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HomeMy WebLinkAboutSan Marcos Audit 08-31-05TEXAS STUDENT HOUSING CORPORATION- THE RIDGE AT SAN MARCOS FINANCIAL REPORT AUGUST 31, 2005 CONTENTS Page INDEPENDENT AUDITOR'S REPORT ................................................................................... 1 MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited) ................................................ 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-Debt Service Coverage Ratio ................................................................... 21 I I I WEAVER -rmm-- TIDWELL L. L. P. CERTIFIED PUBLIC AccOUNTANTS AND CONSULTANTS DALLAS Tbn•t• Fon·st Plaza 12221 J\1erit Drim• Suite 1400 Dallas, Texas 75251-2280 972.490.1970 F 972.702.8321 FORT WORTH 1600 West Sevt'lltb Stret't Suite 300 Fort Wortb, Texas 76102-2506 817.332.7905 F 817.429.5936 WWW.WEAVERANDTIDWELL.COM AN INDEPENDENT MEMBER OF BAKER TILLY INTERNATIONAL INDEPENDENT AUDITOR'S REPORT To the Board of Directors Texas Student Housing Corporation-The Ridge at San Marcos We have audited the accompanying financial statements of the business type activities ofT exas Student Housing Corporation -The Ridge at San Marcos (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 San Marcos 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 San Marcos 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 Corporation-The Ridge at San Marcos will continue as a going concern. As discussed in Note 1 to the financial statements, the Project is in default on its Bonds and the Trustee or Service Agent 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. Texas Student Housing Corporation The Ridge at San Marcos Page 2 Management's discussion and analysis on pages 3 through 6 are not a required part of the basic financial statements but are 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. 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 San Marcos. 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 SAN MARCOS MANAGEMENT'S DISCUSSION AND ANAYLSIS YEAR ENDED AUGUST 31, 2005 (unaudited) Page 3 As Staff of the Texas Student Housing Corporation-San Marcos Project ("San Marcos") we offer the readers of San Marcos' Financial Statements this narrative overview and analysis of the financial activities of San Marcos for the fiscal year ended August 31, 2005. We encourage readers to consider the information presented herein in conjunction with San Marcos' 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) has been implemented. The reader should note that this financial report addresses only the financial condition of San Marcos itself for 2005. The prior period covered 20 months of activity and will not provide meaningful comparison to current year activities comparative information will be presented when available. FINANCIAL HIGHLIGHTS The Liabilities of San Marcos exceeded its Assets at the close ofthe fiscal year by $5,202,541 and increase of$1,537,319 over the prior year. The primary reason for this increase is the inability to pay interest expense. Operating Revenue of$2,036,642 is $17,445 worse than budget. In addition, Operating Expense is $90,444 worse than budget thus compounding the revenue shortage. Major components of the expense overage were $32,685 worse than budget in Turnover Expense (painting, recarpeting, etc. rooms during student turnover expense). Utilities were also worse by $49,559. At the end of the current fiscal year, the total cash balances were $66,562 in unrestricted cash and $151,000 in restricted cash. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis are intended to serve as an introduction to San Marcos' basic financial statements. San Marcos' 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 SAN MARCOS 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. Total current and other assets $ 1,126,908 Total capital assets 15,267,231 TOTAL ASSETS 16,394,139 Total current liabilities 21,596,680 Noncurrent liabilities TOTAL LIABILITIES 21,596,680 NET ASSETS Invested in capital assets, net of related debt 4,343,277) Restricted for debt service Unrestricted ~ 859,264~ TOTAL NET ASSETS ~$ 5,202,541) The statement of revenues, expenses, and changes in net assets account for all of the Project's revenues and expenses regardless of when cash is paid or received. Total operating revenue Total operating expenses OPERATING INCOME Interest income Interest expense TOTAL NON-OPERATING LOSS CHANGE IN NET ASSETS NET ASSETS, AUGUST 31, 2004 NET ASSETS, AUGUST 31, 2005 $ 2,036,642 ( 1,669,106) 367,536 1,864 ( 1,906,719) ( 1,904,855) ( 1,537,319) ( 3,665,222) ($ 5,202,541) The statement of cash flows recaps how cash