PATTON RIDGE HOMES CORPORATION. Financial Statements and Supplementary Information with Independent Auditors' Report

Transcription

1 Financial Statements and Supplementary Information with Independent Auditors' Report For the Years Ended December 31, 2014 and 2013

2 Board of Directors Patton Ridge Homes Corporation Montgomery Village, Maryland INDEPENDENT AUDITORS' REPORT Report on the Financial Statements We have audited the accompanying financial statements of the Patton Ridge Homes Corporation, which comprise the balance sheets as of December 31, 2014 and 2013, and the related statements of revenues and expenses, 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. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors 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 auditors consider 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.

3 Patton Ridge Homes Corporation Independent Auditors Report (Continued) Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Patton Ridge Homes Corporation as of December 31, 2014 and 2013, 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 Required Supplementary Information Accounting principles generally accepted in the United States of America require that supplementary information on future major repairs and replacements on page 14 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. DeLeon and Stang, CPAs and Advisors DeLeon & Stang, CPAs Gaithersburg, Maryland March 24, 2015

4 Balance Sheets December 31, 2014 and 2013 ASSETS Cash and cash equivalents $ 136,781 $ 201,533 Investments 1,434,000 1,304,000 Assessments receivable (net of allowance for doubtful accounts of $74,704 in 2014 and $62,606 in 2013) 36,196 32,757 Due from related party - Montgomery Village Foundation 14,621 7,571 Accrued interest receivable 6,352 7,054 Net unsettled investment funds - 4,024 Prepaid expenses 1,608 1,608 TOTAL ASSETS $ 1,629,558 $ 1,558,547 LIABILITIES AND MEMBERS' EQUITY Liabilities: Accounts payable $ 93,193 $ 10,745 Prepaid assessments 56,417 55,541 Total Liabilities 149,610 66,286 Members' Equity: Designated replacement reserves 1,427,984 1,410,238 Undesignated members' equity 51,964 82,023 Total Members' Equity 1,479,948 1,492,261 TOTAL LIABILITIES AND MEMBERS' EQUITY $ 1,629,558 $ 1,558,547 See Accompanying Notes to the Financial Statements Page 2

5 Statements of Revenues and Expenses For the Years Ended December 31, 2014 and Revenues: Assessment income $ 749,628 $ 740,752 Interest income 20,047 34,346 Water quality protection rebate 28,193 - Roadway reimbursement 6,294 6,294 Other Total Revenues 804, ,642 Administrative Expenses: Management fee 98,878 95,998 Bad debts 13,116 17,735 Other 5,524 6,256 Insurance 3,473 3,629 Common interest fee 3,216 3,015 Legal and audit 3,084 3,802 Total Administrative Expenses 127, ,435 Operating Expenses: Lawn maintenance 135, ,840 Snow removal 101,594 27,178 Security contract 99,320 99,414 Trash removal contract 68,822 63,192 Water quality tax 38,068 15,343 Maintenance and repairs 36,667 21,542 Electricity 29,980 37,293 Trees and shrubs 24,967 42,868 Street maintenance and repairs 9,868 13,393 Trash removal other 4,404 3,436 Replacement reserve expenses 139,765 58,070 Total Operating Expenses 689, ,569 Total Expenses 816, ,004 Excess (Deficit) of Revenues Over Expenses $ (12,313) $ 155,638 See Accompanying Notes to the Financial Statements Page 3

6 Statements of Changes in Members' Equity For the Years Ended December 31, 2014 and 2013 Undesignated Designated Total Members' Replacement Members' Equity (Deficit) Reserves Equity Balance, December 31, 2012 $ 41,825 $ 1,294,798 $ 1,336,623 Net Excess of Revenues Over Expenses 155, ,638 Additions: Reserve contribution (132,870) 132,870 - Interest contribution to reserves (34,346) 34,346 - Roadway reimbursement (6,294) 6,294 - Deductions: Storm drains 28,900 (28,900) - Trees 17,790 (17,790) Paths 7,670 (7,670) Entry signs 3,710 (3,710) - Balance, December 31, ,023 1,410,238 1,492,261 Net (Deficit) of Revenues Over Expenses (12,313) - (12,313) Additions: Reserve contribution (131,170) 131,170 - Interest contribution to reserves (20,047) 20,047 - Roadway reimbursement (6,294) 6,294 - Deductions: Streets 31,120 (31,120) - Storm drains 5,100 (5,100) Entry signs 1,992 (1,992) Trees 67,520 (67,520) - Miscellaneous 26,808 (26,808) Concrete 7,225 (7,225) - Balance, December 31, 2014 $ 51,964 $ 1,427,984 $ 1,479,948 See Accompanying Notes to the Financial Statements Page 4

