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HomeMy WebLinkAboutDenton Audit 08-31-04 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT FINANCIAL REPORT AUGUST 31, 2004 CONTENTS Page INDEPENDENT AUDITORS REPORT....................................................................................1 FINANCIAL STATEMENTS Statementof Net Assets..................................................................................................2 Statement of Revenues, Expenses, and Changes in Net Assets.....................................3 Statementof Cash Flows.................................................................................................4 Notes to Financial Statements.........................................................................................6 Auditors Report of Supplemental Schedules..................................................................14 Schedule I — Schedule of Revenues and Expenses.......................................................15 Schedule II —Certificate of the Fixed Charges Coverage Ratio .....................................16 '=a INDEPENDENT AUDITOR'S REPORT To the Board of Directors WEAVER Texas Student Housing Corporation-Denton Project TIDWELL We have audited the accompanying financial statements of Texas Student Housing L.L.P. Corporation-Denton Project (the "Project"), as of and for the year ended August 31, 2004, CERTIFIED PUBLIC as listed in the table of contents. These financial statements are the responsibility of the ACCOUNTANTS Project management. Our responsibility is to express an opinion on these financial AND CONSULTANTS 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, 2004, 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 Texas Student Housing Corporation — Denton Project at August 31, 2004 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 — Denton Project will continue as a going concern. As discussed in Note 1 and Note 5 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. DALLAS Texas Student Housing Corporation — Denton Project has not presented managements '`221 A rh Dr'" discussion and analysis that accounting principles generally accepted in the United States rz221,a1��,�1a 13r1vr Suite 1400 of America has determined is necessary to supplement, although not required to be part Ddhis, Texas 75251-2280 of the basic financial statements. 9172.490.1970 F 9,?.70 2.8321 FART WORTH 1600 sepenr/,,sm,et WEAVER AND TIDWELL, L.L.P. Suite 300 Fri Marti, Texas 76102-1506 8 17.33-1.79 05 Fort Worth, Texas F 81,-i_?9.>>>r February 8, 2005 W W W.W EAVERANDTIDW ELL.COM AN INDEPENDENT MEMBER OF 4282 BAKER TILLY INTERNATIONAL Page 2 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT STATEMENT OF NET ASSETS AUGUST 31, 2004 ASSETS CURRENT ASSETS Cash $ 58,104 Restricted cash 3,496,752 Property management receivable 224,922 Accounts receivable, net of reserve of$55,740 58,441 Total current assets 3,838,219 CAPITAL ASSETS Land 2,200,000 Other capital assets, net of accumulated depreciation 23,634,427 Total capital assets 25,834,427 INTANGIBLE ASSETS Deferred financing costs, net of amortization 910,715 Total intangible assets 910,715 TOTAL ASSETS $ 30,583,361 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Trade accounts payable $ 311,972 Management fees payable 799,013 Deferred revenue 204,008 Tenant security deposits 12,035 Accrued interest 506,948 Accrued legal fees 188,922 Other current liabilities 32,208 Property management advance 499,736 Bonds payable 31,557,796 Total current liabilities 34,112,638 NET ASSETS Invested in capital assets, net of related debt ( 5,723,369) Restricted for debt service 3,110,144 Unrestricted ( 916,052) Total net assets ( 3,529,277 TOTAL LIABILITIES AND NET ASSETS $ 30,583,361 The Notes to Financial Statements are an integral part of this statement. Rage 3 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEAR ENDED AUGUST 31, 2004 OPERATING REVENUES Rental income $ 3,563,430 Other income 304,336 Total operating revenue 3,867,766 OPERATING EXPENSES Personnel expenses 279,691 Contract services 66,275 Utilities 399,319 Repairs and maintenance 83,675 Turnover expenses 179,927 Advertising and promotion 42,477 Administration expenses 62,157 Management fees 332,075 Replacements 243,914 Depreciation expense 1,059,423 Other 11,153 Total operating expenses 2,760,086 OPERATING INCOME 1,107,680 NONOPERATING REVENUES (EXPENSES) Interest income 157,024 Interest expense ( 2,503,408) TOTAL NONOPERATING LOSS �f 2,346,384) CHANGE IN NET ASSETS ( 1,238,704) NET ASSETS, AUGUST 31, 2003, AS PREVIOUSLY REPORTED ( 1,814,648) PRIOR PERIOD ADJUSTMENT ( 475,925) NET ASSETS, AUGUST 31, 2003, RESTATED { 2,290,573) NET ASSETS, AUGUST 31, 2004 $ 3,529,277 The Notes to Financial Statements are an integral part of this statement. Page 5 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2004 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 1,107,680 Adjustments to reconcile operating income to net cash used in operating activities Depreciation and amortization 1,093,343 Changes in operating assets and liabilities: Accounts receivable 37,838 Trade accounts payable 162,948 Management fees payable 327,075 Deferred revenue ( 6,624) Tenant security deposits ( 48,562) Accrued legal fees ( 24,349) Other current liabilities ( 20,746) Net cash provided by operating activities $ 2,628,603 The Notes to Financial