AVENUE COMMUNITY DEVELOPMENT CORPORATION COMBINED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT DECEMBER 31, 2009

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1 COMBINED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT DECEMBER 31, 2009

2 INDEX Independent Auditors' Report 3 Combined Statement of Financial Position 4 Combined Statement of Activities and Changes in Net Assets 5 Combined Statement of Cash Flows 6 Notes to Combined Financial Statements 7-16 Supplementary Schedules Schedule of Combined Functional Expenses 17 Schedule of Activities for NeighborWorks America Capital Fund 18 Schedule of Activities for NeighborWorks America Expendable Funds 19 Federal Awards Independent Auditors' Report on Federal Expenditures 20 Schedule of Expenditures for Federal Awards 21 Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance to Government Auditing Standards 22 Report on Compliance with Requirements Applicable to each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A Schedule of Findings and Questioned Costs 24 Page

3 DAVID N. MILLER & COMPANY, LLP CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITORS' REPORT Board of Directors Avenue Community Development Corporation Houston, Texas We have audited the accompanying combined statement of financial position of Avenue Community Development Corporation, consolidated with its subsidiaries, and Fulton Gardens Corporation (Texas corporations referred to as the Organization) as of December 31, 2009, and the related combined statements of activities and changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of the Organization's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Avenue Community Development Corporation, consolidated with its subsidiaries, and Fulton Gardens Corporation as of December 31, 2009, and the combined results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic combined financial statements of the Organization taken as a whole. The accompanying supplementary schedules are presented for purposes of additional analysis and are not a required part of the basic consolidated financial statements. The information in those schedules have been subjected to the auditing procedures applied in the audit of the basic combined financial statements and, in our opinion, is fairly presented in all material respects in relation to the basic combined financial statements taken as a whole. David N. Miller and Company, LLP June 4, WOODWAY, SUITE 320/HOUSTON, TEXAS 77063/(713) /FAX (713)

4 COMBINED STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2009 ASSETS Cash $ 2,761,049 Inventories Land $ 7,277,063 Housing costs and other 1,861,970 9,139,033 Prepaid expenses and deposits 54,867 Receivables Due from related parties Jefferson Davis Artist Lofts Limited Partnership 1,503,981 Washington Courtyards Limited Partnership 64,162 Others 965,868 2,534,011 Property and Equipment Land 1,206,069 Buildings 2,887,957 Equipment and furniture 156,365 Construction in progress 296,496 4,546,887 Less accumulated depreciation (463,092) 4,083,795 Investments in closely held entities 85,313 Total Assets $ 18,658,068 See accompanying notes.

5 LIABILITIES AND NET ASSETS Development note payable $ 85,101 Long term debt Due within one year $ 2,187,886 Due after a year 2,689,905 4,877,791 Recoverable grants 118,604 Accrued liabilities 374,705 Total Liabilities 5,456,201 Net assets Unrestricted 7,573,855 Temporarily restricted 1,381,164 Permanently restricted 4,246,848 13,201,867 Total Liabilities and Net Assets $ 18,658,068 4

6 COMBINED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 2009 Temporarily Permanently Unrestricted Restricted Restricted Total Support and Revenue Revenue from sale of housing $ 1,740,390 $ - $ - $ 1,740,390 Grants and contributions 641,630 1,025,285 2,725,000 4,391,915 Rental, fees and other income 332, ,048 Interest income 71, ,373 Fund raising event 195, ,199 2,980,640 1,025,285 2,725,000 6,730,925 Net assets released from restrictions Restrictions satisfied 1,220,246 (647,246) (573,000) - Total Support and Revenue 4,200, ,039 2,152,000 6,730,925 Operating Expenses Programs 2,871, ,871,539 Administrative 118, ,274 Fundraising 172, ,237 3,162, ,162,050 Other expenses Provision for loss on related party receivable 66, ,000 Income tax expense Total Expenses 3,228, ,228,706 Increase in Net Assets 972, ,039 2,152,000 3,502,219 Net Assets, Beginning of Year 6,601,675 1,003,125 2,094,848 9,699,648 Net Assets, End of Year $ 7,573,855 $ 1,381,164 $ 4,246,848 $13,201,867 See accompanying notes. 5