7 Statements of Cash Flows For the Years Ended December 31, 2014 and Cash Flows From Operating Activities: Excess (Deficit) of Revenues Over Expenses $ (12,313) $ 155,638 Adjustments to Reconcile Excess of Revenues over Expenses to Net Cash Provided by Operating Activities: Provision for losses on accounts receivable 13,116 17,735 (Increase) decrease in: Assessments receivable (16,555) (15,750) Due from related party - Montgomery Village Foundation (7,050) 13,220 Accrued interest receivable Net unsettled investment funds 4,024 (4,024) Prepaid expenses - (201) Increase (decrease) in: Accounts payable 82,448 (58,526) Prepaid assessments 876 1,471 Net Cash Provided by Operating Activities 65, ,671 Cash Flows From Investing Activities: Net purchase of investments (130,000) (112,000) Net Cash Used in Investing Activities (130,000) (112,000) Net Decrease in Cash and Cash Equivalents (64,752) (2,329) Cash and Cash Equivalents, Beginning of Year 201, ,862 Cash and Cash Equivalents, End of Year $ 136,781 $ 201,533 See Accompanying Notes to the Financial Statements Page 5

8 Notes to Financial Statements December 31, 2014 and 2013 NOTE 1 - NATURE OF ORGANIZATION Patton Ridge Homes Corporation (Association) was incorporated in Maryland on December 28, The purpose of the organization is to maintain and preserve the common areas of the Association for the 1,072 unit owners of the nine residential communities. The Association is located in Montgomery Village, Maryland. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the major accounting policies followed by the Association is set forth below: Basis of Accounting The Association maintains its records on the accrual basis of accounting. 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 the reported amounts of assets and liabilities and disclosure of contingent 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. Fair Value of Financial Instruments The Association currently does not measure any of its assets or liabilities at fair value and is not required under generally accepted accounting principles to disclose the fair value of its financial instruments. Interest Income Interest income is allocated to the undesignated and replacement funds in proportion to the interest bearing deposits of each fund. Page 6

9 Notes to Financial Statements (Continued) December 31, 2014 and 2013 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments The Association s investments consist of negotiable certificates of deposit classified as held-to-maturity securities and recorded at amortized cost, with unrealized gains and losses disclosed but not recorded on the financial statements. The amortized cost and fair value may differ due to market conditions. Cash Equivalents The Association considers all cash demand balances and all highly-liquid instruments purchased with no fixed maturity to be cash equivalents. The Association maintains its primary banking relationship with Community Association Banc. The Association s account is part of a managed group of banking accounts held by its managing agent, The Montgomery Village Foundation, Inc. (MVF). In order to facilitate a more timely and efficient transfer of the Association s assessments received by MVF, MVF maintains the ability to transfer these funds electronically from its Assessments lockbox directly to the Association s operating account. While MVF also has the ability to transfer funds from the Association s account, MVF and the Association have agreed that MVF is not authorized to do so. 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. Assessments receivable at the balance sheet dates represent assessments fees due from homeowners. The Association's policy is to retain legal counsel and place liens on the properties of homeowners whose assessments are ninety days or more delinquent. An allowance for bad debts has been established as the Association currently anticipates a loss. Delinquent assessments may be written off if liens cannot be enforced although other collection activity may continue in an attempt to recover revenue. The Association s Board of Directors has the ability, with proper approval by the membership, to pass special assessments when and if the need arises. Any excess assessments at year end are retained by the Association for use in the succeeding year. Assessments over ninety days delinquent were $108,905 and $93,368 as of December 31, 2014 and 2013, respectively. Page 7

