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HomeMy WebLinkAboutDenton Audit 08-31-03 TEXAS STUDENT HOUSING CORPORATION— DENTON PROJECT FINANCIAL STATEMENTS As of August 31, 2003 and June 30, 2002 and for the Fourteen-Month Period Ended August 31, 2003 with Report of Independent Auditors TEXAS ,STUDENT HOUSING CORPORATION DENTON PROJECT As of August 31, 2003 and June 30, 2002 and for the Fourteen-Month Period Ended August 31, 2003 Table of Contents Reportof Independent Auditors......................................................................................................... 1 Financial Statements: Statements of Financial Position........................................................................................... 2 Statement of Activities and Changes in Net Deficit............................................................. 3 Statementof Cash Flows ...................................................................................................... 4 Notesto Financial Statements............................................................................................................ 5 Supplemental Schedules: Schedule I—Schedule of Revenues and Expenses............................................................... 13 Schedule 11—Certification of the Fixed Charges Coverage Ratio........................................ 14 Partners VII H I T L E Y PENN Larry G.Autrey,P.C, CPA5 AND PRpFESSiONAL CONSULTANTS Felixf.Lozano Ili, P.C. .Scott A. Mayfield, P.C. Ricky L. McBride, P.C. David L. Neal, P.C. James C. Penn, P.C. Tilomasf,Rein, P.C. REPORT OF INDEPENDENT AUDITORS Mark A Topel, P.C. J.Alan White, P.C. B. Glen Whitley, P.C. To the Board of Directors of Texas Student Housing Corporation—Denton Project We have audited the accompanying statements of financial position of Texas Student Housing Corporation—Denton Project (the "Corporation") as of August 31, 2003 and June 30, 2002, and the statements of activities and changes in net deficit and cash flows for the fourteen-month period ended August 31, 2003. 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 audits. We conducted our audits 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 — Denton Project as of August 31, 2003 and June 30, 2002, and the changes in its net deficit and its cash flows for the fourteen- month period ended August 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Our audits were 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 audits 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. ; r WOW Fort Worth,Texas October 17, 2003 Dallas:542o LBf Freeway,Suite 144o•Dallas,Texas 75240• (972)392-6600•fax(972)392-6601 Fart Worth:17o1 River Run Road,Suite 507•Fort Worth,Texas 76107•(817)258-9100•fax(817)877-3036 Mid-Cities:86o West Airport Freeway,Suite 6o1 •Hurst,Texas 76054•(817)258-9100•fax($17)656-4013 www.wpcpa.com TEXAS STUDENT HOUSING CORPORATION-DENTON PROJECT STATEMENTS OF FINANCIAL POSITION August 31, June 30, 2003 2002 Assets Cash and cash equivalents $ 597,161 $ 178,118 Restricted cash 3,803,766 5,001,903 Accounts receivable, net of reserve of$23,000 and$0,respectively 96,279 261,069 4,497,206 5,441,090 Property and equipment: Land 2,200,000 2,200,000 Furniture, fixtures and equipment 1,253,841 1,140,550 Building 25,705,000 25,705,000 29,158,841 29,045,550 Less accumulated depreciation 2,264,991 1,038,439 Total property and equipment, net 26,893,850 28,007,111 Intangible assets: Deferred financing costs 944,636 984,232 Total assets $ 32,335,692 $ 34,432,433 Liabilities and Net Deficit Liabilities: Trade accounts payable $ 149,024 $ 42,728 Management fees payable 471,938 168,025 Deferred revenue 210,632 203,078 Tenant security deposits 60,597 63,853 Accrued interest 412,817 1,235,140 Accrued legal fees 213,271 161,066 Other current liabilities 52,954 24,877 Property management advance 363,796 123,914 Bonds Payable 32,215,311 33,302,989 Total liabilities 34,150,340 35,325,670 Net deficit: Temporarily restricted (1,814,648) (893,237) Total liabilities and net deficit $ 32,335,692 $ 34,432,433 See accompanying notes to financial statements. 2 TEXAS STUDENT HOUSING CORPOATION-DENTON PROJECT STATEMENT OF ACTIVITIES AND CHANGES IN NET DEFICIT For the Fourteen-Month Period Ended August 31,2003 Temporarily Unrestricted Restricted Total Revenue Rental income $ - $ 4,578,061 $ 4,578,061 Other operating income - 177,284 177,284 Total Revenue - 4,755,345 4,755,345 Net assets released from restriction 5,676,756 (5,676,756) - 5,676,756 (921,411) 4,755,345 Expenses Personnel expenses 438,398 - 438,398 Contract services 40,835 - 40,835 Utilities 414,642 - 414,642 Repairs and maintenance 30,075 - 30,075 Turnover expenses 157,033 - 157,033 Advertising and promotion 35,685 - 35,685 Administration expenses 97,147 - 97,147 Management fees 372,425 - 372,425 Replacements 54,863 - 54,863 Depreciation expense 1,226,552 - 1,226,552 Other expenses 65,035 - 65,035 2,932,690 - 2,932,690 Other Income and Expense Interest income (170,324) - (170,324) Interest expense 2,914,390 - 2,914,390 2,744,066 - 2,744,066 Change in net deficit - (921,411) (921,411) Net deficit at beginning of year - (893,237) (893,237) Net deficit at end of year $ - $ (1,814,648) $ (1,814,648) See accompanying notes to financial statements. 