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ARKANSAS DEVELOPMENT FINANCE AUTHORITY

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ARKANSAS DEVELOPMENT FINANCE AUTHORITY

Arkansas Development

    Finance Authority Combined Financial Statements for the Year Ended June 30, 1997, and Independent Auditors’ Report

INDEPENDENT AUDITORS’ REPORT

    The Board of Directors of

    Arkansas Development Finance Authority:

    We have audited the accompanying combined balance sheet of Arkansas Development Finance Authority

    (the “Authority”) as of June 30, 1997, and the related combined statements of revenues, expenses and

    changes in fund balances and of cash flows for the year then ended. These combined financial

    statements are the responsibility of the management of the Authority. Our responsibility is to express an

    opinion on these combined financial statements based on our audit.

    We conducted our audit in accordance with generally accepted auditing standards and the standards

    applicable to financial audits contained in Government Auditing Standards issued by the Comptroller

    General of the United States. 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, such combined financial statements present fairly, in all material respects, the financial

    position of the Authority as of June 30, 1997, and the results of its operations and its cash flows for the

    year then ended in conformity with generally accepted accounting principles.

    In accordance with Government Auditing Standards, we have also issued a report dated November 20,

    1997, on our consideration of the Authority’s internal control over financial reporting and our tests of its

    compliance with certain provisions of laws, regulations, contracts and grants.

November 20, 1997

ARKANSAS DEVELOPMENT FINANCE AUTHORITY

    COMBINED BALANCE SHEET

    JUNE 30, 1997

    (DOLLAR AMOUNTS IN THOUSANDS)

     Single FamilyMulti-FamilyOther

    Mortgage MortgageDevelopmentProgramsMemorandum

    PurchasePurchaseFinanceand ADFAOnly

    ProgramsProgramsProgramsGeneral FundTotals

    ASSETS

    Cash and cash equivalents (Note 2)23,970$ 1,251$ 32,652$ 56,481$ 114,354$ Accounts receivable675 16 9,749 2,720 13,160 Accrued interest receivable5,880 804 2,045 2,644 11,373 Accrued rent receivable- - 767 - 767 Investments, at amortized cost (Note 2)636,823 9,970 48,119 79,550 774,462 Loans receivable, at amortized cost, net (Note 3)166,846 52,341 192,461 314,005 725,653 Deferred charges9,442 1,125 5,264 4,184 20,015 Direct financing leases (Note 4)- - 87,125 - 87,125 - - - 400400 Capitalized assets

    $ 65,507843,636$ 378,182$ 459,984$ 1,747,309$ TOTAL ASSETS

    LIABILITIES AND FUND BALANCE

    Bonds and notes payable, net of unamortized

     discounts and premiums (Note 5)771,715$ 57,101$ 310,900$ 275,554$ 1,415,270$ Accrued interest payable17,078 2,039 3,432 2,555 25,104 Accounts payable377 32 29,855 13,181 43,445

     1498,715 23,545 5,771 38,180 Deferred fees, advances, grants and credits

     Total liabilities797,885 59,321 367,732 297,061 1,521,999

    FUND BALANCE:

     Restricted for bond programs45,751 6,186 10,450 145,143 207,530

     - - - 17,780 17,780 Unrestricted

     6,18645,751 10,450 162,923 225,310 Total fund balance TOTAL LIABILITIES AND FUND BALANCE843,636$ 65,507$ 378,182$ 459,984$ 1,747,309$

See notes to financial statements.

    - 2 -

ARKANSAS DEVELOPMENT FINANCE AUTHORITY

    COMBINED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND BALANCES

    YEAR ENDED JUNE 30, 1997

    (DOLLAR AMOUNTS IN THOUSANDS)

     Single FamilyMulti-Family Other

    MortgageMortgage DevelopmentProgramsMemorandum

    PurchasePurchaseFinance and ADFAOnly

    ProgramsProgramsProgramsGeneral FundTotals

    REVENUES:

     Interest income (Note 3):

     Loans and direct leases15,286$ 4,358$ 15,245$ 11,693$ 46,582$

     Investments41,775 986 2,301 8,183 53,245

     Amortization of discounts and premiums

     on loans and investments, net272 - 6 9,250 9,528 161,181 2,044 2,420 5,661 Financing fee income

     Total interest income58,514 5,360 19,596 31,546 115,016

     Federal financial assistance programs- - - 30,043 30,043

     State of Arkansas financial assistance programs- - 12 8,9338,921

     - - 6 572 578 Other income

     Total revenues58,514 5,360 19,614 71,082 154,570 EXPENSES:

     Interest on bonds and notes:

     Current interest48,694 4,261 16,109 22,661 91,725 - 4,546 - - 4,546 Accreted interest

