contributions - 108,427 108,427
Net Loss (1,138) (112,686) (113,824)
---------- ---------- ----------
Partners' Equity at Dec. 31, 1998 (3,114) 371,655 368,541
---------- ---------- ----------
Contributions - 12,117 12,117
Net Loss (714) (70,713) (71,427)
---------- ---------- ----------
Partners' Equity at Dec. 31, 1999 $ (3,828) $313,059 $309,231
---------- ---------- ----------
See notes to financial statements.
Page 83
<PAGE>
TVMJG 1996 Putnam Square Limited Partnership
STATEMENTS OF CASH FLOW
For the Years Ended December 31, 1998 and 1999
1999 1998
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (71,427) $ (113,824)
----------- -----------
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 42,956 43,837
Forgiveness of debt (13,000) -
Decrease (Increase) in Operating Assets:
Tenant Security Deposits (3,085) -
Accounts Receivable 4,466 (3,371)
Prepaid Expenses 313 (3,477)
Organizational Costs - (5,234)
Increase (Decrease) in Operating Liabilities:
Accounts Payable - Trade (3,058) (8,779)
Accounts Payable - General Partner 3,781 -
Accrued Interest Payable 34,520 46,000
Other Accrued Expenses (Taxes) 6,627 -
Deferred Rental Credits 750 -
Security Deposits 892 (2,276)
----------- -----------
TOTAL ADJUSTMENTS 74,536 66,700
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING EXPENSES 3,109 (47,124)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Rental Property (14,832) (59,591)
Withdrawals from Escrow Accounts, Net - 1,500
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (14,832) (58,091)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital Contributions 12,117 108,427
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,117 108,427
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 394 3,212
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 3,212 -
----------- -----------
CASH AND CASH EQUIVALENTS END OF YEAR $ 3,606 $ 3,212
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest $ 11,480 $ 3,952
----------- -----------
See notes to financial statements.
Page 84
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION
TVMJG 1996 - Putnam Square Limited Partnership (the "Partnership") was
formed in Connecticut on February 2, 1996. Under the terms of the First
Amendment to the Second Amended and Restated Agreement of Limited Partnership
dated April 26, 1996 (the "Partnership Agreement"), the General Partner is
Putnam Homes for America Holdings, Inc., (the "General Partner") and the Limited
Partner is U.S.A. Institutional Tax Credit Fund IV, (the "Limited Partner"). The
General Partner has a 1% interest in the Partnership, while the Limited
Partner's interest is 99%.
The Partnership was organized to acquire, develop, and operate an 18 unit
rental housing project in Bridgeport, Connecticut.
The project has qualified and been allocated low- income housing credits
pursuant to Internal Revenue Code Section 42 ("Section 42") which regulates the
use of the project as to occupant eligibility and unit gross rent, among other
requirements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Partnership are prepared on the accrual
basis of accounting and in accordance with generally accepted accounting
principles.
Rental Property
Investment in rental property is carried at cost. Depreciation is provided
for in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives. Buildings and improvements are depreciated
over 40 years using the straight-line method. Equipment is depreciated over
seven years using an accelerated method.
Improvements are capitalized, while expenditures for maintenance and
repairs are charged to expense as incurred.
Organization Costs
Organization Costs are amortized over 60 months using the straight-line
method.
Income Taxes
No federal income taxes are payable by the Partnership and none have been
provided in the accompanying financial statements. The Partners' are to include
their respective share of Partnership income or loss in their separate returns.
The Partnership's tax returns are subject to examination by Federal taxing
authorities. The tax laws rules and regulations governing these returns are
complex, technical and subject to varying interpretations. If an examination
required the Partnership to make adjustments, the profits or losses allocated to
the Partners would be adjusted accordingly. No examination is currently in
process.
Rental Income
Rental income is recognized as rentals become due under the terms of
operating leases with Project tenants. Rental payments received in advance are
deferred until earned.
Reclassification
Certain amounts in 1998 have been reclassified to conform with 1999
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements.
Actual results could differ from those estimates.
Page 85
<PAGE>
NOTE 3 - LONG TERM DEBT
The Partnership is obligated under a $400,000 promissory note. The note
bears interest at 8% per annum. Monthly payments of principal and interest of
$3,087 are due to the extent of surplus cash as defined in the note. The note
matures on January 1, 2014 and is secured by an open-ended mortgage deed and
security agreement. In both 1999 and 1998 interest expense of $32,000 was
charged to operations.
At December 31, 1999 and 1998 the balance of the note was $400,000 and
accrued interest was $117,688 and $85,688, respectively. No payments have been
made as of December 31, 1999 due to insufficient cash flow. The Partnership does
not expect to make payments in the foreseeable future.
The liability of the Partnership under the note is limited to the
underlying value of the real estate collateral plus other amounts deposited with
the lender.
The Partnership is obligated under a promissory note to the General Partner
in the amount of $200,000 in connection with the development fee. The note bears
interest at the rate of 7% per annum and is payable from cash flow as defined in
the partnership agreement. The note matures December 31, 2006 and is unsecured.
During both 1999 and 1998 interest expense of $14,000 was charged to operations.
As of December 31, 1999 and 1998 the balance of the note was $200,000 and
accrued interest was $39,036 and $36,516, respectively.
NOTE 4 - CAPITAL CONTRIBUTION
The Limited Partner contributed $692,065 of capital to the Partnership, of
which, $12,117 and $108,427 were paid during the years ended December 31, 1999
and 1998, respectively. The General Partner is responsible for a $100
contribution, which is outstanding as of December 31, 1999.
NOTE 5 - RELATED PARTIES TRANSACTIONS
Development Fee
Pursuant to a development fee agreement, the Partnership is obligated to
pay a development fee of $200,000 to the General Partner. The fee has been
capitalized as part of buildings and improvements. As of December 31, 1999, the
entire fee remains payable. The payment of the development fee has been deferred
and the obligation to pay such fee is evidenced by a promissory note (see Note
3).
Partnership Administrative Fee
For its services in managing the operations of the Partnership, the General
Partner earns an annual partnership administrative fee. The fees are cumulative
and are payable from net cash flow, as described in Note 8. In no event shall
the fee exceed $40,000 each year. No fees were paid during 1999 and 1998 due to
insufficient cash flow.
Operating Deficit Guaranty
The General Partner has agreed to fund operating deficits up to the date of
achievement of breakeven operations in an unlimited amount. Upon breakeven and
through the fifth anniversary of breakeven operations the obligation is limited
to $60,000.
Breakeven operations is defined in the partnership agreement as the earlier
date in which the following occurs:
1. three consecutive months in which cash revenue exceeds accrued operational
expenses (on an accrual basis), debt-service, mortgage escrow deposits and
reserve for replacements, or
2. The date in which income from operations exceeds operational expenses for a
twelve month period as reported in an annual audited financial statement of
the Partnership.
