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HomeMy WebLinkAboutDenton Audit 08-31-05-rev1TEXAS STUDENT HOUSING CORPORATION - THE RIDGE AT NORTH TEXAS FINANCIAL REPORT AUGUST 31, 2005 CONTENTS Page INDEPENDENT AUDITOR'S REPORT ................................................................................... 1 MANAGEMENT'S DISCUSSION AND ANALYSIS .................................................................. 3 FINANCIAL STATEMENTS Statement of Net Assets .................................................................................................. 7 Statement of Revenues, Expenses, and Changes in Net Assets ..................................... 8 Statement of Cash Flows ................................................................................................. 9 Notes to Financial Statements ....................................................................................... 11 SUPPLEMENTAL SCHEDULES Schedule 1-Schedule of Revenues and Expenses ....................................................... 20 Schedule II-Certificate of the Fixed Charges Coverage Ratio ..................................... 21 I I WEAVER I~ /_ p ACCOUNTANTS "-,ND CoNSULTANTs INDEPENDENT AUDITOR'S REPORT To the Board of Directors Texas Student Housing Corporation -The Ridge at North Texas We have audited the accompanying financial statements of the business type activities of Texas Student Housing Corporation-The Ridge at North Texas (the "Project"), as of and for the year ended August 31, 2005, as listed in the table of contents. Texas Student Housing Corporation -The Ridge at North Texas Project is a component unit of the Town of Westlake. These financial statements are the responsibility of the Project's management. Our responsibility is to express an opinion on these financial statements based on our audit. 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. As discussed in Note 1, the financial statements present only the Project and do not purport to, and do not, present fairly the financial position of Texas Student Housing Corporation as of August 31, 2005, and the changes in its financial position and cash flows, where applicable, for the year then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the business type activities of the Texas Student Housing Corporation-The Ridge at North Texas at August 31, 2005 and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that Texas Student Housing -The Ridge at North Texas will continue as a going concern. As discussed in Note 1 and Note 6 to the financial statements, the Project is in default on its Bonds and Bond Holders may choose to accelerate the bonds, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's discussion and analysis on pages 3 through 6 are not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Texas Student Housing Corporation The Ridge at North Texas Page 2 Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplemental schedules on pages 20 to 21 are presented for purposes of additional analysis and are not a required part of the basic financial statements of the Texas Student Housing Corporation -The Ridge at North Texas. The information has been subjected to the 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. WEAVER AND TIDWELL, L.L.P. Fort Worth, Texas January 19, 2006 MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited) TEXAS STUDENT HOUSING CORPORATION- THE RIDGE AT NORTH TEXAS MANAGEMENT'S DISCUSSION AND ANAYLSIS YEAR ENDED AUGUST 31,2005 (unaudited) Page3 As Staff of the Texas Student Housing Corporation-the Ridge at North Texas ("Denton") we offer the readers of Denton's Financial Statements this narrative overview and analysis of the financial activities of Denton for the fiscal year ended August 31,2005. We encourage readers to consider the information presented herein in conjunction with Denton's financial statements which follow this section. As the Corporation is an instrumentality of the Town of Westlake and is thus considered a governmental entity, Governmental Accounting Standards Board Statement 34, Basic Financial Statements-and Management Discussion and Analysis-for State and Local Governments (Statement 34) were implemented. The reader should note that this financial report addresses only the financial condition of Denton itself. FINANCIAL HIGHLIGHTS The Liabilities of Denton exceeded its Assets at the close of the fiscal year by $5,307,951 and increase of$1,778,674 over the prior year. The primary reason for this increase is debt service payments. Operating Revenue of$3,029,987 is $44,857less than budget; however Operating Expense is $41,888 worse than budget. Major components of the expense overage were utilities, and repair and maintenance as compared to budget. At the end of the current fiscal year, the total cash balances were $561,899 in unrestricted cash and $2,466,250 in restricted cash. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis are intended to serve as an introduction to Denton's basic fmancial statements. Denton's report consists of three parts-Management Discussion and Analysis. the basic financial statements, and notes to the financial statements. The basic financial statements include a statement of net assets, statement of revenues, expenses, and changes in net assets, a statement of cash flows, and supplemental schedules. TEXAS STUDENT HOUSING CORPORATION- THE RIDGE AT NORTH TEXAS MANAGEMENT'S DISCUSSION AND ANAYLSIS YEAR ENDED AUGUST 31, 2005 (unaudited) Page4 The statement of net assets presents information on all of the Corporation's assets and liabilities with the difference between the two reported as net assets. 2005 2004 Total current assets 3,941,275 4,748,934 Total capital assets 24,786,190 25,834,427 TOTAL ASSETS 28,727,465 30,583,361 Total current liabilities 34,035,416 34,112,638 Noncurrent liabilities TOTAL LIABILITIES 34,035,416 34,112,638 NET ASSETS Invested in capital assets, net of related debt (5,597,279) (5,723,369) Restricted for debt service 2,297,517 3,11 0,144 Unrestricted (2,008, 189) (916,052) TOTAL NET ASSETS (5,307,951) (3,529,277) The statement of revenues, expenses, and changes in net assets account for all of the Authority's revenues and expenses regardless of when cash is paid or received. 2005 2004 Total operating revenue 3,029,987 3,867,766 Total operating expenses (2,562,711) (2,760,086) OPERATING INCOME 467,276 1,107,680 Interest income 160,702 157,024 Interest expense (2,406,652) (2,503,408) TOTAL NONOPERATING LOSS (2,245,950) (2,346,384) CHANGE IN NET ASSETS (1 '778,67 4) (1 ,238,704) NET ASSETS, SEPTEMBER 1 (3,529,277) (2,290,573) NET ASSETS, AUGUST 31 (5,307,951) (3,529,277) The statement of cash flows recaps how cash decreased year over year. TEXAS STUDENT HOUSING CORPORATION- THE RIDGE AT NORTH TEXAS MANAGEMENT'S DISCUSSION AND ANAYLSIS YEAR ENDED AUGUST 31, 2005 (unaudited) NOTES TO THE FINANCIAL STATEMENTS Page 5 The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. Restricted Cash Restricted cash represents monies held in escrow by the Trustee and are restricted for the payment of expenses as outlined in the Installment Sale Agreement. As of August 31, 2005 these balances were as follows: Bond Fund-Series 2001A Bond Fund-Series 2001B Debt Service Reserve Fund-Series 2001A2, Debt Service Reserve Fund-Series 2002B Repair and Replacement Fund Trustee Fee Fund Series B Principal Fund Denton (UNT) Operating Reserve Denton (UNT) Series A Principal Total Non-Restricted Cash $ 50,248 103 2,402,695 12,895 39 49 99 7 115 $2,466,250 Non-restricted cash is available for general use of the project. Bonds Payable As of August 31,2005, since the bonds are in default, all amounts are considered due immediately. 2001ABonds 2001B Bonds2 Less Discounts Total $ 28,955,000 3,240,000 ( 934 719) $ 31,260,281 For the Fiscal Year ending on August 31, 2006, the total principal and interest payment is calculated at $3,465,280. A total of$335,000 in principal was paid during 2005. ECONOMIC FACTORS AND NEXT YEAR'S BUDGET Leases at Denton are primarily 12 month leases, however due to competitive and market conditions, a relatively minor number of 10 month leases exist. These leases do bring a monthly TEXAS STUDENT HOUSING CORPORATION- THE RIDGE AT NORTH TEXAS MANAGEMENT'S DISCUSSION AND ANAYLSIS YEAR ENDED AUGUST 31, 2005 (unaudited) Page 6 premium over the 12 month leases. Occupancy for the fiscal year ending August 31, 2006 is forecast at 94 %. However rental rates, again due to competitive pressures will not see a large increase. This is exacerbated by the fact that the University of North Texas does not allow Freshmen to live in off campus housing. CONTACTING THE AUTHORITY'S FINANCIAL MANAGEMENT This financial report is designed to provide the reader with a general overview of the Denton's finances and to demonstrate the Denton's accountability for the money it receives. If you have any questions about this report or need additional information, please contact Pete Ehrenberg at 817-490-5723 or Hank Smyth at 817-281-5053. FINANCIAL STATEMENTS Page 7 TEXAS STUDENT HOUSING CORPORATION -THE RIDGE AT NORTH TEXAS STATEMENT OF NET ASSETS AUGUST 31, 2005 ASSETS Current Assets Cash Restricted cash Accounts receivable, net of reserve of $2,857 Property management receivable Total current assets Capital Assets Land Other capital assets, net of accumulated depreciation Total capital assets Intangible Assets Deferred financing costs, net of amortization Total intangible assets Total Assets CURRENT LIABILITIES Trade accounts payable Management fees payable Tenant security deposits Accrued interest Accrued legal fees Other current liabilities Property management advance Deferred revenue Bonds payable Total current liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for debt service Unrestricted Total net assets The Notes to Financial Statements are an integral part of this statement. $ 561,8gg 2,466,250 4,894 31,420 3,064,463 2,200,000 22,586,190 24,786,190 876,812 876,812 28,727,465 88,676 831,011 1,264 612,226 188,g22 109,806 499,737 443,493 