7 COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2009 Increase (Decrease) in Cash CASH FLOWS FROM OPERATING ACTIVITIES Increase in net assets $ 3,502,219 Adjustments Contribution deemed reduction of development and construction notes (700,000) Contribution deemed reduction of long term debt (2,500,000) Contribution from recoverable grant deemed paid amount (34,500) Depreciation 103,458 Income from investments and other (24,810) (Increase) decrease in Receivables (393,820) Inventories 177,785 Prepaid expenses and deposits (14,523) Increase (decrease) in Accrued liabilities 85,084 Net Cash Provided by Operating Activities 200,893 CASH FLOWS FROM INVESTING ACTIVITIES Distributions from investment 19,200 Expenditures for property and equipment (544,331) Net Cash Used by Investing Activities (525,131) CASH FLOWS FROM FINANCING ACTIVITIES Payments on construction and development notes, net of borrowings (137,338) Funds from new borrowings 1,169,544 Funds from recoverable grant 15,000 Retirement of long term debt (341,791) Net Cash Provided by Financing Activities 705,415 NET INCREASE IN CASH 381,177 CASH, BEGINNING OF YEAR 2,379,872 CASH, END OF YEAR $ 2,761,049 See accompanying notes. 6

8 NOTES TO COMBINED FINANCIAL STATEMENTS HISTORICAL Avenue Community Development Corporation (Avenue CDC) and Fulton Gardens Corporation (FGC) are incorporated in the State of Texas as a non-profit charitable organizations. Avenue CDC has been established for charitable and educational purposes and is dependent on certain organizations operating in the greater Houston area for a significant portion of its support. Avenue CDC's service area is the greater Houston metropolitan area, with a particular focus on the Washington Avenue and Near Northside communities. Avenue CDC's mission is to revitalize the community by developing affordable housing and economic opportunities, while preserving the area's economic, cultural and historical diversity. FGC's mission is to develop and operate an affordable housing project in the Near Northside community. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Combination - The combined financial statements include the accounts of Avenue CDC, and its wholly owned subsidiaries and FGC. The financial statements of FGC have been combined with Avenue CDC's because of common control. All significant intercompany accounts and transactions have been eliminated in consolidation. Financial Statement Presentation - Avenue CDC and FGC presents their financial statements in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 958 (formerly Statement of Financial Accounting Standards (SFAS) No. 117) regarding accounting for Financial Statements of Not-for-Profit Organizations. Under ASC 958, Avenue CDC is required to report information on its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. Support - Avenue CDC and FGC also follows the recommendations of ASC 958 (formerly SFAS No. 116) regarding Accounting for Contributions Received and Contributions Made. Under ASC 958, contributions received are recorded as unrestricted, temporarily restricted or permanently restricted depending on the existence and nature of any donor restrictions. All donor-restricted support is reported as an increase in temporarily restricted or permanently restricted net assets, depending on the nature of the restrictions. When a restriction expires (that is, when a stipulated time restriction ends or the purpose is accomplished), temporarily or permanently restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Revenue - Revenue from housing activities is recognized upon the closing of the sale using the deposit method. During construction, lot costs, all direct material, labor and subcontracting costs relating to the acquisition and construction are capitalized as inventories. Capitalized costs are charged to activities upon closing. Cash - For purposes of the statement of cash flows, cash consists of the amount used in the statement of financial position. Receivables - Management has established an allowance for doubtful accounts for receivables which are subject to uncertainties. Inventories - Inventories are accounted for by the lower of cost or market method. Inventories are recorded at cost except for contributed land and housing which are recorded at fair value at the date of contribution using the specific identification method. An allowance for inventory writedowns to market value is maintained at a level which, in management's judgment, is adequate to reflect any deficiency between the anticipated sales price and the cost of a housing unit which is carried in inventories. 7