10 Notes to Financial Statements (Continued) December 31, 2014 and 2013 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Commonly Owned Property It is the Association s policy not to record the value of land, buildings and donated assets in the financial statements since covenants restrict the Association s ability to sell or dispose of these assets. Subsequent Events The Association has evaluated the financial statements for subsequent events recording or disclosure through March 24, 2015, the date the financial statements were available for issuance. NOTE 3 - CASH AND INVESTMENTS As of December 31, the Association maintained its funds in the following manner: Cash Type of Cash and Cash Institution Account Equivalents 2014 CABanc Checking $ 46,896 Morgan Stanley 5101 Money Market 66,345 Morgan Stanley 1101 Money Market 23,540 $ 136, CABanc Checking $ 69,495 Morgan Stanley 5101 Money Market 66,709 Morgan Stanley 1101 Money Market 65,329 $ 201,533 Page 8

11 Notes to Financial Statements (Continued) December 31, 2014 and 2013 NOTE 3 - CASH AND INVESTMENTS (Continued) Investments As of December 31, 2014 and 2013, the Association maintained its investments in negotiable certificates of deposit. The negotiable certificates of deposit are classified as held-to-maturity and recorded at amortized cost. The amortized costs and fair values of the negotiable certificates of deposit, by contractual maturity, as of December 31, 2014 and 2013, are shown below. Expected maturities may differ from contractual maturities for the negotiable securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties Gross Gross Moragn Stanley Year Ending Interest Amortized Fair Unrealized Unrealized Account December 31, Rate Cost Value Gain Loss MS % % $ 92,000 $ 92,398 $ 425 $ (27) MS % % 201, ,105 3,105 - MS % % 51,000 51, MS % % 204, ,927 3,927 - MS % % 83,000 83, (14) MS % % 220, ,261 2,681 (420) MS % % 67,000 66, (174) MS % % 255, , (2,317) MS % % 29,000 28,702 - (298) MS % % 232, ,640 3,775 (1,135) Total negotiable certificates of deposit $ 1,434,000 $ 1,445,309 $ 15,694 $ (4,385) 2013 Gross Gross Moragn Stanley Year Ending Interest Amortized Fair Unrealized Unrealized Account December 31, Rate Cost Value Gain Loss MS % % $ 67,000 $ 67,694 $ 709 $ (15) MS % % 199, ,781 3,781 - MS % % 67,000 67, (78) MS % % 201, ,832 7,832 - MS % % 51,000 52,315 1,315 - MS % % 204, ,068 5,092 (24) MS % % 79,000 79, (91) MS % % 200, ,080 2,480 (400) MS % 11,000 11, MS % % 225, ,315 - (3,685) Total negotiable certificates of deposit $ 1,304,000 $ 1,322,562 $ 22,855 $ (4,293) Page 9

12 Notes to Financial Statements (Continued) December 31, 2014 and 2013 NOTE 3 - CASH AND INVESTMENTS (Continued) Investments (Continued) Information pertaining to negotiable certificates of deposit with gross unrealized losses at December 31, 2014 and 2013, aggregated by length of time that individual certificates of deposit have been in a continuous loss position, is below Less than one year More than one year Total Moragn Stanley Unrealized Unrealized Unrealized Account Fair Value Loss Fair Value Loss Fair Value Loss MS 1101 $ 100,000 $ (499) $ 16,000 $ (14) $ 116,000 $ (513) MS ,000 (1,480) 242,000 (2,392) 428,000 (3,872) $ 286,000 $ (1,979) $ 258,000 $ (2,406) $ 544,000 $ (4,385) 2013 Less than one year More than one year Total Moragn Stanley Unrealized Unrealized Unrealized Account Fair Value Loss Fair Value Loss Fair Value Loss MS 1101 $ 62,000 $ (184) $ - $ - $ 62,000 $ (184) MS ,000 (3,709) 32,000 (400) 282,000 (4,109) $ 312,000 $ (3,893) $ 32,000 $ (400) $ 344,000 $ (4,293) NOTE 4 - FUTURE MAJOR REPAIRS AND REPLACEMENTS The Association s governing documents do not require that funds be accumulated for future major repairs and replacements; however, the Association has elected to set aside funds for replacement reserves. Accumulated funds are generally not available for expenditures for normal operations. Miller-Dodson Associates conducted a Level II reserve study in 2014 to estimate the remaining useful lives and the replacement costs of the components of common property. The estimates were based on current estimated replacement costs. The table included in the Unaudited Supplementary Information on Future Major Repairs and Replacements is based on the 2014 study. Page 10

