Loading...
HomeMy WebLinkAboutSan Marcos Audit 08-31-04[ r TEXAS STUDENT HOUSING AUTHORITY- SAN MARCOS PROJECT FINANCIAL REPORT AUGUST 31, 2004 CONTENTS Page INDEPENDENT AUDITOR'S REPORT ................................................................................... 1 FINANCIAL STATEMENTS Statement of Net Assets .................................................................................................. 2 Statement of Revenues , Expenses, and Changes in Net Assets ..................................... 3 Statement of Cash Flows ................................................................................................. 4 Notes to Financial Statements ......................................................................................... 6 SUPPLEMENTAL SCHEDULES Auditor's Report of Supplemental Schedules ................................................................. 14 Schedule I -Schedule of Revenues and Expenses ....................................................... 15 Schedule II -Debt Service Coverage Ratio ................................................................... 16 I I I WEAVER ---c:m- TIDWELL L.L.P. CERTIFIED PUBLIC ACCOUNTANTS AN D CONSULTANTS DALLAS i l•rt't' f nr ·ct fJIIf:,t I.!.!.! 1 .\hru Driz., \111u I IIIII IJ~tf/,u, ]; .\.IIJ -')l) J -.!.!S(J 9·1 ,yo. J<ro F y-] -o.! Sl.!J F ORT WOR TH J6UO \roJ ~c'''"''' !::tnut \ujr,· JOO ;;m \\"orJI•. Tr.\o~J "6/0.!-]506 8/-332 -')(}) I· 81-t.19 ilJ:i(, WWW WEAVERANDTIDWELL.COM AN INDEPENDENT MEM BE R O F BAKER TI LLY INDEPENDENT AUDITOR'S REPORT To the Board of Directors Texas Student Housing Authority-San Marcos Project We have audited the accompanying financial statements of Texas Student Housing Authority -San Marcos Project (the "Project"), as of and for the twenty month period ended August 31, 2004, as listed in the table of contents . 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 , 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 Authority -San Marcos Project at August 31, 2004 and the results of its operations and cash flows for the twenty month period 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 Authority -San Marcos Project will continue as a going concern. As discussed in Note 1 to the financial statements , the Project is in default subsequent to year end 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 Authority -San Marcos Project has not presented management discussion and analysis that accounting principles generally accepted in the United States of America has determined is necessary to supplement, although not required to be part of the basic financial statements . WEAVER AND TIDWELL , L.L.P . Fort Worth, Texas May 23, 2005 INTERNAT IONAL 4358 Page 2 TEXAS STUDENT HOUSING AUTHORITY -SAN MARCOS PROJECT STATEMENT OF NET ASSETS AUGUST 31, 2{)04 CURRENT ASSETS Cash Restricted cash Accounts receivable Total current assets CAPITAL ASSETS Land ASSETS Other capital assets, net of accumulated depreciation Total capital assets OTHER ASSETS Deposit Deferred financing costs, net of amortization Total intangible assets TOTAL ASSETS CURRENT LIABILITIES Trade accounts payable Management fees payable Deferred revenue Tenant security deposits Accrued interest Accrued expenses Other current liabilities Development fee payable Bonds payable Total current liabilities NET ASSETS LIABILITIES AND NET ASSETS Invested in capital assets, net of related debt Restricted for debt service Unrestricted Total net assets TOTAL LIABILITIES AND NET ASSETS The Notes to Financial Statements are an integral part of this statement. $ 215 ,922 18,526 78,328 312,776 1,552 ,207 14,360 ,604 15,912 ,811 900 895,448 896,348 $ 17,121,935 $ 211 ,361 344,233 49,652 75,963 134,155 25,693 180,770 133,050 19,632,280 20 ,787 ,157 3 ,719 ,469) 54,247 3,665,222) $ 17,121,935 Page 3 TEXAS STUDENT HOUSING AUTHORITY -SAN MARCOS PROJECT STATEMENT Of REVENUES, EXPENSES , AND CHANGES IN NET ASSETS FOR THE TWENTY MONTH PERIOD ENDED AUGUST 31 , 2004 OPERATING REVENUES Rental income Other income Total operating revenue OPERATING EXPENSES Personnel expenses Utilit ies Contract services Repairs and maintenance Turnover expenses Advertising and promotion Administration expenses Management f ees Replacements Depreciation expense Amortization expense Total