9 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments in Closely Held Entities - The investments are recorded under the equity method. Property and Equipment - Property and equipment are recorded at cost except for contributed assets which are recorded at fair market value at the date of contribution. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Donated Services - A substantial number of unpaid volunteers have made significant contributions of their time to develop Avenue CDC's programs. No amounts have been reflected in the financial statements for those services since they do not meet the criteria for recognition under ASC 958. Functional Allocation of Expenses - Avenue CDC allocates expenses on a functional basis among its various programs and support services based on management's estimates. Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimated. Federal Income Taxes - Avenue CDC and FGC are non-profit, tax-exempt, charitable organizations under Section 501 (c) (3) of the Internal Revenue Code. Although Avenue CDC and FGC are tax exempt, any "unrelated business income" would be subject to federal income tax. RELATED PARTY TRANSACTIONS Avenue CDC owns 100% of Avenue Jeff Davis, LLC (AJD), a closely-held Texas company. AJD owns 49% of Jeff Davis, LLC (JD). JD owns one hundredth of a percent (.01%) interest in Jeff Davis Artist Lofts Limited Partnership (JDAL). JDAL is a limited partnership organized under the laws of the state of Minnesota and was formed to acquire and rehabilitate the former Jefferson Davis Hospital located in Houston, Texas. The project was developed under the low-income housing tax credit program. A summary of receivables from JDAL as of December 31, 2009 follows: Notes receivable, bearing interest at 5.34% $ 831,000 Accrued developer fee, bearing interest at 5.34% 405,000 Accrued interest 333,981 1,569,981 Allowance for doubtful accounts (66,000) $ 1,503,981 The JDAL notes are due until the later of (1) July 31, 2046 or (2) the maturity date of the first deed of trust loan that JDAL entered into in connection to the project. The notes are collateralized by the JDAL property but are subject to a subordination agreement. In addition, Avenue CDC has provided an affiliate guaranty for the performance of all general partner obligations as outlined in the partnership agreement. However, the guaranty is limited to the fees Avenue CDC is entitled to receive with respect to the project. The developer fee is payable by JDAL upon the availability of sufficient cash. 8

10 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) RELATED PARTY TRANSACTIONS (CONTINUED) Avenue CDC owns 100% of Four Courtyards, Inc. (FCI), a closely-held Texas corporation. FCI is a for-profit general partner in Washington Courtyards Limited Partnership (WCLP) and owns one hundredths of a percent (.01%) interest in WCLP. WCLP is a limited partnership organized under the laws of the state of Texas and was formed to acquire, develop and construct an apartment project located in Houston, Texas. The project was developed under the low-income housing tax credit program. A summary of receivables from WCLP as of December 31, 2009 follows: Accrued developer fee, bearing interest at 5.66% $ 232,541 Subordinated note receivable, bearing interest at 6% 34,692 Accrued interest and other 29,470 Total 296,703 Allowance for doubtful accounts (232,541) Net $ 64,162 The note receivable is subordinate and inferior to a construction loan executed by WCLP. Avenue CDC has accrued a developer fee of $232,541 for services provided during 2000 on the apartment project mentioned above. In accordance with the developer and partnership agreement, the payment of the developer fee has been deferred and is payable by WCLP only as equity installments and positive cash flow become available. Future collections of the developer fee by Avenue CDC could be affected by the project's liquidity. Accordingly, an allowance for doubtful accounts has been set. For the year ending December 31, 2009 interest income earned from JDAL amounted to $66,000 and interest income earned from WCLP amounted to $1,487. Avenue CDC donated land and related development and construction costs with an aggregate cost of $656,353 to FGC during FGC intends to develop affordable housing for very low income seniors on this land. INVENTORIES A summary of inventories for the year ending December 31, 2009 follows: Land $ 7,277,063 Housing costs and other 1,861,970 $ 9,139,033 Construction and other costs include capitalized construction period interest and capitalized property taxes. As of December 31, 2009 management has determined that an allowance for writedown of inventories to market value is not necessary. 9

