We expected to have the final 2005 audit available for distribution at this meeting, but at the last minute, our auditor informed us that he was missing a necessary balance confirmation statement from one of the banks in which we have CDs, so the audit has not been finalized. We believe it will be completed momentarily; the new board will distribute it as soon as it is available. Because of the problems with unsatisfactory record keeping by our previous management company, the 2006 audit will be delayed for some months. We do not yet have an estimate from our auditor of when the 2006 audit will be delivered.

The graphs distributed summarize the history of the finances of the association. These are updates of the graphs handed out at last year's meeting. The dollar amounts are from the annual audited statements through 2004. 2005 data are from the 2005 draft audit and 2006 data are from the December monthly statement from the financial management company.

The first graph shows the history of operating expenses since 1990. The three components are labor costs, utilities, and everything else.

The second graph shows annual percentage increases in total operating expenses, labor, and utilities. Most noteworthy are the increases in utilities in the past several years: up 11 percent in 2004, 9 percent in 2005, and 14 percent in 2006. The 2007 budget anticipates a small decline in utilities from last year because of reduced gas rates. Total operating expenses are rising faster than inflation-it took 10 years for the Lauren's operating expenses to grow from $500,000 to $600,000, four years to go from $600,000 to $700,000, and just 2 years from $700,000 to $800,000.

2006 was a relatively slow year for capital expenditures (third graph), about $60,000 for various improvements, replacements and engineering studies. The President has described possible upcoming capital expenditures.

The fourth graph shows how the association has been preparing for needed capital expenditures. The graph, labeled "net cash," shows the sum of all our bank account and CD balances, less all amounts currently owed to employees and outside parties. In other words, we could pay all our current bills and have this amount left over. This measure excludes the association's other principal asset (in addition to bank accounts and CDs), which is the Lauren apartment we own.

As the President explained, starting this year we have accelerated contributions to the capital reserve because we anticipate the need to replace all of the in-unit heating and air conditioning equipment from approximately 2013 to 2015. This will be the largest capital project ever undertaken by the association. For planning purposes, we are assuming an expenditure of $2 million over three years.

The bottom graph on the right (to a different scale than the one beside it) shows the plan that the outgoing board developed for paying the HVAC replacement. It will be up to each future board to decide each year whether to stick to this plan. The plan calls for increasing the rate of annual contributions to the reserve fund to build up a fund approaching 2 million dollars in five years, and then drawing down the fund to pay for the HVAC.

Higher contributions to reserves must be paid for with higher condominium fees. In 2006, the contribution to the reserve fund (not including interest) was equal to 16 percent of condominium fee revenue. In 2007, this ratio will be 21 percent and, according to the plan developed by the board, in 2016 the reserve contribution will equal 28 percent of condominium fee revenue.

The graph does not show it, but, to help us monitor progress toward paying for the HVAC, the board has begun to keep track of the capital reserve as two separate accounts, the normal reserve, and the HVAC reserve. The 2007 budget and the monthly treasurer's report at board meetings show the totals in each of these two accounts.

Joseph Morris, Treasurer