EFTA00611194.pdf

IGY-AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Financial Statements December 31, 2007 (With Independent Auditors' Report Thereon) EFTA00611194 IGY•AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Table of Contents Page Independent Auditors' Report Financial Statements: Balance Sheet 2 Statement of Operations 3 Statement of Changes in Members' Equity 4 Statement of Cash Flows 5 Notes to Financial Statements 6 EFTA00611195 Independent Auditors' Report The Members IGY-AYH St. Thomas Holdings, LLC (A Limited Liability Company): We have audited the accompanying balance sheet of IGY-AYH St. Thomas Holdings, LLC (the Company) as of December 31, 2007, and the related statements of operations, changes in members' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company'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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial statements referred to above present fairly, in all material respects, the financial position of IGY-AYH St. Thomas Holdings, LLC as of December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. t<Pitic, MCP Greenville, South Carolina September 22, 2008 EFTA00611196 IGY•AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 (1) Description of Business and Organization IGY-AYH St. Thomas Holdings, LLC (AYH or the Company) was formed as a wholly owned subsidiary of Island Global Yachting Ltd. (IGY or the Parent) on December 5, 2006. The Company had no activities until its January 18, 2007 acquisition of American Yacht Harbor (note 5). The Company is primarily engaged in the business of owning and operating a marina and retail facility located in St. Thomas, United States Virgin Islands (USVI). It comprises a 128-slip marina and seven buildings with 47,344-square feet of rentable retail space. AYH is managed by an affiliate. The marina is located on 3.2 acres of submerged land leased from the St. Thomas Department of Planning and Natural Resources (DPNR). The retail complex is located on 2.12 acres of adjacent waterfront land. On May 29, 2007, a 50% passive member interest in the Company was sold to one of the Parent's investors. The Company is controlled by the Parent and the members' liability is limited to their respective capital investments in the Company. (2) Summary of Significant Accounting Policies (a) Cash At various times throughout the year, the Company maintains cash balances in excess of federally insured limits. The Company's management believes it mitigates this risk by banking with major financial institutions. As of December 31, 2007, $242,037 of the Company's cash is restricted under the terms of its loan agreement (note 8). (b) Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash flows from operating activities in the statement of cash flows. The allowance for doubtful accounts is management's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on specific account analysis. Past-due balances over 90 days and over specified amounts are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of December 31, 2007, $423,022 of the Company's accounts receivable served as collateral for the loan outstanding. (c) Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of prepaid rent, insurance, and security deposits. (d) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method (FIFO) for all inventories. 6 (Continued) EFTA00611197 IGY•AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 (0 Deferred Financing Costs Costs incurred to obtain financing are being amortized using the straight-line method, which approximates the effective-interest method, over the term of the related debt. (j) Advertising and Marketing Costs Advertising costs are expensed as incurred. Advertising and marketing costs amounted $21,106 for the year ended December 31, 2007. (g) Income Taxes The Company is not subject to U.S. federal and state income taxes as the tax effects of the Company's activities are reported directly by the members on their respective income tax returns. The Company is required to pay USVI withholding taxes on behalf of all non-USVI members. (h) Use of Estimates The preparation of financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the 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. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, intangible assets, and goodwill. Actual results could differ from those estimates. (i) Land The Company owns 2.12 acres of waterfront land in St. Thomas. USVI and leases 3.2 acres of submerged land from the DPNR. Property and Equipment Property and equipment are stated at cost. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the Company's assets are as follows: Buildings 40 years Marina building and structure 20 years Equipment 3 — 7 years Vehicles 5 years Furniture and fixtures 5 — 10 years (k) Goodwill and Other Intangible Assets Goodwill represents the excess of the aggregate purchase price over the fair value of net assets acquired in a business combination. Goodwill and intangible assets determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other 7 (Continued) EFTA00611198 IGY-AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 Intangible Assets. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. The Company will perform its initial impairment review of goodwill in 2008. (I) Impairment of Long-Lived Assets In accordance with SFAS No. 144, hnpainnem of Long-Lived Assets, long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the balance sheet. (m) Revenue Recognition Revenues are recognized primarily at the time services are performed or products are sold and consist of amounts earned from marina and upland operations. Revenues from leases are recognized over the term of the lease. The Company recognizes minimum rental starting when possession is taken. When a lease contains a predetermined fixed escalation of the minimum rental, the Company recognizes the related rental income on a straight-line basis and records the difference between the recognized rent income and the accounts receivable under the lease as straight-line rent receivable. (n) Major Maintenance Activities The Company incurs maintenance costs on all its major equipment. Repair and maintenance costs are expensed as incurred. (o) Customer Deposits The Company receives deposits from its retail tenants in accordance with the lease agreements. It also receives deposits from customers for slip rentals. These deposits are accounted for as customer deposits in the balance sheet. 