Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Financial Statements December 31, 2015 and 2014

Transcription

1 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Financial Statements

2 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Index Page(s) Report of Independent Certified Public Accountants Financial Statements Balance Sheets... 3 Statements of Revenues, Expenses and Changes in Fund Balance Operating Fund... 4 Statements of Revenues, Expenditures and Changes in Fund Balance Reserve for Replacement Fund... 5 Statements of Cash Flows... 6 Notes to Financial Statements Other Financial Information Supplementary Information on Future Major Repairs and Replacements (Unaudited)... 14

3 Report of Independent Certified Public Accountants The Board of Directors of Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club We have audited the accompanying financial statements of the Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club (the Association ), which comprise the balance sheets as of and the related statements of revenues, expenses and changes in fund balance - operating fund, of revenues, expenditures and changes in fund balance - reserve for replacement fund, and of cash flows for the years then ended. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the 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. Independent Certified Public Accountants Responsibility Our responsibility is to express an opinion on the 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 from 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 our 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, we consider internal control relevant to the Association 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 Association 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club at, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP, 4040 West Boy Scout Boulevard, Suite 1000, Tampa, FL T: (813) , F: (813) ,

4 Other Matter Accounting principles generally accepted in the United States of America require that the Supplementary Information on Future Major Repairs and Replacements (Unaudited) 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. April 13,

5 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Balance Sheets 2015 Reserve for Operating Replacement Fund Fund Total 2014 Assets Cash and cash equivalents $ 2,353,036 $ 11,537,742 $ 13,890,778 $ 9,897,274 Investments 2,450,000 4,617,900 7,067,900 8,802,263 Maintenance fees receivable, less allowance for doubtful accounts of approximately $94,000 and $101,000 in 2015 and 2014, respectively 102,967 44, , ,173 Maintenance fees receivable due from MRHC 338, , ,569 Accrued interest receivable 825 8,883 9,708 13,664 Prepaid expenses and other assets 368, , ,565 Income tax receivable 3,640-3,640 4,525 General excise tax receivable Due from Marriott Kaua'i Beach Club Owners Association, Inc. 5,023-5, ,195 Due (to) from Operating Fund - (46,102) (46,102) 202,801 Due from (to) Reserve for Replacement Fund 46,102-46,102 (202,801) Total assets $ 5,668,476 $ 16,162,425 $ 21,830,901 $ 20,503,305 Liabilities and Fund Balances Liabilities Accrued expenses $ 13,001 $ 50,427 $ 63,428 $ 150,348 Unearned maintenance fees 2,585, ,590 3,168,582 3,348,232 Income tax payable - 16,727 16, General excise tax payable Due to Marriott Vacations Worldwide Corporation 14,321-14, ,715 Due to HPTMI Hawaii Inc. 962, , ,936 Total liabilities 3,575, ,744 4,225,421 4,837,596 Fund balances 2,092,799 15,512,681 17,605,480 15,665,709 Total liabilities and fund balances $ 5,668,476 $ 16,162,425 $ 21,830,901 $ 20,503,305 The accompanying notes are an integral part of these financial statements. 3

6 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Statements of Revenues, Expenses and Changes in Fund Balance Operating Fund Years Ended Revenues Maintenance fees $ 16,549,268 $ 16,331,727 Operating finance charges 48,585 44,729 Interest income 7,227 5,439 Total revenues 16,605,080 16,381,895 Expenses Accounting and administration 897, ,305 Audit fees 13,309 15,013 Bad debt expense 11,790 25,315 Business license and registration 1,685 1,825 Credit card fees 131,826 - Electricity 3,667,124 4,138,002 Gas 417, ,461 General excise tax 4,553 3,206 Housekeeping 1,207,176 1,210,946 Income tax expense 1, Insurance 1,314,237 1,460,652 Management fee 1,191,927 1,172,598 Recreation and activities 925, ,681 Rent 357, ,389 Repairs and maintenance 3,305,534 3,200,803 Water and sewer 2,512,950 2,358,552 Total expenses 15,961,484 16,119,057 Excess of revenues over expenses 643, ,838 Fund balance Beginning of year 1,449,203 1,186,365 End of year $ 2,092,799 $ 1,449,203 The accompanying notes are an integral part of these financial statements. 4

