EFTA01074554.pdf

ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2008 and 2007 (With Independent Auditors' Report Thereon) EFTA01074554  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Table of Contents Page(s) Independent Auditors' Report Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Members' Equity 4 Consolidated Statements of Cash Flows 5—6 Notes to Consolidated Financial Statements 7 — 42 EFTA01074555  KPMG LIP Stale 900 55 Beattie Place Greenville. SC 29601-2106 Independent Auditors' Report The Members Island Global Yachting Ltd.: We have audited the accompanying consolidated balance sheets of Island Global Yachting Ltd. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, members' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Island Global Yachting Ltd. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. KiPtv(e- LLP Greenville, South Carolina October 30, 2009 IMMO LIP. a U S. 'riled liabitly Dartnath0. it the U.S. mania arm of KPMG Intl:mamma a Siam caoparahvo. EFTA01074556  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2008 and 2007 Assets 2008 2007 Current assets: Cash and cash equivalents $ 17,371,336 10,219,041 Restricted cash 2,548,789 3,256,560 Accounts receivable, net of allowance 6,200,381 6,512,863 Note receivable 3,000,000 Income tax receivable 685,086 561,660 Deferred income taxes 186,923 258,751 Unbilled revenue 990,538 1,577,384 Prepaid expenses and other current assets 2,590,848 4,354,555 Total current assets 33,573,901 26,740,814 Assets held for sale 7,400,000 10,300,000 Note receivable, excluding current portion 3,010,875 — Investments in affiliated companies 34,561,872 24,033,254 Deposits toward future acquisitions — 2,022,957 Land and land estate rights, net 91,109,396 92,350,747 Property and equipment, net 161,276,297 141,818,601 Intangible assets, net 2,655,888 4,183,857 Goodwill 27,589,332 42,359,654 Deferred financing costs, net 2,409,620 3,191,240 Deferred expenses 2,055,382 4,872,761 Other assets 2.394.831 1.935.397 Total assets S 365.037.394 353.809.1:O Liabilities and Members' Equity Current liabilities: Bank overdraft $ 324,917 1,372,384 Notes payable and short-tcrm credit facilities 10,421,568 119,327,825 Accounts payable, accrued expenses, and other current liabilities 16,098,772 21,245,560 Income taxes payable 1,095,345 830,673 Duc to affiliates (note 4) — 1,976,206 Deferred revenue 6,339,077 561,003 Customer deposits 2,540,254 2,916,197 Total current liabilities 36,819,933 148,229,848 Notes payable, excluding current portion 167,270,732 118,066,612 Deferred lease obligation 5,006,497 4,035,696 Deferred income taxes 26,175,031 27,870,246 Deferred revenue 446,104 19,265,778 Other noncurrent liabilities 1,444,488 1,190,445 Noncontrolling interest in consolidated subsidiaries 6,694,143 5,971,536 Total liabilities 243,856,928 324,630,161 Members' equity 124,180,466 29,179,121 Commitments and contingencies Total liabilities and members' equity $ 368.037.394 353.809./8? See accompanying notes to consolidated financial statements. EFTA01074557  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2008 and 2007 2008 2007 Revenues: Engineering and other services $ 52,186,498 15,364,040 Marina management services 2,445,675 1,616,286 Marina facilities 50,574,973 35,537,999 Upland facilities 16,485,662 21,760,685 121,692,808 74,279,010 Costs and expenses: Engineering and other services (note 4) 44,215,664 23,147,089 Marina management services 2,008,171 3,466,566 Marina and upland facilities (note 4) 64,198,008 62,904,563 Depreciation and amortization 10,822,535 11,973,561 Impairment losses on long-lived assets (notes 2, 7 and 12) 6,605,212 131,232,336 Impairment losses on goodwill (note 12) 14,770,322 General and administrative (note 4) 31,539,226 25,372,933 174,159,138 258,097,048 Operating loss (52,466,330) (183,818,038) Other income (expense): Interest income (note 4) 1,321,952 852,857 Loss allocated to noncontrolling interests 2,368,847 33,099,756 Interest expense (14,664,903) (18,191,304) (Loss) income on investments in affiliated companies (779,180) 71,592 Gain on troubled debt restructuring 61,328,133 Gain on forgiveness of related-party obligations (note 4) 1,436,546 Gain on sale of investment (note 13) 1,431,026 Amortization of deferred financing costs (679,484) (924,058) Loss before income taxes (703,393) (168,909,195) Income tax expense 60,950 604,126 Net loss $ (764,343) (169,513,321) See accompanying notes to consolidated financial statements. 3 EFTA01074558  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Consolidated Statements of Members' Equity Years ended December 31, 2008 and 2007 Class A Class B Receivable member members front Parent Total Balance at December 31, 2006 $ 52,055,932 33,873,516 85,929,448 Capital contributions from members 49,500,000 65,000,000 — 114,500,000 Partners' capital structuring fee — (2,800,000) - (2,800,000) Shares issued for acquisition — 2,795,563 — 2,795,563 Share-based compensation — 1,086,136 - 1,086,136 Advance to Parent (note 4) — — (2,818,705) (2,818,705) Net loss (113,679,536) (55,833,785) - (169,513,321) Balance at December 31, 2007 (12,123,604) 44,121,430 (2,818,705) 29,179,121 Capital contributions from members — 97,650,000 — 97,650,000 Shares repurchased — (648,900) - (648,900) Share-based compensation 718,843 - 718,843 Advance to Parent (note 4) — (1,954,255) (1,954,255) Net loss (413.270) (351.073) — (764.343) Balance at December 31, 2008 S (12.536.874) 141.490.300 (4,772.960) 124.180.466 See accompanying notes to consolidated financial statements. 