8 (Continued) EFTA00611199 IGY•AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 (p) (q) Commitments and Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recently Issued Accounting Standards In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurement (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. The provisions of SFAS No. 157 for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements, are effective for the first fiscal period beginning after November 15, 2007. The provisions for nonfinancial assets and liabilities are effective for the first fiscal period beginning after November 15, 2008. The Company is required to adopt SFAS No. 157 for financial assets and liabilities on January 1, 2008 and does not expect adoption to have a material impact on its financial statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial liabilities—Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 gives the Company the irrevocable option to carry most financial assets and liabilities at fair value that are not currently required to be measured at fair value. If the fair value option is elected, changes in fair value would be recorded in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company's 2008 fiscal year. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations, and cash flows. FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, addresses the uncertainty about how tax positions will be treated under the tax law. This uncertainty leads to questions about whether tax positions taken or to be taken on a tax return should be reflected in the financial statements before the uncertainty is ultimately resolved with the taxing authority. FIN 48 establishes the threshold for recognizing the benefits of tax return positions in the financial statements as "more likely than not" to be sustained by the taxing authority, and prescribes a measurement methodology for those positions meeting the recognition threshold. FIN 48, as revised, is effective for nonpublic entities in fiscal years beginning after December 15, 2007. The adoption of FIN 48 is not expected to have a material impact on the Company's financial position or results of operations. 9 (Continued) EFTA00611200 IGY•AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No. 141 R), and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 5/(SFAS No. 160). SFAS Nos. 141R and 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at "full fair value" and require noncontrolling interests (previously referred to as minority interest) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS No. 141R will be applied to business combinations occurring after the effective date. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The Company is currently evaluating the impact the adoption of this statement could have on its future financial statements. (3) Liquidity The Company experienced a net loss of $(894,575) for the year ended December 31, 2007 and generated $782,476 of cash through operating activities. Management believes that operating cash flow will be sufficient to support operations through at least January 1, 2009. (4) Related-Party Transactions (a) The following is a summary of related-party transactions for the year ended December 31, 2007: Included in revenues: Marina facilities revenue earned from passive member 89,756 Upland facilities revenue earned from passive member 89,444 Included in costs and expenses: Management fees incurred to IGY 484,563 Interest on loan from Parent 743,071 (b) Due from Parent of $42,499 consists of a receivable for prepaid long-term slip fees transferred as deferred revenue from Parent, net of payables for operation advances, management fee, and accrued interest. Included in accounts receivable are $19,675 due from the passive investor. (c) The Company borrowed $25,271,765 from its Parent to purchase the assets of American Yacht Harbor. Interest incurred on the loan accrued at LIBOR plus 2.5% and totaled $743,071 in 2007. Accrued interest on the loan of $330,946 is presented net in due from Parent in the balance sheet. The intercompany loan was partially convened to equity on May 29, 2007 with the remainder being converted to a note payable to bank on August 23, 2007. 10 (Continued) EFTA00611201 IGY-AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 (5) Acquisition On January 18, 2007, the Company acquired substantially all of the assets of American Yacht Harbor, consisting of tangible and intangible assets such as land, buildings, marina docks and related equipment, rights, leases, and slip agreements. The results of American Yacht Harbor's operations have been included in the financial statements since that date. The aggregate purchase price was $25,238,326, consisting of $25,006,665 in cash paid and acquisition costs of $231,661. