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HomeMy WebLinkAboutMSU Audit 08-31-06 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005 TABLE OF CONTENTS Paoe Independent Auditor's Report 1 Financial Statements: Statements of Financial Position 2 Statements of Activities 3 -4 Statements of Cash Flows 5 Notes to Financial Statements 6-11 Supplemental Schedules: Schedule I —Schedule of Revenue Available for Fixed Charges and Fixed Charges 12 Schedules II —Certification of the Fixed Charges Coverage Ratio 13 L ISEDGIN, PARKMAN, FLEMING & FLEMING, PC CERTIFIED PUBLIC ACCOUNTANTS MICHAEL D.EDGIN,CPA 2405 KEMP BLVD.,SUITE B . P.O.Box 750 DAVID L. PARKMAN,CPA,CFE WICHITA FALLS,TEXAS 76007-0750 A.PAUL FLEMING,CPA,CFE PH.(940)766-5550 - FAx(940)766-5778 J.MARK FLEMING,CPA Independent Auditor's Report To the Board of Directors of Texas Student Housing Corporation— MSU Project We have audited the accompanying statement of financial position of Texas Student Housing Corporation — MSU Project (Corporation) as of August 31, 2006, and the statements of activities, and cash flows for the year then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements for the year ended August 31, 2005 were audited by other auditors, whose report dated December 14, 2005 expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 Texas Student Housing Corporation —MSU Project as of August 31, 2006, and the changes in its net assets (deficit) and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules I and II are presented for purposes of additional analysis and are not required as part of the basic financial statements. Such information has been subjected to 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. M, �[ran.�m rTN/ EDGIN, PARKMAN, FLEMING & FLEMING, PC Wichita Falls, Texas January 10, 2007 1 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT STATEMENTS OF FINANCIAL POSITION AUGUST 31, 2006 AND 2006 2006 2005 ASSETS Cash and cash equivalents $ 324,048 $ 312,320 Restricted cash and investments 2,422,132 2,448,914 Accounts receivable 216,296 175,790 Prepaid insurance 33,454 33,821 2,995,930 2,970,845 Property and equipment: Building 11,300,714 11,300,714 Furniture, fixtures and equipment 633,999 629,004 11,934,713 11,929,718 Less accumulated depreciation 1,318,854 878,764 Net property and equipment 10,615,859 11,050,954 Intangible assets: Deferred financing costs 401,790 422,767 Total assets $ 14,013,579 $ 14,444,566 LIABILITIES Accounts payable $ 23,327 $ 18,865 Other current liabilities 12,711 11,395 Deferred revenue 613,054 574,575 Accrued interest 461,875 464,900 Bonds payable 13,966,214 14,052,000 Total liabilities 15,077,181 15,121,735 NET ASSETS (DEFICIT) Temporarily restricted (1,063,602) (677,169) Total liabilities and net assets (deficit) $ 14,013,579 $ 14,444,566 See accompanying notes to financial statements. 2 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED AUGUST 31, 2006 Temporarily Unrestricted Restricted Total Revenue: Rental income $ $ 1,578,707 $ 1,578,707 Other operating income 16,935 16,935 Total revenue - 1,595,642 1,595,642 Net assets released from restrictions 1,099,166 (1,099,166) - Expenses: Personnel expenses 148,035 148,035 Insurance 53,539 53,539 Telephone &communication services 48,499 - 48,499 Utilities 241,581 - 241,581 Repairs, maintenance & supplies 51,287 - 51,287 Other operating expenses 82,201 - 82,201 Issuer administration fee 25,000 - 25,000 Other fees 8,934 8,934 Depreciation expense 440,090 440,090 Total expenses 1,099,166 - 1,099,166 Other income and (expense): Interest income - 86,033 86,033 Interest expense - (968,942) (968,942) Total other income and (expense) - (882,909) (882,909) Change in net assets - (386,433) (386,433) Net assets (deficit) at beginning of period (677,169) (677,169) Net assets (deficit) at end of period $ $ (1,063,602) $(1,063,602) See accompanying notes to financial statements. 