11 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) OTHER RECEIVABLES A summary of other receivables for the year ending December 31, 2009 follows: Homebuyer loans, non-interest bearing $ 552,600 Grants and contributions 338,406 Other receivables 74,862 $ 965,868 Avenue CDC has made loans to a number of homebuyers since The loans are due in 30 years or upon the sale of the house. A homebuyer who sells a house during the first ten years of ownership would be required to pay Avenue CDC a portion of any appreciation in the value of the house in addition to the principal balance of the loan. The loans have not been discounted because management believes it is likely that some homes will be sold during the first ten years and that Avenue CDC would recognize some income from such appreciation in value. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31, 2009 follows: Accumulated Cost Depreciation Net Land $ 1,206,069 $ - $ 1,206,069 Buildings 2,887, ,202 2,513,755 Equipment and furniture 156,365 88,890 67,475 Construction in progress 296, ,496 $ 4,546,887 $ 463,092 $ 4,083,795 The land and buildings are used by Avenue CDC in its low income rental housing and homebuyer education program. Land also includes a number of contiguous lots owned by FGC. INVESTMENTS IN CLOSELY HELD ENTITIES Avenue CDC is a limited partner in 2101 Winter Street Building, LTD (Winter) and is a member of certain closely held entities. A summary of the investment equity as of December 31, 2009 follows: Winter Others Total Investment equity $ 82,907 $ 2,406 $ 85,313 10

12 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) ACCRUED LIABILITIES Accrued liabilities at December 31, 2009 follows: Due to contractors, including retainages of $48,813 $ 148,226 Due to local taxing authorities and homeowner's associations 120,440 Due to others 106,039 $ 374,705 The amounts due to contractors relate to construction costs for certain housing projects included in inventories and property to be used in the low-income rental housing program. DEVELOPMENT NOTE PAYABLE The development note payable as of December 31, 2009 follows: Note payable to Capital One, bearing interest at 4%, maturing July 2010 $ 10,101 Note payable to PMI Group, bearing no interest, due on demand 75,000 $ 85,101 RECOVERABLE GRANTS The recoverable grants are based on a development agreement with the City of Houston's Department of Housing and Community Development (City) and provides for borrowings of up to $345,172 with no interest over a ten year period and a grant from LISC. The City agreement requires certain performance by Avenue CDC. Provided that Avenue CDC fully and timely complies with all of the requirements under the agreement over its ten year term, the outstanding principal balance of the note shall be deemed paid on a yearly pro-rata basis at the rate of 10% per year. Avenue CDC shall have an obligation to repay the entire principal amount only in the event of a default. Under default, the entire principal balance of the note becomes immediately due along with interest at a specified default rate. A summary of transactions through December 31, 2009 follows: Borrowings City $ 345,172 LISC 15, ,172 Deemed paid amount 241,568 Balance due $ 118,604 11

13 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) LONG TERM DEBT Long term debt at December 31, 2009 follows: Notes payable to Houston Housing Finance Corp., bearing interest at 5%, due through November 2011, collateralized by land and buildings $ 3,628,656 Notes payable to Amegy Bank, bearing interest at 6.22% to 7.5%, due through March 2037, collateralized by land and buildings 388,782 Note payable to Wells Fargo, bearing interest at 2%, due in March ,000 Note payable to Congregation of the Sisters of Charity of the Incarnate Word, bearing interest at 1%, due May ,000 Note payable to Capital One Community Development Corporation, bearing interest at 6%, due December ,830 Note payable to Adrian Sisters, bearing interest at 3%, due June ,000 Note payable to Basilian Fathers of Toronto, bearing interest at 3%, due October ,000 Note payable to City of Houston, bearing no interest, due July ,523 $ 4,877,791 The future maturities of long term debt follows: 2010 $ 2,187, ,626, , , ,455 Thereafter 732,921 Total $ 4,877,791 12