Statements are an integral part of this statement. Page 6 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 1. GENERAL STATEMENT Texas Student Housing Corporation - Denton Project (the "Project"), a Texas non-profit organization, was incorporated on May 17, 2001, as a duly constituted authority of the Town of Westlake, Texas (the "Town") pursuant to Section 53.35(b) of the Texas Education Code, as amended (the "Act"). The Project's primary purpose is to purchase, own and operate a student housing facility known as Jefferson Commons (the "Denton Project") in Denton, Texas. The Denton 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 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 Denton Project is operated and managed under the terms of the (a) Property Management and Leasing Agreement by and between the Corporation and JPI Campus Quarters Management, L.P. ("JPI") and (b) the Asset Management Agreement by and between the Corporation and JPI Apartment Management, L.P., (collectively referred to as the "Agreements") for the period audited. The 2004 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 of the Project is in the final stages of changing the Indenture to allow the Project to come into compliance with the covenants of the Indenture. 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 7 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT 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 "net income and capital maintenance" 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, 2004, the Project had no such investments included in cash and cash equivalents. The Project's cash of $58,104 (bank balance $62,387) is deposited in FDIC insured state or national banking corporations and is categorized as category one as all balances are covered by FDIC insurance. In addition, the Project has restricted cash of $3,496,752 that is held by the Trustee for the Bonds Payable under provisions of the Indenture. Page 8 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT 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. 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, 2004 were approximately $43,000. 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 30 years Furniture, fixtures and equipment 3 to 20 years Page 9 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued 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, 2004, restricted cash consists of the following funds and accounts: Fund/Account Description 2004 Revenue Fund $ - Bond Fund - Series 2001A 317,988 Bond Fund - Series 20016 20 Repair and Replacement Fund 237,955 Surplus Fund - Trustee Fee Fund 4,274 Series A Principal Fund 8,338 Series B Principal Fund 58 Operating Reserve Fund 7 Debt Service Reserve Fund - Series 2001A 2,403,112 Debt Service Reserve Fund - Series 2001 B 525_,000 Total 1 3 496.752 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. 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. Page 10 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Restricted Cash - continued Surplus Fund- The trustee shall deposit any remaining amount in the revenue fund into the surplus fund. Amounts on deposit in the surplus fund will be released to the 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. As of August 31, 2004 these fees have not been paid and are appropriately accrued in the Statement of Net Assets. 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 2001A Account- The amounts on deposit in this account are to be used for the purpose of paying principal and interest on the Series 2001A Bonds as they become due in the event there should be insufficient funds in the Bond Fund. Debt Service Reserve 2001B Account- The amounts on deposit in this account are to be used for the purpose of paying principal and interest on the Series 2001B Bonds as they become due in the event there should be insufficient funds in the Bond Fund. NOTE 3. PROPERTY MANAGEMENT ADVANCE As of August 31, 2004 the Project has recorded a liability to JPI for amounts received of approximately $500,000. 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 (5,5% at August 31, 2004). As of August 31, 2004 the financial statements include accrued interest related to the property management advance in the amount of approximately $38,000. Page 11 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 4. CAPITAL ASSETS Capital asset activity for the Project for the year ended August 31, 2004 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 - - 22000 Capital assets being depreciated: Building 25,705,000 - - 25,705,000 Furniture and fixtures 1,253,841_ _ _ 1,253,841 Total capital assets being depreciated 26,958,841 - - 26 958,841 Totals at historical cost 2958,841 29,158,841 Less accumulated depreciation: Building 856,853 856,856 - 1,713,709 Furniture and fixtures _ 1,408,138 202,567 - _1,610,705 Total accumulated depreciation 2,264,991 1,059,423 - 3,324,414 Capital assets, net $26,893,850 1LQ59.423 $ - $25,834,427 NOTE 5. 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. 