     Total interest on bonds and notes53,240 4,261 16,109 22,661 96,271

     Amortized public discounts and premiums

     on bonds and notes20 4 111 245 380 801,478 856 410 2,824 Amortized bond and note issuance costs

     Total amortized bond and note discount1,498 84 967 655 3,204

     Federal financial assistance programs- - - 8,662 8,662

     Salaries and benefits expenses- - - 2,348 2,348

     Operations and maintenance expense- - - 709 709 36397 435 1,347 2,215 Other expenses

     36397 435 13,066 13,934 Total administrative expenses 4,38155,135 17,511 36,382 113,409 Total expenses EXCESS OF REVENUES OVER EXPENSES BEFORE

     TRANSFERS FROM (TO) OTHER FUNDS3,379 979 2,103 34,700 41,161

    (Continued)

    - 3 -

ARKANSAS DEVELOPMENT FINANCE AUTHORITY

    COMBINED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND BALANCES

    YEAR ENDED JUNE 30, 1997

    (DOLLAR AMOUNTS IN THOUSANDS)

     Single FamilyMulti-Family Other

    MortgageMortgageDevelopmentProgramsMemorandum

    PurchasePurchaseFinanceand ADFAOnly

    ProgramsProgramsProgramsGeneral FundTotals

     TRANSFERS FROM (TO) OTHER FUNDS(2,729)$ (2,102)$ (861)$ 5,692$ - $

    EXCESS (DEFICIENCY) OF REVENUES OVER

     EXPENSES AFTER TRANSFERS 650 (1,123) 1,242 40,392 41,161

    FUND BALANCE: Beginning of year45,101 7,309 9,208 122,531 184,149 End of year45,751$ 6,186$ 10,450$ 162,923$ 225,310$

    (Concluded) See notes to financial statements.

    - 4 -

ARKANSAS DEVELOPMENT FINANCE AUTHORITY

    COMBINED STATEMENT OF CASH FLOWS

    YEAR ENDED JUNE 30, 1997

    (DOLLAR AMOUNTS IN THOUSANDS)

     Single FamilyMulti-Family Other MortgageMortgageDevelopmentProgramsMemorandumPurchasePurchaseFinanceand ADFAOnlyProgramsProgramsProgramsGeneral FundTotals

    OPERATING ACTIVITIES:

     Excess (deficiency) of revenues over expenses

     after transfers650$ (1,123)$ 1,242$ 40,392$ 41,161$

     Adjustments to reconcile excess (deficiency) of revenues over

     expenses to net cash provided by operating activities:

     Amortization of discounts and premiums on

     investments and loans, net(272) - (6) (9,250) (9,528)

     Amortization of deferred financing fees(1,181) (6) (1,867) (532) (3,586)

     Accreted interest4,546 - - - 4,546

     Amortization of bond and note discounts20 4 111 245 380

     Amortization of bond and note issuance costs1,478 80 856 410 2,824

     Loss on sale of assets11 - - 70 81

     Changes in operating assets and liabilities:

     Accounts receivable(267) (16) (1,155) (1,573) (3,011)

     Accrued interest receivable(643) (91) (912) (800) (2,446)

     Accrued rents receivable- - 26 - 26

     Interfund receivable(174) - 826 (448) 204

     Other assets70 - (756) (27) (713)

     Accrued interest payable1,738 (52) 603 (270) 2,019

     Accounts payable44 - 10,748 3,454 14,246

     Other liabilities(135) - (1,228) 140 (1,223) Interfund payable62 32 295 (594) (205)

     Net cash provided (used) by operating activities5,947 (1,172) 8,783 31,217 44,775 INVESTING ACTIVITIES:

     Purchase of investments(475,207) (13,128) (66,945) (45,340) (600,620)

     Sales and maturities of investments423,251 18,423 27,256 49,628 518,558 Net (increase) decrease in loans receivable26,610 (467) 7,019 (14,301) 18,861

     Investment in direct financing leases- - (59,605) - (59,605) Lease payments received- - 21,219 - 21,219

     Net cash provided (used) by investing activities(25,346) 4,828 (71,056) (10,013) (101,587)

    (Continued)

    - 5 -

ARKANSAS DEVELOPMENT FINANCE AUTHORITY

    COMBINED STATEMENT OF CASH FLOWS

    YEAR ENDED JUNE 30, 1997

    (DOLLAR AMOUNTS IN THOUSANDS)

     Single FamilyMulti-Family Other

    Mortgage MortgageDevelopmentProgramsMemorandumPurchasePurchaseFinanceand ADFAOnly ProgramsProgramsProgramsGeneral FundTotals

NONCAPITAL FINANCING ACTIVITIES:

     Proceeds from issuance of bonds and notes payable155,501$ - $ 99,755$ 1,274$ 256,530$