3 TEXAS STUDENT HOUSING CORPORATION-DENTON PROJECT STATEMENT OF CASH FLOWS Fourteen-Month Period Ended August 31, 2003 Cash flows from operating activities Changes in net deficit $ (921,411) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 1,226,552 Non-cash interest expense 81,918 Changes in operating assets and liabilities Restricted cash 1,198,137 Accounts receivable 164,790 Trade accounts payable 106,296 Management fees payable 303,913 Deferred revenue 7,554 Tenant security deposits (3,256) Accrued interest (822,323) Accrued legal fees 52,205 Other current liabilities 28,077 Net cash provided by operating activities 1,422,452 Cash flows from investing activities Purchase of property and equipment (113,291) Net cash used by investing activities (113,291) Cash flows from financing activities. Payments on bonds payable (1,130,000) Proceeds from property management advance 239,882 Net cash used by financing activities (890,118) Net increase in cash and cash equivalents 419,043 Cash and cash equivalents at beginning of year 178,118 Cash and cash equivalents at end of year $ 597,161 Supplemental disclosures.of cash flow information Cash paid during year for interest $ 3,654,795 See accompanying notes to financial statements. 4 TEXAS STUDENT HOUSING CORPORATION—DENTON PROJECT NOTES TO FINANCIAL STATEMENTS August 31,2003 A. Nature of Business Texas Student Housing Corporation — Denton Project (the "Corporation"), a Texas non-profit organization, was incorporated on May 17, 2001, as a duly constituted authority of the Town of Westlake, Texas (the "Town") pursuant to Section 53.35(b) of the Texas Education Code, as amended (the "Act"). The Corporation's primary purpose was to purchase, own and operate a student housing facility known as Jefferson Commons (the"Denton Property") in Denton,Texas. The Denton Property was purchased from Jefferson Commons — Denton, L.P. on July 17, 2001. The Corporation obtained its financing through the issuance of Texas Student Housing Corporation — Denton Project Student Housing Revenue Bonds (University of North Texas Project), Series 2001A and Subordinate Series 2001B (the "Bonds"). The Bonds were issued through a Trust Indenture (the "Trust Indenture") by and between the Corporation and The Bank of New York (the "Trustee"). The Series 2001A and Subordinate Series 2001B bonds were issued in the amounts face amounts of$29,105,000 and$5,250,000,respectively. The Corporation was also established to provide education and/or housing assistance to deserving students residing in the Feller Independent School District, the Carroll Independent School District, and the Northwest Independent School District at institutions of higher education that are aided by the Corporation. The Denton Property is operated and managed under the terms of the (a) Property Management and Leasing Agreement by and between the Corporation and JPI Campus Quarters Management, L.P. ("JPI") and (b) the Asset Management Agreement by and between the Corporation and JPI Apartment Management,L.P., (collectively referred to as the "Agreements"). The Corporation changed its fiscal year-end from June 30 to August 31 effective August 31, 2003. B. 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. 5 TEXAS STUDENT HOUSING CORPORATION—DENTON PROJECT NOTES TO FINANCIAL STATEMENTS (continued) B. Summary of Significant Accounting Policies—continued 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 Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. At August 31, 2003 and June 30, 2002, the Company had no such investments included in cash and cash equivalents. The Company 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, 2003 and June 30, 2002 the uninsured portion of these deposits approximated $3,757,000 and $5,062,000, respectively. Restricted Cash Restricted cash represents 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-Lmeollectible 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 establishes a valuation allowance based on historical experience and an evaluation of the outstanding balances. Deferred Financing Costs Costs associated with the issuance of bonds are deferred and amortized to interest expense over the term of the bonds. Advertising Costs All advertising costs are expensed as they are incurred. Advertising costs for the fourteen-month period ending August 31, 2003 were approximately $36,000. 6 TEXAS STUDENT HOUSING CORPORATION—DENTON PROJECT NOTES TO FINANCIAL STATEMENTS (continued) B. Summary of Significant Accounting Policies—continued Property and Equipment Property and equipment have been recorded at the date of acquisition at cost. 