oversight

The Carmichael Rehabilitation Center Federal Housing Administration Project Number 136-43061 Carmichael, California

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-11-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Telephone: (213) 894-8016             http:www.hud.gov/offices/oig/                Fax: (213) 894-8115




                                                Issue Date: November 4, 2004
                                                Audit Case Number: 2005-LA-1801




MEMORANDUM FOR:              Janet L. Browder, Director, HUD’s Office of Multifamily Housing,
                             9AHMLA



FROM:                        Joan S. Hobbs, Regional Inspector General for Audit, 9DGA

SUBJECT:                     The Carmichael Rehabilitation Center
                             Federal Housing Administration Project Number 136-43061
                             Carmichael, California


                                      INTRODUCTION

We have completed an audit of the Carmichael Rehabilitation Center, a Section 232 Nursing
Home. Our review was initiated as part of a nationwide review of the Department of Housing and
Urban Development’s (HUD) Section 232 program. The objective of this review was to
determine if the owner of the Carmichael Convalescent Center complied with the terms of the
Regulatory Agreement with HUD. We found that the owner did not follow HUD requirements
and mismanaged the project’s operations by defaulting on the project’s mortgage and through
ineligible disbursements of the project funds. The audit was performed in accordance with
generally accepted government auditing standards.

Audit work was performed between December 2003 and July 2004, and generally covered the
period of January 1997 through September 2002, which was expanded as necessary. In
conducting the audit, we reviewed records provided by the owner and interviewed appropriate
members of the owner’s staff and management. We also interviewed a partner from the project’s
financial audit firm, and reviewed their audit working papers. In addition, we reviewed HUD
monitoring files, spoke to HUD officials, and reviewed the applicable HUD requirements.

As required by HUD Handbook 2000.6 REV-3, within 60 days please provide us, for each
recommendation without a management decision, a status report on: (1) the corrective action
taken; (2) the proposed corrective action and the date to be completed; or (3) why action is
considered unnecessary. Also, please furnish us copies of any correspondence or directives issued
because of the audit.
Telephone: (213) 894-8016         http://www.hud.gov/offices/oig/                 Fax: (213) 894-8115




Should you or your staff have any questions, please contact me at (213) 534-2470, or
Clyde Granderson, Assistant Regional Inspector General for Audit, at (415) 489-6692.


                                              SUMMARY

We identified violations of the Carmichael Rehabilitation Center’s Regulatory Agreement and
other HUD requirements. This included the owner, Sun Healthcare, incorporating the project in
its petition for bankruptcy and subsequently defaulting on the project’s mortgage. In addition,
during the time period leading up to and during the default, the owner disbursed $3,769,290 in
project funds through ineligible cash distributions and expenses. These activities resulted in
increased risk to HUD, the assignment of the mortgage note to HUD, and HUD’s resulting loss of
$323,925 on the sale of the note.

                                          BACKGROUND

Section 232 of the National Housing Act authorized a mortgage insurance program for residential
care facilities (12 U.S.C. 1715w). HUD insured a $4.9 million mortgage under the Federal Housing
Administration Section 232 program, to establish the Carmichael Rehabilitation Center in November
1992. The project has a 126-bed capacity and is located in the city of Carmichael, California. The
Project Funding Corporation was the holder of the mortgage note.

The owner of Carmichael is Sun Healthcare Group, a for-profit nationwide healthcare provider
founded in 1993, with corporate offices in Irvine, California, and Albuquerque, New Mexico. Sun
is a publicly traded corporation subject to Security and Exchange Commission requirements.
Sun’s operations included inpatient services, rehabilitation therapy services, and home health;
with the majority of its income coming from Medicare and Medicaid programs. In 1999, Sun
operated over 300 projects through its Sunbridge subdivision, which had 40 regional offices
throughout the nation.

Sun obtained the Carmichael facility in 1996 when it acquired the previous owner,
Regency Health Services. Regency had ownership interest in the facility since 1988, before HUD
insured the mortgage note. Sun renamed the facility the Sunbridge Care and Rehabilitation Center
for Carmichael. Sun also operated seven other projects with Federal Housing Administration
insured loans, located in California, Maryland, New Hampshire, New Mexico, and Tennessee. As
of June 2004, Sun still operated Carmichael and five of these projects.