     Repayments of bonds and notes payable(127,616) (2,545) (50,834) (9,501) (190,496)

     Payments of debt issuance cost(1,546) - (1,562) (1) (3,109) Collection of financing fees1,251 16 2,670 563 4,500

     Net cash provided (used) by noncapital financing activities27,590 (2,529) 50,029 (7,665) 67,425

    NET INCREASE (DECREASE) IN CASH AND

     CASH EQUIVALENTS8,191 1,127 (12,244) 13,539 10,613

    CASH AND CASH EQUIVALENTS: Beginning of year15,779 124 44,896 42,942 103,741 End of year23,970$ 1,251$ 32,652$ 56,481$ 114,354$

    SUPPLEMENTAL INFORMATION - Interest paid46,956$ 4,313$ 15,506$ 22,931$ 89,706$

    (Concluded)

    See notes to financial statements.

    - 6 -

    ARKANSAS DEVELOPMENT FINANCE AUTHORITY

    NOTES TO COMBINED FINANCIAL STATEMENTS

    YEAR ENDED JUNE 30, 1997

    1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    The Arkansas Development Finance Authority (the “Authority”) was created May 1, 1985, by Act 1062 of

    1985 (Arkansas Development Finance Authority Act) and is a public body politic and corporate, with

    corporate succession, separated and apart from the State of Arkansas. Pursuant to Act 1062, the Authority

    is authorized and empowered to issue bonds and various other debt instruments for the purpose of financing

    qualified agricultural business enterprises, capital improvement facilities, educational facilities, health care

    facilities, housing developments and industrial enterprises.

    Bonds and other debt instruments issued by the Authority are special obligations of the Authority, payable

    solely from and collateralized by a first lien on the proceeds, monies, revenues, rights, interests and

    collections pledged therefore under the resolutions authorizing the particular issues. The State of Arkansas

    is not obligated to pay the bonds and other debt instruments, and neither the faith and credit nor the taxing

    power of the State of Arkansas is pledged to the payment of the principal or redemption price of, or interest

    on, the bonds and other debt instruments. The Authority has no taxing power.

    The major accounting principles and practices followed by the Authority are presented below:

    Basis of Accounting - The Authority uses the accrual method of accounting whereby expenses are

    recognized when the liability is incurred and revenues are recognized when earned.

    Fund Accounting - The Authority’s accounts are organized as funds, each of which includes accounts for

    the assets, liabilities, fund balances, revenues and expenses of the Authority’s programs and general fund.

    The following describes the nature of the funds currently maintained by the Authority:

    (i) Single Family Mortgage Purchase Programs - Accounts for proceeds from single family

    mortgage purchase bonds, the debt service requirements of the bonds, and the related mortgage

    loans for single family owner-occupied housing in Arkansas.

    (ii) Multi-Family Mortgage Purchase Programs - Accounts for the proceeds of the multi-family

    mortgage purchase bonds, the debt service requirements of the bonds, and the related mortgage

    loans for HUD approved and insured multi-family housing in Arkansas.

    (iii) Development Finance Programs - Accounts for the proceeds from the sale of development

    revenue bonds and notes; the debt service requirements of the bonds and notes and related

    loans to developers, public and private institutions and government bodies within the State of

    Arkansas; and includes certain assets not owned and related obligations not owed by the

    Authority. To a limited extent and only when specified by a specific trust indenture, the

    payment of principal and interest on the obligations not directly owed by the Authority is

    guaranteed by the Authority (see Note 3).

    - 7 -

    (iv) Other Programs and ADFA General Fund - Accounts for various sources and uses of funds in

    connection with the following:

    (a) Section 8 Housing Assistance Payment Program - Accounts for Section 8 housing

    assistance funds received in advance, housing assistance payment disbursements, and

    Authority fees and expenses related to the Section 8 Housing Assistance Payment

    Program.

    (b) Bond Guaranty Program - Accounts for grants from the State Treasurer, guaranty fees

    collected, interest earned on deposits, and disbursements made in connection with bond

    guaranties provided by the Authority. The fund was created by Act 505 of 1985 which

    authorized a grant of $6,000,000 from the State Treasurer for the purpose of enhancing

    and supporting the creditworthiness of bonds and other debt instruments guaranteed by the

    Authority. At June 30, 1997, the fund had cash and cash equivalents and investments

    totaling $18,980,295 in the reserve account to collateralize Authority-guaranteed bonds

    and future issues under the bond guaranty program.

    (c) ADFA/ATRS Interim Loan Program - Accounts for monies borrowed under the

    $5,000,000 Revolving Loan Agreement with the Arkansas Teacher Retirement System and

    related loans to developers, public and private institutions, and government bodies within

    the State of Arkansas who are anticipating financing projects from proceeds of an

    Authority bond issue. At June 30, 1997, unused credit available to the Authority under the

    revolving loan agreement was approximately $3,903,486.

