FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
ST. JOHN HOUSING ASSOCIATES
LIMITED PARTNERSHIP
DECEMBER 31, 1999, 1998 and 1997
<PAGE>
St. John Housing Associates Limited Partnership
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEETS 4
STATEMENTS OF PROFIT AND LOSS 6
STATEMENTS OF PARTNERS' EQUITY 7
STATEMENTS OF CASH FLOWS 8
NOTES TO FINANCIAL STATEMENTS 9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
St. John Housing Associates Limited Partnership
We have audited the accompanying balance sheets of St. John Housing
Associates Limited Partnership as of December 31, 1999 and 1998, and the related
statements of profit and loss, partners' equity and cash flows for the years
ended December 31, 1999, 1998 and 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our 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 St. John Housing
Associates Limited Partnership as of December 31, 1999 and 1998, and the results
of its operations, changes in partners' equity and cash flows for the years
ended December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
Bethesda, Maryland
February 10, 2000
3
<PAGE>
St. John Housing Associates Limited Partnership
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS
1999 1998
---- ----
CURRENT ASSETS
<S> <C> <C>
Cash - operations $ 231,404 $ 125,174
Cash - entity 9,637 8,495
Short-term investments - operations -- 97,275
Tenant accounts receivable 1,363 1,524
Miscellaneous prepaid expenses 17,159 17,014
Accounts receivable - HUD 74,369 --
Accounts and notes receivable - operations 9,600 --
---------- ----------
Total current assets 343,532 249,482
---------- ----------
DEPOSITS HELD IN TRUST - FUNDED
Tenant deposits 20,514 18,039
---------- ----------
RESTRICTED DEPOSITS AND FUNDED RESERVES
Escrow deposits 35,259 52,850
Reserve for replacements 275,135 233,689
---------- ----------
310,394 286,539
---------- ----------
RENTAL PROPERTY
Land 59,800 59,800
Land improvements 15,000 15,000
Buildings and improvements 8,018,620 8,018,620
Furniture and equipment 250,659 243,279
Motor vehicles 10,029 10,029
---------- ----------
8,354,108 8,346,728
Less accumulated depreciation 1,641,846 1,419,336
---------- ----------
6,712,262 6,927,392
---------- ----------
OTHER ASSETS
Intangible assets, net of accumulated amortization of
$30,203 and $26,792, respectively 81,678 85,089
---------- ----------
$7,468,380 $7,566,541
========== ==========
</TABLE>
(continued)
4
<PAGE>
<TABLE>
<CAPTION>
St. John Housing Associates Limited Partnership
BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND PARTNERS' EQUITY
1999 1998
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 14,900 $ 12,969
Prepaid rents 72,125 665
Accrued payroll taxes payable 1,508 1,548
Accrued interest payable 18,290 18,509
Accrued property taxes payable 88,500 85,000
Due to management company 7,701 4,861
Accounts payable - entity 121,250 82,867
Mortgages payable - current maturities 101,180 94,185
---------- ----------
Total current liabilities 425,454 300,604
---------- ----------
DEPOSITS LIABILITY
Tenant deposits held in trust (contra) 19,596 17,203
---------- ----------
LONG-TERM LIABILITIES
Mortgages payable 4,382,140 4,476,604
Less current maturities 101,180 94,185
---------- ----------
4,280,960 4,382,419
---------- ----------
CONTINGENCY -- --
PARTNERS' EQUITY 2,742,370 2,866,315
---------- ----------
$7,468,380 $7,566,541
========== ==========
</TABLE>
See notes to financial statememnts
5
<PAGE>
<TABLE>
<CAPTION>
St. John Housing Associates Limited Partnership
STATEMENTS OF PROFIT AND LOSS
Year ended December 31,
1999 1998 1997
---- ---- ----
Revenue
<S> <C> <C> <C>
Rental $ 1,013,931 $ 1,014,920 $ 1,016,548
Interest and other 17,943 21,926 17,645
----------- ----------- -----------
1,031,874 1,036,846 1,034,193
----------- ----------- -----------
Expenses
Administrative 126,513 122,933 123,961
Utilities 65,345 66,844 61,802
Operating and maintenance 229,874 197,844 196,929
Taxes and insurance 131,648 113,072 148,556
Interest 214,277 221,193 226,741
Depreciation and amortization 225,921 329,664 341,955
----------- ----------- -----------