changed year over year. NOTES TO THE FINANCIAL STATEMENTS The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS MANAGEMENT'S DISCUSSION AND ANAYLSIS YEAR ENDED AUGUST 31, 2005 (unaudited) Restricted Cash Page 5 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: Revenue Fund Debt Service Reserve Fund Repair and Replacement Fund Early Receipts Fund Current Receipts Fund Tax and Insurance Fund Fee and Expense Fund Total Non-Restricted Cash $ 135,683 9 25 16 6 13 15,248 $ 151,000 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 Series 2000 Total $19,610,508 $19,610,508 For the Fiscal Year ending on August 31, 2006, the total principal and interest payment is calculated at $1,856,210 ECONOMIC FACTORS AND NEXT YEAR'S BUDGET Leases at San Marcos are primarily 12 month leases, however due to competitive and market conditions, a relatively minor number of 1 0 month leases exist. These leases do bring a monthly premium over the 12 month leases. Occupancy for the fiscal year ending August 31, 2006 is forecast at 92 % however rental rates, again due to competitive pressures will not see a large increase. This is exacerbated by the fact that Texas State University does not allow Freshmen and Sophomores to live in off campus housing Net Operating Revenue for this next year is projected at $1,332,117. If the bonds were not in default, Debt Service calculated at $1,856,210 would have to be paid, however as in the present arrangement, the Servicing Agent funds all expenses, then applies the remaining funds to Debt Service. This will further erode our Net Assets. TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS MANAGEMENT'S DISCUSSION AND ANAYLSIS YEAR ENDED AUGUST 31, 2005 (unaudited) CONTACTING THE PROJECT'S FINANCIAL MANAGEMENT Page6 This financial report is designed to provide the reader with a general overview of the Project's finances and to demonstrate the Project'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 Page7 TEXAS STUDENT HOUSING CORPORATION· THE RIDGE AT SAN MARCOS STATEMENT OF NET ASSETS AUGUST 31, 2005 ASSETS CURRENT ASSETS Cash Restricted cash Accounts receivable Prepaid expenses Total current assets CAPITAL ASSETS Land Other capital assets, net of accumulated depreciation Total capital assets OTHER ASSETS Deposit Deferred financing costs, net of amortization Total other assets TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade accounts payable Management fees payable Accrued interest Other current liabilities Development fee payable 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. $ 66,562 151,000 42,263 4,741 264,566 1,552,207 13,715,024 15,267,231 900 861,442 862,342 $ 16,394,139 $ 147,118 321,610 943,560 300,757 133,050 140,077 19,610,508 21,596,680 ( 4,343,277) ( 859,264) ($ 5,202,541) TEXAS STUDENT HOUSING CORPORATION -THE RIDGE AT SAN MARCOS 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 Utilities Contract services Repairs and maintenance Turnover expenses Advertising and promotion Administration expenses Management fees Replacements Depreciation expense Amortization expense Total operating expenses OPERATING INCOME NON-OPERATING REVENUES (EXPENSES) Interest income Interest expense TOTAL NON-OPERATING EXPENSES 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. $ ( ( ( ($ PageS 1,966,998 69,644 2,036,642 242,172 312,559 25,773 26,314 90,685 43,949 125,282 82,493 40,294 645,579 34,006 1,669,106 367,536 1,864 1,906,719) 1,904,855) 1,537,319) 3,665,222) 5,202,541} Page9 TEXAS STUDENT HOUSING CORPORATION -THE RIDGE AT SAN MARCOS 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 NON-CAPITAL 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. $ 2,003,063 ( 231 ,424) ( 681,664) 1,089,975 ( 21,772) ( 1,086,953) ( 1,108,725) 1,864 1,864 ( 16,886) 234,448 $ 217,562 $ 66,562 151,000 $ 217,562 TEXAS STUDENT HOUSING CORPORATION -SAN MARCOS PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2005 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Page 10 Operating income $ 367,536 Adjustments to reconcile operating income to net cash provided by operating activities Depreciation and amortization Changes in operating assets and liabilities: Accounts receivable Prepaid expenses Trade accounts payable Management fees payable Accrued expenses 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. 679,585 36,065 ( 4,741) ( 64,242) ( 22,623) 73,546 90,425 ( 75,963) 10,387 $ 1,089,975 Page 11 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS NOTES TO FINANCIAL STATEMENTS NOTE 1. GENERAL STATEMENT Texas Student Housing Corporation -San Marcos Project (the "Project"), a higher education project, was established on January 23, 1995, as a duly constituted project of the Town of Westlake, Texas (the "Town"), pursuant to Section 53.11 of Chapter 53 of the Texas Education Code, as amended. The Project's purpose among other things is to acquire, finance, and operate student housing facilities. The Project operates several student housing facilities in Texas including The Ridge at San Marcos (the "Project").