As of December 31, 1999, break-even operations had not occurred. The
General Partner made operating deficit loans to the Partnership in the amounts
of $12,371 and $8,590 as of December 31, 1999 and 1998, respectively.
Page 86
<PAGE>
NOTE 6 - CONCENTRATIONS OF RISK
The Partnership obtains a credit report on prospective tenants prior to
entering into a lease agreement and generally requires a security deposit equal
to a portion of one month's rent. Credit risk associated with leases is limited
to the amount of rent receivable from tenants less security deposits.
NOTE 7 - OPERATING AND REPLACEMENT RESERVES
The Partnership agreement requires that a minimum of $200 per unit be
deposited annually into a segregated bank account until such time as the reserve
fund equals 5% of the mortgage loan. There were no reserve deposits made during
1999 or 1998. The Partnership's delinquent deposits to the reserve totaled
$14,400 and $10,800 as of December 31, 1999 and 1998, respectively.
An operating reserve fund is required to be funded from capital
contributions of the Limited Partner in the amount of $20,000. No deposits have
been made into the operating reserve fund as of December 31, 1999.
NOTE 8 - PARTNERSHIP PROFITS, LOSSES, AND DISTRIBUTIONS
Profits, losses, and tax credits generally are to be allocated to the
Partners' in accordance with their ownership interests.
Cash flow, as defined in the partnership agreement, is to be distributed as
follows:
1. 50% to pay operating deficit loans.
Of the remaining cash flow:
1. 75% to the General Partner as payment of the development note and
thereafter as payment of the partnership administration fee.
2. 25% to the Limited Partner.
Beginning in 1996, to the extent that there is not sufficient cash flow to
distribute at least $3,000 to the Limited Partner, the General Partner or the
management agent is required to fund the shortfall to the Limited Partner. No
amounts were funded or advanced as of December 31, 1999.
Gain from a capital transaction is allocable as follows:
1. To the extent proceeds are available, to all Partners' having negative
capital account balances, an amount equal to such Partners' negative
balance.
2. To each Partner in the amount and to the extent necessary to increase their
capital accounts so that proceeds from the transaction are distributed in
accordance with the Partners' respective capital accounts.
Loss from a capital transaction is allocable as follows:
1. To the Partners in proportion to their positive capital account balances.
2. To the Partners in accordance with the manner in which they bear an
economic risk of such loss.
NOTE 9 - CONTINGENCY
The project's low income housing credits are contingent on its ability to
maintain compliance with applicable sections of Section 42. Failure to maintain
compliance with occupant eligibility, and/or gross rent, or to correct
noncompliance within a specified time period could result in recapture of
previously taken tax credits plus interest. In addition, such potential
noncompliance may require an adjustment to the capital contributed by the
Limited Partner.
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and notes payable.
The Partnership estimates that the fair value of all its financial instruments
does not differ materially from their aggregate carrying values in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Partnership using available market information and appropriate
valuation methodologies. Considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value, and
accordingly, the estimates are not indicative of the amounts that the
Partnership could realize in a current market exchange. None of the financial
instruments are held for trading purposes.
Page 87
<PAGE>
Statement of
Profit and Loss
Department of Housing and Urban Development
Office of Housing
Federal Housing Commissioner
OMB Approval No. 2502-
0052 (Exp. 1/31/95)
Public Reporting Burden for this collection of information is estimated to
average 1.0 hours per response, including the time for reviewing instructions,
searching existing datasources, gathering and maintaining the data needed, and
completing and reviewing the collection of information. Send comments regarding
this burden estimate or any other aspect of this collection of information,
including suggestions for reducing this burden, to the Reports Management
Officer, Office of Information Policies and Systems, U.S. Department of Housing
and urban Development, Washington, D.C. 20410-3600 and to the Office of
management and Budget, Paperwork Reduction Project (2502-0052), Washington, D.C.
20503. Do not send this completed form to either of these addresses.
<TABLE>
For Month/Period
Beginning: 1/1/99
Ending: 12/31/99
<S> <C> <C> <C>
Part I Description of Account Acct. No. Amount*
---------------------------------------------------------------------------------------------
Apartments or Member Carrying Charges (Coops) 5120 $89,935
Tenant Assistance Payments 5121
Rental Furniture and Equipment 5130
Income Stores and Commercial 5140
5100 Garage and Parking Space 5170
Flexible Subsidy Income 5180
Miscellaneous (specify) 5190
Total Rent Revenue Potential at 100% Occupancy $89,935
---------------------------------------------------------------------------------------------
Apartments 5220
Furniture and Equipment 5230
Vacancies Stores and Commercial 5240
5200 Garage and Parking Spaces 5270
Miscellaneous (specify) 5290
Total Vacancies 0
Net rental Revenue Rent Revenue Less Vacancies $89,935
---------------------------------------------------------------------------------------------
Elderly and Congregate Services Income 5300
Total Service Income (Schedule Attached) 5300
Interest Income-Project Operations 5410 $160
Financial Income from Investments-Residual Receipts 5430
Revenue Income from Investments-Reserve for Replacements 5440
5400 Income from Investments-Miscellaneous 5490
Total Financial Revenue $160
---------------------------------------------------------------------------------------------
Laundry and Vending 5910 $640
NSF and Late Charges 5920
Other Damages and Cleaning Fees 5930
Revenue Forfeited Tenant Security Deposits 5940
5900 Other Revenue (specify) 5990 $17,958
Total Other Revenue $108,693
Total Revenue $18,598
---------------------------------------------------------------------------------------------
Advertising 6210 $ 541
Other Administrative Expense 6250 $190
Office Salaries 6310
Office Supplies 6311 $374
Office or Model Apartment Rent 6312
Administrative Management 6320
Expenses Manager or Superintendent Salaries 6330
6200/6300 Manager or Superintendent Rent Free Unit 6331
Legal Expenses (Project) 6340 $4,764
Auditing Expenses (Project) 6350 $12,103
Bookkeeping Fees/Accounting Services 6351
Telephone and Answering Service 6360 $1,335
Bad Debts 6370
Miscellaneous Administrative Expenses (specify) 6390 $2,028
Total Administrative Expenses $21,335
---------------------------------------------------------------------------------------------
Fuel Oil/Coal 6420
Utilities Electricity (Light and Misc. Power) 6450 $8,199
Expense Water 6451 $6,942
6400 Gas 6452 $14,589
Sewer 6453 $4,569