31,260,281 34,035,416 5,597,279) 2,297,517 2,008,189) ($ 5,307,951) Page 8 TEXAS STUDENT HOUSING CORPORATION -THE RIDGE AT NORTH TEXAS STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEAR ENDED AUGUST 31, 2005 OPERATING REVENUES Rental income Other income Total operating revenue OPERATING EXPENSES Personnel expenses Contract services Utilities Repairs and maintenance Turnover expenses Advertising and promotion Administration expenses Management fees Replacements Depreciation and amortization expenses Travel Other Total operating expenses OPERATING INCOME NONOPERATING REVENUES (EXPENSES) Interest income Interest expense TOTAL NONOPERATING LOSS CHANGE IN NET ASSETS NET ASSETS, AUGUST 31, 2004 NET ASSETS, AUGUST 31, 2005 The Notes to Financial Statements are an integral part of this statement. $ 2,905,894 124,093 3,029,987 330,581 46,936 435,566 114,783 123,601 50,022 128,222 116,878 91,507 1,119,626 2,776 2,213 2,562,711 467,276 160,702 2,406,652) ( 2,245,950) ( 1,778,674) 3,529,277) ($ 5,307,951) Page 9 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2005 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants Cash paid to employees Cash paid to suppliers Net cash provided by operating activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on bonds payable Interest paid Net cash used in capital and related financing activities CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments Net cash provided by investing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash Restricted Cash Total cash and cash equivalents The Notes to Financial Statements are an integral part of this statement. $ 2,959,441 ( 315,224) ( 695,261) 1,948,956 ( 335,000) ( 2,301 ,374) ( 2,636,374) 160,702 160,702 526,716) 3,554,865 $3,028,149 $ 561,899 2,466,250 $3,028,149 TEXAS STUDENT HOUSING CORPORATION -DENTON PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31,2005 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income Adjustments to reconcile operating income to net cash provided by operating activities Depreciation and amortization Changes in operating assets and liabilities: Accounts receivable Trade accounts payable Management fees payable Deferred revenue Tenant security deposits Other current liabilities Net cash provided by operating activities The Notes to Financial Statements are an integral part of this statement Page 10 $ 467,276 1 '119,626 53,547 ( 223,296) 31,998 239,485 ( 10,771) 271,091 $ 1,948,956 Page 11 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE1. GENERALSTATEMENT Texas Student Housing Corporation -The Ridge at North Texas (the "Project"), a Texas non-profit organization, was incorporated on May 17, 2001, a component unit of the Town of Westlake, Texas (the "Town") pursuant to Section 53.35(b) of the Texas Education Code, as amended (the "Act"). The Project's primary purpose is to purchase, own and operate a student housing facility known as Texas Student Housing Corporation-The Ridge at North Texas. The Project was purchased from Jefferson Commons-Denton, L.P. on July 17, 2001. The Project obtained its financing through the issuance of Texas Student Housing Corporation- Denton Project Texas 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 face amounts of $29,105,000 and $5,250,000, respectively. The accompanying financial statements present the operations of the Project, whose revenue streams are pledged for the bonds described herein. The Corporation was also established to acquire educational facilities and housing facilities to be used by the students, faculty and staff of institutions of higher education and facilities incidental, subordinate or related thereto or appropriate within the State of Texas. The Project was 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., up until September 30, 2004. The Project subsequent to September 30, 2004 is managed and operated by Asset Campus Housing under the terms of a Property Management and Leasing Agreement. The 2005 financial statements were prepared assuming the project will continue as a going concern. The Project's Bonds payable are considered to be in default by the Trustee which gives the bond holders the right to demand payment of the Bonds in full. Management and the property manager are in the process of developing and implementing plans to increase occupancy and rental rates at the property to improve its financial performance. