BOCA RIO BEACH HOMEOWNERS ASSOCIATION FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2009 TABLE OF CONTENTS. Accountant's Report 1

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1 FINANCIAL STATEMENTS FOR THE YEAR ENDED TABLE OF CONTENTS Accountant's Report 1 Financial Statements Balance Sheet 2 Statement of Revenues and Expenses and Changes in Fund Balances 3 Statement of Cash Flows 4 Notes to Financial Statements 5-7 Supplementary Information 8

2 GREGORY V. VILLARD CERTIFIED PUBLIC ACCOUNTANT 7777 ALVARADO ROAD, SUITE 702 LA MESA CALIFORNIA PHONE (619) FAX (619) ACCOUNTANT S REPORT Board of Directors and Members Boca Rio Beach Homeowners Association I have reviewed the accompanying balance sheet of Boca Rio Beach Homeowners Association as of December 31, 2009, and the related statements of revenues, expenses, changes in fund balances and of cash flows for the year then ended, in accordance with Statements of Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management and Board of Directors. A review consists principally of inquiries of association personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, I do not express such an opinion. Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. The supplementary information on future major repairs and replacements on page 8 is not a required part of the basic financial statements but is supplementary information required by the American Institute of Certified Public Accountants. I have compiled the supplementary information from information that is the representation of management of Boca Rio Beach Homeowners Association, without audit or review. Accordingly, I do not express an opinion or any other form of assurance on the supplementary information. La Mesa, California September 15, 2010 Gregory V. Villard Certified Public Accountant

3 BALANCE SHEET Operating Replacement ASSETS Fund Fund Total Cash $ 8,196 $ 126,597 $ 134,793 Assessments Receivable 8,750-8,750 Prepaid Taxes 1,557-1,557 Total Assets $ 18,503 $ 126,597 $ 145,100 LIABILITIES Accounts Payable $ 9,185 $ - $ 9,185 Prepaid Assessments 2,096-2,096 Prepaid Special Assessments - 7,000 7,000 Total Liabilities 11,281 7,000 18,281 FUND BALANCES 7, , ,819 Total Liabilities and Fund Balances $ 18,503 $ 126,597 $ 145,100 See accompanying notes and accountant's report. 2

4 STATEMENT OF REVENUES AND EXPENSES & CHANGES IN FUND BALANCES FOR THE YEAR ENDED Operating Replacement REVENUES Fund Fund Total Regular Assessments $ 156,244 $ 13,596 $ 169,840 Interest - 2,126 2,126 Laundry Income 1,918-1,918 Other Member Charges 7,379-7,379 Total Revenues $ 165,541 $ 15,722 $ 181,263 EXPENSES Maintenance Pest Control 1,356-1,356 Custodial Services 3,117-3,117 Water Instrusion 6,004-6,004 Landscaping Maintenance 11,908-11,908 Tree Maintenance Electrical 3,085-3,085 Area Repairs & Supplies 62,173-62,173 Painting 15,124-15,124 Plumbing 1,304-1,304 Total Maintenance 105, ,061 Utilities Gas & Electricity 10,588-10,588 Water & Sewer 8,812-8,812 Trash Removal 12,770-12,770 Total Utilities 32,170-32,170 General and Administrative Legal/Review/Tax Preparation 7,907-7,907 Management & Accounting 6,300-6,300 Insurance 31,500-31,500 Office & Administrative 12,819-12,819 Income Taxes License and Permits Total Administrative 59,130-59,130 Major Repair and Replacements - 6,865 6,865 Total Expenses 196,361 6, ,226 Excess Revenues over Expenses (30,820) 8,857 (21,963) Beginning Fund Balances 28, , ,782 Interfund Transfers (Net) 9,200 (9,200) - Ending Fund Balances $ 7,222 $ 119,597 $ 126,819 See accompanying notes and accountant's report. 3

5 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED Operating Replacement Fund Fund Total Cash Flows from Operating Activities Excess (Deficiency) of Revenues over Expenses $ (30,820) $ 8,857 $ (21,963) Adjustments to Reconcile Excess of Revenues over Expenses to Net Cash Provided by Operating Activities: (Increase) Decrease in: Assessments Receivable 16,371-16,371 Prepaid Insurance Increase (Decrease) in: Accounts Payable 5,126-5,126 Prepaid Assessments 1,095-1,095 Prepaid Special Assessments 0 7,000 7,000 Net Cash Provided (Used) by Operating Activities (7,669) 15,857 8,188 Net Increase(Decrease) in Cash (7,669) 15,857 8,188 Cash at Beginning of Year 6, , ,605 Interfund Transfers (Net) 9,200 (9,200) - Cash at End of Year $ 8,196 $ 126,597 $ 134,793 See accompanying notes and accountant's report. 4