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition: Current assets 141,124 Property and equipment 22,630,949 Intangible assets 1,967,000 Goodwill 946,212 Total assets acquired 25,685,285 Current liabilities (446,959) Total liabilities assumed (446,959) Net assets acquired $ 25,238,326 The acquired intangible assets, all of which are being amortized, have a weighted average useful life of approximately 8.3 years. The intangible assets include a favorable fuel contract valued at $1,156,000 (11.3-year useful life), a beneficial government lease of the marina basin valued at $674,000 (4-year useful life), and net beneficial leasehold assets of $137,000 (3.5-year useful life). (6) Goodwill and Other Intangible Assets The following table presents certain information regarding the Company's goodwill and acquired intangible assets as of December 31, 2007: Cross Amortization carrying Accumulated Net period amount amortization balance Goodwill $ 946,212 Amortizable intangible assets: Beneficial retail leases 3.5 years $ 137,000 37,512 99,488 Beneficial leasehold 4 years 674,000 161,479 512,521 Favorable fuel contract 11.3 years 1,156.000 97,779 1,058,221 Total $ 1,967.000 296,770 1,670,230 11 (Continued) EFTA00611202 IGY•AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 Estimated amortization expense for the next five years is: $310,000 in 2008, $310,000 in 2009, $292,000 in 2010, $109,000 in 2011, and $102,000 in 2012. (7) Property and Equipment Property and equipment consist of the following at December 31, 2007: Building $ 16.936.873 Marina structure and equipment 4,188,410 Other equipment 279,412 Total property and equipment 21,404,695 Accumulated depreciation (990,948) Property and equipment, net $ 20,413,747 The Company leases commercial real estate that has a gross book value of $12,182,356 and accumulated depreciation of $578,226 at December 31, 2007. (8) Note Payable The Company obtained a $15,300,000 million loan facility from a bank on August 23, 2007. Interest accrues at LIBOR plus 2.35%. Principal and interest are due monthly and the loan matures on August 22, 2017. At December 31, 2007, the principal amount outstanding under the loan was $15,246,000. The interest rate in effect at December 31, 2007 was 7.58% (calculated based on a blended LIBOR rate of 5.23% plus 2.35%). The loan is collateralized by the real property and improvements thereon, the Company's rights under its retail leases, and certain cash accounts and accounts receivable of the Company. The terms of the loan contain certain financial covenants, negative covenants, material adverse change provisions, and other terms and conditions customarily found in loan agreements of this type. The Company was in compliance with all of the covenants associated with the loan agreement as of December 31, 2007. Future payments of the balance outstanding on December 31, 2007 are due as follows: 2008 220,500 2009 238,500 2010 256,800 2011 276,900 2012 299,250 Thereafter 13,954,050 $ 15,246,000 12 (Continued) EFTA00611203 IGY•AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 (9) Lease Agreements (a) Coastal Zone Management Permits (CZM) The Company is party to two coastal zone management permits with the DPNR. These permits provide the Company the use of submerged land and upland at the marina site. The permits expire in 2010 and 2011. Annual fees paid under the permits during 2007 totaled $61,582. Future minimum payments due under the permits are as follows: 2008 61,582 2009 61,582 2010 52,388 2011 6,262 Total 181,814 (b) Retail Leases The Company leases its upland building spaces to retail operations under operating leases. The leases have remaining terms of up to 10 years and contain standard renewal options. Base rentals are subject to escalation based upon scheduled rent increases within individual leases. A schedule of approximate minimum future base rentals on noncancelable operating leases as of December 31, 2007 is as follows: 2008 987,752 2009 684,138 2010 448,695 2011 353,094 2012 189,197 Thereafter 649,070 Total 3,311,946 (10) Fair Value of Financial Instruments As of December 31, 2007, the carrying amounts of the Company's cash, accounts receivable, and accounts payable approximate their fair values due to their short-term nature. The Company's note payable incurs interest at market rates plus a margin and the Company's management believes it could obtain a note payable under similar terms at comparable spreads; thus, the fair value of the note payable approximates the carrying value. 13 (Continued) EFTA00611204 IGY•AYH ST. THOMAS HOLDINGS, LLC (A Limited Liability Company) Notes to Financial Statements December 31, 2007 (11) Asset Retirement Obligation The CZM permits that provide the Company use of the submerged land and upland at the marina site require that, upon expiration, the permitted area be restored to its original condition. The Company has recorded an obligation and corresponding asset of $402,376 in accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations, for its obligation under these permits. Balance at beginning of year Liabilities incurred during the year 402,376 Accretion expense 20,119 Balance at end of year 422,495 (12) Commitments and Subsequent Events Retirement Plan On January 1, 2008, the Company sponsored a defined contribution 401(k) profit-sharing plan for substantially all its employees. Employees are eligible to participate after completing three months of service. The Company may contribute each year an amount determined by management. Discretionary employer contributions are allocated based on the compensation of each employee and the total compensation of all participants. Additionally, the 401(k) profit-sharing plan allows for voluntary employee contributions, which vest immediately. Each employee is allowed to contribute 100% of his/her salary up to a maximum of $15,500. The Company makes a matching contribution of 30% of the employee contribution, not to exceed 10% of the employee's total compensation. The combined employer and employee contribution may not exceed the lesser of $15,500 or 100% of the employee's salary. The employer contribution vests at 20% per year for each completed year of employment. Fuel Purchase Contract The Company is party to a fuel purchase agreement under which it has committed to buy its gasoline and diesel fuel from one vendor at a fixed differential above a common index. The Company is required to purchase at least 65,000 gallons per month of diesel and gasoline combined. There is no limit to the quantity the Company can purchase. The agreement expires May 31, 2018, although either party can terminate any time after 2014. The agreement is renewable for an optional additional three years by the Company. 14 EFTA00611205