4 EFTA01074559  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2008 and 2007 2008 2007 Cash flows from operating activities: Net loss $ (764,343) (169,513,321) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 8,687,859 9,697,967 Amortization of land estate rights 1,241,351 1,203,698 Amortization of intangible assets 893,325 1,071,896 Impairment losses on long-lived assets 6,605,212 131,232,336 Impairment losses on goodwill 14,770,322 — Provision for losses on accounts receivable 13,484,163 — Amortization of deferred financing costs 679,484 924,058 Gain on troubled debt restructuring (61,328,133) Loss (gain) on sale of property 485,873 (61,042) Gain on forgiveness of related party obligation (1,436,546) — Write-off of deposits toward future acquisitions 2,022,957 — Interest incurred added to note payable balance 7,271,751 — Interest income on receivable from Parent added to note (768,528) — Accrual of deferred lease obligation 970,801 943,649 Increase in cash surrender value of life insurance (181,324) (120,860) Deferred income taxes (1,623,387) (745,765) Loss allocated to noncontrolling interests (2,368,847) (33,099,756) Share•based compensation 718,843 1,086,136 Gain on sale of investment in affiliated company (1,431,026) — Loss (income) on investment in affiliated companies 779,180 (71,592) Changes in operating assets and liabilities: Accounts receivable (13,171,681) (2,513,152) Unbilled revenue 586,846 (489,932) Prepaid expenses and other current assets 1,763,707 (2,651,874) Deferred expenses 2,817,379 (2,762,903) Other assets (278,110) (525,329) Accounts payable and accrued expenses (2,374,722) (5,427,983) Due to affiliates (539,660) 1,821,206 Customer deposits and other liabilities (121,900) 702,444 Deferred revenue (13,041,600) 14,297,733 Income taxes receivable/payable 141,246 (693,964) Net cash used in operating activities (35,509,508) (55,696,350) Cash flows from investing activities: Decrease (increase) in restricted cash 707,771 (871,902) Purchases of property and equipment (34,937,018) (39,276,182) Proceeds from sale of property and equipment 37,571 5,096,982 Acquisition of American Yacht Harbor assets, less cash acquired (note II) — (25,234,460) Acquisition of Sun Resorts shares, less cash acquired (note II) — (10,356,058) Acquisition of Montauk assets, less cash acquired (note I1) — (3,998,220) Acquisition of Isle de Sol, less cash acquired (note II) — (33,974,963) Proceeds from sale of noncontrolling interest (note II) — 12,458,763 Issuance of note receivable (6,010,875) — Investments in affiliated companies (16,307,798) (13,750,941) Proceeds from sale of investment in affiliated company 6,431,026 — Deposits toward future acquisitions — (269,673) Net cash used in investing activities (50,079,323) (110,176,654) 5 (Continued) EFTA01074560  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2008 and 2007 2008 2007 Cash flows from financing activities: (Decrease) increase in bank overdrafts $ (1,047,467) 1,257,789 Net borrowings (repayments) under short-term credit facilities 11,564,697 (22,680,000) Proceeds from notes payable issued 16,114,086 83,012,540 Principal payments on notes payable (32,797,017) (13,761,362) Capital contributions from members 97,650,000 114,500,000 Partners' capital structuring fee — (2,800,000) Advance to Parent (1,185,727) (2,818,705) Shares repurchased (648,900) — Subsidiary membership interests issued to noncontrolling interests 3,091,454 7,668,546 Dividends paid by subsidiary to noncontrolling interests — (255,330) Deferred financing costs paid — (2,879,517) Net cash provided by financing activities 92,741,126 161,243,961 Net increase (decrease) in cash and cash equivalents 7,152,295 (4,629,043) Cash and cash equivalents at beginning of year 10,219,041 14,848,084 Cash and cash equivalents at end of year $ 17,371,336 10,219,041 Supplemental disclosure of cash flow information: Cash paid for interest and letter-of-credit fees, of which $1,229,484 and $459,777 was capitalized in 2008 and 2007, respectively $ 8,095,678 22,869,613 Cash paid for income taxes 1,507,224 1,404,620 Supplemental disclosure of noncash financing activities: Interest incurred added to note payable balance $ 7,271,751 — Loan proceeds paid directly to noncontrolling interest holder (note II) — 7,508,969 Shares issued for Sun Resorts shares (note I I) - 2,795,563 Note payable issued for Montauk acquisition (note II) — 31,025,000 See accompanying notes to consolidated financial statements. 6 EFTA01074561  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 (1) Description of Business and Organization Island Global Yachting Ltd. (IGY or the Company), a Cayman Islands exempted company, was formed as a subsidiary of Island Global Yachting L.P. (IGY1 or Parent) in October 2005. The Company was capitalized with additional equity from three partnerships, Island Global Yachting II L.P. (IGY2), a Delaware limited partnership, Island Global Yachting III L.P. (IGY3), a Delaware limited partnership, and Island Global Yachting IV L.P. (IGY4), a Cayman Islands exempted limited partnership. Each of IGY2, IGY3, and IGY4 is a holder of Class B Shares (as defined below) in IGY. As of December 31, 2008 and 2007, IGY1 held 12,000,000 Class A (voting) shares (Class A Shares) of the Company. Class A Shares entitle the shareholder to vote on company