Total Utilities Expense $34,299
---------------------------------------------------------------------------------------------
Page 88
<PAGE>
---------------------------------------------------------------------------------------------
Janitor and Cleaning Payroll 6510
Janitor and Cleaning Supplies 6515 $3,441
Janitor and Cleaning Contract 6517
Exterminating Payroll/Contract 6519
Exterminating Supplies 6520
Garbage and Trash Removal 6525 $4,452
Security Payroll/Contract 6530
Grounds Payroll 6535
Grounds Supplies 6536
Operating and Grounds Contract 6537
Maintenance Repairs Payroll 6540
Expenses Repairs Material 6541 $3,335
6500 Repairs Contract 6542
Elevator Maintenance/Contract 6545 $2,072
Heating/Cooling Repairs and Maintenance 6546
Swimming Pool Maintenance/Contract 6547
Snow Removal 6548
Decorating Payroll/Contract 6560
Decorating Supplies 6561
Other 6570 $1,391
Miscellaneous Operating and Maintenance Expenses 6590
Total Operating and Maintenance Expenses $14,691
---------------------------------------------------------------------------------------------
Real Estate Taxes 6710 $13,879
Payroll Taxes (FICA) 6711
Miscellaneous Taxes, Licenses and Permits 6719
Taxes Property and Liability Insurance (Hazard) 6720 $5,529
and Fidelity Bond Insurance 6721
Insurance Workers' Compensation 6722
6700 Health Insurance and Other Employee Benefits 6723
Other Insurance (specify) 6729
Total Taxes and Insurance $19,408
---------------------------------------------------------------------------------------------
Interest on Bonds Payable 6810
Interest on Mortgage Payable 6820 $32,000
Financial Interest on Notes Payable (Long-Term) 6830 $14,001
Expenses Interest on Notes Payable (Short-Term) 6840
6800 Mortgage Insurance Premium/Service Change 6850
Miscellaneous Financial Expenses 6890 $ 1,430
Total Financial Expenses $47,431
---------------------------------------------------------------------------------------------
Elderly & Total Service Expenses-Schedule Attached 6900
Congregate Total Cost of Operations Before Depreciation $137,164
Services Profit ((Loss) Before Depreciation ($28,471)
6900 Expenses Depreciation (Total)-6600 (specify) 6600 $42,956
Operating Profit or (Loss) $(71,427)
---------------------------------------------------------------------------------------------
Officer Salaries 7110
Corporate or Legal Expenses (Entity) 7120
Mortgagor Taxes (Federal-State-Entity) 7130-32
Entity Other Expenses (Entity) 7190
Expenses Total Corporate Expenses $0
7100 Net Profit or (Loss) $(71,427)
---------------------------------------------------------------------------------------------
</TABLE>
Warning: HUD will prosecute false claims and statements. Conviction may result
in criminal and/or civil penalties. (16 U.S.C. 1001, 1010, 1012; 31 U.S.C. 3729,
3802)
Miscellaneous or other Income and Expense sub-account Groups. If miscellaneous
or other income and/or expense sub-accounts (5190, 5290, 5490, 5990, 5390, 6590,
6729, 6890, and 7190) exceed the Account Groupings by 10% or more, attach a
separate schedule describing or explaining the miscellaneous income or expense.
Part II
1. Total principal payments required under the mortgage, even if payments
under the Workout Agreement are less or more than those required under the
mortgage NONE
2. Replacement Reserve deposits required by the Regulatory Agreement or
Amendments thereto, even if payments may be temporarily suspended or
waived. NONE
3. Replacement or Planting Reserve releases which are included as expense
items on this Profit and Loss statement. NONE
4. Project Improvement Reserve Releases under the Flexible Subsidy Program
that are included as expense items on this profit and Statement. N/A
Page 89
<PAGE>
ITEM 5. AUDITED FINANCIAL STATEMENTS FOR MIDDLEBURY/ELKHART, L.P. FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998
INDEPENDENT AUDITORS' REPORT
To the Partners of
Middlebury Elkhart, L.P.
We have audited the balance sheets of Middlebury Elkhart, L.P., as of
December 31, 1999 and 1998, and the related statements of operations, partners'
equity and cash flows for the years ended December 31, 1999 and 1998. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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, the financial statements referred to above present fairly,
in all material respects, the financial position of Middlebury Elkhart, L.P., as
of December 31, 1999 and 1998, and the results of its operations, changes in
partners' equity and cash flows for the years then ended in conformity with
generally accepted accounting principles.
Thomas Stephen & Company, LLP
March 10, 2000
Page 90
<PAGE>
MIDDLEBURY/ELKHART, LP
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
--------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 29,690 $ 332,151
Working capital reserves 66,145 64,738
Tenant receivables 10,155 -
Subscriptions receivable 212,102 -
Due from general partner 4,372 -
---------- ----------
TOTAL CURRENT ASSETS 322,464 396,889
---------- ----------
RESTRICTED DEPOSITS AND FUNDED RESERVES
Restricted mortgage funds 1,229,877 2,176,840
Replacement reserves 203,294 -
Demolition escrow - 10,000
Operating deficit reserves 153,120 -
---------- ----------
TOTAL RESTRICTED DEPOSITS/RESERVES 1,586,291 2,186,840
---------- ----------
RENTAL PROPERTY
Land 87,823 70,000
Buildings 1,916,961 797,527
Furniture, fixtures and equipment 30,591 29,096
Construction in progress 389,293 216,667
---------- ----------
2,424,668 1,113,290
Less accumulated depreciation (39,166) (927)
---------- ----------
NET RENTAL PROPERTY 2,385,502 1,112,363
---------- ----------
OTHER ASSETS
Bond issuance costs, net 248,207 278,250
Loan financing fees, net 106,784 110,466
---------- ----------
TOTAL OTHER ASSETS 354,991 388,716
---------- ----------
TOTAL ASSETS $4,649,248 $4,084,808
---------- ----------
Page 91
<PAGE>
MIDDLEBURY/ELKHART, LP
BALANCE SHEETS (Continued)
December 31, 1999 and 1998
LIABILITIES AND PARTNERS' EQUITY
1999 1998
--------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 3,578 $ 47,353
Contractor payable 171,303 -
Current portion of mortgage payable 20,140 -
Real estate taxes payable 48,184 52,627
Accrued interest 9,569 -
Prepaid rent 3,318 -
Advances from general partner - 146,978
---------- ----------
TOTAL CURRENT LIABILITIES 256,092 246,958
---------- ----------
TENANT SECURITY DEPOSITS 10,575 10,845
---------- ----------
LONG-TERM LIABILITIES
Note payable 3,216,760 3,236,900
Developer fees payable 56,509 38,689
---------- ----------
TOTAL LONG-TERM LIABILITIES 3,273,269 3,320,589
---------- ----------
TOTAL LIABILITIES 3,539,936 3,578,392
---------- ----------
PARTNERS' EQUITY 1,109,312 506,416
---------- ----------
TOTAL LIABILITIES AND PARTNERS' EQUITY 4,649,248 4,084,808
---------- ----------
Page 92
<PAGE>
MIDDLEBURY/ELKHART, LP
STATEMENT OF OPERATIONS
December 31, 1999 and 1998
1999 1998
--------------------------------------------------------------------------------
REVENUES
Rental income $ 515,730 $ 18,215
Other tenant income 8,301 -
Interest income 8,005 -
---------- ----------
Total Revenues 532,036 18,215
---------- ----------
EXPENSES
Administrative 133,889 4,878