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the Project's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: Reporting Entity For financial reporting purposes, management has considered all potential component units. The decision to include a potential component unit in the reporting entity was made by applying the criteria set forth in GASB Statement No. 14 as amended by GASB statement No. 39. The criteria used is as follows: Page 12 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED Reporting Entity-continued Financial Accountability -The primary government is deemed to be financially accountable if it appoints a voting majority of the organization's governing body and (1) it is able to impose its will on that organization or (2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government. Additionally, the primary government may be financially accountable if an organization is fiscally dependent on the primary government regardless of whether the organization has a separately elected governing board appointed by a higher level of government or a jointly appointed board. No entities met the above requirements to be considered component units. In addition, the Project is not a component unit of any other governmental entity. Measurement Focus and Basis of Accounting The Project uses the "economic resources" measurement focus. This means that all assets, liabilities, equity, revenues, and expenses are accounted for using the accrual basis of accounting. Revenue is recognized when earned and expenses are recognized when they are incurred. In applying the requirements of GASB Statement No. 20, the Project has chosen to apply all applicable GASB pronouncements as well as Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Income Taxes The Project 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. Cash and Cash Equivalents The Project considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. At August 31, 2005, the Project had no such investments included in cash and cash equivalents. In addition, the Project has restricted cash of $2,466,250 that is held by the Trustee for the Bonds Payable under provisions of the Indenture. During the year ended August 31, 2005 the investment income received from cash was $160,702. See Note 3 for risk disclosures and breakdown of restricted cash accounts. Page 13 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 2. 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. 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 establishes a valuation allowance based on historical experience and an evaluation of the outstanding balances. An allowance of $2,857 has been provided at August 31, 2005. Deferred Financing Costs Costs associated with the issuance of bonds are deferred and amortized to interest expense over the terms of the bonds. Advertising Costs All advertising costs are expensed as they are incurred. Advertising costs for the twelve- month period ending August 31, 2005 were approximately $50,000. Capital Assets Property and equipment have been recorded at the date of acquisition at cost. Routine maintenance and repair costs to ready the units for the next period are expensed as incurred. Expenditures directly related to the improvement of property are capitalized at cost. The Project capitalizes the cost of roof replacements and expenditures or other major property improvements. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Building Furniture and fixtures 30 years 3 to 20 years Page 14 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 3. CASH AND INVESTMENTS At August 31, 2005, the carrying amount of the Project's deposits (cash with interest bearing accounts and restricted cash held in interest bearing accounts) was in total $3,028,14g of which $2,466,250 represented restricted cash. The following is the breakdown of the restricted cash. Restricted Cash Restricted cash represents amounts placed on deposit in accounts and held by the Trustee, which are restricted for the payment of expenses as required by the Trust Indenture. At August 31, 2005, restricted cash consists of the following funds and accounts: Fund/Account Description Revenue Fund Bond Fund -Series 2001A Bond Fund-Series 2001B Repair and Replacement Fund Surplus Fund Trustee Fee Fund Series A Principal Fund Series B Principal Fund Operating Reserve Fund Debt Service Reserve Fund-Series 2001A Debt Service Reserve Fund -Series 2001 B Total $ 50,248 103 3g 4g 115 g9 7 2,402,695 12 895 $2.446 250 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 Project. All monies are deposited in the revenue fund and then properly distributed to the other funds, as required by the Trust Indenture. Amounts in the 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 2001 B accounts. Page 15 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 3. CASH AND INVESTMENTS -CONTINUED Restricted Cash -continued 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 Project 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. 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 Project 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. 