· The Ridge at San Marcos was purchased from Jefferson Commons -Austin, L.P., a Delaware limited partnership on December 28, 2000. The Project obtained its financing through the issuance of the City of Cameron Education Corporation Student Housing Revenue Bonds Series 2000. The Bonds were issued through a Trust Indenture (the "Trust Indenture") by and between the City of Cameron Education Corporation and The Bank of New York (the "Trustee"). The Series 2000 Bonds were issued in the face amount of $19,900,000. The accompanying financial statements present the operations of the one Project, whose revenue streams are pledged for the bonds described herein. The Project was operated and managed under the terms of the (a) Property Management and Leasing Agreement by and between the Project and JPI Campus Quarters Management, L.P. ("JPI") and (b) the Asset Management Agreement by and between the Project and JPI Apartment Management, L.P., up until March 31, 2004. The Project is now managed and operated by Asset Campus Housing under the terms of a Property Management and Leasing Agreement dated April 1, 2004. The property management agreements are collectively referred to as the "Agreements". 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 due to the discontinuance of principal and interest payments. These are considered an event of default by the Trustee which gives the bond holders the right to accelerate and 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 are as follows: Page 12 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS 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. The Project does not have any component units. 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 $151,000 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 $1,864. See Note 3 for risk disclosures and breakdown of restricted cash accounts. Page 13 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS 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. As of August 31, 2005, management has determined that all accounts doubtful of collection have been charged to operations and an allowance is not required. Deferred Financing Costs Costs associated with the issuance of bonds are deferred and amortized over the terms of the bonds. Advertising Costs All advertising costs are expensed as they are incurred. Advertising costs for the year ended August 31, 2005 were approximately $44,000. 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 for other major property improvements. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Building Furniture, fixtures and equipment 30 years 7 years Page 14 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS NOTES TO FINANCIAL STATEMENTS NOTE 3. CASH AND INVESTMENTS At August 31, 2005, the carrying amount of Texas Student Housing Project-The Ridge at San Marcos's deposits (cash with interest bearing accounts and restricted cash held in interest bearing accounts) was in total $217,562 of which $151 , 000 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 Tax and Insurance Fund Replacement Fund Fee and Expense Fund Early Receipts Fund Current Receipts Fund Debt Service Reserve Total $135,683 13 25 15,248 16 6 9 $151.000 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 to collect monthly deposits made by the Project and properly distribute appropriate amounts to the other funds. The revenue fund has other accounts, including the current receipts account and the early receipts accounts. Tax and Insurance Fund -Pro rata amounts estimated by the servicing agent are deposited to pay the annual property taxes and annual premiums on all insurance required by the financing agreement. Fee and Expense Fund-Amounts are deposited into account until (a) such account contains sufficient funds to pay all fees and expenses payable under the Financing Agreement and the indenture as of the next date the payment is due and (b) a pro rata portion of any such fees and expenses as directed by the servicing agent which are not currently due and will not be paid within 30 days of receiving the invoice. Page 15 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS NOTES TO FINANCIAL STATEMENTS NOTE 3. CASH AND INVESTMENTS -CONTINUED Replacement Fund-Amounts deposited into this account are to be held and disbursed as required under the terms of the Loan and