HOMEOWNERS ASSOCIATION, INC. SEPTEMBER 30, 2005

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1 HERONS GLEN HOMEOWNERS ASSOCIATION, INC. FINANCIAL STATEMENTS SEPTEMBER 30, 2005

2 Balance sheet 2 Statement of revenues, expenses and changes in fund balances 3 Statement of cash flows 4 Notes to financial statements 5-12

3 David L. Schultz, CPA*, ABV Clifford Chaipel, CPA Martin A. Redovan, CPA*, CVA Russell T. Baker, CPA CHAIPEL SCHULTZ REOOVAN BAKER&COLLP. The Board of Directors Herons Glen Homeowners Association, Inc. Lee County, Florida We have audited the accompanying balance sheet of Herons Glen Homeowners Association, Inc., (the "Association"), as of September 30, 2005, and the related statement of revenues and expenses and changes in fund balance and cash flows for the year then ended. These financial statements are the responsibility of the Association'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. In our opinion, the finanqial statements referred to above present fairly, in all material respects, the financial position of Herons Glen Homeowners Association, Inc. as of September 30, 2005, 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. ~~~i;e\,~::,~:~~:~~~~ November 18, International Center Blvd. Fort Myers, FL (239) Fax: (239) Encore Way, Suite 102 Naples, FL (239) Fax: (239)

4 HERONS GLEN HOMEOWNERS BALANCE SHEET September 30, 2005 ASSOCIATION, INC. ASSETS Operating Replacement Fund Fund Total Cash and cash equivalents $ 354,218 $ 547,592 $ 901,810 Assessments receivable, of which $71,913 is due from the developer 355,491 30, ,641 Other receivables Due from operating fund 23,897 23,897 Due to replacement fund (23,897) (23,897) Prepaid expenses 10,400 10,400 Property and equipment, net 6,897 6,897 Total assets $ 703,413 $ 601,639 $ 1,305,052 LIABILITIES AND FUND BALANCE LIABILITIES Accounts payable $ 103,670 $ $ 103,670 Deferred resident fees 475,726 42, ,323 Due to developer Accrued expenses 3,082 3,082 Working capital deposits 294, ,918 Note payable 423, ,791 Total liabilities 1,301,187 42,597 1,343,784 FUND BALANCE (DEFICIT) (597,543) 559,042 (38,501) Total liabilities and fund balance $ 703,644 $ 601,639 $ 1,305,283 The accompanying notes are an integral part of these financial statements. 2

5 The accompanying notes are an integral part of these financial statements. 3

6 RECONCILIATION OF NET INCOME TO Operating Replacement Fund Fund Total NET CASH FROM OPERATING ACTIVITIES Net income $ 25,819 $ 147,725 $ 173,544 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 4,207 4,207 Decrease in accounts receivable 11,076 4,844 15,920 Increase in prepaid expenses (1,920) (1,920) Increase in accounts payable 71,661 71,661 Increase in accrued expenses Increase in deferred revenue 68,601 1,373 69,974 Decrease in due to developer (9,037) (9,037) Total adjustments 145,432 6, ,649 NET CASH FROM OPERATING ACTIVITIES $ 171,251 $ 153,942 $ 325,193

7 HERONS GLEN HOIyIEOWNERS ASSOCIATION, September 30, 2005 INe. NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Herons Glen Homeowners Association, Inc. (the "Association") was organized in 1990 as a not-for-profit corporation in the State of Florida to function as a homeowners' association and to provide for the ownership, maintenance, preservation and architectural control of lots, properties and common areas within the development known as Herons Glen Country Club Community located in North Fort Myers, Florida. Each purchaser of a lot in the community automatically becomes a member of the Association. The anticipated build-out of Herons Glen Country Club Community is 1,300 lots. As of September 30, 2005, 1,196 lots, or 92%, of the lots have been sold to residents. According to the Declaration of Covenants, Conditions and Restrictions of the Association, the developer maintained direct control of the Association until 75 percent of the lots are sold, at which time the Association was turned over to the residents. The turnover occurred January 1, Homeowners' associations may be taxed either as homeowners' associations or as regular corporations. As a homeowners' association, non-member income is taxed at a 30% rate. As a regular corporation, membership income is exempt from taxation if certain elections are made, and the association would be taxed only on its nonmembership income at the regular graduated federal and state corporate rates. The Association's investment income is subject to tax. Federal and State income tax expense for the year ended September 30,2005 totaled $2,038 and $500, respectively. The Association's Board of Directors approves assessments based upon budgeted expenditures and all unit owners are assessed accordingly. In addition, the developer is assessed on platted lots owned by the developer and on lots expected to be platted during the year. For 2005 this number was 1,300 the maximum number of developable lots in Herons Glen. In the event that assessments exceed the related expenditures in any year, the excess may be deferred and used to reduce assessments in the subsequent year or refunded to the owners. If additional funds are needed, the Association has the ability to increase

