EMERALD ISLE RESORT CONDOMINIUM ASSOCIATION, INC.

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1 PENSACOLA, FLORIDA FINANCIAL STATEMENTS

2 PENSACOLA, FLORIDA FINANCIAL STATEMENTS CONTENTS PAGE Independent Auditor s Report 1 Balance Sheet 3 Statement of Revenues, Expenses and Changes in Fund Balances 4 Statement of Cash Flows 5 Notes to Financial Statements 6 Required Supplementary Information: Schedule of Future Major Repairs and Replacements 11

3 Board of Directors and Members Emerald Isle Resort Condominium Association, Inc. Pensacola, Florida INDEPENDENT AUDITOR'S REPORT We have audited the accompanying financial statements of Emerald Isle Resort Condominium Association, Inc. (the Association ), which comprise the balance sheet as of December 31, 2014, and the related statements of revenues, expenses, and changes in fund balances and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. -1-

4 Board of Directors and Members Emerald Isle Resort Condominium Association, Inc. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Association as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Disclaimer of Opinion on Supplementary Information Accounting principles generally accepted in the United States of America require that the Schedule of Future Major Repairs and Replacements on page 11 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Pensacola, Florida April 10,

5 BALANCE SHEET ASSETS Operating Fund Assets: Cash $ 201,163 $ 410,591 $ 611,754 Assessments receivable 11,695-11,695 Prepaid expenses 122, ,858 Interfund balances (180) Certificate of deposit - 150, ,489 Utility deposits 12,267-12,267 Furniture and equipment, net 42,723-42,723 Total Assets $ 390,526 $ 561,260 $ 951,786 LIABILITIES AND FUND BALANCES Replacement Fund Liabilities: Accounts payable $ 21,118 $ - $ 21,118 Income tax payable Assessments paid in advance 15,482-15,482 Total liabilities 36, ,990 Fund Balances: 353, , ,796 Total Liabilities and Fund Balances $ 390,526 $ 561,260 $ 951,786 Total The accompanying notes are an integral part of these financial statements. -3-

6 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND BALANCES YEAR ENDED Operating Replacement Fund Fund Total Revenues: Regular assessments $ 892,444 $ 82,916 $ 975,360 Special assessments 45, , ,244 Miscellaneous income 15, ,403 Total revenues 953, ,513 1,177,007 Expenses: Salaries and wages 70,769-70,769 Maintenance 162, , ,645 Professional services 16,529 3,275 19,804 Lease expense 131, ,755 Management fees 42,465-42,465 Insurance 185, ,631 Utilities 299, ,442 Taxes 3, ,247 Depreciation 10,068-10,068 Other expenses 7, ,436 Total expenses 929, ,893 1,095,262 Excess of Revenues Over Expenses 24,125 57,620 81,745 Fund Balances: Beginning of period 323, , ,051 Transfer from replacement fund to operating fund 5,673 (5,673) - End of period $ 353,669 $ 561,127 $ 914,796 The accompanying notes are an integral part of these financial statements. -4-

7 STATEMENT OF CASH FLOWS YEAR ENDED Operating Fund Replacement Fund Cash Flows From Operating Activities: Excess of revenues over expenses $ 24,125 $ 57,620 $ 81,745 Adjustments to reconcile excess of revenues over expenses to net cash provided by (used in) operating activities: Depreciation 10,068-10,068 Changes in - Assessments receivable (9,623) 871 (8,752) Interfund balances 277 (277) - Prepaid expenses 2,824-2,824 Accounts payable 6,317 (8,072) (1,755) Income tax payable Assessments paid in advance (20,181) - (20,181) Deferred revenue - (185,244) (185,244) Net cash provided by (used in) operating activities 14,064 (134,969) (120,905) Cash Flows From Investing Activities: Purchase of certificate of deposit - (150,489) (150,489) Purchase of furniture and equipment (11,307) - (11,307) Net cash used in investing activities (11,307) (150,489) (161,796) Cash Flows From Financing Activities: Transfer between funds 5,673 (5,673) - Change in Cash 8,430 (291,131) (282,701) Cash, Beginning of Year 192, , ,455 Cash, End of Year $ 201,163 $ 410,591 $ 611,754 Total The accompanying notes are an integral part of these financial statements. -5-