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 monies in the Bond Fund on any interest payment date. Debt Service Reserve 2001 A 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 2001 B Account-The amounts on deposit in this account are to be used for the purpose of paying principal and interest on the Series 2001 B Bonds as they become due in the event there should be insufficient funds in the Bond Fund. The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies relating to a governmental entity's cash and investments. Disclosure Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an instrument. Generally, the longer the maturity of an investment the Page 16 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 3. CASH AND INVESTMENTS-CONTINUED Disclosure Relating to Interest Rate Risk-continued greater the sensitivity of its fair value to changes in market interest rates. Texas Student Housing Corporation-The Ridge at North Texas is not significantly exposed to interest rate risk as all investments earn a variable rate. Disclosure Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The Public Funds Investment act has a minimum rating that is required for investments. Texas Student Housing Corporation-The Ridge at North Texas holds all of its cash and investments with the bond trustee and commercial banks. Concentration of Credit Risk The investment policy of Texas Student Housing Corporation-The Ridge at North Texas is subject to the indenture agreement of the Bonds. As of August 31, 2005, Texas Student Housing Corporation-The Ridge at North Texas held all of its restricted cash balances with the trustee, which represents 81% of the total cash and investments held at August 31, 2005. Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Public Funds Investment Act does not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The Public Funds Investment Act requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least the bank balances less FDIC insurance at all times. As of August 31, 2005, the Project's unrestricted cash is $561,899 (bank balance $538,352). When the bank balance exceeds $100,000 it is no longer covered by federal depository insurance and the remaining portion is collateralized with a Bank Deposit Guarantee Bond from the Project's primary depository in the amount of $2,000,000. Page 17 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 4. PROPERTY MANAGEMENT ADVANCE AND MANAGEMENT FEES As of August 31, 2005 the Project has recorded a liability to JPI for amounts received of approximately $499,737. These advances have been made to the Project according to the terms of the Agreements. Further, the Agreement requires interest to accrue on the advances at the "Prime Rate" as published in The Wall Street Journal, plus 100 basis points (7.5% at August 31, 2005). As of August 31, 2005 the financial statements include accrued interest related to the property management advance in the amount of approximately $72,000 with expense for 2005 of approximately $33,000. In addition, the Project owes JPI property and asset management fees for the management of the Denton Property. As of August 31, 2005, the Project has recorded $831,011 in unpaid property and asset management fees. Interest accrues at 12% on unpaid management fees. Accrued interest of approximately $161,000 and current year expense of $72,000 has been recorded at August 31, 2005. The Project owes management fees of approximately $33,000 to ACH at August 31, 2005 which is included in other current liabilities. NOTE 5. CAPITAL ASSETS Capital asset activity for the Project for the year ended August 31, 2005 was as follows: Beginning Ending Balance Additions Retirements Balance Capital assets not being depreciated: Land $2,200,000 $ $ $2,200,000 Total capital assets not being depreciated 2,200,000 2,200,000 Capital assets being depreciated: Building 25,705,000 25,705,000 Furniture and fixtures 1253841 1,253.841 Total capital assets being depreciated 26.958,841 26,958.841 Totals at historical cost 29,158,841 29,158,841 Less accumulated depreciation: Building 1,713,709 856,833 2,570,542 Furniture and fixtures 1610705 191 404 1,802,109 Total accumulated depreciation 3 324 414 1,048,237 4,372,651 Capital assets, net ~25 834 427 ($1 .048 237\ $ ~21786,19Q Page 18 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 6. BONDS PAYABLE The Bonds are Tax-Exempt Governmental Obligations under the Internal Revenue Code. The Bonds payable represent 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 Town of Westlake does not have any liability for the payment of the bonds as the bonds are non- recourse to both the Town of Westlake and Texas Student Housing Authority. Interest rates on the bonds range from 5.00% to 11.00% and are payable semi-annually on July 1 and January 1 of each year thereafter. At August 31, 2005, the Project was not in compliance with certain covenants of the Indenture including insufficient funds in some of the required funds discussed in Note 2 and the fixed charge ratio. Upon certain events of default either the trustee, or owners of not less than 25% in aggregate principal of the bonds then outstanding, may declare the principal and all interest then due to be immediately due and payable. Generally accepted accounting principles require that if the events of default occur, the liability should be disclosed as current on the financial statements. In addition, all required principal payments on the Series B bonds had not been made at August 31, 2005. The following is a