8 HERONS GLEN HOMEOWNERS ASSOCIATION, INC. September 30, 2004 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) regular assessments, pass special assessments or delay major repairs and replacements until funds are available. Member assessments for the fiscal year ending September 30, 2005 include the following elements: Common area and security assessments User fees: Lawn Maintenance - Single Home Lawn Maintenance - Villa Vacant lot maintenance Cable TV Irrigation Capital replacement reserve assessments Villa assessments $ 408 $ 360 $ 60 $ 363 $ 181 $ 120 $ 456 To ensure and facilitate the fiduciary responsibility required of the Association regarding restrictions placed on the use of resources available to it, the accounts are maintained in accordance with the principles of fund accounting. Disbursements from the operating fund are generally at the discretion of the Board of Directors. Disbursements from the replacement fund generally may be made only for designated purposes. The Association's revenues, except for its capital replacement assessments, currently have no restrictions and, accordingly, are recorded in the operating fund and are available for normal operating expenditures. The capital replacement assessments are recorded in the replacement fund and are available only for designated purposes.

9 HERONS GLEN HOMEOWNERS ASSOCIATION, INC. September 30,2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In conformity with industry practice, the Association recognizes the following common property assets: Property to which the Association has title and that the Board of Directors can dispose of for cash while retaining the proceeds or that is used to generate significant cash flows from members and nonmembers on the basis of usage. The Association records such assets at cost and depreciates these assets over their estimated useful lives using the straight line method. The Association also owns common real property dedicated for the use of the entire community. However, the property cannot be sold separately and thus has no fair market value other than that related to its intended use. Such assets are not recognized in the financial statements of the Association. For purposes of the statement of cash flows, the Association considers all cash deposits subject to immediate withdrawal to be cash and/or cash equivalent. At times, the Association has cash balances on deposit with financial institutions in excess of FDIC insurance limits of$100,000. 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 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.

10 HERONS GLEN HOMEOWNERS ASSOCIATION, INC. September 30, 2005 Prime plus 1% (7.75% at September 30, 2005) promissory note payable to a bank. The note requires monthly payments of $5,156 which will include principal and interest which will be 1% over the Wall Street Journal prime rate and a balloon payment in December of The maturity schedule presented below is based on the new series of payments and a 7.75% interest rate. The note is collateralized by all assets of the Association and is guaranteed by the developer. On October 1, 2005 the Association used funds from the Replacement note. Fund to retire this Prior to January 1, 2005 the developer maintained direct control of the Association. On January 1, 2005 the Association was turned over to the residents. The developer continues to provide irrigation, landscaping, and management services to the Association. The developer charges the Association a fixed fee for these services. Fees paid to the developer for the year ended September 30, 2005 for irrigation, landscaping, management services, and security were $63,156, $41,570, $13,125 and $66,750, respectively. Herons Glen Recreation District, a governmental entity composed of the same housing units as the Association, provides accounting services to the Association. The charge for the accounting services is based upon a flat monthly fee. Fees paid to Herons Glen Recreation District for the year ended September 30, 2005 for accounting services were $26,000.

11 HERONS GLEN HOMEOWNERS ASSOCIATION, INC. September 30, 2005 The Association has entered into a contract with Time Warner Cable to provide cable services for the residents. The Association is billed a flat rate for each resident. For the fiscal year ending September 30,2005, the Association paid Time Warner $366,080. The Association has entered into a contract with ADT Services to provide securitymonitoring services. The Association is billed a flat monthly fee. For the fiscal year ending September 30, 2005, the Association paid ADT Services $2,272. The Association has entered into a contract with Floridaquatic to provide lake and fountain management services. The Association is billed a flat monthly fee. For the fiscal year ending September 30,2005, the Association paid Floridaquatic $11,309. The Association's governing documents allow for funds to be accumulated for future major repairs and replacements. Accumulated funds are held in separate savings accounts and generally are not available for expenditures for normal operations. Funds are being accumulated in the replacement fund for future repairs and replacements of common property components. Actual expenditures may vary from the amounts collected, and the variations may be material. Therefore, amounts accumulated in the replacement fund may not be adequate to meet all future needs for maj or repairs and replacements. If additional funds are needed, the Association has the right, subject to membership approval, to increase regular assessments, pass special assessments, or delay major repairs and replacements until funds are available.