Between 1997 and 2001, the Independent Public Accounting firm of Lesley, Thomas, Schwarz,
and Postma, Inc. prepared Carmichael’s annual financial audit reports. These reports were signed
by owner representatives and submitted to HUD. HUD did not require a financial audit report for
fiscal year 2002.




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                                                FINDING

                      OWNER MISMANAGED THE PROJECT’S OPERATIONS

Sun Healthcare did not follow the project’s Regulatory Agreement and other HUD requirements
in managing operations of the Carmichael Rehabilitation Center. This included Sun incorporating
the project into its petition for bankruptcy and defaulting on the project’s mortgage. In addition,
Sun Healthcare inappropriately disbursed $3,769,290 of the project’s cash between January 1997
and September 2002 (see Appendix B). The latter included ineligible distributions to the owner
totaling $2,965,619, and use of project funds to pay ineligible ownership costs of $803,671. The
inappropriate distributions continued while the project was subject to the owner’s bankruptcy, in
default, and HUD held the note. In addition, when the project’s financial audit reports identified a
portion of the inappropriate distributions, the owner submitted misleading information to HUD to
make it appear the problems had been corrected. This occurred because Sun Healthcare lacked
internal controls to ensure it complied with HUD’s requirements. We believe these actions
increased the risk to HUD’s mortgage insurance fund by reducing the cash available for the
project’s normal operations. In addition, the default directly resulted in HUD incurring a loss of
$323,925 on the disposition of the Carmichael facility.

HUD Requirements

The Regulatory Agreement between HUD and the Carmichael Rehabilitation Center was
approved on November 20, 1992. The agreement required the owner to promptly make all
payments due under the note, and the owner was also not allowed to include the facility in any
petition for bankruptcy. In addition, the owner could not make, receive, or retain any distributions
of the project’s assets or income, except surplus cash after the end of annual or semiannual
periods. The Agreement stated no distributions could be made when there was a default under the
mortgage. All the project’s rents and receipts were supposed to be deposited in the name of the
project, and such funds could be withdrawn only for project expenses or allowed surplus cash
distributions. Finally, the owner could not have the facility incur any liability or obligation not in
connection with the project’s operations.

HUD Handbook 4370.2, Revision 1, Financial Operations and Accounting Procedures, dated
January 23, 1996, stipulates under Chapter 2 that distributions can only be paid from surplus cash,
but cannot be paid when the project is in default. The surplus cash generated at the end of one
fiscal period is not available for distribution until the next fiscal period. If the owner takes
distributions when the project is in default or when the project is in a non-surplus cash position,
the owner is subject to criminal and/or civil penalties.

12 U.S.C. Sec. 1715z-4a states that HUD may recover any assets or income used by any person in
violation of a regulatory agreement applicable to a multifamily project insured by HUD. This
prohibits owners and their agents from using project resources for anything other than the
project’s operating expenses, which are the necessary and reasonable expenses arising from the
everyday operation and maintenance of the project. HUD may recover double the value of any
assets and income of the project that have been used in violation of the regulatory agreement, plus
all related costs such as reasonable attorney and auditing fees.



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HUD Notice 01-3 regarding the Section 232 program, issued April 2001, stipulates any owner or
operator of a healthcare facility that has filed for bankruptcy within the last five years, is not
eligible to participate in any manner in a facility with a Section 232 insured mortgage.

Petition for Bankruptcy and Default

Although strictly prohibited by the Regulatory Agreement, Sun incorporated the project into its
petition for bankruptcy and defaulted on the project’s mortgage. This activity directly resulted in
HUD incurring a loss on the disposition of the Carmichael facility.

Sun Healthcare filed for Chapter 11 bankruptcy protection on October 14, 1999, including all its
subdivisions, affiliates, and projects (including the Carmichael Rehabilitation Center). Shortly
thereafter, Sun began defaulting on the project’s mortgage when it failed to make the December
1999 payment. No subsequent payments were forthcoming, so the lender, the Project Funding
Corporation, optioned to assign the note to HUD in May 2000. Since the project was included in
Sun’s bankruptcy, it then fell under the jurisdiction of the bankruptcy court. Sun could not bring
the mortgage current until its creditors approved its plan of reorganization, which didn’t occur
until February 2002. Thus, no mortgage payments were made until March 11, 2002, when Sun
Healthcare finally brought the mortgage current with a payment to HUD of $1,129,470. This
amount included all delinquent mortgage interest and principal.