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. Page 12 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 5. BONDS PAYABLE - continued At August 31, 2004, 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 a current asset which has been shown on the financial statements. The following is a summary of long-term debt transactions of the Project for the year ended August 31, 2004: Balance Balance August 31, August 31, Due Within 2003 Increases Decreases 2004 One Year Revenue Bonds 2001A Bonds $29,105,000 $ - ($ 50,000) $29,055,000 $29,055,000 2001E Bonds 4,120,000 - ( 645,000) 3,475,000 3,475,000 Less Discounts ( 1,009,689} $ - 37,485 ( 972.204) (_ 972,204} Total $ 32.215.311 8 {8 657.516} 31.557.796 X31,557,796 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, 2004 are as follows: Due Fiscal Year Ending August 31 Principal Interest Total 2005 $ 32,530 000 $40,436,902 $72,966,902 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. Page 13 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 7. EMPLOYEE BENEFIT PLAN Employees of the Denton Property are eligible to participate in the JPI 401(k) Profit Sharing Retirement Plan (the "Plan") as of August 31, 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 $2,400 for the year ended August 31, 2004. NOTE 8. MANAGEMENT FEES The Project pays JPI property and asset management fees for the management of the Denton Property. The Project recorded property and asset management fees of approximately $332,000 for the period ending August 31, 2004. As of August 31, 2004, the Project has recorded approximately $800,000 in unpaid property and asset management fees. 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. PRIOR PERIOD ADJUSTMENT The Project has cash accounts which are held by the trustee and cash accounts held by the management company. The financial statements as of August 31, 2003 reported cash accounts that belonged to the Texas Student Housing Corporation. These cash accounts have been removed from the financial statements with a resulting decrease in net assets of $475,928. NOTE 11. SUBSEQUENT EVENT Subsequent to August 31, 2004, the Project changed the property management Company. SUPPLEMENTAL SCHEDULES Page 14 i WEAVER TIDWELL L.LP. CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS To the Members of the Board of Directors Texas Student Housing Corporation — Denton Project Westlake, Texas 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 15 and 16 are presented for purposes of additional analysis and is not a required part of the basic financial statements of the Texas Student Housing Corporation — Denton Project. The information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. uJ a4 � ,f:f-?. WEAVER AND TIDWELL, L.L.P. Fort Worth, Texas February 8, 2005 DALLAS Tbres Forest Plaza 12221 Merit Drive Suite 1,400 Dallas, Txas:5271-2280 9/7?$9o.i J o F 9?2.70 2.8321 FORT WORTH 1600 Mest Se iTud,.Srreet Suite 300 Fort llowk 7?sa;;6102-2506 41 >3 -sup 1 81,-.429-5936 W W W.WEAVERANUTIUWELL.COM AN INDEPENDENT MEMBER OF BAKER TILLY INTERNATIONAL f`I 7 Page 15 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT SCHEDULE I - SCHEDULE OF REVENUES AND EXPENSES FOR THE YEAR ENDED AUGUST 31, 2004 2004 2004 Actual Budget Variance Revenue and Other Support: Rental Income $ 3,563,430 $ 3,632,570 ($ 69,140) Other income 304,336 - 304,336 Interest income 157,024 125,000 32,024 Total revenue and other 4,024,790 3,757,570 267,220 Operating Expenses Personnel expenses 279,691 345,895 66,204 Contract services 66,275 79,842 13,567 Utilities 399,319 337,338 ( 61,981) Repairs and maintenance 83,675 28,034 ( 55,641) Turnover expense 179,927 143,148 ( 36,779) Advertising and promotion 42,477 33,541 ( 8,936) Administration expenses 62,157 52,159 ( 9,998) Other expense 11,153 213,320 202,167 Total operating expenses 1,124,674 1,233,277 108,603 Revenue available for fixed charges 2,900,116 2,524,293 375,823 Other Expenses Management fees 332,075 298,728 ( 33,347) Replacements 243,914 - ( 243,914) Reserves - 162,635 162,635 Depreciation and amortization 1,059,423 - ( 1,059,423) Interest expense 2,503,408 3,059,343 555,935 Total other expenses 4,138,820 3,520,706 618,114) Excess of expenses over revenue ($ 1,238,704) ($ 996,413) ($ 242,2911 Page 16 TEXAS STUDENT HOUSING CORPORATION - DENTON PROJECT 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 - Denton Project ("Project") and the Bank of New York ("Trustee"), dated July 1, 2001, relating to Texas Student Housing Corporation - Denton Project Student Housing Revenue Bonds (University of North Testing Project) the "Indenture", to certify the Fixed Charges Coverage Ratio as of August 31, 2004. The Fixed Charges Coverage Ratio is defined in the Indenture as the ratio of Revenue Available for Fixed Charges to Fixed Charges. Further, fixed charges are defined in the Indenture as the sum of all cash outflows related to the Project that the Issuer cannot avoid without violating long-term contractual or legal obligations (those obligations which extend for a period greater than one year), including, but not limited to, (i) interest on Indebtedness other than Short-Term Indebtedness, and (ii) scheduled payments of principal on Indebtedness other than Short-Term Indebtedness, provided that Maximum Annual Debt Service shall be used for purposes of computing (i) and (ii) above. The audited financial statements indicate revenue available for fixed charges for the twelve- month period ended August 31, 2004 to be $2,900,116. Based on the above revenues and fixed charges, we calculate that the Fixed Charges Coverage Ratio as of August 31, 2004 to be .84, which is based on one year of operations and is not in compliance with the Indenture.