6 NOTES TO FINANCIAL STATEMENTS NOTE 1. ORGANIZATION Boca Rio Beach Homeowners Association is a common interest realty corporation that was incorporated on December 20, 1975, under the general nonprofit laws of the State of California. The Association was organize d to provide for the management and maintenance of the commonly owned areas of the housing development which includes 44 residential condominium units located in Imperial Beach, California. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The Association's records are maintained on the modified cash basis of accounting whereby revenues are recognized when earned and expenses are recognized when paid. The accompanying financial statements and the Association's corporate income tax returns have been prepared on the accrual method of accounting in accordance with generally accepted accounting principles whereby revenues are recognized when earned and expenses are recognized when incurred. Fund Accounting The Association's governing documents provide certain guidelines for governing its financial activities. To ensure observance of limitations and restrictions on the use of financial resources, the Association maintains its accounts using fund accounting. Financial resources are classified for accounting and reporting purposes in the following funds established according to their nature and purpose: Operating Fund - This fund is used to account for financial resources available for the general operations of the Association. Replacemen t Fund - This fund is used to accumulate financial resources designated for future major repairs and replacements. Property and Equipment Real property owned by individual unit owners in common and related improvements made by the Association to such property are not capitalized in the financial statements. Personal property and equipment acquired by the Association are recorded at cost. These assets, if significant in amount, are depreciated over their estimated useful lives using straight - line method of depreciation. 5

7 NOTES TO FINANCIAL STATEMENTS Statement of Cash Flows According to SFAS No. 95 regarding the Statement of Cash Flows, certificates of deposits and securities with original maturities of three months or less are classified as cash equivalents. Certificates of deposit and securities with original maturities over three months are considered short-term investments. The Association's policy is to treat all cash, cash equivalents, and short-term investments together as cash funds. NOTE 3. INCOME TAXES The Association may elect to be taxed as a regular corporation or a homeowners association. The Association elected to be taxed as a homeowners association for the year ended December 31, Under that election, the Association is generally taxed only on nonmembership income, such as interest earnings. Excess membership income is exempt from taxation. Federal and California income tax expense s for the year were $415 and $144, respectively. As of December 31, 2009, the Association has prepaid $1,185 in Federal and $372 in California income taxes. NOTE 4. HOMEOWNER ASSESSMENTS Association members are subject to monthly assessments to provide funds for the Association's operating expenses, future capital acquisitions, and major repairs and replacements. The annual budget and assessments of members are determined by the Board of Directors. Any excess assessments at the year end are retained by the Association for use in future years. Monthly assessments to owners were $285 for the first month and $325 for the rest of the year. NOTE 5. FUTURE MAJOR REPAIRS AND REPLACEMENTS The Association's policy is to accumulate funds for future major repairs and replacements. Accumulated funds are held in separate interest-bearing accounts and are generally not available for operating purposes. The Association engaged an independent consultant who conducted a study in August 2009 to estimate the remaining useful lives and the replacement costs of the common property components. The table included in the compiled Supplementary Information on Future Major Repairs and Replacements is based on this study. 6

8 NOTES TO FINANCIAL STATEMENTS The Association is funding such major repairs and replacements over the estimated useful lives of the components based on the study's estimates of current replacement costs, considering amounts previously accumulated in the replacement fund. Actual expenditures, however, may vary from the estimated amounts and the variations may be material. Therefore, amounts accumulated in the replacement fund may not be adequate to meet all future needs for major repairs and replacements. If additional funds are needed, however, the Association has the right to increase regular assessments, levy special assessments, or delay major repairs and replacements until funds are available. NOTE 6. ASSESSMENTS RECEIVABLE The Association's policy is to place liens on the properties of owners whose assessments are in arrears and retain legal counsel if necessary to collect delinquent assessments. As of December 31, 2009, there are $8,750 in assessments and charges due from homeowners and $2,096 of assessments have been paid in advance. NOTE 7. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7

9 SUPPLEMENTARY INFORMATION ON FUTURE MAJOR REPAIRS AND REPLACEMENTS (compiled ) The Association engaged an independent consultant to estimate the remaining useful lives and the replacement costs of the components of common property as of December 31, The estimates were based on information provided by the Board of Directors and property manager and on site inspection by the consultant. Replacement costs were based on the estimated costs to repair or replace the common property components at the time of the study. The following table is based on the study and presents significant information about the components of common property: Components of Estimated Remaining Estimated Current Fund Balance at Components Useful Lives (Years) Replacement Costs December 31, 2009 Roofing & Decks 1 to 15 $284,087 $ 58,583 Painting & Repairs 1 to 5 53,734 11,081 Fence & Security 2 to 25 59,343 12,238 Paved Surfaces 1 6,650 1,371 Mechanica l & Plumbing 1 to 20 30,475 6,284 Ocean Tide Control 1 to 10 70,000 14,435 Fire/Safety 2 2, Landscapi ng/irrigation 2 6,025 1,242 Lighting/Electrical 1 to 2 6,032 1,244 Miscellaneous 8 to 18 33,980 7,007 Contingency (5%) - 27,617 5,696 Total $579,958 $119,597 According to the study, the annual replacement funding requirement and accumulated replacement funding requirement are $55,697 and $340,168, respectively. The study determined the funding program to be 25.7% funded as of December 31, See Accountant s Report 8