In July 2002, HUD sold Carmichael’s note at auction without Federal Housing Administration
insurance. At that time, the note’s adjusted balance was $4,559,895. However, the adjusted
balance received from GE Capital’s winning bid was only $4,235,970. As a result, HUD incurred
a loss of $323,925 when the note sale closed in September 2002.

Ineligible Distributions to the Owner

The Regulatory Agreement strictly limited the distribution amounts the owner could withdraw
from the project. However, Sun did not follow these requirements and collected excessive
distributions totaling $2,965,619. This resulted from the owner’s practice of transferring and
commingling all the project’s cash with its own funds in violation of HUD requirements.

Sun Healthcare’s application of an inappropriate cash management system led to excessive
distributions of the project’s cash. Project receipts were initially deposited to a project operating
bank account, which also held deposits of various other Sun projects. However, Sun then
routinely and consistently transferred all the cash to its own bank accounts on the same day as the
deposit, which Sun called a “cash sweep.” The sweeps commingled the cash with the owner’s
other financial activity, enabling the owner to utilize it for non-project purposes and thus resulting
in distributions. According to the Regulatory Agreement, Sun was only allowed to collect a
distribution up to the surplus cash amount calculated on the prior year’s financial audit report, and
Sun could make no distributions to itself while the project was in default. Nevertheless, the net
amounts collected by Sun through these transfers exceeded the available surplus cash between
1997 and 2001. Since Sun did not immediately return the cash to the project, it resulted in
ineligible distributions.



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                      Ineligible Distributions to Owner
                      Fiscal     Distribution Surplus Cash                             Ineligible
                      Year         Amount       Available (1)                         Distribution
                      1997        $   797,122          $     543,665       $                    253,457
                      1998        $   372,466          $     288,661       $                      83,805
                      1999        $   787,122          $     271,858       $                    515,264
                      2000        $   648,690              None (2)        $                    648,690
                      2001        $ 1,464,403              None (2)        $                  1,464,403
                      Total       $ 4,069,803          $ 1,104,184         $                  2,965,619
                      (1) Based on prior year's financial audit report calculation.
                      (2) No distributions of surplus cash available while project in default.




HUD Handbook 4370.1, Reviewing Annual and Monthly Financial Statements, Chapter 2-21,
Section J, allows a management agent to deposit project funds in the same bank account as other
projects, with HUD’s prior written approval, as long as an agent can identify all receipts and
liabilities of individual projects.

Although the handbook did amend the Regulatory Agreement to allow a management agent to
commingle multiple housing projects in a single account, it did not amend the Regulatory
Agreement to allow project funds to be commingled with those of the owner. Since Sun self-
managed the facility there was no independent management agent to ensure the proper
administration of the funds separate from the owner’s, or prevent its utilization for the owner’s
other purposes. In addition, Sun did not obtain HUD approval to commingle funds with other
projects or in the owner’s multiple bank accounts, so it was precluded from conducting this
activity.

Distributions In Excess of Surplus Cash Identified on Financial Audit Reports

Although the project’s financial audit reports did not identify all the inappropriate distributions
(above), they did identify approximately $1.5 million of distributions in excess of surplus cash,
including $458,097 on the 2000 report and $1,056,740 on the 2001 report. The audit reports
recommended that Sun Healthcare return the funds to the project’s operating account, and for Sun
to amend its procedures to assure distributions do not exceed the allowable surplus cash. Sun
Healthcare’s Vice-President and Corporate Controller attested that these funds had been returned
to the project’s operating account in the project’s 2001 financial statements submitted to HUD.
However, we found that Sun did not fully comply with these recommendations.

Although Sun claimed the funds were returned to the operating account, this was not completely
accurate. To resolve the 2000 recommendation, Sun made a deposit of $458,097 to the project’s
operating account on March 7, 2002. However, the funds were immediately swept back to Sun’s
own bank accounts on the same day. As a result, the problem was not appropriately corrected.
We also noted that no cash was returned to the project’s operating account to resolve the 2001
recommendation. In addition, the cash management practices were never amended to prevent this
activity, at least up through September 2002.