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 fourteen-month period ended August 31, 2003. Expenditures directly related to the improvement of property are capitalized at cost. The Corporation capitalizes the cost of roof replacement, appliances, and expenditures for other major property improvements, as well as rehabilitation and repositioning costs incurred. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Building 30 years Furniture, fixtures and equipment 3 to 20 years 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 common area fees, carport rentals, late charges, and other. 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. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 7 TEXAS STUDENT HOUSING CORPORATION—DENTON PROTECT NOTES TO FINANCIAL STATEMENTS (continued) C. Restricted Cash 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, 2003 and June 30, 2002,. restricted cash consists of the following funds and accounts: Fund/Account Description 2003 2002 Revenue Fund $ - $ 9,982 Bond Fund—Series 2001A 324,281 972,797 Bond Fund---Series 2001B 69,797 262,345 Project Fund 67,989 117,624 Repair and Replacement Fund 204,373 89,816 Surplus Fund - 16 Trustee Fee Fund 5,099 4,186 Series A Principal Fund 8,333 - Series B Principal Fund 107,512 540,001 Operating Reserve Fund 88,256 - Debt Service Reserve Fund—Series 2001A 2,403,124 2,466,326 Debt Service Reserve Fund—Series 2001B 525,002 538,810 $ 3,803,766 $ 5,001,903 The following is a brief description of the funds and accounts making up the restricted cash 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. 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 Series 2001A and the Series 2001B accounts. Project Fund — The project fund shall be used solely for the purposes of purchasing assets from the Seller. 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 Denton 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. 8 TEXAS STUDENT HOUSING CORPORATION—DENTON PROJECT NOTES TO FINANCIAL STATEMENTS (continued) C. Restricted Cash- continued 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 Corporation 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. Trustee Fee Fund—Amounts are deposited in the trustee fee fund on a monthly basis and are intended to pay the fees to the Trustee at year end. As of August 31, 2003 these fees have not been paid and are appropriately accrued in the Statement of Financial Position. Series A Principal Fund—Amounts in the Series A principal fund represent sinking fund payments set aside for repayment of the principal balance on the Series A Bonds. Series B Principal Fund—Amounts in the Series B principal fund represent sinking fund payments set aside for repayment of the principal balance on the Series B Bonds. Operating Reserve Fund— Amounts in the operating reserve fund may be transferred to the property manager to fund operations if the transfer from the revenue fund is not sufficient to pay operating expenses. Amounts may also be transferred to the Bond Fund to pay principal and interest on the bonds; to the extent there are insufficient moneys in the Bond Fund on any interest payment date. Debt Service Reserve 2001A Account The amounts on deposit in this account are to be used for the purpose of paying principal and interest on the Series 2001A Bonds as they become due in the event there should be insufficient funds in the Bond Fund. Debt Service Reserve 2001B Account—The amounts on deposit in this account are to be used for the purpose of paying principal and interest on the Series 2001B Bonds as they become due in the event there should be insufficient funds in the Bond Fund. D. Property Management Advance As of August 31, 2003 and June 30, 2003 the Corporation has recorded a liability to JPI for amounts advanced of approximately $364,000 and $124,000 respectively. These advances have been made to the Corporation according to the terms of the Agreements. In the terms of the Agreements, JPI is required to obtain approval from the Board of Directors of the Corporation prior to advancing funds. The Board of Directors of the Corporation are currently disputing this advance with JPI and the associated loan documents due to JPI not obtaining advance approval from the Board of Directors of the Corporation. The outcome of the dispute is unknown; therefore, the liability has been included in the accompanying financial statements of the Corporation. Once the dispute is finalized, the loan amount will be paid when there are available funds pursuant to the Trust Indenture. Further, the Agreement requires interest to accrue on the advance at the "Prime Rate" as published in The Wall Street Journal, plus 100 basis points. As of August 31, 2003 the financial statements include accrued interest related to the property management advance in the amount of approximately$19,000. There was no interest accrual as of June 30, 2002. 9 TEXAS STUDENT MOUSING CORPORATION—DENTON PROJECT NOTES TO FINANCIAL STATEMENTS (continued) E. 