14 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NET ASSETS Net assets consist of the following at December 31, 2009: Unrestricted net assets Designated for capital projects $ 7,041,269 Designated - other 111,057 Undesignated 421,529 $ 7,573,855 Temporarily restricted net assets Capital projects $ 1,335,606 Housing programs and operations 45,558 $ 1,381,164 Permanently restricted net assets Capital projects $ 4,246,848 The sources from the permanently restricted net assets and related capital projects consist of the following: Source Amount Project City of Houston $ 2,500,000 Capital Grant NeighborWorks America 1,143,848 Capital Grants Houston Endowment 497,000 JDAL Harris County 56,000 JDAL Houston Endowment 25,000 Community Center Meadows Foundation 25,000 Community Center $ 4,246,848 Temporarily restricted net assets were released from donor restrictions by incurring certain costs and expenditures, therefore, satisfying the purpose of the restrictions specified by the donors as follows: City of Houston / HUD $ 406,826 NeighborWorks America 14,020 Local Initiatives Support Corporation 146,900 HUD 43,500 Others 36,000 $ 647,246 Permanently restricted net assets amounting to $573,000 were released by NeighborWorks America by a written communication. 13

15 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) GRANTS AND CONTRIBUTIONS The statement of activities and changes in net assets recognizes support from the following grants and contributions for the year ending December 31, 2009: Temporarily Permanently Unrestricted Restricted Restricted Total Bank of America $ 35,000 $ - $ - $ 35,000 Citigroup 25,000 10,000-35,000 City of Houston - 34,500 2,500,000 2,534,500 City of Houston / HUD - 775, ,863 Heron Foundation 70, ,000 LISC - 56,760-56,760 LISC / DOJ - 10,000-10,000 LISC / HUD - 67,002-67,002 HUD - 43,500-43,500 JP Morgan Chase 50, ,000 NeighborWorks America 392,500 12, , ,160 Wachovia 25, ,000 Others 44,130 15,000-59,130 $ 641,630 $ 1,025,285 $ 2,725,000 $ 4,391,915 The above grants are for the following purposes: Temporarily Permanently Unrestricted Restricted Restricted Total Capital projects $ - $ 769,500 $ 2,725,000 $ 3,494,500 Operating expenses 641, , ,415 $ 641,630 $ 1,025,285 $ 2,725,000 $ 4,391,915 Grants awarded by the NeighborWorks America used for capital projects and development costs are considered to be permanently restricted because of the donor's stipulation that the net assets be held in perpetuity. However, Avenue CDC is permitted to use the income derived from these net assets. FUND RAISING EVENT Avenue CDC's fund raising event is a silent auction of art works from local artists in which auction proceeds are shared with the artists. During 2009, the gross proceeds from the event amounted to $195,199. Expenditures relating to this event, including payments to artists, are listed in the Schedule of Functional Expenses. 14

16 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) RENTAL, FEES AND OTHER INCOME The statement of activities and changes in net assets recognizes rental, fees and other income as follows for the year ended December 31, 2009: Rentals from low income housing program $ 228,275 Supportive service fees 42,640 Other income 61,133 Other income includes $24,871 of revenue from Winter's operations. $ 332,048 Supportive service fees were earned primarily by providing services to the tenants of the Oak Arbor, Redwood Heights and Washington Courtyards apartment projects. RETIREMENT PLAN In 2003, Avenue CDC adopted a salary deferral 401(K) plan that allows employees to defer a portion of their salary. Avenue CDC has the option to match the employee deferral. The matching contribution for 2009 amounted to $9,436. CONTINGENCIES Avenue CDC and FGC are not involved in any litigation as of December 31, Avenue CDC and FGC adopted new accounting guidance on accounting for uncertainty in income taxes. Avenue CDC and FGC review and assesses their tax positions taken or expected to be taken in tax returns. Based on this assessment, management determines whether it is more likely than not that the positions would be sustained under examination by the tax authorities. Avenue CDC and FGC's assessment has not identified any significant positions that it believes would not be sustained under examination. ADDITIONAL CASH FLOW INFORMATION Interest paid during 2009 amounted to $54,391. Federal income tax paid during 2009 amounted to $656. Non cash contributions follows: Amount of donations recorded as debt reduction $ 3,200,000 Amount of recoverable grant recorded as deemed paid 34,500 Amount reported $ 3,234,500 15