summary of long-term debt transactions of the Project for the year ended August 31, 2005: Balance Balance August 31, August 31, Due Within 2004 Increases Decreases 2005 One Year Revenue Bonds 2001A Bonds $ 29, 055,000 $ ($ 100,000) $28,955,000 $28,955,000 2001B Bonds 3,475,000 ( 235,000) 3,240,000 3,240,000 Less Discounts 972 204) $ 37 485 934 719) ( 934 719) Total :11 31 55:Z 796 :1> (:I> 297 5Hi) :1>31 26Q 28J :1>31 26Q 281 The debt originally was to be amortized through 2031 with varying payment amounts ranging from $2,618,093 to $3,465,280 for interest and principal. The annual requirements to amortize all debts outstanding as of August 31, 2005 are as follows and have not been adjusted for the default of the bonds. Under the original terms of the indenture a total of $1,235,000 in principal and $2,230,280 in interest is due in fiscal 2006. The total interest to be paid will depend on the ultimate maturities of the bonds. Due Fiscal Year Ending August 31 2006 Principal Interest Total $ 32 195 000 $38.135 524 $70 330 524 SUPPLEMENTAL SCHEDULES Page 19 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 7. NET ASSETS Net assets represents the residual assets after liabilities are deducted. These assets are reported in the following categories. Invested in Capital Assets, Net of Related Debt consists of capital assets, net of accumulated depreciation and reduced by outstanding balances for bonds, notes, and other debt that are attributed to the acquisition, construction, or improvement of those assets. Restricted for Debt Service results when constraints placed on net asset use are either externally imposed by creditors, grantors and the like, or imposed by law through constitutional provisions or enabling legislation. NOTE 8. EMPLOYEE BENEFIT PLAN Employees of the Property were eligible to participate in the JPI 401 (k) Profit Sharing Retirement Plan (the "Plan") through September 30, 2004. Employee salary deferrals into the Plan are matched by the Project up to 3% of employee compensation as defined by the Plan. The Project's contributions to the Plan were approximately $428 for the year ended August 31, 2005. Employees of the Project are currently eligible to participate in the Asset Campus Management 401 (k) as of August 31, 2005. Employee salary deferrals into the Plan are matched by the Project up to 1% of employee compensation as defined by the Plan. During the year ended August 31, 2005, there were no contributions made by the Project. NOTE 9. CONCENTRATIONS The Project consists of one property in Denton, Texas and is dependent upon the Denton area and the higher education facilities in the Denton area for revenue. NOTE 10. RELATED PARTY TRANSACTIONS The Project receives funds for administrative services and other transfers based on release tests from the Trustee on behalf of the Project. As of August 31, 2005 for the year then ended the Trustee paid approximately $15,261 to the Authority. Page 20 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS SCHEDULE I -SCHEDULE OF REVENUES AND EXPENSES FOR THE YEAR ENDED AUGUST 31, 2005 2005 2005 Actual Bud9et Variance Revenue and Other Support: Rental Income $ 2,905,894 $ 2,981,844 ($ 75,950) Other income 124,093 93,000 31,093 Interest income 160,702 160,702 Total revenue and other 3,190,689 3,074,844 115,845 Operating Expenses Personnel expenses $ 330,581 342,000 11,419 Contract services 46,936 50,600 3,664 Utilities 435,566 406,000 ( 29,566) Repairs and maintenance 114,783 45,000 ( 69,783) Turnover expense 123,601 138,000 14,399 Advertising and promotion 50,022 41,000 ( 9,022) Administration expenses 128,222 162,000 33,778 Travel 2,776 5,500 2,724 Other expense 2,213 ( 2,213) Total operating expenses 1,234,700 1 '190,100 ( 44,600) Revenue available for fixed charges 1,955,989 1,884,744 71,245 Other Expenses Management fees 116,878 97,000 19,878) Replacements 91,507 148,000 56,493 Reserves Depreciation and amortization 1 '119,626 1,085,723 33,903) Interest expense 2,406,652 2,413,770 7,118 Total other expenses 3,734,663 3,744,493 9,830 Excess of expenses over revenue ($ 1,778,674) ~$ 1,859,749) $ 81,075 Page 21 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT NORTH TEXAS SCHEDULE II-CERTIFICATE OF THE FIXED CHARGES COVERAGE RATIO We are providing this letter, as required by the Trust Indenture by and between Texas Student Housing Corporation -The Ridge at North Texas ("Project") and the Bank of New York ("Trustee"), dated July 1, 2001, as amended on March 22, 2005 relating to Texas Student Housing Corporation -Denton Project Texas Student Housing Revenue Bonds (University of North Testing Project) the "Indenture", to certify the Fixed Charges Coverage Ratio as of August 31' 2005. 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 year ended August 31, 2005 to be $1,955,989. Based on the above revenues and fixed charges, we calculate that the Fixed Charges Coverage Ratio as of August 31, 2005 to be .56, which is based on one year of operations and is not in compliance with the Indenture.