3 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED AUGUST 31, 2005 Temporarily Unrestricted Restricted Total Revenue: Rental income $ $ 1,556,660 $1,556,660 Other operating income 14,072 14,072 Total revenue - 1,570,732 1,570,732 Net assets released from restrictions 991,576 (991,576) Expenses: Personnel expenses 135,204 - 135,204 Insurance 54,059 - 54,059 Telephone &communication services 40,591 - 40,591 Utilities 194,525 - 194,525 Repairs, maintenance & supplies 32,205 - 32,205 Other operating expenses 60,223 - 60,223 Issuer administration fee 25,000 - 25,000 Other fees 10,178 - 10,178 Depreciation expense 439,591 439,591 Total expenses 991,576 991,576 Other income and (expense): Interest income - 68,750 68,750 Interest expense - (975,202) (975,202) Total other income and (expense) - (906,452) (906,452) Change in net assets - (327,296) (327,296) Net assets (deficit) at beginning of period - (349,873) (349,873) Net assets (deficit) at end of period $ - $ (677,169) $ (677,169) See accompanying notes to financial statements. 4 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005 2006 2005 Cash flows from operating activities: Change in net assets $ (386,433) $ (327,296) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 440,090 439,591 Amortization (64,809) 45,403 Changes in operating assets and liabilities: (Increase) decrease in: Restricted cash and investments 26,782 (92,324) Accounts receivable (40,506) 53,161 Prepaid insurance 367 151 Increase (decrease) in: Accounts payable 4,462 7,861 Other current liabilities 1,316 3,122 Deferred revenue 38,479 (8,406) Accrued interest (3,025) - Net cash provided by operating activities 16,723 121,263 Cash flows from investing activities: Purchase of property and equipment (4,995) (4,180) Net cash used by investing activities (4,995) (4,180) Net increase in cash and cash equivalents 11,728 117,083 Cash and cash equivalents at beginning of period 312,320 195,237 Cash and cash equivalents at end of period $ 324,048 $ 312,320 Supplemental disclosures of cash flows information: Cash paid during period for interest $ 926,775 $ 929,800 See accompanying notes to financial statements. 5 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2006 AND 2005 Note 1 - NATURE OF BUSINESS Texas Student Housing Corporation — MSU Project (Corporation), a Texas non-profit organization, was incorporated on April 22, 2002, as a duly constituted authority of the Town of Westlake, Texas (Town) pursuant to Section 53.35(b) of the Texas Education Code, as amended (Act). The Corporation's primary purpose was to construct, own and operate a student housing facility known as Sunwatcher Village (Property) on the campus of Midwestern State University (MSU) in Wichita Falls, Texas. The Property was constructed from the proceeds from the issuance of Texas Student Housing Corporation - MSU Project Student Housing Revenue Bonds, Series 2002 (Bonds). The Bonds were issued through a Trust Indenture (Trust Indenture) by and between the Corporation and The Bank of New York (Trustee) dated August 1, 2002. The land on which the Property is located (approximately 4 acres) is leased and the Property is operated and managed under the terms of the Ground Lease and Management Agreement (Agreement) by and between the Corporation and MSU. Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the Corporation's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. Basis of Accounting The accounts are maintained and the financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Cash and Cash Equivalents The Corporation considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. At August 31, 2006 and 2005, the Corporation had no such investments included in cash and cash equivalents. The Corporation maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (FDIC). At August 31, 2006 and 2005, no portion of these deposits was uninsured. 6 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT NOTES TO FINANCIAL STATEMENTS (CONT'D.) AUGUST 31, 2006 AND 2005 Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D.) Restricted Cash and Investments Restricted cash and investments represent amounts held by the Trustee, which are restricted for the payment of expenses as required by the Trust Indenture. Accounts Receivable Accounts receivable are stated at amounts management expects to collect from outstanding balances. Management writes off uncollectible amounts through a reduction to revenue and a credit to accounts receivable based on its assessment of the outstanding receivables. At year end management assesses the accounts receivable balance and writes off any balances deemed to be