7 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Statements of Revenues, Expenditures and Changes in Fund Balance Reserve for Replacement Fund Years Ended Revenues Reserve for replacement assessment $ 2,980,000 $ 2,880,827 Reserve finance charges 10,466 11,525 Interest income 47,552 24,564 Unrealized (loss) gain on fair value investments (19,363) 12,888 Total revenues 3,018,655 2,929,804 Expenditures Roof replacement 983,781 - Furniture and fixtures 704,650 2,025,995 Pavement resurfacing 13,021 49,422 Income tax expense 21,028 8,567 Total expenditures 1,722,480 2,083,984 Excess of revenues over expenditures 1,296, ,820 Fund balance Beginning of year 14,216,506 13,370,686 End of year $ 15,512,681 $ 14,216,506 The accompanying notes are an integral part of these financial statements. 5

8 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Statements of Cash Flows Years Ended 2015 Reserve for Operating Replacement Fund Fund Total 2014 Cash flows from operating activities Excess of revenues over expenses/expenditures $ 643,596 $ 1,296,175 $ 1,939,771 $ 1,108,658 Adjustments to reconcile excess of revenues over expenses/expenditures to net cash provided by operating activities Bad debt expense 11,790-11,790 25,315 Unrealized loss (gain) on fair value investments - 19,363 19,363 (12,888) Changes in operating assets and liabilities Decrease in maintenance fees receivable 162,986 34, ,414 53,553 Decrease (increase) in maintenance fees receivable due from MRHC 279, ,283 (617,569) (Increase) decrease in accrued interest receivable (757) 4,713 3,956 (13,410) (Increase) decrease in prepaid expenses and other assets (22,032) - (22,032) 60,473 (Increase) decrease in income tax receivable (3,640) 4, ,291 Decrease (increase) in general excise tax receivable (77) Decrease (increase) in due from Marriott Kaua'i Beach Club Owners Association, Inc. 371,683 88, ,172 (449,781) Decrease in accrued expenses (81,554) (5,366) (86,920) (41,675) (Decrease) increase in unearned maintenance fees (132,597) (47,053) (179,650) 3,348,232 (Decrease) increase in income tax payable (309) 16,727 16,418 (5,079) Increase (decrease) in general excise tax payable 240 (56) 184 (116) Decrease in due to Marriott Vacations Worldwide Corporation (586,394) - (586,394) (285,685) Increase in due to HPTMI Hawaii Inc. 224, , ,175 (Decrease) increase in due to/from Operating/ Reserve for Replacement Funds (248,903) 248, Net cash provided by operating activities 617,656 1,660,848 2,278,504 3,508,417 Cash flows from investing activities Purchases of investments (8,085,000) (735,000) (8,820,000) (12,729,955) Proceeds from maturity of investments 6,125,000 4,410,000 10,535,000 6,820,000 Net cash (used in) provided by investing activities (1,960,000) 3,675,000 1,715,000 (5,909,955) Net (decrease) increase in cash and cash equivalents (1,342,344) 5,335,848 3,993,504 (2,401,538) Cash and cash equivalents Beginning of year 3,695,380 6,201,894 9,897,274 12,298,812 End of year $ 2,353,036 $ 11,537,742 $ 13,890,778 $ 9,897,274 Supplemental disclosure of cash flow information Cash paid (received) during the year for income taxes $ 5,071 $ (224) $ 4,847 $ 664 The accompanying notes are an integral part of these financial statements. 6