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Ineligible Ownership Expenses

Sun Healthcare inappropriately charged the project $803,671 for expenses associated with its
ownership of the facility without obtaining HUD’s permission. This included income tax
liabilities charged prior to and during the default, and goodwill expenses charged to the facility
prior to the mortgage default. These were Sun’s ownership expenses, as defined by HUD
handbooks, and should not have been charged to the project without HUD’s prior approval.

HUD Handbook Criteria

HUD Handbook 4370.2, Financial Operations and Accounting Procedures for Insured
Multifamily Projects, Chapter 4-4, Section G, distinguishes mortgagor/corporate expenses from
expenses necessary and reasonable for the operation of the project. Mortgagor/corporate expenses
include federal and state income taxes. The handbook states owners may only charge these
expenses against the project’s operations with the prior written approval of HUD.

Handbook 4370.4, Basic Accounting Desk Reference for HUD Loan Servicers, Chapter 4-3,
states corporate expenses may represent diversions of project funds for unauthorized purposes.
The handbook also lists federal and state taxes as corporate expenses.

Inappropriate Application of Income Taxes

Between 1997 and 2001, Sun permanently reduced the cash amounts it owed the project by
charging income taxes totaling $686,541 (see Appendix B). According to HUD requirements,
income taxes are an expense of the owner, which should not have been charged to the project
without HUD’s prior written approval. Sun never obtained HUD’s permission to charge these
costs to the project. However, this liability was still applied to Carmichael through annual
adjustments treating the ownership expense as a project liability, which affected the asset balances
included on the financial audit reports submitted to HUD. Although the income taxes were shown
on the project’s income statements, included as part of the financial audit reports, Sun did not
provide any information to HUD concerning the inappropriate adjustments.

Ineligible Goodwill Expense

The owner charged ineligible expenses to the project totaling $117,130 (see Appendix B), which Sun
identified as goodwill1 expense. The owner initially charged the goodwill expense to the project in
1998 through a series of monthly inter-company accounting entries totaling $150,108. The owner
later reduced this amount by $108,032, leaving a net goodwill expense amount of $42,076. In 1999,
Sun charged another $75,054 to the project. These goodwill expenses are corporate expenses of Sun
Healthcare, and are not reasonable and necessary for the operation of the project. These expenses
reduced the cash balance Sun owed to the project. As a result, the expense was, in effect, an
additional inappropriate distribution to the owner in violation of the Regulatory Agreement.


1
  Goodwill represents the amount an organization paid to acquire another entity over its estimated fair value. Sun
Healthcare recorded goodwill in its corporate books when it acquired Regency, the prior owner of the Carmichael
facility.


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                            AUDITEE COMMENTS AND OIG EVALUATION

We provided our draft report to the auditee for its comments on September 2, 2004. We also
discussed the draft report during an exit conference discussion with Sun Healthcare officials on
September 3, 2004. The auditee provided its comments on September 20, 2004. Sun Healthcare
issued its comments through the Carmichael Rehabilitation Center. We included the auditee’s
final written comments in Appendix C to the report, including all attachments.

In general, the auditee did not agree with our conclusions over the bankruptcy and default,
excessive distributions, and ineligible expenses. All comments were considered but no material
changes were made to our report.

Bankruptcy and Mortgage Default

Comments Synopsis:

The auditee stated that bankruptcy codes barred the application and effects of the Regulatory
Agreement and subsequent administrative action. The auditee also blamed the loss on HUD’s
decision to sell the note. Sun believed HUD could have waited and sold the note at some
subsequent date when it would not have incurred a loss.

OIG Evaluation:

We do not agree with the auditee’s position that HUD was the cause for the loss on the sale of the
mortgage. Sun Healthcare included the project in a bankruptcy petition and stopped making
mortgage payments in violation of the Regulatory Agreement, resulting in the note being assigned to
HUD. There was also no evidence to show that putting off the note sale until some unidentified
future date would have further reduced HUD’s losses. In addition, the bankruptcy codes cited by the
auditee do not clearly bar HUD from pursuing appropriate action against the auditee.

Cash Management

Comments Synopsis:

The auditee did not believe it was in violation of HUD requirements, insisting that the provisions
of Handbook 4370.2 were met. The auditee argued this handbook did not require a management
agent to be independent, nor require prior approval from HUD to utilize a centralized account. As
a result, cash sweeps should not be considered distributions.