uncollectible based on historical experience and an evaluation of the outstanding balances. Management does not consider these amounts to be material. Property and Equipment Property and equipment have been recorded at the date of acquisition at cost. Expenditures directly related to the improvement of property are capitalized at cost. The Corporation capitalizes the cost of major property improvements and furniture, fixtures and equipment if the unit cost of the item is greater than $2,500. Routine maintenance and repair costs are expensed as incurred. As assets are retired or disposed of, the associated cost of assets retired and the related accumulated depreciation are removed from the accounts. There were no retirements during the years ended August 31, 2006 and 2005. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Building 30 years Furniture, fixtures and equipment 10 years Deferred Financing Costs Costs associated with the issuance of bonds are deferred and amortized to interest expense over the term of the bonds. Revenue Recognition Rental and other operating income is recorded on the accrual method of accounting and recognized as earned. The Corporation reports prepaid rental income as revenue when the rental income is due from the tenant. Such amounts received but not yet earned as of year end are reported as deferred revenue. Rental income received from the operation of the Corporation is restricted by the terms of the Trust Indenture for the purpose of satisfying the amounts owed by the Corporation to the bondholders and for the payment of operating expenses incurred by the Corporation. Other operating income includes various charges to tenants, such as forfeitures, damages, and other. 7 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT NOTES TO FINANCIAL STATEMENTS (CONT-D.) AUGUST 31, 2006 AND 2006 Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D.) Advertising Costs All advertising costs are expensed as they are incurred. Income Taxes The Corporation is an instrumentality of the Town and, therefore, its income is not subject to federal income taxation pursuant to Section 115 of the Internal Revenue Code. Financial Statement Presentation The Corporation presents their financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 117, Financial Statements of Not-for-Profit Corporations. Under SFAS No. 117, the Corporation is required to report information regarding their financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. In addition, the Corporation is required to present a statement of cash flows. Note 3 - RESTRICTED CASH AND INVESTMENTS Restricted cash represents amounts placed on deposit in an account held by the Trustee, which are restricted for the payment of expenses as required by the Trust Indenture. At August 31, 2006 and 2005, restricted cash and investments consist of the following funds and accounts: Fund/Account Description 2006 2005 Revenue Fund $ 79,281 $ 116,089 Operating Fund 19 19 Bond Fund 606,875 574,900 Debt Service Reserve Fund 1,134,327 1,134,327 Repair and Replacement Fund 189,727 123,980 Basic Additional Payments Fund 8,519 8,582 Subordinated Operating Expense Fund 19 18 Issuer Administration Fund 32,283 31,597 Surplus Fund 306,727 410,710 Tax and Insurance Fund 30,367 13,410 Insurance and Condemnation Fund 1 1 Cost of Issuance Fund - 2,430 Construction and Acquisition Fund 31,815 30,753 Project Capital Improvement Fund 2,172 2,098 Total 2.4 $2.448.914 8 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT NOTES TO FINANCIAL STATEMENTS (CONT-D.) AUGUST 31, 2006 AND 2005 Note 3 - RESTRICTED CASH AND INVESTMENTS (CONT'D.) The following is a brief description of the funds and accounts making up the restricted cash and investments balance at year end, as defined by the Trust Indenture. Revenue Fund — The revenue fund was established for monthly deposits from the depository account that holds general revenues of the Corporation. All monies are deposited in the revenue fund and then properly distributed to the other funds, as required by the Trust Indenture. Amounts in this fund at year end represent amounts that have not been distributed to the other funds due to timing of the interfund transfers. Operating Fund— Amounts in the operating fund are to be disbursed