993,578 1,051,550 1,099,944
----------- ----------- -----------
Other entity expenses (income) 100,741 92,569 103,217
----------- ----------- -----------
NET LOSS $ (62,445) $ (107,273) $ (168,968)
=========== =========== ===========
</TABLE>
See notes to financial statememnts
6
<PAGE>
St. John Housing Associates Limited Partnership
STATEMENTS OF PARTNERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Total General partner Limited partners
----- --------------- ----------------
<S> <C> <C> <C>
Partners' equity (deficit), December 31, 1996 $ 3,361,076 $ (877) $ 3,361,953
Partner distributions (118,018) (1,180) (116,838)
Net loss - 1997 (168,968) (1,690) (167,278)
----------- ----------- -----------
Partners' equity (deficit), December 31, 1997 3,074,090 (3,747) 3,077,837
Partners' distributions (100,502) (1,005) (99,497)
Net loss - 1998 (107,273) (1,073) (106,200)
----------- ----------- -----------
Partners' equity (deficit), December 31, 1998 2,866,315 (5,825) 2,872,140
Partners' distributions (61,500) (615) (60,885)
Net loss - 1999 (62,445) (624) (61,821)
----------- ----------- -----------
Partners' equity (deficit), December 31, 1999 $ 2,742,370 $ (7,064) $ 2,749,434
=========== =========== ===========
</TABLE>
See notes to financial statememnts
7
<PAGE>
<TABLE>
<CAPTION>
St. John Housing Associates Limited Partnership
STATEMENTS OF CASH FLOWS
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (62,445) $ (107,273) $ (168,968)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation 222,510 324,253 336,544
Amortization 3,411 5,411 5,411
Interest income on U.S. Treasury Bills - - (7,323)
(Increase) decrease in tenant accounts receivable 673 (244) (78)
(Increase) decrease in accounts receivable - interest subsidy (9,600) 9,122 (9,122)
(Increase) decrease in prepaid expenses (145) 94 (9)
(Increase) in accounts receivable - other (74,369) - -
(Increase) decrease in escrow deposits 17,590 (13,223) 41,840
Increase (decrease) in accounts payable 1,930 (4,288) 1,633
Increase in accrued liabilities 6,301 - -
Decrease in accrued interest payable (219) (193) (450)
Increase (decrease) in accrued real estate tax - (13,000) 3,000
Increase in tenant security deposits - net (593) (512) (302)
Increase in prepaid rents 71,460 290 254
Increase (decrease) in due to management company - 70 (89)
Increase (decrease) in accounts payable - entity 38,383 (11,135) (14,515)
Due from other project - deposit error - - 9,246
--------- --------- ---------
Net cash provided by operating activities 214,887 189,372 197,072
--------- --------- ---------
Cash flows from investing activities
Net deposits to reserve for replacement (41,446) (15,920) (32,098)
Proceeds from redemption of U.S. Treasury Bills - 129,757 250,000
Purchase of U.S. Treasury Bills - - (227,032)
Net purchase of fixed assets (7,380) - -
---------- --------- ---------
Net cash provided by (used in) investing activities (48,826) 113,837 (9,130)
---------- --------- ---------
Cash flows from financing activities
Mortgage principal payments (94,464) (87,934) (81,855)
Distributions (61,500) (100,502) (118,018)
--------- --------- ---------
Net cash used in financing activities (155,964) (188,436) (199,873)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH 10,097 114,773 (11,931)
Cash, beginning 230,944 18,896 30,827
--------- --------- --------
Cash, end $ 241,041 $ 133,669 $ 18,896
========= ========== ========
Supplemental disclosure of cash flow information
Cash paid for interest during the year $ 214,496 $ 221,386 $ 227,191
========= ========= =========
</TABLE>
See notes to financial statememnts
8
<PAGE>
St. John Housing Associates Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - ORGANIZATION
The partnership was formed as a limited partnership under the laws of the
State of Illinois on June 1, 1992, for the purpose of acquiring,
rehabilitating and operating a rental housing project under Sections 236 and
241 of the National Housing Act. The project, which was acquired December
29, 1993, consists of 144 units located in Gary, Indiana and is currently
operating under the name of St. John Homes.