matters. In addition, the Company had 12,380,814 and 7,557,803 Class B (nonvoting) shares (Class B Shares) outstanding as of December 31, 2008 and 2007, respectively. IGY conducts its business primarily through its subsidiaries, Island Global Yachting Services Ltd. (IGYS) and Island Global Yachting Facilities Ltd. (IGYF). IGYS and its subsidiaries provide marina design and development services, marina and property management services, and environmental, water resources, and coastal engineering services. IGYF, through its various operating subsidiaries, acquires direct and indirect interests (including controlling and noncontrolling interests) in luxury marina and related upland facilities in key yachting and nautical tourism areas around the world and operates these facilities. In 2008 and 2007, IGY's operations were conducted mainly in the Caribbean, the United States of America, Mexico, and Dubai, United Arab Emirates. (2) Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the financial statements of IGY and its controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for the portion of a subsidiary that is not owned as noncontrolling interests. Noncontrolling interests in an acquired enterprise are reported in the consolidated financial statements at either the book value or fair value of the net assets acquired by the Company at the date of acquisition depending upon the nature of the acquisition plus the cumulative allocation of net income (loss) from that date forward to the noncontrolling interests based on its ownership percentage. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46(R), (FIN 46(R)), Consolidation of Variable Interest Entities, and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements in accordance with FIN 46(R). The Company reports its operating results by classifying all revenues and costs and expenses to its IGYF and IGYS segments. General and administrative expenses relate to the indirect operating costs of the Company. Impairment losses related to IGYS and IGYF are reported as a single component in the Company's consolidated financial statements. 7 (Continued) EFTA01074562  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 (b) Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers liquid investments with original maturities of three months or less to be cash equivalents. Short-term investments included as cash equivalents are $649,976 and $2,327,235 at December 31, 2008 and 2007, respectively. 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, 2008 and 2007, $2,548,789 and $3,256,560, respectively, of the Company's cash is restricted under the terms of its loan agreements (note 9). (c) 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 consolidated statements 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. Accounts receivable at December 31, 2008 and 2007 are net of an allowance of $14,008,153 and $738,531, respectively. The Company does not have any off-balance-sheet credit exposure related to its customers. Of the Company's accounts receivable, $1,294,206 and $2,914,778 served as collateral for the notes payable and credit facilities (note 9) at December 31, 2008 and 2007, respectively. (d) Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist primarily of prepaid rent and insurance, and security deposits. (e) Investments in Affiliated Companies Investments in two entities are accounted for under the cost method. These investments are periodically evaluated for factors that may indicate an other than temporary decrease in fair value compared to the carrying value. The Company accounts for its other investments in partnership or membership interests using the equity method. Investments accounted for under the equity method generally represent an investment of 50% or less or where the Company does not have control, but is able to exhibit substantial influence. Under the equity method, the initial investment is recorded as an asset, and a liability is recorded for the amount of capital commitment the Company is contractually obligated to invest. Subsequently, the asset is adjusted for income or loss allocations and the receipt of distributions of capital, and the liability is reduced for investments made pursuant to the commitment. 8 (Continued) EFTA01074563  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 (/) Deposits toward Future Acquisitions The Company capitalizes certain deposits and other capitalizable costs directly incurred with respect to pending or anticipated transactions. The Company reviews these costs periodically as transactions occur for allocation to the cost of an acquired entity. Costs associated with potential transactions that are no longer being pursued are expensed. (g) Note Receivable Note receivable relates to a financing arrangement that was entered into in conjunction with an intended acquisition. The note bears interest at a market rate based on the borrower's credit quality and is recorded at face value. Interest is recognized over the life of the note. The Company has a security interest in certain collateral of the borrower in support of the note. The Company does not intend to sell this receivable. Interest collected on notes receivable is included in net cash provided by operating activities in the consolidated statements of cash flows. There is no loan loss allowance with respect to this note receivable at December 31, 2008. (h) Assets Heldfor Sale Assets held for