9 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Notes to Financial Statements 1. Summary of Significant Accounting Policies Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club (the "Association") was incorporated on February 17, 1995 in the State of Hawaii. The purpose of the Association is to administer and manage the condominium project created and established as Marriott s Kaua i Resort and Beach Club condominium project. The complex consists of Marriott s Kaua i Beach Club Owners Association, Inc. ( VOA ), HPTMI Hawaii Inc. ( Hotel ) and Marriott Kaua i Ownership Resorts, Inc. ( MKORI ) and on February 25, 2011, MKORI transferred its ownership interest in certain real property located in the Kilohana Tower to Essex House Condominium Corporation ( Essex, a subsidiary of Marriott International). On July 29, 2015, Essex sold its ownership interest in certain real property located in the Kilohana Tower to Marriott Ownership Resorts, Inc. (the Developer ). The Association is managed under an agreement with Essex. Use of 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. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating Fund The Association's fees and earnings from operations, which are restricted for the use and benefit of Association members, are recorded in the Operating Fund. Reserve for Replacement Fund The Association is accumulating funds for future major repairs and replacements. Accumulated funds are held in separate savings accounts and generally are not available for normal operations. Essex, on behalf of the Association s Board of Directors, engages a third-party vendor to conduct ongoing studies to estimate the remaining useful lives and the replacement costs of the components of common property. The table included in the Supplementary Information on Future Major Repairs and Replacements (Unaudited) is based on those studies. The Association is funding for major repairs and replacements over the remaining estimated useful lives of the components based on the study s estimates of current replacement costs and considering amounts previously accumulated in the Reserve for Replacement Fund. Accordingly, a funding requirement of $3,099,201 has been included in the 2016 budget. Funds are being accumulated in the Reserve for Replacement Fund based on estimates of future needs for repairs and replacements of common property components. Actual expenditures may vary from the estimated future expenditures, and the variations may be material. Therefore, amounts accumulated in the Reserve for Replacement Fund may not be adequate to meet all future needs for major repairs and replacements. If additional funds are needed, the Association has the right, subject to the Board of Directors' approval, to increase regular assessments, pass special assessments, or delay major repairs and replacements until funds are available. 7

10 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Notes to Financial Statements Cash and Cash Equivalents The Association considers money in checking accounts, money market funds, and certificates of deposit with an original maturity of three months or less, at date of purchase, to be cash equivalents. The Association places its cash and cash equivalents with financial institutions in the United States of America. The Federal Deposit Insurance Corporation ( FDIC ) provides for deposits at FDIC-insured institutions to be insured up to $250,000. Investments Investments consist of certificates of deposit and equity-linked certificates of deposit. The Association s certificates of deposit are carried at amortized cost, as the Association has both the intent and ability to hold them until maturity. Certain certificates of deposits are considered depository accounts and are insured by the FDIC. The Association s equity-linked certificates of deposit are principal-protected structured products. At maturity, the Association will receive their principal plus a supplemental payment or minimum interest, if any, that is based on the performance of an underlying index or market measure. Equity-linked certificates of deposit are adjusted to fair value at the end of each period, with unrealized gains or losses shown as a component of revenues (the Fair Value Option ). The Fair Value Option selected by the Association is considered to provide a more transparent presentation to users of the financial statements. Fair Value Measurements The Association measures certain assets at fair value in accordance with current accounting standards on fair value measurements. The standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. A fair value hierarchy is utilized which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels may be used to measure fair value: Level 1 quoted prices in active markets for identical assets or liabilities. Level 2 quoted prices for similar assets and liabilities in active markets or inputs that are observable. Level 3 inputs that are unobservable (for example cash flow modeling inputs based on assumptions). A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. 8