Cash distributions are limited by agreements between the partnership and the
Department of Housing and Urban Development (HUD) to $121,682 per year to
the extent of surplus cash as defined by HUD. Undistributed amounts are
cumulative and may be distributed in subsequent years if future operations
provide surplus cash in excess of current requirements.
Each building of 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. Each building of the project must meet
the provisions of these regulations during each of 15 consecutive years, the
compliance period, in order to remain qualified to receive the credits. In
addition, on March 14, 1996, St. John Housing Associates Limited Partnership
executed a Declaration of Extended Low-Income Housing Commitment which will
require the utilization of the project pursuant to Section 42 for a minimum
of 30 years, even if disposition of the project by the partnership occurs.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 assets and 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.
Rental Property
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 by use of the straight-line method for financial
reporting purposes. For income tax purposes, accelerated lives and methods
are used.
9
<PAGE>
St. John Housing Associates Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets and Amortization
Mortgage costs are amortized over the term of the mortgage loan using the
straight-line method.
Income Taxes
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
Rental Income
Rental income is recognized as rentals become due. Rental payments received
in advance are deferred until earned. All leases between the partnership and
the tenants of the property are operating leases.
Investments
Investments in U.S. Treasury Bills are carried at amortized cost, which
approximates fair value, and are classified as held-to-maturity. The
remaining bill bears interest at 4.659% and matures April 27, 2000. This
bill is included in security deposit cash.
NOTE C - MORTGAGES PAYABLE
The mortgage note is insured by the Federal Housing Administration (FHA) and
is collateralized by a deed of trust on the rental property. The note is
payable in monthly principal and interest installments of $5,394, net of an
interest reduction subsidy through maturity on November 1, 2014. The note
bears interest at the rate of 7% per annum; however, HUD, through the
interest reduction subsidy, reduces the interest rate to an effective annual
rate of approximately 1% over the term of the mortgage. The annual interest
subsidy of $109,832 for 1999, $109,433 for 1998 and $109,721 for 1997, is
reflected as a reduction of interest expense. As of December 31, 1999 and
1998, principal balances of $1,614,987 and $1,674,405 were outstanding and
accrued interest was $995 and $995, respectively.
10
<PAGE>
St. John Housing Associates Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE C - MORTGAGES PAYABLE (Continued)
The second mortgage in the original amount of $2,908,300 is insured by the
FHA and collateralized by a second deed of trust on the rental property. The
note bears interest at the rate of 7.5% per annum. Principal and interest
are payable by the partnership in monthly installments of $20,335 through
maturity on May 1, 2025. As of December 31, 1999 and 1998, principal
balances of $2,767,153 and $2,802,199 were outstanding and accrued interest
was $17,295 and $17,733, respectively.
Under agreements with the mortgage lenders and FHA, the partnership is
required to make monthly escrow deposits for taxes, insurance and
replacement of project assets, and is subject to restrictions as to
operating policies, rental charges, operating expenditures and distributions
to partners.
The liability of the partnership under the mortgage notes is limited to the
underlying value of the real estate collateral plus other amounts deposited
with the lenders.
Aggregate maturities of the mortgages payable over each of the next five
years and thereafter are as follows:
First
Mortgage Second Mortgage Total
-------- --------------- -----
December 31, 2000 $ 63,413 $ 37,767 $ 101,180
2001 67,997 40,699 108,696
2002 72,913 43,859 116,772
2003 78,184 47,264 125,448
2004 83,836 50,933 134,769
Thereafter 1,248,644 2,546,631 3,795,275
------------- ------------ ----------
$ 1,614,987 $ 2,767,153 $4,382,140
============= ============ ==========
11
<PAGE>
St. John Housing Associates Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE D - HOUSING ASSISTANCE PAYMENT CONTRACT AGREEMENTS
FHA has contracted with the partnership, effective December 1989, under
Section 8 of The National Housing Act of 1937, to make housing assistance
payments to the partnership on behalf of qualified tenants. The terms of the
agreements are:
Number of units covered Expiration date
-------------------------------- -------------------------------
110 September 30, 2000
34 June 30, 2000
Under the Multifamily Assisted Housing and Reform and Affordability Act
(MAHRA) of 1997, as amended, Congress set forth the legislation for a
permanent "mark-to-market" program and provided permanent authority for the
renewal of Section 8 contracts. Owners with Section 8 contracts expiring
after September 30, 1998 are subject to the provisions of MAHRA. On
September 11, 1998, HUD issued an interim rule to provide clarification for
implementation of the mark-to-market program. Since then, revised guidance
has been provided through various HUD housing notices, most recently HUD
housing notice 99-36, which addresses project-based Section 8 contracts
expiring in fiscal year 2000.