Utilities 72,819 340
Maintenance 71,578 -
Property Management Fees 31,442 -
Taxes 53,607 3,654
Insurance 42,137 -
Interest 35,290 -
Depreciation and amortization 50,480 927
---------- ----------
Total Expenses 491,242 9,799
---------- ----------
NET INCOME $ 40,794 $ 8,416
---------- ----------
Page 93
<PAGE>
MIDDLEBURY/ELKHART, LP
STATEMENT OF PARTNERS' EQUITY
December 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C>
General Investor Administrative
Partner Limited Limited
Partner Partner Total
------------------------------------------------------------------------------------------------
Contributions $ - $ 498,000 $ - $ 498,000
Net Income 8 8,407 1 8,416
---------- ---------- ---------- ----------
Balance at Dec. 31, 1998 8 506,407 1 506,416
---------- ---------- ---------- ----------
Contributions - 350,000 - 350,000
Subscriptions receivable - 212,102 - 212,102
Net Income 40 40,750 4 40,794
---------- ---------- ---------- ----------
Balance at Dec. 31, 1999 $ 48 $1,109,259 $ 5 $1,109,312
---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
Page 94
<PAGE>
MIDDLEBURY/ELKHART, LP
STATEMENTS OF CASH FLOWS
December 31, 1999 and 1998
1999 1998
--------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 40,794 $ 8,416
----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 50,480 927
Increase (decrease) in accounts payable (43,775) 1,353
Increase in operating escrows (154,526) (64,738)
Increase (decrease) in real estate taxes payable (4,443) 3,564
Increase in interest payable 9,569 -
Decrease in security deposits (270) -
Increase in accounts receivable (10,155) -
Decrease in advances from related parties, net (142,606) -
Increase in prepaid rent 3,318 -
Total adjustments (292,408) (58,894)
----------- -----------
Net cash used in operating activities (251,614) (50,478)
----------- -----------
Cash flows from investing activities
Increase in replacement reserves (203,294) -
Increase (decrease) in project improvement fund 10,000 (10,000)
Payments for rental property (1,088,056) (801,715)
Construction in progress expenditures (66,460) (50,000)
----------- -----------
Net cash used in investing activities (1,347,810) (861,715)
----------- -----------
Cash flows from financing activities
Partner's capital contributions 350,000 498,000
Cash payments for bond issuance costs - (203,250)
Cash payments for financing costs - (110,466)
Proceeds from issuance of long-term debt 946,963 1,060,060
----------- -----------
Net cash provided by financing activities 1,296,963 1,244,344
----------- -----------
Net increase in cash and cash equivalents (302,461) (332,151)
----------- -----------
Cash and equivalents, beginning of year 332,151 -
----------- -----------
Cash and equivalents, end of year 29,690 332,151
----------- -----------
Supplemental disclosures of cash flow information
Cash paid during year for interest $ 77,753 $ -
----------- -----------
See notes to financial statements.
Page 95
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION
Middlebury Elkhart, L.P. (the "Partnership") was formed in Indiana on July
21, 1997. Under the terms of the Amended and Restated Agreement of Limited
Partnership dated December 1, 1998 (the "Partnership Agreement"), the general
partner is Prairie Village- Homes for America, Inc. (the "General Partner"), the
investor limited partner is Alliant Tax Credit Fund V Limited Partnership (the
"Investor Limited Partner") and the administrative limited partner is Alliant
Tax Credit V, Inc. (the "Administrative Limited Partner").
The Partnership was organized to acquire, rehabilitate and operate a
120-unit apartment building (including land), in Elkhart, Indiana, for rental to
low-income tenants (the "Project"). The Project was acquired on December 16,
1998 and the rehabilitation is expected to be completed in 2000.
The Project has applied to receive an allocation of low income housing tax
credits from the Indiana Housing Finance Authority under Section 42 of the
Internal Revenue Code of 1986, as amended. As such, the Project is required to
lease a minimum of 40% of its units to families whose income is 60% or less of
the area median gross income.
The Project is financed and constructed under Section 221(d)(4) of the
National Housing Act, as amended, and is administered by the U.S. Department of
Housing and Urban Development (HUD). Under this program the Partnership provides
housing to the low and moderate income, subject to regulation by HUD as to
rental charges and operating methods. Section 221(d)(4) is a major HUD program.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the partnership are prepared on the accrual
basis of accounting and in accordance with generally accepted accounting
principles.
Rental Property
Land, buildings, furniture and equipment is recorded at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets as follows:
Buildings and Improvements 40 years
Furniture and Fixtures 7 years
Equipment 5 years
Improvements are capitalized, while expenditures for maintenance and
repairs are charged to expense as incurred.
Amortization
Bond issuance costs of $256,766 and permanent financing costs of $110,466
were capitalized and will be amortized using the straight-line method over the
30-year life of the mortgage and related bonds.
Income Taxes
No federal income taxes are payable by the Partnership and none have been
provided in the accompanying financial statements. The partners are to include
their respective share of Partnership income or loss in their separate tax
returns.
The Partnership's tax returns are subject to examination by Federal taxing
authorities. The tax laws rules and regulations governing these returns are
complex, technical and subject to varying interpretations. If an examination
required the partnership to make adjustments, the profits or losses allocated to
the partners would be adjusted accordingly. No examination is currently in
process.
Rental Income
Rental income is recognized as rentals become due under the terms of
operating leases with Project tenants. Rental payments received in advance are
deferred until earned.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements.
Actual results could differ from those estimates.
Page 96
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Partnership considers
investments purchased with an original maturity of three months or less to be
cash equivalents.
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform to their 1999 presentation.
NOTE 3 - LONG TERM DEBT
To partially finance the acquisition and renovation of the Project, on
December 15, 1998, the Partnership entered into a $3,236,900 HUD-insured Section
221(d)(4) mortgage loan agreement with Patrician Financial Company Limited
Partnership (the "Lender") relating to the issuance of $2,380,000 Tax-Exempt
Multifamily Housing Mortgage Revenue Refunding Bonds Series 1998A and $850,000
Taxable Multifamily Housing Mortgage Revenue Refunding Bonds Series 1998B (the
"Bonds"). The Bonds are GNMA Collateralized and are issued by the City of
Elkhart, Indiana. The bonds are assigned to Chase Manhattan Trust Company,
National Association, as trustee.