Financing Agreement for purchases related to the San Marcos Property. The Loan and Financing Agreement requires monthly deposits to the replacement fund. The Trustee disburses amounts from the replacement fund, but only upon the receipt of a written authorization from MuniMae Portfolio Services, LLC (the "Servicing Agent"). Early Receipts -The early receipts account is a sub-account of the revenue fund. Amounts in this account were established with the original proceeds of the note and were to be held until early repayment of the note was allowed on or after January 1, 2011. During the year ended August 31, 2005, the funds in this account were used to fund principal and interest payments. Current Receipts -The current receipts account is also a sub-account of the revenue fund. Monthly deposits in the revenue fund are first deposited in the current receipts account. From here they are appropriately distributed to other funds in accordance with the Loan and Financing Agreement for payment of certain expenses. Debt Service Reserve Fund -This account is funded by the proceeds of the bond equal to the Debt Service Reserve Fund Requirement. The funds are only to be used in the event any principal or interest is not paid in accordance with the terms of the Loan and Financing Agreement. During the year ended August 31, 2005, the balance in the debt service reserve fund was used to make principal and interest payments. 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 entities 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 greater the sensitivity of its fair value to changes in market interest rates. Texas Student Housing Corporation -The Ridge at San Marcos 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 San Marcos holds all of its cash and investments with the bond trustee and commercial banks. Page 16 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS NOTES TO FINANCIAL STATEMENTS NOTE 3. CASH AND INVESTMENTS-CONTINUED Concentration of Credit Risk The investment policy of Texas Student Housing Corporation -The Ridge at San Marcos is subject to the indenture agreement of the Bonds. As of August 31, 2005, Texas Student Housing Project-The Ridge at San Marcos held all of its restricted cash balances with the trustee, which represents 70% 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 governmental 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 $66,562 (bank balance $54,555). 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 depository in the amount of $2,000,000. NOTE 4. CAPITAL ASSETS Capital asset activity for the Project for the year ended August 31, 2005 was as follows: Capital assets not being depreciated: Land Total capital assets not being depreciated Capital assets being depreciated: Building Furniture, fixtures & equipment Beginning Balance $1,552,207 1.552.207 15,875,143 818,332 Additions Retirements Ending Balance $1,552,207 1.552,207 15,875,143 818,332 Page 17 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS NOTES TO FINANCIAL STATEMENTS NOTE 4. CAPITAL ASSETS -continued Total capital assets being depreciated Totals at historical cost Less accumulated depreciation Capital assets, net NOTE 5. BONDS PAYABLE Beginning Balance 16,693,475 18.245,682 Additions Retirements 2,332,872 645,579 $15.912.810 ($ 645,579) ~$=== Ending Balance 16,693,475 18.245,682 2,978,451 $15.267.231 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 December 1, 2000. The Bonds are payable solely from the revenues generated by the Project and are secured by the revenues pledged and assigned under the terms of the Trust Indenture. The annual interest rate is 8.2% and interest is due on the first of each month. In the case of default under the terms of the indenture, the interest rate increases by 2%. During 2005, the Project defaulted on the bonds and the interest rate increased to 1 0.2%. During 2005 the Project ceased making the required principal and interest payments required by the Loan and Financing Agreement. This constitutes an event of default under provisions of the indenture and permits the Trustee at the direction of the Servicing Agent to declare the principal and all interest then due to be immediately due and payable. Accounting principles generally accepted in the United States of America require that if an event of default occurs, the liability should be disclosed as a current liability. As a result, the outstanding principal at August 31, 2005 has been shown as a current liability in the accompanying financial statements. The following is a summary of long-term debt transactions of the Project for the twelve month period ended August 31, 2005: Balance Balance August 31, August 