Under this notice project owners have several options for Section 8 contract
renewals, depending on the type of project and rent level Options include
marking rents up to market, renewing other contracts with rents at or below
market, referring projects to the Office of Multifamily Housing Assistance
Restructuring (OMHAR) for mark-to-market or "OMHAR lite" renewals, renewing
contracts that are exempted from referral to OMHAR, renewing contracts for
portfolio reengineering demonstration and preservation projects, and opting
out of the Section 8 program. Owners must submit their option to HUD at
least 120 days before expiration of their contract. Each option contains
specific rules and procedures that must be followed to comply with the
requirements of housing notice 99-36.
As of the date of the report, the partnership intends to apply for renewal
of their contracts without mortgage restructuring.
12
<PAGE>
St. John Housing Associates Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE E - RELATED PARTY TRANSACTIONS
Management Fee
The property is managed by L-B Residential Management Company, an affiliate
of one of the stockholders of the general partner, pursuant to a management
agreement approved by HUD that expired February 28, 1997, and which is
presently on a month-to-month basis. The management agreement provided for a
management fee of 5.14% of monthly rental collections. Additionally, the
partnership pays L-B Residential Management Company a monthly computer
accounting/bookkeeping fee of $3.50 per unit. During the years ended
December 31, 1999, 1998 and 1997, management fees of $48,975, $52,833 and
$52,724, and computer and accounting fees of $6,048, $6,048 and $6,048 were
charged to operations, respectively. At December 31, 1999 and 1998, the
partnership owed the management agent $7,701 and $4,861, respectively, which
consisted of unpaid management fees of $7,197 and $4,357 and computer
accounting/bookkeeping fees of $504 and $504, respectively.
Maintenance Services
An affiliate of one of the stockholders of the general partner provides
certain maintenance and repair services. During the years ended December 31,
1999, 1998 and 1997, $7,650, $3,060, and $1,080 were charged to operations,
respectively.
Repurchase Guaranty
Under the terms of the partnership agreement, the general partner is
obligated to purchase the partnership interest of the investor limited
partner upon the occurrence of a repurchase event as described in the
partnership agreement.
Partnership Administration Fee
The partnership has entered into a partnership administration services
agreement with the general partner for its services in managing the
partnership throughout the term of the partnership. Under the terms of this
agreement, commencing January 1, 1996, the partnership is obligated to pay
to the general partner an annual fee in the amount of the lesser of 50% of
the project's net cash flow as defined in the partnership agreement or 3% of
the replacement cost of the rental property as of the date of substantial
completion. In the event that in any year 50% of net cash flow exceeds 3% of
the replacement cost of the rental property as of the date of substantial
completion, such excess
13
<PAGE>
St. John Housing Associates Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE E - RELATED PARTY TRANSACTIONS (Continued)
Partnership Administration Fee (Continued)
amount shall be paid to the general partner to the extent that the
partnership administration fee paid in any prior years was less than 3% of
the replacement cost. For the years ended December 31, 1999, 1998 and 1997,
a partnership administrative fee of $100,883, $92,367 and $103,502,
respectively, was incurred, of which $121,250 and $82,867 were payable as of
December 31, 1999 and 1998, respectively.
Consulting Fees
The general partner received compensation from L-B Residential Management
Company, the management agent, for consulting services rendered in 1999,
1998 and 1997.
NOTE F - 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 unit gross rent, or to
correct compliance 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 contributed capital by the
limited partner.
NOTE G - CONCENTRATION OF CREDIT RISK
The partnership maintains its cash balances in two banks. The balances are
insured by the Federal Deposit Insurance Corporation up to $100,000 by each
bank. As of December 31, 1999 and 1998, the uninsured portion of the cash
balances held at one of the banks was $134,570 and $25,074, respectively.
14