operating expenses OPERATING INCOME NONOPERATING REVENUES (EXPENSES) Interest income Interest e x pense TOTAL NONOPERATING EXPENSES CHANGE IN NET ASSETS NET ASSETS, DECEMBER 31 , 2002 NET ASSETS, AUGUST 31 , 2004 The Notes to Financial Statements are an integral part of this statement. $ 3,433,624 139,139 3,572,763 388 ,108 384,195 29,222 46,889 1 2 8 ,737 46,810 285,241 309,123 200,192 1,075,969 56 ,676 2 ,951 ,162 621 ,601 2 ,849 2 ,698,985) 2 ,696, 136) 2 ,074 ,535) 1 ,590 ,687) ($ 3 ,665,222) Page4 TEXAS STUDENT HOUSING AUTHORITY -SAN MARCOS PROJECT STATEMENT OF CASH FLOWS FOR THE TWENTY MONTH PERIOD ENDED AUGUST 31 , 2004 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants Cash paid to employees Cash paid to suppliers Net cash provided by operating activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on bonds payable Interest paid Net cash used in capital and related financing activities CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments Net cash provided by investing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash Restricted cash Total cash and cash equivalents The Notes to Financial Statements are an integral part of this statement. $ 3 ,457,288 ( 359 ,262) ( 1 ,030 ,234) 2 ,067,792 134,398) 2 ,699,902) ( 2 ,834,300) 2,849 2 ,849 ( 763,659) 998,107 $ 234,448 $ 215,922 18 ,526 $ 234,448 Page 5 TEXAS STUDENT HOUSING AUTHORITY -SAN MARCOS PROJECT STATEMENT OF CASH FLOWS FOR THE TWENTY MONTH PERIOD ENDED AUGUST 31 , 2004 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income Adjustments to reconcile operating income to net cash provided by operating activities Depreciation and amortization Changes in operating assets and liabilities: Accounts receivable Prepaid expenses Other assets Trade accounts payable Management fees payable Accrued expenses Deferred revenue Tenant security deposits Development fee payable Other current liabilities Net cash provided by operating activities The Notes to Finan cial Statements are an integral part of this statement. $ 621,601 1 ,132,645 44,702) 8,777 900) 160,007 144,116 15,177) 123,203) 53,330 74 ,125 57,173 $ 2 ,067,792 TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 1. GENERAL STATEMENT Page6 Texas Student Housing Authority (the "Authority"), a higher education authority, was established on January 23, 1995, as a duly constituted authority of the Town of Westlake , Texas (the "Town "), pursuant to Section 53 .11 of Chapter 53 of the Texas Education Code , as amended . The Authority's purpose among other things is to acquire , finance , and operate student housing facilities . The Authority operates several student housing facilities in Texas including the San Marcos Project (the "Project"). The San Marcos Project was purchased from Jefferson Commons -Austin, L.P ., a Delaware limited partnership on December 28 , 2000 . The Proj ect 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 fo r 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 Authority and JPI Campus Quarters Management, L.P. ("JPI") and (b) the Asset Management Agreement by and between the Authority and JPI Apartment Management, L.P ., up until March 31 , 2004. The Project is now managed and operated by Asset Campus Management 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 2004 financial statements were prepared assuming the project will continue as a go ing concern . The Project's Bonds payable are considered to be in default due to the discontinuance of principal and interest payments subsequent to the end of the year. These are considered an event of default by the Trustee which gives the bond holders the right to accele rate and demand payment of the Bonds in full. Management and the property manager have developed and implemented 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 account ing policies co nsistently applied in the preparation of the accompany ing financial statements follows : Reporting Entity For f inancial report ing purposes , management has cons idered all potential component units. The decision to include a po tential component unit in the reporting ent ity was made by applying the criteria set forth in GASB Statement No . 14 as amended by GASB Statement No . 