31, Due Within 2004 Increases Decreases 2005 One Year Revenue Bonds 2000 Bonds $ 19.632.280 $ ($ 21.772) $19.610.508 $19,610,508 Total 31 19,632,28Q (31 21,772) :fij 9,6j Q,5Q8 S19,61Q,5Q8 The debt originally was to be amortized through 2031 with varying monthly principal payment amounts ranging from $7,280 to $11,613,942 due at maturity. The annual requirements to amortize all debts outstanding as of August 31, 2005 are as follows and Page 18 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS NOTES TO FINANCIAL STATEMENTS NOTE 5. BONDS PAYABLE-CONTINUED includes interest per the original payment schedule adjusted for the increase in the interest rate. The total interest to be paid will depend upon the ultimate maturity of the bonds. The total amount of accrued interest due at August 31, 2005 was $943,560. Due Fiscal Year Ending August 31 2006 Principal Interest Total $ 19.610.508 $35.123.546 $54.734.054 In addition, the Project was not in compliance with certain debt covenants as of August 31, 2005. NOTE 6. 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. At August 31, 2005, the total funds available for debt service was less than the accrued interest due at August 31, 2005. As a result, net assets restricted for debt service are shown at zero. NOTE 7. EMPLOYEE BENEFIT PLAN Employees of the Project are eligible to participate in the Asset Campus Housing 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 by the Project. NOTE 8. MANAGEMENT FEES Previous to April 30, 2004 the Project paid JPI property management fees for the management of the Project. Subsequent to April 30, 2004 the Project paid Asset Campus Management for property management fees for the management of the Project. The Project recorded property management fees of approximately $59,000 to ACH for the year ended August 31, 2005. As of August 31, 2005, the Project has recorded approximately $321,610 in unpaid property and asset management fees to JPI. An additional $11,528 is owed to ACH and is included in accounts payable August 31, 2005. Page 19 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS NOTES TO FINANCIAL STATEMENTS NOTE 9. CONCENTRATIONS The Project consists of one property in San Marcos, Texas and is dependent upon the San Marcos area and the higher education facilities in the San Marcos 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 $18,597 to the Authority. SUPPLEMENTAL SCHEDULES TEXAS STUDENT HOUSING CORPORATION -SAN MARCOS PROJECT SCHEDULE I -SCHEDULE OF REVENUES AND EXPENSES FOR THE YEAR ENDED AUGUST 31, 2005 Actual Bud9et Revenue and other support: Rental income $ 119661998 $ 119791087 ($ Other income 691644 751000 ( Interest income 11864 Total revenue and other 210381506 210541087 ( Operating expenses Personnel expenses 2421172 2491000 Utilities 3121559 2631000 ( Contract Services 251773 241850 ( Repairs and maintenance 261314 321700 Turnover expense 901685 581000 ( Advertising and promotion 431949 381000 ( Administration expenses 1251282 1101740 ( Total operating expenses 8661734 7761290 ( Revenue available for debt coverage 111711772 112771797 ( Other expenses Management fees 82,493 661000 ( Replacements 401294 981000 Depreciation and amortization 6791585 ( Interest expense 119061719 ( Total other expenses 217091091 1641000 ( Excess of expenses over revenue ~$ 1 15371319~ $ 111131797 ~$ Page 20 Variance 121089) 51356) 11864 151581) 61828 491559) 923) 61386 321685) 51949) 141542) 90,444) 1061025) 16,493) 571706 6791585) 1 19061719) 215451091) 216511 116~ Page 21 TEXAS STUDENT HOUSING CORPORATION-THE RIDGE AT SAN MARCOS SCHEDULE II -DEBT SERVICE COVERAGE RATIO FOR THE YEAR ENDED AUGUST 31, 2005 The Debt Service Coverage Ratio is defined in the Loan and Financing Agreement as net operating income divided by the total amount of principal and interest due under the Note. Net operating revenue is defined as gross revenues less operating expenses. Schedule I indicates that the actual revenue available for debt coverage for the year ended August 31, 2005 is $1,171,772. The amount of principal and interest due under the Note for the next twelve months is $1,696,347 under the original terms of the indenture. Based on the above revenue available for debt coverage and the required principal and interest due under the Note, the Debt Service Coverage Ratio as of August 31, 2005 is .69. Schedule I indicates that the budgeted revenue available for debt coverage for the year ended August 31, 2005 to be $1,277,797. Based on the budgeted revenue available for debt coverage and the required principal and interest due under the Note, the budget would have resulted in a Debt Service Coverage Ratio as of August 31, 2005 of .75.