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OIG Evaluation:

Although HUD Handbook 4370.2 does not specifically mention whether HUD approval is
required, Handbook 4370.1, Chapter 2, states the commingling of funds between projects is only
permissible with the advance approval of HUD. In addition, both handbooks required the cash to
be maintained in a single centralized bank account, allowing only a single separate subsidiary
payroll bank account.

Sun Healthcare’s practice of sweeping cash did not follow HUD’s conditions for the utilization of
a centralized account. Sun did not maintain the project’s cash balance in one centralized bank
account, but instead swept it from the project bank account to its own accounts. Sun then further
transferred these funds to various other corporate bank accounts and its revolving line of credit,
commingling the cash with various other corporate funds. This made the project’s separate cash
balance in these bank accounts unidentifiable, and provided Sun the means to utilize it for non-
project purposes. If a management agent maintained the project’s cash in a single joint account in
accordance with HUD requirements, it would not have been available for the owner’s benefit. As
a result, the cash sweeps resulted in distributions to the owner.

Financial Audit Findings on Excessive Distributions

Comments Synopsis:

The auditee stated the project had access to the cash at all times prior to fiscal year 2000, so there
were no distributions. Sun claimed it treated the 2000 and 2001 activity as excessive distributions
because the bankruptcy limited the availability of the funds held by Sun to the project.

The auditee did not believe the statute (12 U.S.C. Sec. 1715z-4a) was applicable because all
excessive distributions were repaid in 2002, leaving no remaining ineligible amounts. Sun
maintained the temporary March 2002 deposit of $458,097 resolved the 2000 financial audit
finding by making the cash available to the project. Sun therefore recomputed the 2000 negative
surplus cash balance to include the deposit, which also reduced the excessive distributions it
reported to HUD for 2001. In addition, Sun believed the payment of $1,129,470 on March 11,
2002 to bring the mortgage current sufficiently resolved all remaining distributions.

OIG Evaluation:

The auditee’s positions over distributions and the availability of funds were not plausible. If Sun
believed the cash was restricted in 2000 and 2001 then it should have identified all prior years
excessive transfers as excessive distributions, since they were still held by Sun, and returned these
funds to the project. In addition, there was no information to show that the bankruptcy court
precluded Sun from resolving the distribution problem. Sun could have left receipts in the
project’s operating account, immediately transferred previously swept cash back to that account,
or even held the project funds in an escrow account in the name of the project.

The 2002 deposit of $458,097 to the project’s operating account did not resolve the 2000 financial
audit finding, since it was immediately swept back to the owner’s accounts. In addition, Sun should



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not have retroactively applied this deposit to the negative surplus cash reported on the 2000 financial
audit, just so it could understate the 2001 finding amount.

The owner did bring the mortgage current in March 2002 to prevent a HUD foreclosure. However,
this payment did not change the fact that Sun had already violated the regulatory agreement in 2001
by distributing funds in excess of surplus cash. In addition, the payment did not address the total
balance of excessive distributions (see Appendix B).

1999 Surplus Cash

Comments Synopsis:

The auditee stated it should have been allowed to collect the project’s 1999 surplus cash in
calendar year 2000, despite the mortgage default. The auditee asserted HUD was obligated to
apply the project’s Reserve for Replacement funds to temporarily cover the mortgage payments,
making the surplus cash available to Sun.

OIG Evaluation:

We do not agree with the auditee’s assertions over the application of the project’s Reserve for
Replacements funds. The purpose of the reserve was for the replacement of the project’s capital
items. HUD was not required to allow these funds to cover the owner’s nonpayment of the
mortgage, which would have only temporarily delayed the default and subsequent assignment. It
would not have been reasonable for HUD to allow an owner to deplete the project’s reserves, just
so the owner could collect surplus cash.

Ineligible Ownership Income Taxes

Comments Synopsis:

The auditee stated that even though it did not obtain prior HUD approval, it should still be
allowed to charge the project for the income taxes. The auditee referred to HUD handbook
requirements, which state that HUD may approve such expenses. Sun also stated the income
taxes were Carmichael Rehabilitation Center, Inc.’s responsibility, not Sun Healthcare’s.