8 NOTES TO FINANCIAL STATEMENTS NOTE 1 - NATURE OF ORGANIZATION Emerald Isle Resort Condominium Association, Inc., (the Association ) was incorporated on April 18, 1997 under the laws of Florida as a not-for-profit corporation for the purpose of administering and maintaining the common property of the 128-unit condominium. The condominium is a 17-story building located on approximately 4.8 acres on Pensacola Beach, Florida. The unit owners each have an undivided ownership interest in the common areas and elements such as the roof, hallways, parking lot, swimming pool, and landscaping and are not considered severable. Accordingly, such common elements are not capitalized and are not reflected in these financial statements. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fund Accounting: The Association is a not-for-profit organization which employs the fund method of accounting in order to properly account for restrictions on the expenditures resulting from actions of the Board of Directors, the Association voting membership, or Florida Statutes. The financial statements segregate the accounting for such funds as either Operating or Replacement Funds. At the end of the year, excess funds are retained by the fund generating such excess during the year to reduce the assessments of the following year. Operating Fund - This fund is used to account for financial resources available for the general operations of the Association. Disbursements from the operating fund are generally at the discretion of the Board of Directors and the Association s Manager. Replacement Fund - These funds are used to accumulate financial resources restricted for future major repairs and replacements of designated common elements that require replacement less frequently than annually. Disbursements from this replacement fund may only be utilized in accordance with Florida Statutes and the purposes established by the Board of Directors and the Association membership. Property and Equipment: Real property and common areas acquired from the developer and related improvements to such property are not recorded in the Association s financial statement because those properties are owned by the individual unit owners as undivided interest in common and not by the Association. The Association is responsible for maintaining the assets of the Association, including the exterior of the buildings and common areas. Personal property (furniture and equipment) acquired by the Association is capitalized at cost and depreciated using the straight-line method over the estimated useful life. The estimated useful life of the furniture and equipment is generally seven years. -6-

9 NOTES TO FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimates and Assumptions: 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 and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition: Regular assessments to members are recognized as revenue during the period for which they are assessed. Assessments received in advance of this period are reported as assessments paid in advance on the balance sheet. Special assessments are recognized as revenue when billed by the Association unless the special assessments are designated for specific costs that have not yet been incurred. Assessments Receivable from Owners and Allowance for Uncollectible Assessments: Assessments receivable from owners are reported at the outstanding balance due from owners. The Association s policy is to retain legal counsel and place liens on the property owners whose assessments are delinquent. Balances due are considered delinquent if payment has not been received within 10 days of the due date. Interest is accrued at a rate of 18% on all delinquent balances. Unpaid assessments become a lien against the property and should, therefore, eventually be collected by the Association. However, an allowance is established for the portion of the balance greater than 6 months overdue. In the event a lien becomes non-enforceable and foreclosure is not possible, the delinquent assessments are written off against the existing allowance or charged off as bad debts. Income Taxes: Homeowners associations may be taxed either as a homeowners association or as a regular corporation. As a regular corporation, membership income is exempt from taxation if certain elections are made, and the Association is taxed only on its nonmember income, such as interest earnings, at regular federal and state corporate rates. Subsequent Events: Management has evaluated subsequent events through April 10, 2015, which is the date the financial statements were available to be issued. -7-

10 NOTES TO FINANCIAL STATEMENTS NOTE 3 - MEMBERS ASSESSMENTS Member assessments are allocated to the owners on a per unit basis. Annual property assessments to owners were $635 per month for the year ended December 31, Regular assessments for the year ended December 31, 2014 totaled $975,360, of which $82,916 was reserve funding. During 2013, the Association levied a special assessment totaling $320,000. The Association expended special assessment funds totaling $185,244 for repair and replacement costs and site improvement costs during the year ended December 31, NOTE 4 - LAND LEASE The Association leases the property on which the condominium was built from the Santa Rosa Island Authority. The lease term is 99 years with 35 years remaining as of December 31, During the year ended December 31, 2014, $131,755 was paid to the Santa Rosa Island Authority. Minimum lease payments are $131,221 for each of the next five years. NOTE 5 - FUTURE MAJOR REPAIRS AND REPLACEMENTS The Association s governing documents and Florida Statutes require funds to be accumulated for future major repairs and replacements. As of December 31, 2014, the accumulated funds totaled $561,127. The funds are held in separate accounts and are not used for operating purposes. It is the Association s policy to allocate interest earned on such funds as additions to each separate line item in the repair and replacement funds. In September 2013, the Association obtained a survey performed by an external engineer. The Association is funding for such major repairs and replacements over the estimated useful lives of the components based on the external engineer s survey report and management s estimates. Actual expenditures, however, may vary from the estimated amounts and the variations may be material. Therefore, amounts accumulated in the replacement fund may or may not be adequate to meet future needs. If additional funds are needed, the Association has the right, subject to member approval, to increase regular assessments or levy special assessments, or it may delay major repairs and replacements until funds are available. The following table is a summary of the changes in elements of the replacement fund balance. -8-