The loan bears interest at 5.85% per annum with interest only monthly
payments due through June 2000. Beginning in July 2000, monthly principal and
interest payments of $19,096 are payable for 30 years. The mortgage loan is
non-recourse to the Partnership's General Partner and is secured by the
Partnership's rental property and future rental revenues.
The loan agreement requires monthly payment of principal and interest
sufficient to meet sinking fund requirements for payment of amounts due under
the bonds based on their varying maturities and interest rates. Principal
amounts, maturity dates and interest rates on the Series A Bonds are as follows:
(1) $420,000 on May 20, 2018 at 5.25% and (2) $1,960,000 on May 20, 2030 at
5.35%. Principal amounts, maturity dates and interest rates on the Series B
Bonds are as follows: (1) $385,000 on May 20, 2008 at 6.125% and (2) $465,000 on
May 20, 2014 at 6.60%.
Required repayments of principal on the mortgage note for the next five
years are as follows:
December 31, 2000 $ 20,140
2001 42,086
2002 44,615
2003 47,296
2004 50,138
Thereafter 3,032,625
----------
Total $3,236,900
----------
NOTE 4 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP
Capital Contributions and Allocations of Profit, Loss, Tax Credits, and
Cash Flow
The General Partner and the Administrative Limited Partner are to
contribute $100 each for a .1% interest and .01% interest, respectively, in the
Partnership. The Limited Partner is to contribute $1,060,506 for a 99.89%
interest in the Partnership. The Investor Limited Partner contributed $498,000
in 1998 and $350,000 in January 1999. The final installment of $212,102 is
payable upon the later of: (1) closing and funding of the mortgage loan (2)
construction completion (3) issuance of occupancy certificates (4) completion of
cost certification (5) issuance by the Tax Credit Agency of Forms 8609 and (6)
rental achievement, as defined. During 1999 the Partnership's management elected
to record the remaining $212,102 capital contribution as a subscription
receivable.
Profits, losses, and tax credits generally are to be allocated to the
partners in accordance with their ownership interests.
Page 97
<PAGE>
NOTE 4 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Cash from operations, as defined, is to be distributed annually as follows:
1. To the Investor Limited Partner for any unpaid tax credit shortfall;
2. To the payment of any interest on voluntary partner loans;
3. To the payment of any principal on voluntary partner loans;
4. To the payment of any unpaid Asset Management Fees;
5. To the payment of any unpaid Developer Fees;
6. To the payment of any fees pursuant to the Supervisory Agent and
Incentive Management Agreement and;
7. The balance to be paid 80% to the General Partner, .01% to the
Administrative Limited Partner and 19.99% to the Investor Limited Partner.
NOTE 4 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP
(Continued)
Guaranty of Tax Credits
Under the terms of the Partnership Agreement, the General Partner has the
duty to use its best efforts to ensure that the Partnership qualifies for the
maximum lawful low-income- housing tax credits. In the event that actual
low-income-housing tax credits accruing to the benefit of the Investment Limited
Partner are less than the amount of credits that were projected at the formation
of the Partnership, the contributions of capital otherwise required of the
Investment Limited Partner may be reduced, or constructive advances deemed made,
in accordance with applicable provisions of the Partnership Agreement.
Operating Deficit and Completion Guarantees
The General Partner is obligated to make loans to the Partnership as
necessary to fund operating expenses, debt service payments, reserve and escrow
accounts, capital improvements and maintenance expenses that occur during
certain specified periods, as defined. Additionally, the General Partner has
guaranteed to fund any cost overruns necessary to complete the Project. Any such
loans bear no interest, and are repayable in accordance with provisions of the
Partnership Agreement.
Operating Deficit and Replacement Reserves
The Partnership funded a $150,000 operating deficit reserve from the
proceeds of the mortgage loan. The operating reserve must be funded at this
level for the first two years of operation.
Pursuant with terms of the HUD regulatory agreement and upon mortgage
closing, the Partnership funded a $200,000 repair and replacement reserve for
capital improvements and repairs. Monthly payments of $1,079 are required
concurrent with the beginning of mortgage principle amortization. No replacement
reserves were funded during 1999.
The operating deficit and replacement reserve escrows were funded in
January 1999 from the proceeds of an Investor Limited Partner capital
contribution. The operating deficit and replacement reserve funds held $153,120
and $203,294, respectively, as of December 31, 1999.
NOTE 5 - TRANSACTIONS WITH RELATED PARTIES
Amounts due to/from related parties at December 31, 1999 and 1998 in the
accompanying balance sheet, consist of the following:
1999 1998
--------------------------------------------------------------------------------
Developer Fees due General Partner $ 56,509 $ 83,689
Advances from General Partner-Acquisition 146,978
Advances to General Partner (4,372) -
----------- -----------
$ 52,137 $ 230,667
----------- -----------
Page 98
<PAGE>
NOTE 5 - TRANSACTIONS WITH RELATED PARTIES (Continued)
Advances from General Partner
At December 31, 1998, the General Partner had made non-interest bearing
advances of $146,978 to fund project acquisition costs.
Development Fees
On August 1, 1998, the Partnership entered into a Development Agreement
with the General Partner to render development services for construction of the
Project. The total fee due under the agreement is $236,092. As of December 31,
1999 and 1998 $155,732 and $83,689 had been earned, respectively, and recorded
as construction in progress on the accompanying balance sheet. The unpaid
developer fee of $56,509 and $83,689 as of December 31, 1999 and 1998,
respectively, is included as a long-term liability on the accompanying balance
sheets. The liability is non-interest bearing and will be repaid out of
distributable cash from operations, as defined.
Supervisory Agent and Incentive Management Fee
The Partnership has entered into a supervisory management and incentive
agreement with the General Partner for its services in managing and directing
the business of the Partnership and the Project. Commencing in 1999 the
Partnership shall pay the General Partner an annual fee equaling 80% of net cash
flow, as defined. The fee shall not exceed 12% of gross rental income and is
paid subject to the Partnership Agreement distributable cash flow, as defined.
No supervisory management fees or incentive management fees were paid during
1999 and 1998.
Asset Management Fee
Commencing in 1999, the Partnership is obligated to pay the Investor
Limited Partner an annual $7,500 asset management fee for its services in
monitoring the operations of the property. The fee adjusts annually by the
consumer price index and is subject to the Partnership Agreement distributable
cash flow, as defined. No asset management fees were paid during 1999 and 1998.
NOTE 6 - CONCENTRATIONS OF RISK
The Partnership obtains a credit report on prospective tenants prior to
entering into a lease agreement and generally requires a security deposit equal
to a portion of one month's rent. Credit risk associated with leases is limited
to the amount of rent receivable from tenants less security deposits.