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 July 1, 2001. The bonds are payable solely from the revenues generated by the Denton Property and are secured by, the revenues pledged and assigned under the terms of the Trust Indenture. The bonds payable are shown net of remaining discounts in the amounts of$1,009,689 and$1,052,011 as of August 31, 2003 and June 30,2002,respectively. Future payments for the bond principal are as follows: Principal Year Ending Payment August 31,2004 $ 695,000 August 31, 2005 805,000 August 31, 2006 1,235,000 August 31, 2007 485,000 August 31, 2008 510,000 Thereafter 29,495,000 33,225,000 Less discounts 1,009,689 $ 32,215,311 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 July 1 and January 1 of each year thereafter. Interest rates for the Bonds are as fellows: Series 2001A Bonds Maturity Year Principal Amount Interest Rate 2007 $ 1,100,000 5.000% 2011 2,230,000 6.000% 2016 3,685,000 6.750% 2021 5,110,000 6.750% 2031 16,980,000 6.850% Series 2001B Bonds Maturity Year Principal Amount Interest Rate 2006 $ 3,250,000 9.375% 2031 2,000,000 11.000% Interest expense incurred on the Bonds for the fourteen-month period ended was $2,914,390. 10 TEXAS STUDENT HOUSING CORPORATION—DENTON PROTECT NOTES TO FINANCIAL STATEMENTS (continued) F. Temporarily Restricted Net Deficit Temporarily restricted net deficit represent excess of expenses over revenues in the amount of $421,411 for the fourteen-month period ended August 31, 2003. Temporarily restricted net assets are restricted for the operations of the Denton Property and the repayment of principal and interest associated with the Trust Indenture entered into by the Corporation and the Trustee. G. 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. H. Employee Benefit Plan Employees of the Denton Property are eligible to participate in the JPI 401(k) Profit Sharing Retirement Plan (the "Plan"). Employee salary deferrals into the Plan are matched by the Corporation up to 3% of employee compensation as defined by the Plan. The Corporation's contributions to the Plan were approximately$2,000 for the fourteen-month period ended August 31, 2003. I. Management Fees The Corporation pays JPI property and asset management fees for the management of the Denton Property. The Corporation recorded property and asset management fees of approximately $301,000 and$72,000,respectively for the fourteen-month period ending August 31, 2003. As of August 31, 2003 and June 30, 2002, the Corporation has recorded approximately $472,000 and $168,000,respectively in unpaid property and asset management fees. 11 SUPPLEMENTAL SCHEDULES TEXAS STUDENT HOUSING CORPOATION-DENTON PROJECT SCHEDULE I-SCHEDULE OF REVENUES AND EXPENSES For the Fourteen-Month Period Ended August 31,2003 Actual . Budget Variance Revenue and Other Support: Rental income $ 4,578,061 $ 4,878,278 $ (300,217) Other operating income 177,284 147,328 29,956 Interest income 170,324 165,000 5,324 4,925,669 5,190,606 (264,937) Operating Expenses: Personnel expenses 438,398 425,944 12,454 Contract services 40,835 41,530 (695) Utilities 414,642 357,836 56,806 Repairs and maintenance 30,075 40,454 (10,379) Turnover expenses 157,033 151,897 5,136 Advertising and promotion 35,685 37,636 (1,951) Administration expenses 97,147 93,792 3,355 1,213,815 1,149,089 64,726 Revenues available for fixed charges 3,711,854 4,041,517 (329,663) Other income/expense Management fees 372,425 367,675 4,750 Replacements 54,863 116,229 (61,366) Depreciation and amortization 1,226,552 - 1,226,552 Other(Income)and expense 65,035 57,474 7,561 Interest expense 2,914,390 2,822,045 92,345 4,633,265 3,363,423 1,269,842 Excess of expenses over revenue $ (921,411) $ 678,094 $ (1,599,505) 13 Texas Student Housing Corporation—Denton Project Schedule H—Certification of the Fixed Charges Coverage Ratio We are providing this letter, as required by the Trust Indenture by and between Texas Student Housing Corporation — Denton Project ("Corporation") and the Bank of New York ("Trustee"), dated July 1, 2001, relating to Texas Student Housing Corporation — Denton Project Student Housing Revenue Bonds (University of North Testing Project - the "Indenture"), to certify the Fixed Charges Coverage Ratio as of August 31, 2003. 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 fourteen- month period ended August 31, 2003 to be $3,711,854. The unaudited financial information indicates revenue available for fixed charges for the twelve months ending June 30, 2003 to be $3,280,780. The maximum annual debt service for the bonds is$3,465,280. Based on the above revenues and fixed charges, we calculate that the Fixed Charges Coverage Ratio as of August 31, 2003 to be 1.0712, which is based on fourteen months of operations. Based on the unaudited revenues available for fixed charges for the twelve months ending June 30, 2003, we calculate the Fixed Charges Coverage Ratio as of June 30, 2003 to be 0.947, which is not in compliance with the Trust Indenture. 14