11 NOTES TO FINANCIAL STATEMENTS NOTE 5 - FUTURE MAJOR REPAIRS AND REPLACEMENTS (Continued) Beginning Ending Component Balance Assessments Expenses Transfers Interest Balance Roofing $ 59,448 $ 19,647 $ 17,377 $ - $ 212 $ 61,930 Drive & parking areas 11,093 3, ,585 Exterior sealing & painting 298,448 27, ,516 Sanitary sewer 5,001 1, ,006 Dune walkover 7,502 2, ,009 Electrical distribution equipment 4, ,156 Pools & equipment 5,350 2, ,035 Fire pump & sprinkler 5,003 1, ,713 Emergency generator 7,503 1, ,017 Auto doors & gates 6,002 1, ,008 Fire alarm system 6,524 1, ,291 Elevators 46,920 11,007 6, ,393 Common area HVAC (2,795) 2, , ,545 Common area finishes & specs 10, ,005 Trash handling system 12,823 2,283 1, ,128 Wet glaze 8, ,561 Balustrades 17, , ,707 (7,907) - 9,599 Plumbing & Domestic Pump - 1, ,720 Exterior Lighting Storm Water Irrigation systems NOTE 6 - INCOME TAXES $ 509,180 $ 222,620 $ 165,893 $ (5,673) $ 893 $ 561,127 Homeowners associations may elect to be taxed under Internal Revenue Code ( IRC ) Section 277, which applies to certain membership organizations, or under IRC Section 528, which applies specifically to homeowner associations as that term is defined for tax purposes. For the year ended December 31, 2014, the Association was taxed under the provisions of IRC Section 277. Under IRC Section 277, the Association is required to separate membership income and expenses from non-membership income and expenses. Each component is taxed separately; however, net membership income is exempt from taxation if certain elections are made. For the year ended, December 31, 2014, the Association s net nonmembership income was $7,809, resulting in federal and state income taxes of $1,

12 NOTES TO FINANCIAL STATEMENTS NOTE 6 - INCOME TAXES (Continued) The Association follows accounting requirements associated with uncertainty in income taxes using the provisions of Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) 740, Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more-than-likely-than-not the positions will be sustained upon examination by the tax authorities. It also provides guidance for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2014, the Association has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The federal income tax returns of the Association for years after 2010 are subject to examination by the IRS, generally for three years after they were filed. NOTE 7 - COMMITMENTS AND CONTINGENCIES Concentration of Credit Risk - Owner Assessments: The Association assesses regular and special assessments to its members. It is the Association s policy to turn over significantly past due accounts for collection and to file liens against the individual condominium units. Should the collection of any such liens be enforced by the sale of the unit, the collectability of the receivable is dependent on the quick sale market value of the unit, and the amount of any such other liens that may have priority. Market value may be influenced by the real estate market in Escambia County, Florida. -10-

13 REQUIRED SUPPLEMENTARY INFORMATION

14 A study was performed by an external engineer in September 2013 to estimate the remaining useful lives and the replacement costs of the components of common property. The following table is based on the study and presents significant information about the components of common property and management's estimates. Component EMERALD ISLE RESORT CONDOMINIUM ASSOCIATION, INC. SCHEDULE OF FUTURE MAJOR REPAIRS AND REPLACEMENTS (UNAUDITED) Estimated Useful life Estimated Remaining Useful Life Estimated Replacement Roofing 15 7 $ 217,000 $ 22,153 $ 61,930 Drive & parking areas ,000 3,415 14,585 Exterior sealing & painting ,000 27, ,516 Sanitary sewer , ,006 Dune walkover ,000 2,496 10,009 Electrical distribution equipment , ,156 Pools & equipment ,000 2,664 8,035 Fire pump & sprinkler ,000 1,699 6,713 Emergency generator ,000 1,499 9,017 Auto doors & gates , ,008 Fire alarm system ,000 1,748 8,291 Elevators ,000 11,300 51,393 Common area HVAC ,000 1,779 1,545 Common area finishes & specs ,000-10,005 Trash handling system ,800 2,612 13,128 Wet glaze ,300-8,561 Balustrades ,000-9,599 Plumbing & domestic pump ,000 1,713 1,720 Exterior lighting , Stormwater 5 4 4, Irrigation systems 6 5 3, Cost Funding Required 2015 Balance December 31, 2014 $ 1,306,100 $ 85,316 $ 561,