17 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) ADDITIONAL CASH FLOW INFORMATION - CONTINUED Non cash activity affecting inventory, and property and equipment follows: Inventory Property (Increase) decrease from prior year $ 675,486 $ (1,300,063) Donated property to FGC (656,353) 656,353 Transfer (99,379) 99,379 Capitalized interest financed 258,031 - Amount reported $ 177,785 $ (544,331) SUBSEQUENT EVENT During February 2010, Avenue CDC sold, at cost, approximately 5.7 acres of land it held in inventory for $2,565,859 to Irvington Court, LP (Irvington). At the close of the sale, long term debt was paid down by $2,165,859. The debt reduction consisted of $2,075,366 to Houston Housing Finance Corp. and $90,523 to the City of Houston. In addition, Avenue CDC recorded a note receivable of $400,000, which bears interest at 4.44%. Avenue CDC has an ownership interest in Irvington. Irvington intends to build apartments that should qualify for low income housing tax credits on the land. Subsequent events have been evaluated through June 4, 2010 which is the date the financial statements were available to be issued. 16

18 SCHEDULE OF COMBINED FUNCTIONAL EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2009 Programs Administrative Fundraising Total Cost of housing sold $ 1,807,181 $ - $ - $ 1,807,181 Cost of artworks sold ,421 38,421 Cost of fundraising event ,643 27,643 Salaries and fringes 541,467 70,101 41, ,667 Office and operating expenses 223,262 17,640 12, ,988 Professional 88,395 16,071 52, ,454 Rental expenses, excluding depreciation and interest 79, ,335 Depreciation 88,996 14, ,458 Interest expense 42, ,903 $ 2,871,539 $ 118,274 $ 172,237 $ 3,162,050 17

19 SCHEDULE OF ACTIVITIES FOR NEIGHBORWORKS AMERICA CAPITAL FUND FOR THE YEAR ENDED DECEMBER 31, 2009 Capital Cash Inventory Projects Loans Total Balance, Beginning $ 359,346 $ 304,085 $ 751,417 77,000 $ 1,491,848 Grants Collected 225, ,000 Transfers and releases (74,000) - (499,000) - (573,000) Disbursements Made (124,626) 23,600 96,026 5,000 - Balance, End of Year $ 385,720 $ 327,685 $ 348,443 82,000 $ 1,143,848 18

20 SCHEDULE OF ACTIVITIES FOR NEIGHBORWORKS AMERICA EXPENDABLE FUNDS FOR THE YEAR ENDED DECEMBER 31, 2009 Cash, Beginning of Year $ 25,856 Grants Collected Operating purposes 192,500 Program purposes 12, ,016 Expenditures Made Operating services 192,500 Program services 15, ,525 Cash, End of Year $ 23,491 19

21 DAVID N. MILLER & COMPANY, LLP CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITORS' REPORT ON FEDERAL EXPENDITURES Board of Directors Avenue Community Development Corporation Houston, Texas Our audit was conducted for the purpose of forming an opinion on Avenue Community Development Corporation's basic consolidated financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by the U.S. Office of Management and Budget Circular A-133, Audits of State, Local Governments and Non-Profit Organizations, and is not a required part of the consolidated financial statements. Such information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic consolidated financial statements taken as a whole. David N. Miller and Company, LLP June 4, WOODWAY, SUITE 320/HOUSTON, TEXAS 77063/(713) /FAX (713)

22 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS The following schedule of expenditures of Federal awards includes the federal grant activity of the Avenue Community Development Corporation, and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. Federal Grantor/Pass-through Federal CFDA Number Federal Grantor/Program Title Expenditures U.S. Department of Housing and Urban Development HUD Housing Counseling $ 43,500 Home Investment Partnership Program ,807 HUD Section ,002 U.S. Department of Justice Community Safety ,000 U.S. Department of Treasury NeighborWorks America ,596 Total $ 1,286,905 21