NOTE 7 - PROPERTY MANAGEMENT FEES
The Partnership entered into a property management agreement with a third
party to operate, manage and lease the property during an interim period. During
1999, an affiliate of the General Partner assumed management of the Property
under the same terms. Total property management fees paid during 1999 were
$31,442 (6% of gross receipts), of which, $18,771 was paid to a related party.
NOTE 8 - TAX EXEMPT STATUS
The tax-exempt status of the interest on the Bonds is conditioned upon the
Partnership complying with the Internal Revenue Code, as amended, and applicable
Treasury Regulations as they relate to the issuance of the Bonds. In addition to
the requirements relating to the renting of units to persons of low to moderate
income, the Partnership must make rehabilitation expenditures in an amount equal
to at least 15% of the cost of acquiring the Project buildings. Failure to
comply may result in the loss of tax-exempt status of the interest on the Bonds
retroactive to their issuance. As of December 31, 1999, the Partnership's
management believes the Partnership has maintained these requirements.
NOTE 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and notes payable.
The partnership estimates that the fair value of all its financial instruments
does not differ materially from their aggregate carrying values in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the partnership using available market information and appropriate
valuation methodologies. Considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that
the Partnership could realize in a current market exchange. None of the
financial instruments are held for trading purposes.
Page 99
<PAGE>
NOTE 10- RESTRICTED CASH
At December 31, 1998, the Partnership funded a $10,000 demolition escrow
held by the Lender for payment of project rehabilitation costs. The funds were
disbursed during 1999 to renovate the project. Additionally, the project has
funded $66,145 and $64,738 of operating reserves held by the lender at December
31, 1999 and 1998, respectively, to satisfy Project operating and mortgage loan
requirements.
At December 31, 1999 and 1998, the Lender held $1,229,877 and $2,176,840,
respectively, of cash restricted for mortgage loan proceeds to the Partnership.
The remaining balance will be loaned to the Partnership in 2000 to fund the
renovation of the Project.
NOTE 11 - UNINSURED CASH BALANCES
The Partnership may at times maintain cash balances at financial
institutions which exceed amounts covered by insurance provided by the U.S.
Federal Deposit Insurance Corporation (FDIC). The maximum loss that would have
resulted from that risk totaled $232,151 at December 31, 1998. The Partnership
has not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk to cash.
NOTE 12 - CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Partnership's sole asset is the Project. The Partnership's operations
are concentrated in the multifamily real estate market. In addition, the
Partnership operates in a heavily regulated environment. The operations of the
Partnership are subject to administrative
NOTE 12 - CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS (Cont'd)
directives, rules and regulations of federal, state and local regulatory
agencies, including, but not limited to, HUD. Such administrative directives,
rules and regulations are subject to change by an act of congress or an
administrative change mandated by HUD. Such changes may occur with little notice
or inadequate funding to pay for the related cost, including the additional
administrative burden, to comply with a change.
NOTE 13 - REGULATORY AGREEMENT PROVISIONS
Under provisions of the HUD Regulatory Agreement for Multifamily Housing
Projects dated December 15, 1998, the Partnership is required to maintain tenant
security deposits in a trust account separate from other funds of the Project.
The amount shall at all times equal or exceed the aggregate of all outstanding
obligations under said account. At December 31, 1999, the Project had security
deposit liabilities of $10,575, of which, none were being held in separate
trust. The Partnership's management intends to fund the security deposit
shortfall during 2000.
Page 100
<PAGE>
ITEM 6. STATEMENTS OF REVENUE AND CERTAIN EXPENSES FOR LAKE'S EDGE APARTMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (AUDITED)
AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Homes for America Holdings, Inc.
We have audited the accompanying Statement of Revenue and Certain Expenses
of Lakes Edge Apartments (the Property) as described in Note 2 for the year
ended December 31, 1998. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free from material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures made in the Statement of
Revenue and Certain Expenses. An audit also includes assessing the basis of
accounting used and significant estimates made by management, as well as
evaluating the overall presentation of the Statement of Revenue and Certain
Expenses. We believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a Current Report on Form 8-K of Homes for
America Holdings, Inc. as described in Note 1, and is not intended to be a
complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses described in Note 1 of the Property for the year ended December 31,
1998, in conformity with generally accepted accounting principles.
Rappaport, Steele & Company, P.C.
New York, New York
May 3, 2000
Page 101
<PAGE>
LAKES EDGE APARTMENTS
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
January 1, 1999
Year Ended Through
December 31, 1998 June 30, 1999
--------------------------------------------------------------------------------
REVENUE
Base Rents $ 2,681,083 $ 1,441,969
Total Reimbursements 99,351 55,938
------------- -------------
Total Revenue 2,780,434 1,497,907
------------- -------------
EXPENSES
Property Operating and Maintenance 1,194,721 568,959
Real Estate Taxes 318,579 153,654
Management Fees 110,548 60,071
Insurance 38,094 12,977
------------- -------------
Total Expenses 1,661,942 795,661
------------- -------------
Revenue in Excess of Certain Expenses $ 1,118,492 $ 702,246
------------- -------------
See accompanying notes.
Page 102
<PAGE>
LAKES EDGE APARTMENTS
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying statements of revenue and certain expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a Current Report on Form 8-K of Homes
for America Holdings, Inc. The accompanying statements are not representative of
the actual operations of the property, as described in Note 2, for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation, amortization and interest expense, which may not be comparable to
the expenses expected to be incurred by Homes for America, Inc. in future
operations of the property, have been excluded.
Revenue and Expense Recognition
Rental revenue is recognized on a cash basis as it is received. Expenses
are recognized in the period in which they are incurred.
Use of Estimates
The preparation of the statements of revenue and certain expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of the revenue
and certain expenses during the reporting periods. Actual results could differ
from these estimates.
Compiled Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
NOTE 2 - DESCRIPTION OF PROPERTY
The accompanying statements of revenue and certain expenses relate to the
operations of Lakes Edge Apartments, an apartment complex with 400 units located
in Miami, Florida. Lakes Edge Homes Holdings, Inc., acquired the property and
related Florida Multifamily Housing Revenue Bonds on June 30, 1999 for
approximately $14,025,000 from an unrelated party.
NOTE 3 - RENTALS
The property has entered into tenant leases that provide for tenants to pay
monthly rent as defined in the lease. Garbage collection and cable are provided
to tenants at no extra charge.
Page 103
<PAGE>
ITEM 7. STATEMENTS OF REVENUE AND CERTAIN EXPENSES FOR COUNTRY LAKE APARTMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (AUDITED)
AND FOR THE TEN MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED)
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Homes for America Holdings, Inc.
We have audited the accompanying Statement of Revenue and Certain Expenses
of Country Lake Apartments (the Property) as described in Note 2 for the year
ended December 31, 1998. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free from material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures made in the Statement of
Revenue and Certain Expenses. An audit also includes assessing the basis of
accounting used and significant estimates made by management, as well as
evaluating the overall presentation of the Statement of Revenue and Certain
Expenses. We believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a Current Report on Form 8-K of Homes for
America Holdings, Inc. as described in Note 1, and is not intended to be a
complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses described in Note 1 of the Property for the year ended December 31,
1998, in conformity with generally accepted accounting principles.
