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I REPORT TO MANAGEMENT I I. CURRENT YEAR FINDINGS AND RECOMMENDATIONS I Findinq: As a result of performing the financial condition assessment procedures it was determined that a deteriorating financial condition exists with respect to the Enterprise Fund operations. For the fiscal year ended September 30, 2005, the XXXXXX has reported accumulated deficits in its Enterprise Fund. The accumulated deficit as of September 30, 2005 is $5,736,254. The balance owed to the Developer of $7,662,652 includes the Developer Reserve Deficiency Requirement and related accrued interest payable, start up costs of the golf course and funds used for the operation of the golf course. The XXXXXX is dependent on the Developer and ultimate repayment of the advances is uncertain at this time. I I Manaqement Response: Management concurs. I II. PRIOR YEAR FINDINGS AND RECOMMENDATIONS I Findinq: As a result of performing the financial condition assessment procedures it was determined that a deteriorating financial condition exists with respect to the enterprise fund operations. For the fiscal year ended September 30, 2004, the XXXXXX has reported accumulated deficits in its enterprise fund. The accumulated deficit as of September 30, 2004 is $4,449,572. The enterprise fund is used to account for the operations of the recreational facilities of the XXXXXX. The recreational facilities include a championship eighteen-hole golf course, a pro shop, putting green and a driving range, a clubhouse and other recreational facilities. The accumulated deficits arose from depreciation expense, which is a non-cash item, and the treatment of Developer advances as Due to Developer and Developer loans. The balance owed to the Developer of $6,360,856 includes the Developer Reserve Deficiency Requirement, start up costs of the golf course and funds used for the operation of the golf course. The XXXXXX is dependent on the Developer and ultimate repayment of the advances is uncertain at this time. I I I It should be noted that the prior deficits did not result in any failure to meet current obligations, including scheduled bond principal maturities and interest payments. I Golf Course AccountinQ I Findinq: Accounting records and internal financial reports of the enterprise fund have not been maintained in accordance with accounting principles generally accepted in the United States of America. a. Accounts Receivable are not in agreement with underlying records. b. No record of fixed assets is maintained. c. Full accrual basis is not used. d. Bank reconciliation items are not posted to the general ledger. e. Activity of the Developer is included in the general ledger. f. The State mandated chart of accounts has not been utilized by the enterprise fund. g. All purchases and expenses relating to the enterprise fund are affected by direct purchase by, and reimbursement to the Developer/Golf Course Facilities Manager. Management has assured us that the fund is not overpaying for these items even though if the fund was the direct purchaser of these items, its tax-exempt status could be utilized to avoid payment of sales tax. Management has not produced proof of this. Although sales tax could be avoided on selected items, there are many items which sales tax is paid by the end user as opposed to the golf club. There are also purchasing power advantages that may be realized by wel which would not be available to a stand-alone golf club. h. The enterprise fund reimburses the Developer / Golf Course Facilities Manager a significant amount each month for equipment leases. No sub-leases between the parties exist thereby technically relieving the enterprise fund of all obligations under the lease contracts. This may or may not be the case should the obligations not be fulfilled and termination charges be assessed. Although no sub-leases exist between the parties, this is not deemed to be a material weakness as the golf club could obtain new leases if necessary. The terms of potential new leases would likely be similar to existing terms. I I I I I I I