OIG Evaluation:

The auditee never obtained HUD’s prior written permission to charge the income taxes to the project.
As a result, the auditee was in violation of HUD handbook requirements. Just because HUD had the
option of granting such permission, does not mean the auditee was automatically entitled to charge
the project.




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Ineligible Ownership Goodwill

Comments Synopsis:

Sun acknowledged goodwill amortization was a corporate expense, but claimed the charges to the
project were in accordance with standard company and industry practices and generally accepted
accounting principles. The auditee also wanted credit for management fees it could have charged
the project.

OIG Evaluation:

Whether or not Sun’s internal policies called for these expenses to be allocated to the facility level
does not change the fact that they were ineligible ownership expenses in violation of the Regulatory
Agreement and other HUD requirements. The goodwill was not a project asset so the associated
amortization expense was not a reasonable and necessary project expense.

Sun’s request to now retroactively charge a management fee to offset ineligible expenses is not
reasonable.


                                      RECOMMENDATIONS


We recommend the Director of Multifamily Housing:

     1A. Pursue recovery from Sun Healthcare of the $323,925 loss incurred on the sale of the
         mortgage note.

     1B. Take appropriate administrative action and pursue recovery of the net ineligible distributions
         amount of $3,769,290 from Sun Healthcare, as permitted by statute (12 U.S.C. Sec. 1715z-
         4a).




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                                 MANAGEMENT CONTROLS

In planning and performing our audit, we considered the management controls relevant to the
Carmichael Rehabilitation Center and Sun Healthcare activity to determine our audit procedures,
not to provide assurance on the controls. Management controls include the plan of organization,
methods, and procedures adopted by management to ensure that its goals are met. Management
controls include the processes for planning, organizing, directing, and controlling program
operations. They include the systems for measuring, reporting, and monitoring program
performance.

We determined that the following management controls were relevant to our audit objectives:

     •    Controls and procedures over cash management of project funds
     •    Controls and procedures over project disbursements and expenses

It is a significant weakness if management controls do not provide reasonable assurance that the
process for planning, organizing, directing, and controlling program operations will meet an
organization’s objectives.

Based on our review, we believe there was a significant weakness in Sun Healthcare’s lack of
policies and procedures to ensure it followed HUD Handbook and Regulatory Agreement
requirements over cash management and disbursement of project funds.




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                                                                                       Appendix A


                                SCHEDULE OF QUESTIONED COSTS

Finding Number                      Type of Questioned Cost                 Funds to be Put to
                            Ineligible 1/        Unsupported 2/             Better Use 3/

          1A                  $323,925
          1B                $3,769,290



1/        Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
          that the auditors believed are not allowable by law, contract or Federal, State or local
          policies or regulations.

2/        Unsupported costs are costs charged to a HUD-financed or HUD-insured program or
          activity, and eligibility cannot be determined at the time of the audit. The costs are not
          supported by adequate documentation, or there is a need for a legal or administrative
          determination on the eligibility of the costs. Unsupported costs require a future decision
          by HUD program officials. This decision, in addition to obtaining supporting
          documentation, might involve a legal interpretation or clarification of Departmental
          policies and procedures.

3/        Funds to be put to better use are costs that will not be expended in the future if our
          recommendations are not implemented; for example, costs not incurred, de-obligation of
          funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary
          expenditures, loans and guarantees not made and other savings.




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                                                                                                                          Appendix B




Ineligible Diversions of Carmichael's Funds

Inappropriate Activity                        1997             1998            1999               2000          2001               Total

Ineligible Distributions   $253,457 $ 83,805 $515,264 $648,690 (1) $ 1,464,403 (2) $ 2,965,619
Ownership Goodwill Expense          $ 42,076 $ 75,054                              $ 117,130
Ownership Income Taxes     $231,000 $128,510 $251,031 $     29,300 $        46,700 $ 686,541
Total Ineligible Diversions                 $484,457 $254,391 $841,349 $                            677,990 $   1,511,103 $ 3,769,290

Period project in default on mortgage, December 1999 through March 2002.
(1) - Financial audit report for fiscal year 2000 only identified $458,097 of the ineligible distributions.
(2) - Financial audit report for fiscal year 2001 only identified $1,056,740 of the ineligible distributions.




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                                                               Appendix C

                              AUDITEE COMMENTS




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