Thomas Stephen & company, LLP
March 30, 2000
Page 104
<PAGE>
COUNTRY LAKE APARTMENTS
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
January 1, 1999
Year Ended Through
December 31, 1998 October 31, 1999
--------------------------------------------------------------------------------
REVENUE
Base rents $ 1,420,960 $ 1,237,091
Tenant reimbursements 54,716 74,541
------------- -------------
Total revenue 1,475,676 1,311,632
------------- -------------
EXPENSES
Property operating and maintenance 514,718 431,191
Real estate taxes 158,421 139,650
Management fee 57,413 51,609
Insurance 15,362 9,549
------------- -------------
Total expenses 745,914 631,999
------------- -------------
Revenue in excess of certain expenses $ 729,762 $ 679,633
------------- -------------
See accompanying notes
Page 105
<PAGE>
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying statements of revenue and certain expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a Current Report on Form 8-K of Homes
for America Holdings, Inc. The accompanying statements are not representative of
the actual operations of the property, as described in Note 2, for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation, amortization and interest expense, which may not be comparable to
the expenses expected to be incurred by Homes for America, Inc. in future
operations of the property, have been excluded.
Revenue and Expense Recognition
Rental revenue is recognized as rentals become due under the terms of
operating leases with tenants. Expenses are recognized in the period in which
they incurred.
Use of Estimates
The preparation of the statements of revenue and certain expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of the revenue
and certain expenses during the reporting periods. Actual results could differ
from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
NOTE 2 - DESCRIPTION OF PROPERTY
The accompanying statements of revenue and certain expenses relate to the
Operations of County Lakes Apartments, an apartment complex with 192 units
located in West Palm Beach, Florida. Country Lake-Homes Holdings, Inc., acquired
the property and related Florida Multifamily Housing Revenue Bonds on November
9, 1999 for approximately $10,100,000 from an unrelated party.
NOTE 3 - RENTALS
The property has entered into tenant leases that provide for tenants to pay
monthly rent as defined in the lease. Garbage collection and cable are provided
to tenants by the property.
NOTE 4 - TRANSACTIONS WITH RELATED PARTIES
Pursuant to the property management agreement in effect during 1998, an
affiliate of the owner was retained to operate, manage, and lease the property.
For the year ended December 31, 1998 management fees earned and paid were
$51,609 which represented 4% of collected revenues.
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ITEM 8. PRO FORMA STATEMENT OF OPERATIONS FOR THE COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1998
Introduction to Pro Forma Statements of Operations
The Pro Forma statement dated December 31, 1998 reflects the Company's
results of operations on a pro forma basis assuming the Briar Meadows, Prairie
Village, and Lakes Edge acquisitions were completed effective January 1, 1998.
Page 107
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------------------------------------------
Homes For America Holdings, Inc.
Pro Forma Statement of Operations
Year Ended December 31, 1998
(Unaudited)
------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
As Reported Briar Prairie Lakes Adjustments Pro Forma
12/31/98 Meadows Village Edge DR CR 12/31/98
----------- ------------ ------------ ------------ ----------- ------------ ------------
Revenues
Rental Income $ 2,400,036 $609,174 $ 578,514 $ 2,771,455 $ 6,359,179
R.E. Development Fees 1,722,211 0 0 1,722,211
Interest Income 56,398 0 0 56,398
Other Income 55,222 18,000 6,500 79,722
------------ ------------ ------------ ------------ ----------- ------------ ------------
Total Income 4,233,867 627,174 585,014 2,771,455 8,217,510
------------ ------------ ------------ ------------ ----------- ------------ ------------
Expenses
Administrative Expenses 1,227,421 127,047 72,000 645,225 $ 29,667 2,042,026
Maint. & Oper. Expenses 332,947 71,650 125,526 338,475 33,926 834,672
Utilities 554,915 96,000 50,000 363,981 1,064,896
Taxes and Insurance 201,506 56,400 86,500 384,232 728,638
Interest Expenses 558,293 89,813 220,536 1,848,591 2,717,233
Depreciation & Amortization 415,665 47,580 38,316 693,939 1,195,500
------------ ------------ ------------ ------------ ----------- ------------ ------------
Total Expenses 3,290,747 488,490 592,878 4,274,443 63,593 8,582,965
------------ ------------ ------------ ------------ ----------- ------------ ------------
Income Before Minority 943,120 138,684 (7,864) (1,502,988) (429,048)
Minority Int. In Net Loss 243,503 (137,297) 7,785 1,487,958 1,601,949
------------ ------------ ------------ ------------ ----------- ------------ ------------
Income Before Prov. Inc. Tax. 1,186,623 1,387 (79) (15,030) 1,172,901
Provision For Inc. Tax 398,700 466 (27) (5,050) 394,089
------------ ------------ ------------ ------------ ----------- ------------ ------------
Net Income $ 787,923 $ 921 $ (52) (9,980) $ 778,812
------------ ------------ ------------ ------------ ----------- ------------ ------------
</TABLE>
Notes to Pro Forma Financial Statements as of December 31, 1998
(1) The company acquired the assets of Briar Meadows Apartments in Dallas,
Texas at a cost of $ 1,050,000 and Prairie Village Apartments in Elkhart,
Indiana at a cost of $ 804,000. The company also acquired the assets of
Lakes Edge in North Miami, Florida at a cost of $15,106,423.
(2) Preparation of Pro Forma Financial Statements gives effect to the
depreciation of fixed assets as if they were acquired at the beginning of
the period. The Pro Forma Statements also contain adjustments to reflect
the elimination of management fee expenses paid to a third party as if the
transaction occurred at January 1, 1998.
Page 108
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ITEM 9. PRO FORMA STATEMENT OF OPERATIONS FOR THE COMPANY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Introduction to Pro Forma Statements of Operations
The Pro Forma statement dated June 30, 1999 reflects the Company's results
of operations on a pro forma basis assuming that the Lake's Edge acquisition was
completed effective January 1, 1999.
Page 109
<PAGE>
------------------------------------------
Homes For America Holdings, Inc.