each month to MSU for the purpose of paying monthly operating and maintenance expenses authorized under the Annual Budget. Bond Fund — The Trustee makes monthly deposits in the bond fund pursuant to the Trust Indenture. Amounts in the bond fund shall be used solely to fund the payment of principal and interest on the Bonds, for the redemption of the Bonds at or prior to maturity, and to purchase bonds on the open market. In the event of default, amounts in this fund may pay the fees and expenses of the Trustee prior to making any payments to the bondholders. This fund has two accounts, the interest and principal accounts. Debt Service Reserve Fund— The amounts on deposit in this account are to be used for the purpose of paying principal and interest on the Bonds as they become due in the event there should be insufficient funds in the Bond Fund. Repair and Replacement Fund— Amounts in the repair and replacement fund may be (a) used to pay the maintenance and repair costs related to the Property, which the Corporation is obligated to pay pursuant to the Trust Indenture and (b) transferred to the bond fund to pay principal of or interest on the Bonds to the extent there are insufficient monies in the bond fund. Basic Additional Payments Fund — Amounts are deposited in the basic additional payments fund on a monthly basis and are intended to pay the fees of the Trustee and Rating Agency. Subordinated Operating Expense Fund—Amounts in the subordinated operating expense fund are to be disbursed to MSU for any operating and maintenance expense item included in the Annual Budget not otherwise payable from the operating fund. Issuer Administration Fund — The amounts in the account are to be used to pay the Annual Lessee Fee on September 1 of each year until the Bonds have been paid in full. Surplus Fund — The Trustee shall deposit any remaining amount in the revenue fund into the surplus fund. Amounts on deposit in the surplus fund will be released to the University if certain release tests are satisfied. If the release tests are not satisfied, the Trustee will retain the monies on deposit in the surplus fund. Tax and Insurance Fund— Amounts in the tax and insurance fund are to be disbursed for the payment of the costs of maintaining the insurance on the Project, pay ad valorem property taxes, if any, or payments in lieu of taxes, if any. 9 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT NOTES TO FINANCIAL STATEMENTS (CONT-D.) AUGUST 31, 2006 AND 2005 Note 3 - RESTRICTED CASH AND INVESTMENTS (CONT'D.) Insurance and Condemnation Fund — This account is to be used to deposit net insurance proceeds and net condemnation proceeds, if any. Cost of Issuance Fund— Amounts deposited in the cost of issuance fund are intended to pay the costs of issuing the Bonds. Construction and Acquisition Fund — Amounts deposited in the construction and acquisition fund are intended to pay the costs of constructing and equipping the Project. Project Capital Improvement Fund—Amounts deposited in the project capital improvement fund are intended to fund any capital improvement included in the Corporation's annual budget. Note 4 - BONDS PAYABLE The Bonds are Tax-Exempt Governmental Obligations under the Internal Revenue Code. The bonds payable represents amounts due to the bondholders, via the Trustee, and payable under the terms of the Trust Indenture dated August 1, 2002. The Bonds are payable solely from the revenues generated by the Property and are secured by the revenues pledged and assigned under the terms of the Trust Indenture. The bonds payable as of August 31, 2006 and 2005 are as follows: 2006 2005 Gross bonds payable $14,430,000 $14,540,000 Less discounts 463,786 488,000 Totals $13.966.214 $14.052.000 Future payments for the bond principal are as follows: Principal Year Ending August 31 Payment 2007 $ 145,000 2008 170,000 2009 200,000 2010 210,000 2011 220,000 Thereafter 13.485,000 Total 14.430.000 10 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT NOTES TO FINANCIAL STATEMENTS (CONT-D.) AUGUST 31, 2006 AND 2005 Note 4 - BONDS PAYABLE (CONT'D.) The Bonds bear interest at the rates per annum, as described below, computed on the basis of a 360-day year consisting of twelve 30-day months, payable semi-annually on September 1 and