23 DAVID N. MILLER & COMPANY, LLP CERTIFIED PUBLIC ACCOUNTANTS Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance to Government Auditing Standards To The Board of Directors Avenue Community Development Corporation Houston, Texas We have audited the financial statements of Avenue Community Development Corporation as of December 31, 2009 and for the year then ended, and have issued our report thereon dated June 4, We conducted our audits in accordance with United States of America generally accepted auditing standards, and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control over Financial Reporting In planning and performing our audit, we considered Avenue Community Development Corporation's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements but not for the purpose of expressing an opinion on the effectiveness of Avenue Community Development Corporation's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of Avenue Community Development Corporation's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of control deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and other matters As part of obtaining reasonable assurance about whether Avenue Community Development Corporation's financial statements are free of material misstatements, we performed tests of its compliance with certain provisions of laws, regulations, contract and grant agreements, noncompliance with which could have a direct material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions are not an objective of our audit and, accordingly we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the board of directors, the Department of Housing and Urban Development, the Department of the Treasury, the Department of Justice and management and is not intended to be and should not be used by anyone other than these specified parties. David N. Miller and Company, LLP June 4, WOODWAY, SUITE 320/HOUSTON, TEXAS 77063/(713) /FAX (713)

24 DAVID N. MILLER & COMPANY, LLP CERTIFIED PUBLIC ACCOUNTANTS Report on Compliance with Requirements Applicable to each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 To The Board of Directors Avenue Community Development Corporation Houston, Texas We have audited the compliance of Avenue Community Development Corporation with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to its major federal programs for the year ended December 31, Avenue Community Development Corporation's major federal programs are identified in the summary of auditors' results section of the accompanying Schedule of Findings and Questioned Costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of the Avenue Community Development Corporation's management. Our responsibility is to express an opinion on Avenue Community Development Corporation's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal programs occurred. An audit includes examining, on a test basis, evidence about the Avenue Community Development Corporation's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the Avenue Community Development Corporation's compliance with those requirements. In our opinion, Avenue Community Development Corporation complied, in all material respects, with the requirements referred to above that are applicable its major federal programs for the year ended December 31, The management of Avenue Community Development Corporation is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered Avenue Community Development Corporation's internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Avenue Community Development Corporation's internal control over compliance. A control deficiency in an entity's internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect noncompliance with a type of compliance requirement of a federal program on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to administer a federal program such that there is more than a remote likelihood that noncompliance with the type of compliance requirement of a federal program that is more than inconsequential will not be prevented or detected by the entity's internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that result in more than a remote likelihood that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected by the entity's internal control. Our consideration of internal control over compliance was for the limited purpose described above and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we considered to be material weaknesses, as defined above. This report is intended solely for the information and use of the board of directors, the Department of Housing and Urban Development, the Department of the Treasury, the Department of Justice and management and is not intended to be and should not be used by anyone other than these specified parties. David N. Miller and Company, LLP June 4,

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26 SCHEDULE OF FINDINGS AND QUESTIONED COSTS DECEMBER 31, 2009 Section I - Summary of Auditors' Results Financial Statements Type of auditors' report issued: Unqualified Internal control over financial reporting: Material weakness(es) identified? Yes X No Significant deficiency(s) identified that are not considered to be material weakness(es)? Yes X None Noncompliance material to financial statements noted? Yes X No Federal Awards Internal control over major programs: Material weakness(es) identified? Yes X No Significant deficiency(s) identified that are not considered to be material weakness(es)? Yes X None Type of auditors' report issued on compliance for major programs: Unqualified Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A-133? Yes X None Identification of major programs: CFDA Number Name of Federal Program or Cluster Home Investment Partnership Program NeighborWorks America Dollar threshold used to distinguish between type A and type B programs: $300,000 Auditee qualified as low-risk auditee? X Yes No Section II - Financial Statement Findings Findings related to the financial statements required to be reported under GAAS Yes X None Section III - Findings and Questioned Costs- Major Federal Awards Findings and Questioned Costs for Federal Awards Yes X None 25