39 . The crit eria used are as follows : TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -continued Reporting Entity -continued Page 7 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. 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 account ing . 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 $215 ,922 (bank balance $216 ,937) is deposited in FDIC insured state or national banking corporations and is categorized as category one and three . Category one represents cash and cash equivalents that are insured in the amount of $1.00,000. Cash in excess of FDIC insured amounts are secured by a safekeeping receipt from Northwest Bank in the amount of $1,000,000 at August 31 , 2004 . In addition, the Project has restricted cash of $18 ,526 that is held by the Trustee per provisions of the Indenture . TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued Cash and Cash Equivalents -continued Page 8 During the twenty month period ending August 31, 2004 the investment income received from the restricted cash was $2 ,849. 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 , 2004, 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 twenty-month period ending August 31 , 2004 were approximately $47 ,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. TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued Capital Assets -continued Page 9 Depreciation is computed using the straight-line method over the estimated useful lives as follows: Building Furniture, fixtures and equipment Restricted Cash 30 years 7 years 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 a·ccounts : 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 $ 13 25 18,467 6 6 9 $ 18.526 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. TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 2. SUMMARY OF S IGNIFICANT ACCOUNTING POLICIES-continued Page 10 Replacement Fund-Amounts deposited into this account a re 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 depos its 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 f und . 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 twenty months ended August 31 , 2004, 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 twenty months ended August 31 , 2004 , the balance in the debt service reserve fund was used to make principal and interest payments . NOTE 3. CAPITAL ASSETS Capita l asset activity for the Project for the twenty month period ended August 31 , 2004 was as follows: Capital assets not being depreciated : Land Total capital assets not being depreciated Capi tal assets being depreciated : Bu ilding Furniture , fixtures & equipment Beginning Balance $1 ,552 ,207 1,552 ,207 15,875 ,143 818 ,333 Additions Retirements Ending Balance $1 ,552,207 1,552,207 15,875,143 818.333 Page 11 TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT NOTES TO FINANCIAL STATEMENTS NOT E 3. CAPITAL ASSETS -continued Total capital assets being depreciated Totals at historical cost Less accumulated depreciation Capital assets, net NOTE 4. BONDS PAYABLE Beginning Balance 16,693.476 18.245,683 1.256,903 $:16,988 , 78Q Ending Additions Retirements Balance 16,693.476 18.245,683 1,075,969 2,332,872 ($1,075 ,969) $ $15,9:12,811 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%. Subsequent to August 31, 2004, 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 the events of default occur, the liability should be disclosed as a current liability. As a result, the outstanding principal at August 31 , 2004 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 twenty month period ended August 31, 2004: Balance Balance December 31, August 31, Due Within 2002 Increases Decreases 2004 One Year Revenue Bonds 2000 Bonds $ 19.766.678 $ ($ 134.398) $19,632,280 $19,632.280 Total ~ 19,766,6Z8 ~ (~ 13~,398) ~:19 ,632 ,28Q $19,632 ,280 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 , 2004 are as follows and Page 12 TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 4. BONDS PAYABLE -continued includes interest per the orig inal payment schedu le. The total amount of accrued interest due at August 31 , 2004 was approximately $134,000 . Due Fiscal Year Ending August 31 2005 Principal Interest Total $ 19.632.280 $36.730 .059 $56 .362 .339 In addition, the Project was not in compl iance with certain debt covenants as of August 31 , 2004. NOTE 5. NET ASSETS