13 Notes to Financial Statements (Continued) December 31, 2014 and 2013 NOTE 4 - FUTURE MAJOR REPAIRS AND REPLACEMENTS (Continued) The Association is funding for future major repairs and replacements over the remaining useful lives of the components based on estimates of the future replacement costs and considering amounts previously accumulated in the replacement reserves. Accordingly, the funding recommendation of $131,170 from assessments and $20,047 of interest income has been included in the fiscal year 2014 financial statements. In addition, the Association elected to contribute the roadway reimbursements to the replacement reserves in the amounts of $6,294 for Actual expenditures may vary from the estimated future expenditures, and the variations may be material; therefore, amounts accumulated in the replacement reserves may or may not be adequate to meet all future needs for repairs and replacements. If additional funds are needed, the Board of Directors, on behalf of the Association, may increase regular assessments, pass special assessments, or delay major repairs and replacements until funds are available. As of December 31, 2014 and 2013, the Association had designated $1,427,984 and $1,410,238, respectively, for replacement reserves. These designated reserves were funded by cash and negotiable certificates of deposit. NOTE 5 - OWNERS ASSESSMENTS Quarterly assessments to owners for 2014 and 2013 were $ and $170.13, respectively. Of these amounts, approximately $30.99 and $28.43 were designated to the replacement fund in 2014 and 2013, respectively. NOTE 6 - INCOME TAXES The Association is a non-stock, nonprofit corporation, which holds tax-exempt status under Section 501(c)(4) of the Internal Revenue Code. No provision for income taxes is required as the Association has no unrelated business income. Federal and state tax returns are subject to audit for three years after filing, hence the Association s tax return for the years 2011 and onward are open to tax examination. As of December 31, 2014 and 2013, the Association had no liability for uncertain tax positions required to be disclosed under Accounting Standards Codification Page 11

14 Notes to Financial Statements (Continued) December 31, 2014 and 2013 NOTE 7 - RELATED PARTY MONTGOMERY VILLAGE FOUNDATION, INC. Every unit owner of the Association is automatically a member of the Montgomery Village Foundation, Inc. (Foundation). Foundation members have a right of enjoyment in certain common properties of the Foundation. The individual unit owners pay quarterly assessments directly to the Foundation, which then remits the funds to the Association. As of December 31, 2014 and 2013, the Foundation collected $14,621 and $7,571, respectively, at the conclusion of the respective quarter which was remitted to the Association in January of the following year. These amounts are reflected in the accompanying balance sheets as Due from related party Montgomery Village Foundation. NOTE 8 - MAINTENANCE AND MANAGEMENT SERVICES AGREEMENT The Association executed a management services agreement with Montgomery Village Foundation, Inc. (Foundation) for The management fee is a fixed amount for the year with additional maintenance services charged as needed. The Foundation also passes expenses through to the Association for insurance, street light electricity and community mailings. The charges for these services were as follows: The Foundation is considered a related party and amounts due are included within accounts payable on the accompanying balance sheets. As of December 31, 2014 and 2013, the Foundation was owed $1,798 and $2,711, respectively. Type Management $ 98,878 $ 95,998 Pass-through expenses 30,338 32,969 Maintenance, landscaping and reserve expenditures 6,041 3,929 $ 135,257 $ 132,896 Page 12

15 Supplementary Information

16 Supplementary Information on Future Major Repairs and Replacements December 31, 2014 (Unaudited) An independent engineer conducted a study in 2014 to estimate the remaining useful lives and the repair and replacement costs of the components of common property, as part of the annual budgeting process. Replacement costs are based on the estimated costs to repair or replace the common property components at the date of the study. The Association utilizes the cash flow method of funding for replacement reserves. Estimated replacement costs have been adjusted to take into account the effects of a 4.5% inflation rate and an investment return rate of 1.0%. The following information is based on the study and presents significant information about the components of common property. Components Estimated Estimated Remaining 2014 Useful Replacement Life (Years) Costs Asphalt pavement - mill & overlay 8-14 $ 1,738,251 Asphalt pavement - rejuvenation 0 204,500 Asphalt path, overlay 3 27,853 Stormwater management 10 44,400 Concrete curb & gutter ,000 Concrete sidewalk ,416,100 Streetlight replacement 5 24,200 Wood retaining wall 10 97,120 Entrance monument ,478 Electrical disconnect stations 6 8,250 Gazebos 5 14,620 Tot lot, structure 13 35,000 Tot lot, accessories ,115 Totals $ 4,477,887 Page 14