sale at December 31, 2008 consist of nine condominium units and a travel lift. The Company is actively marketing these assets for sale through various brokerage firms. During 2008, management performed an impairment analysis in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for the assets held for sale. Management determined that the fair value less cost to sell was below the carrying value for both the nine condominium units and the travel lift. The fair value of these assets was estimated using recent sales transactions. As a result, the Company recorded an impairment charge of $5,871,342, which is included in impairment losses on long-lived assets in the accompanying consolidated statement of operations, relating to its IGYF segment, to reduce the carrying value of the assets held for sale to fair value less cost to sell. In 2007, the Company recorded an impairment charge of $4,352,694, relating to the IGYF segment, to reduce the carrying value of the condominium units to fair value less cost to sell. (i) Land and Land Estate Rights The Company owns land and holds long-term leases (land estate rights) for land and submerged land at various marina sites. These assets are recorded at original cost or at their fair value on the date of acquisition if acquired in a purchase business combination. Land estate rights are amortized using the straight-line method over the respective lease term. 9 (Continued) EFTA01074564  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 Property and Equipment Property and equipment are stated at cost. Depreciation on property and equipment is calculated on 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 30 — 55 years Marina buildings and structures 15 — 30 years Equipment 3 — 7 years Vehicles 5 years Furniture and fixtures 5 — 10 years For projects under development, the Company capitalizes all direct costs related to the acquisition, development, and construction of the project, including interest, property taxes, and amortization of deferred financing costs as well as indirect costs such as allocations of wages and expenses of employees of certain affiliates under common control that clearly and directly relate to the project. Upon completion of the project, assets are placed into service and depreciated over their estimated useful lives. Leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. In accordance with SFAS No. 144, 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 determined to be held for sale and real estate held for sale are separately presented in the consolidated 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 section of the consolidated balance sheet. (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 or earlier if triggering events occur, in accordance with the provisions of SFAS No. 142, Goodwill and Other 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 10 (Continued) EFTA01074565  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 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 performs its annual impairment review of goodwill at December 31 and when a triggering event occurs between annual impairment tests. Intangible assets with estimable useful lives are amortized using the straight-line method over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144. (I) 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. For project-specific financing, the amortization is recorded and capitalized as real estate development costs until the developed real estate is placed into service. Deferred financing costs at December 31, 2008 and 2007 of $2,409,620 and $3,191,240 are net of accumulated amortization of $1,403,528 and $621,909, respectively. (m) Other Assets Other assets consist primarily of straight-line rent receivable related to retail leases, leasing commissions, cash surrender value of officer life insurance policies, and notes receivable from employees. (n) Advertising and Marketing Costs Advertising costs are expensed as incurred. Advertising and marketing costs amounted to $4,899,471 and $5,009,236 for the years ended December 31, 2008 and 2007, respectively, and are included in both segment-specific cost and general and administrative expenses. (o) Income Taxes The Company is not subject to U.S. federal or state income taxes as the tax effects of the Company's activities are reported directly by the members on their respective income tax returns. However, certain of the Company's subsidiaries are taxable corporations operating in U.S. and foreign jurisdictions that impose income taxes. For these subsidiaries, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 11 (Continued) EFTA01074566  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 The Company is a withholding agent for U.S. federal tax purposes with respect to its foreign members. As a result, the Company would have to make periodic U.S. federal tax payments, to the extent the Company earns income during a period, on behalf of its foreign members to satisfy this withholding obligation and file related annual information tax returns with the Internal Revenue Service (IRS). Any U.S. withholding payments made on behalf of a foreign member would be treated as cash distributions to such member. To the extent the Company is subsequently found by the IRS to have underwithheld on its foreign members' distributive share of the Company's income, the Company and its Parent may become liable for such underwithholding as a result of the Company's status as a withholding agent for this purpose. (p) Retirement Plans On January 1, 2007, the Company sponsored the establishment of a defined contribution 401(k) profit sharing plan (the 401k Plan) for substantially all its employees in the United States of America. 