March 1 of each year thereafter. Interest rates for the Bonds are as follows: Maturity Principal Interest Year Amount Rate 2012 $1,530,000 5.5% 2022 3,485,000 6.5% 2034 9,525,000 6.5% Interest expense incurred on the Bonds for the years ended August 31, 2006 and 2005 was as follows: 2006 2005 Interest on Bonds $923,750 $929,800 Amortization of financing costs 20,978 21,075 Amortization of bond discount 24,214 24.327 Total interest expense $9.942 � The Bonds have numerous covenants which must be complied with annually by the Corporation. For the years ended August 31, 2006 and 2005, all of the covenants have been satisfactorily met. Note 5 - TEMPORARILY RESTRICTED NET DEFICIT Temporarily restricted net deficit represents the cumulative excess expenses over revenues at August 31, 2006 and 2005 of $1,063,602 and $677,169, respectively. The deficits are restricted for the operations of the Project and the repayment of the Bond principal and interest. Note 6 - CONCENTRATION The Corporation owns one property which is located on the campus of MSU in Wichita Falls, Texas. Therefore, the Corporation is dependent upon MSU for revenue. Note 7 - COMMITMENT/CONTINGENCY Pursuant to the Agreement, the Corporation may owe MSU an amount annually for the ground lease. No payments for the ground lease have been made since inception. Additionally, no amounts have been accrued in the accompanying statements of financial position since the payments are contingent of the Corporation meeting its bond covenants and having surplus funds available. The maximum amount of funds available to pay the ground lease is $306,727 which is the amount in the Surplus Fund at August 31, 2006. 11 SUPPLEMENTAL SCHEDULES TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT SCHEDULE I -SCHEDULE OF REVENUE AVAILABLE FOR FIXED CHARGES, FIXED CHARGES, AND FIXED CHARGES COVERAGE RATIO FOR THE YEAR ENDED AUGUST 31, 2006 Revenue Available for Fixed Charges Revenue: Rental income $ 1,578,707 Other operating income 16,935 Total revenue $ 1,595,642 Expenses: Personnel expenses 148,035 Insurance 53,539 Telephone&communication services 48,499 Utilities 241,581 Repairs, maintenance&supplies 51,287 Other operating expenses 82,201 Issuer administration fee 25,000 Other fees 8,934 Total expenses (659,076) Other income: Interest income 86,033 Net revenue 1,022,599 Adjustments to net revenue: Additions: Issuer administration fee 25,000 Subordinate expenses 338,956 Subtractions: Annual Reserve& Replacement Fund additions (60,564) Trustee fee (5,250) Total adjustments to net revenue 298,142 Revenue Available for Fixed Charges $ 1,320,741 Fixed Charges Maximum annual debt service (2005-06 payments) $ 1,036,775 Fixed Charges Coverage Ratio 1.27 12 TEXAS STUDENT HOUSING CORPORATION - MSU PROJECT SCHEDULE II—CERTIFICATION OF THE FIXED CHARGES COVERAGE RATIO We are providing this letter, as required by the Trust Indenture by and between the Corporation and the Trustee, dated August 1, 2002, relating to the Bonds to certify the Fixed Charges Coverage Ratio as of August 31, 2006. The Fixed Charges Coverage Ratio is defined in the Indenture as the ratio of Revenue Available for Fixed Charges to Fixed Charges. Further, fixed charges are defined in the Indenture as the sum of all cash outflows related to the Project that the Issuer cannot avoid without violating long-term contractual or legal obligations (those obligations which extend for a period greater than one year), including, but not limited to, (i) interest on Indebtedness other than Short-Term Indebtedness, and (ii) scheduled payments of principal on Indebtedness other than Short-Term Indebtedness, provided that Maximum Annual Debt Service shall be used for purposes of computing (i) and (ii) above. The audited financial statements indicate revenue available for fixed charges for the twelve month period ended August 31, 2006 to be $1,320,741. The maximum annual debt service for the bonds is $1,036,775. Based on the above revenues and fixed charges, we calculate that the Fixed Charges Coverage Ratio as of August 31, 2006 to be 1.27, which is based on twelve months of operations then ended, which is in compliance with the Trust Indenture. Pursuant to the Trust Indenture, the Fixed Charges Coverage Ratio must be at least 1.20. 13