Pro Forma Statement of Operations
Six Months Ended June 30, 1999
(Unaudited)
------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
As Reported Lakes Adjustments Pro Forma
6/30/99 Edge DR CR 6/30//99
------------ ------------ ------------ ------------ ------------
Revenues
Rental Income $ 1,775,430 $ 1,385,728 $ 3,161,158
R.E. Development Fees 73,631 73,631
Interest Income 925 925
Other Income 901,338 901,338
------------ ------------ ------------ ------------ ------------
Total Income 2,751,324 1,385,728 4,137,052
------------ ------------ ------------ ------------ ------------
Expenses
Administrative Expenses 795,952 322,613 $ 69,286 1,049,279
Maint. & Oper. Expenses 282,701 169,238 451,939
Utilities 371,507 181,991 553,498
Taxes and Insurance 158,573 192,116 350,689
Interest Expenses 318,896 924,296 1,243,192
Depreciation & Amortization 343,563 346,970 690,533
------------ ------------ ------------ ------------ ------------
Total Expenses 2,271,192 2,137,224 69,286 4,339,130
------------ ------------ ------------ ------------ ------------
Income Before Minority 480,132 (751,496) (271,364)
Minority Int. In Net Loss 193,025 743,981 937,006
------------ ------------ ------------ ------------ ------------
Income Before Prov. Inc. Tax. 673,157 (7,515) 665,642
Provision For Inc. Tax 185,500 (2,071) 183,429
------------ ------------ ------------ ------------ -----------
Net Income $ 487,657 $ (5,444) $ 482,213
------------ ------------ ------------ ------------ ------------
</TABLE>
Notes to Pro Forma Financial Statements as of June 30, 1999
(1) Preparation of Pro Forma Financial Statements gives effect to the
depreciation of fixed assets as if they were acquired at the beginning of
the period. The Pro Forma Statements also contain adjustments to reflect
the elimination management expenses paid to a third party as if the
transaction occurred at January 1, 1999.
(2) On June 30, 1999, Homes For America Holdings, Inc. acquired the 400-unit
Lake's Edge apartments in North Miami, Florida at a cost of $15,106,423.
This acquisition was accomplished through a wholly-owned subsidiary, Lakes
Edge Homes Holdings, Inc. In conjunction with this acquisition, Lakes Edge
Homes Holdings purchased 6.0% tax-exempt bonds for $14,025,000 and
immediately sold them for $14,850,000, earning $825,000 on the transaction.
Simultaneously, the Lake's Edge property was acquired for a purchase price
of $14,850,000, financed by the tax-exempt bond debt. Total investment,
including related acquisition costs, was $15,132,495. In addition to the
$825,000 gain on the sale of bonds, the Company earned and recognized
$73,631 in developer's fees.
Page 110
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PART III
ITEM 1. INDEX TO EXHIBITS
No. Description
-------------------------------------------------
3.1*
Articles of Incorporation
3.2
Amended and Restated By-Laws
10.1*
Amended and Restated Agreement of Limited Partnership of Dallas/Glen
Hills, L.P dated as of March 27, 1997.
10.2*
Capital Note dated March 27, 1997 of Related Corporate partners V, L.P.
10.3*
Promissory Note dated March 21, 1997 of Glen Hills Homes for America, Inc.
10.4*
Promissory Note dated February 8, 1996 for a loan to Dallas/Glen Hills,
L.P. from Hanover Capital Mortgage Corporation.
10.5*
Dallas/Glen Hills, L.P. First Amendment to Amended and Restated Agreement
of Limited Partnership.
10.6*
First Amendment to TVMJG 1996 - Putnam Square Limited Partnership Second
Amended and Restated Agreement of Limited Partnership.
10.6.1*
First Amendment to Certification and Agreement dated September 29, 1997.
10.6.2*
First Amendment to Partnership Administration Services Agreement dated
September 29, 1997.
10.6.3*
Promissory Note dated April 26, 1996 between TVMJG 1996 - Putnam Square
Limited Partnership and Donald Snyder.
10.6.4*
First Amendment to Commercial Promissory Note between TVMJG 1996 - Putnam
Square Limited Partnership and Joseph Gall.
10.7*
Agreement of Purchase and Sale dated March 28, 1997 between
Prairie-Middlebury Associates and the Company.
10.7.1*
Assignment of Agreement of Purchase and Sale dated July 24, 1997, amending
an Agreement of Purchase and Sale dated March 28, 1997, between
Prairie-Middlebury Associates and the Company.
10.7.2*
Amended and Restated Agreement of Limited Partnership of Middlebury
Elkhart, L.P. dated December 1, 1998
10.8*
Agreement of Purchase and Sale by and between BRE-N, Inc. and the Company
dated July 13, 1998.
10.9*
Contract of Sale dated November 2, 1998 between Legato Investments, Inc.
and the Company.
10.9.1*
Assignment of Contract of Sale dated December 1998 between
Arlington/Homes For America, Inc. and the Company.
10.10*
Agreement of Purchase and Sale by and between the Company and William C.
Mannix, DBA Mannix, Inc.
10.11*
Property Purchase Agreement dated March 24, 1999 between Lake's Edge
Partners, L.P. and Lakes Edge-Homes Holdings, Inc.
10.12*
Promissory Note dated July 29, 1998 between the Company and William
Kaplovitz, Jr.
Page 111
<PAGE>
10.13*
Consulting Agreement dated August 1, 1998 between the Company and
International Business & Realty Consultants, L.L.C.
10.14*
Employment Agreement dated August 1, 1998 between the Company and Mr.
Robert A. MacFarlane.
10.15*
Promissory Note dated June 23, 1999 between the Company and William
Marovitz.
10.16*
Promissory Note dated June 28, 1999 between the Company and William
Kaplovitz.
10.17*
Promissory Note dated March 3, 1999 between the Company and Actrade
Capital, Inc.
10.18*
Joint Venture Agreement between the Company and MasterBuilt, Inc.
10.19*
Convertible Promissory Note.
10.20*
Purchase and Sale Agreement between the Company and Villa Americana
Associates, Ltd., dated September 23, 1999
10.21*
Assignment and Assumption Agreement between the Company and Parkside
Associates, Inc. (et. al.), dated October 26, 1999.
10.22
Agreement of Purchase and Sale between the Company and Sherwood Glen
Willows Apartments Real Estate, LP.
10.23
Private Placement Memorandum dated December 9, 1999.
10.24
Agreement Between the Company and Investors dated June 30, 2000.
10.25
Agreement of Purchase and Sale Between the Company and Amherst Gardens
Associates.
11
Earnings Per Share.
16
Letter on Change in Certifying Accountant.
21
List of Subsidiaries.
27.1
Financial Data Schedule for the 12 Months Ending December 31, 1999.
27.2
Financial Data Schedule for the 6 Months Ending June 30, 2000.
----------
* Previously filed as exhibits to Amendment No. 1 to this Form 10-SB.
Page 112
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PART IV
ITEM 1: SIGNATURE PAGE
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Homes For America Holdings, Inc.
--------------------------------
(Registrant)
By: /s/ Robert A. MacFarlane
--------------------------------
Name: Robert A. MacFarlane
Title: President
November 10, 2000
--------------------------------
Dated:
Page 113
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