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 401k 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 will make 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. The Company has made no discretionary contributions to the 401k Plan for the years ended December 31, 2008 and 2007. In 2009, the Company elected to suspend the matching contributions. A subsidiary of the Company has a supplemental employee retirement plan covering its executive officers. The benefits are based on years of service and certain levels (but not all) of the officer's compensation at retirement. (q) Rent Expense and Deferred Lease Obligation The Company leases land, submerged land, and office space. Minimum rental expenses are recognized over the term of the lease. The Company recognizes minimum rent starting when possession of the property is taken. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rent expense and the amounts payable under the lease as deferred lease obligation. 12 (Continued) EFTA01074567  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 (r) Revenue Recognition The Company's revenues are primarily comprised of services provided by IGYS and rentals and services provided by IGYF. The following details the Company's revenue recognition policies by reporting segment (note 15). IGYS IGYS provides engineering, development, and marina management services. IGYS engineering revenue is recognized under the percentage-of-completion method as defined in American Institute of Certified Public Accountants Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, which recognizes income as work on a contract (or group of contracts if they meet the criteria for combination) progresses. The recognition of revenues and profits is generally related to cost incurred in providing the services required under the contract. Additional factors related to recognition are probable collection of the relevant receivable, persuasive evidence that an arrangement exists, and fixed and determinable sales price. Reimbursed expenses billed to customers are recorded as revenues from engineering and other services at actual cost plus an administrative fee and as costs of engineering and other services in the consolidated statements of operations. Losses on fixed price projects are recognized during the period in which the loss first becomes evident. Project losses are determined to be the amount by which the estimated total costs of the project exceed the total fixed price per the agreement. Customer billings in excess of revenues earned are recorded as deferred revenues or customer deposits. Engineering services are sold principally on a time-and-materials basis or in some cases at a fixed price. Time and material projects are distinguished from fixed price agreements in that the price of the services are quoted based on days incurred on the project or some other measure of time such as hours, weeks, or months. Fixed price agreements are defined as any agreements entered into for a predetermined total price regardless of the number of days actually needed to complete the project or any agreements entered into on a time-and-materials basis that have a cap. IGYS development revenue is derived from service fees earned under multiple phase agreements. SOP 81-1 requires that the Company record these revenues under the completed-contract method. Under this method, contract costs and related billings are accumulated and reported as deferred revenues in the accompanying consolidated balance sheets until the project is completed or substantially completed. During the fourth quarter of 2008, the Company received notification from the customer of the termination of substantially all long-term development contracts in which it was engaged in the United Arab Emirates, which comprised substantially all of its business in the region. As a result of this termination, which triggered completion under the terms of the contracts, the Company recognized substantially all of the revenues and expenses related to these projects and recorded reserves for those receivables it deemed to be uncollectible. IGYS marina management revenues are monthly fees earned for management services provided to third parties. Management revenues to owned subsidiaries, which are the majority of such revenues, are eliminated in consolidation. 13 (Continued) EFTA01074568  ISLAND GLOBAL YACHTING LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 IGYF IGYF revenues are primarily derived from ownership of marina and upland facilities and are recognized primarily at the time services are performed or products are sold. When long-term slip rentals or advance deposits are received, revenues are deferred and recognized over the term of the lease or rental agreement. Revenues from leases are recognized over the term of each 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. As of December 31, 2008 and 2007, approximately $441,381 and $748,041, respectively, has been recognized as straight-line rents receivable, which amounts are included in other assets in the consolidated balance sheets. The Company may provide a lessee with an allowa