    (d) ADFA/ADPC&E Waste Water Treatment Facilities Revolving Loan Fund - Accounts for

    federal grants and state matching funds received, related loans for construction and

    permanent financing of public waste water treatment facilities approved by the Arkansas

    Department of Pollution Control and Ecology, loan repayments and expenses in connection

    with the waste water treatment revolving loan program.

    (e) GNMA/BMIR Loan Purchase Program - Accounts for proceeds from the sale of GNMA

    Guaranteed Bonds, debt service requirements on the bonds, related below market interest

    rate mortgages purchased with bond proceeds, disbursements to program participants of

    excess loan prepayments, and the Authority’s fees and expenses in connection with the

    program.

    (f) ADFA General Fund - Accounts for money transferred from other funds to the extent such

    transfers are permitted by the resolutions establishing other funds and to account for

    income and expenses not directly attributable to a program. Administrative expenses are

    allocated to the programs based on projected receipts in excess of debt service

    requirements of each program. The receipt and disbursement of cash transferred from time

    to time between funds, to the extent that such transfers are permitted by the applicable

    resolutions, are recorded as fund balance transfers if the transfers are permanent or as

    interfund payables/receivables if the transfers are temporary. Also included are two loan

    programs, Rural Economic and Community Development Service (“RECDS”) and Police

    Home Ownership. RECDS involves leveraging of funds through partnership with

    RECDS, a federal agency, and provides mortgage loans to low and moderate income

    homebuyers in rural areas. The Police Home Ownership Program is a partnership between

    the Authority and the City of Little Rock to help declining neighborhoods by providing

    stability and security. This objective is accomplished by offering low interest rate loans to

    police officers agreeing to purchase homes in specified areas.

    - 8 -

    (g) Home Investment in Affordable Housing Program - Accounts for federal financial

    assistance received from the Department of Housing and Urban Development for the

    purpose of developing and supporting affordable housing through tenant based rental

    assistance, rental rehabilitation, new construction, or assistance to homebuyers and

    homeowners.

    (h) Capital Access Program - The Capital Access Program was created by Act 733 and

    Act 886 of 1993 to provide public fiscal resources to assist Arkansas financial institutions

    in overcoming obstacles and constraints in meeting the full range of economically sound

    financing needs. Under the acts, the Authority contracts with Arkansas financial

    institutions who wish to participate in the program. The contracts provide for the creation

    of loan loss reserve accounts for the benefit of the financial institutions. The loan loss

    reserves are funded by fees paid by the borrowers equal to 1.5% to 3.5% of the loan

    amount. The financial institutions match the borrowers’ fees; such match may be funded

    by netting the loan. The Authority provides a 100% to 150% match of the fees paid by the

    borrowers and the financial institutions. The monies deposited in the loan loss reserve

    funds are the property of the Authority and are pledged to the financial institutions for

    reimbursement of financial losses incurred as a result of default on a qualified loan made

    under the program. The Authority’s liability to any financial institution is limited to the

    amount of money credited or on deposit in the loan loss reserve account of that institution.

    (i) Community/Technical College Revolving Loan Fund - Act 683 of 1989, as amended,

    established the College Savings Bond (“CSB”) Program which is managed jointly by the

    Department of Higher Education and the Authority. Community colleges were eligible to

    participate in the original CSB Program. Act 171 of 1993 made technical colleges also

    eligible to participate. The Community/Technical College Revolving Loan Fund (the

    “Fund”) was capitalized with interest earnings on the CSB proceeds. The Fund provides

    low interest loans to community and technical colleges for capital projects. Loan

    repayments will be returned to the Fund and will be used for subsequent loans. Each loan

    will be approved by the State Board of Higher Education. The Authority serves as

    financial manager of the Fund.

    (j) Intermediary Relending Program - The Authority received a $3 million, 1% loan from

    RECDS for business and community development projects in rural Arkansas. A

    combination of Intermediary Relending Program, the Authority and/or private funds can be

    used as a method of leveraging resources and lowering the effective interest rates available

    through lenders and the Authority’s existing loan programs.

    Combined Financial Statements and Memorandum Only Totals Columns - The combined financial

    statements contain the totals of the similar accounts of the several funds. The total column is captioned

    “memorandum only” to indicate that it is presented only to facilitate analysis. No consolidating or

    eliminating entries were made in arriving at the total column; thus, it does not present consolidated

    information in accordance with generally accepted accounting principles. Since the assets of the several

    funds are restricted by the related resolutions, the totaling of the accounts, including assets therein, is for

    convenience only and does not indicate that the combined assets are available in any manner other than that

    provided for in the resolutions for the separate funds.

    - 9 -

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