12 HERONS GLEN HOMEOWNERS ASSOCIATION, INC. September 30, 2005 Major classifications of property and equipment and their respective lives are summarized below: Vehicles Equipment Less: accumulated depreciation $ 13,703 7,334 (14,139) $ 6,898 When a buyer purchases a lot or a residence in Herons Glen the purchaser is required to make a non-interest bearing working capital advance to the Association. When the owner sells the residence the Association is obligated to collect the working capital advance from the new member and refund the working capital amount of the seller. The advance can be used by the Association to cover operating expenses and other expenses incurred pursuant to the Association's declarations and by-laws., The Association entered into a leasing arrangement for a copy machine under an operating lease with a term of36 months. The following is a schedule by years of future minimum rental payments required under the operating lease that has initial or remaining noncancelable lease terms in excess of one year as of September 30, 2005: Year Ending September 30, ,484 Rental payments charged to copier expense was approximately September 30,2005. $5,950 for the year ended

13 HERONS GLEN HOMEOWNERS ASSOCIATION, INC. September 30, 2005 The Association maintains two replacement funds; the General Replacement Reserve fund and a Villas Replacement Reserve fund. The balances in these reserve funds are: General Replacement Reserve Villas Replacement Reserve Balances, September 30, 2004 $ 390,213 $ 21,104 $ 411,317 Assessments and Interest 163,528 7, ,447 Expenditures (23,722) (23,722) Balances, September 30, 2005 $ 530,019 $ 29,023 $ 559,042 NOTE 10,. SUPPLEMENTARY INFORMATION ON FUTURE MAJOR REPAIRS AND REPLACEMENTS (UNAUDITED) The Association is accumulating funds for future major repairs and replacements. The General Reserve is for the maintenance and upkeep of the roads and common areas for the complete development. The Villas Replacement Reserve is for the long term expenditures of painting and roof cleaning. The Board of Directors had a pavement structural condition survey performed by Ardaman & Associates, Inc. in October of 2002 and again in May of The surveys provided estimates of the condition of the roadways within Herons Glen and the estimated costs of maintaining the roadways based on costs at the date of the studies. The repair costs were based on the schedule prepared by Ardaman & Associates in October of 2002 and have been increased for the most current work that is to be done and the estimated costs for the 2012 activity have been doubled by the Board. Both of these adjustments are estimates and could change significantly based on when the work is performed and the extent of the work. These estimates have not been revised since September of 2004 and do not take into account the results of the survey prepared by Ardaman & Associates in May of2005. The following schedule only contains roads older than three years which is approximately 5% of the development.

14 HERONS GLEN HOMEOWNERS ASSOCIATION, INe. September 30, 2005 NOTE 10 - SUPPLEMENTARY INFORMATION ON FUTURE MAJOR REPAIRS AND REPLACEMENTS (UNAUDITED) (CONTINUED) Avenida Del Vera 1 Year Overlay 2005 $ 55,000 Faliron Road 1 Year Fog Seal ,900 Corinthia Circle 1 Year Fog Seal ,850 Faliron Road 7 Years Overlay ,300 Corinthia Circle 7 Years Overlay ,850 Val Paraiso 7 Years Overlay ,000 Via Presido 7 Years Overlay ,600 Palo Duro Way 7 Years Overlay ,750 Corona Del Sire 7 Years Overlay ,500 Embarcadero 7 Years Overlay ,500 Via Verde 7 Years Overlay ,500 Villa Real Way 7 Years Overlay ,500 Santorai 7 Years Overlay ,000 Rio Nuevo Drive 7 Years Overlay ,000 Micrassia 7 Years Overlay ,500 Ochos Rios 7 Years Overlay ,750 Via La Quinta 7 Years Overlay ,800 Mystic Way 17 Years Overlay 2022 Uknown Tisbury Lane 17 Years Overlay 2022 Uknown Dennisport Lane 17 Years Overlay 2022 Uknown Athenian Lane 17 Years Overlay 2022 Uknown Via Athena 17 Years Overlay 2022 Uknown Wheelock Drive 17 Years Overlay 2022 Uknown Odyssea 17 Years Overlay 2022 Uknown Villas Reserve 29,023 Other long term expenditures 48,719