Net assets represents the residual assets after liabilities are deducted . These assets are reported in the following categories . Invested in Cap ital Assets, Net of Re lated Debt consists of capital assets, net of accumulated depreciation and reduced by outstanding ba lances 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 thro ugh constitutional provisions or enabling legislation. At August 31, 2004, the total funds available for debt service was less than the accrued interest due at August 31 , 2004. As a result, net assets restricted for debt service are shown at zero. NOTE 6. EMPLOYEE BENEF IT PLAN Employees of the Project are eligible to participate in the Asset Campus Management 401 (k) as of August 31, 2004 . Employee salary deferrals into the Plan are matched by the Project up to 1% of employee compensation as defined by the Plan. During the twenty months ended August 31, 2004 , total expense related to the P!an was $3 ,045 . NOTE 7. 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 $309,000 for the twenty month period ending August 31, 2004. As of August 31 , 2004, the Project has recorded approximately $344,000 in unpaid property and asset management fees . TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT NOTES TO FINANCIAL STATEMENTS NOTE 8. CONCENTRATIONS Page 13 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. SUPPLEMENTAL SCHEDULES I I I WEAVER --mm-- TIDWELL L. L. P. CERTIFIED PUBLIC ACCOUNTANTS AND CONSU L TANTS DALLAS T/Jra Forni P/r~;:,a I]]:! I j\lait lJrit•t• Snit1' /-If)() Da!ltl.•. 1;·,·\'tli -5151-1280 •r.!.·iYII.JY~o F 'r.!. -o2.8321 F oRT WoRT H )UJ!t' j()() 81-.33.!. -905 F 81-.-129. 5936 WWW.WEAVER ANDTIDWELL.COM AN INDEPENDENT ME MBER OF BAKER TI L L Y INTERNATION A L To the Members of the Board of Directors Texas Student Housing Authority-San Marcos Project Westlake, Texas Page 14 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 are not a required part of the basic financial statements of the Texas Student Housing Authority -San Marcos Project. 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 May 23, 2005 TEXAS STUDENT HOUSING AUTHORITY -SAN MARCOS PROJECT SCHEDULE I -SCHEDULE OF REVENUES AND EXPENSES FOR THE TWENTY MONTH PERIOD ENDED AUGUST 31,2004 Actual Budget Revenue and other support: Rental income $ 3,433,624 $ 3,820,123 Other income 139,139 196,733 Interest income 2,849 Total revenue and other 3,575,612 4,016,856 Operating expenses Personnel expenses 388,108 377 ,503 Utilities 384,195 404,569 Contract Services 29,222 25,823 Repairs and maintenance 46,889 34,725 Turnover expense 128,737 91,264 Advertising and promotion 46,810 48,713 Administration expenses 285,241 183,883 Total operating expenses 1,309,202 1,166,480 Revenue available for debt coverage 2,266,410 2,850,376 Other expenses Management fees 309,123 286,250 Replacements 200,192 45,483 Depreciation and amortization 1,132,645 Interest expense 2,698,985 2,692,935 Total other expenses 4,340 ,945 3,024,668 Excess of expenses over revenue ($ 2 ,074,535} {$ 174,292} Page 15 Variance ($ 386,499) ( 57,594) 2,849 441 ,244) 1 0,605) 20,374 3,399) 12,164) 37,473) 1,903 101,358) 142,722) 583,966) ( 22,873) ( 154,709) ( 1,132,645) ( 6,050) 1,316,277) {$ 1,900,243} TEXAS STUDENT HOUSING AUTHORITY-SAN MARCOS PROJECT SCHEDULE II -DEBT SERVICE COVERAGE RATIO FOR THE TWENTY MONTH PERIOD ENDED AUGUST 31, 2004 Page 16 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 operat ing expenses. Schedule I indicates that the actual revenue available for debt coverage for the twenty months ended August 31 , 2004 is $2 ,266,410. The amount of principal and interest due under the Note for the next twelve months is $1 ,696 ,347 . A total of $2 ,827 ,245 is due over the next twenty months. Based on the above revenue available for debt coverage and the required principal and interest due under t he Note , the Debt Service Coverage Ratio as of August 31 , 2004 is 0.802. Schedule I ind icates that the budgeted revenue available for debt coverage for the twenty months ended August 31 , 2004 to be $2 ,850 ,376. Based on the budgeted revenue available for debt coverage and t he requ ired principal and interest due under the Note, the budget wou ld have resulted in a Debt Service Coverage Ratio as of August 31 , 2004 of 1.008.