11 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Notes to Financial Statements The following table summarizes the Association s investments recorded at fair value on a recurring basis at : 2015 Fair Value Measurements Using Level 1 Level 2 Level 3 Total Equity-linked certificates of deposit $ - $ 497,900 $ - $ 497, Fair Value Measurements Using Level 1 Level 2 Level 3 Total Equity-linked certificates of deposit $ - $ 517,263 $ - $ 517,263 Maintenance Fees Receivable Maintenance fees receivable represents an amount due from owners. Effective January 1, 2010, the Association entered into a Foreclosed Inventory Purchase Agreement with Marriott Ownership Resorts, Inc. ("MORI"). This agreement shall automatically renew for any number of additional one (1) year terms, unless either party terminates the agreement with a 45-day written notice. The agreement provides that MORI shall purchase the Association's foreclosed inventory subject to the terms of the agreement. Should either party terminate the agreement, there could be potential exposure regarding the allowance for doubtful accounts and bad debt expense. As of April 13, 2016, the agreement is in full effect and has automatically renewed, and neither party has opted to terminate the agreement. Unearned Maintenance Fees Maintenance fees for all unit weeks are receivables as of the beginning of each fiscal year. Unearned maintenance fees represent prepayment of the next year's maintenance fees. The fees for the unit weeks prior to the Association's year-end are classified as revenues; the remainder is considered unearned maintenance fees. Income Taxes The Association accounts for income taxes in accordance with ASC 740, Income Taxes. ASC 740 utilizes the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax impact attributable to differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered. 9

12 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Notes to Financial Statements Condominium associations may elect to be taxed as exempt homeowners associations pursuant to Internal Revenue Code Section 528 ( Section 528 ) if they meet certain income, expenditure, and organizational requirements. Section 528 allows electing timeshare associations to be taxed at a 32% rate on their "homeowners association taxable income," which is the excess of the association's gross income, excluding "exempt function income," over related deductions. "Exempt function income" includes membership dues, fees and assessments (less related expenses) from owners of timeshare rights to use, or timeshare ownership interests in, real property. The Association made this election for 2015 and 2014; accordingly, deferred taxes have not been provided for temporary differences related to exempt function income. Should the Association not elect to be taxed as an exempt homeowners association in the future, deferred tax assets and liabilities may be recognized for existing temporary differences at that time, with a corresponding impact on income tax expense. The Association has evaluated the effects of the guidance provided by generally accepted accounting principles related to accounting for uncertainty in income taxes. The Association has determined that it had no uncertain income tax positions that could have a significant effect on the financial statements for the year ended December 31, The Association's federal income tax returns for 2012, 2013 and 2014 are subject to examination by the Internal Revenue Service, generally for a period of three years after the federal income tax returns were filed. Cost Allocation Methodology The complex consists of the VOA, the Hotel, MKORI and the Developer. The hotel back office accounting system is utilized to record all expenses of these four entities. At the end of each month, allocations are made based on different methodologies to credit the hotel books and allocate costs to the timeshare and condominium operations. The allocation methodology was developed by a private consultant in 1994 at the request of the Developer with the assistance of Marriott International. These methodologies were then used by the Developer to register the property as a condominium with a hotel and timeshare operation and as the basis for allocating cost since opening in The management company (currently Essex) continues to use these methodologies in allocating costs between the owners of the Condominium Association. The various allocation methodologies are documented in the management company s standard operating procedures. Examples of the major allocation bases are: 1) check-ins, 2) bays cleaned, 3) guest mix, and 4) square footage ownership. Reclassifications Certain items in the 2014 financial statements have been reclassified to conform to the 2015 presentation. The reclassifications had no effect on the excess of revenues over expenses/ expenditures or fund balances. 10

13 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Notes to Financial Statements 2. Investments Investments are classified as follows at : Amortized Fair Market Amortized Fair Market Cost Value Cost Value Equity-linked certificates of deposit $ 500,000 $ 497,900 $ 500,000 $ 517,263 Certificates of deposit (held-to-maturity) $ 6,570,000 $ 6,568,120 $ 8,285,000 $ 8,250,109 * Investments on the Balance Sheets is the sum of the fair market value of the equity-linked certificates of deposit and the amortized cost of the certificates of deposit. The contractual maturities of investments held-to-maturity and equity-linked certificates of deposit at are as follows: Amortized Fair Market Amortized Fair Market Cost Value Cost Value Due within one year $ 4,900,000 $ 4,894,870 $ 4,900,000 $ 4,892,775 Due between one to five years 2,170,000 2,171,150 3,385,000 3,357,334 Due after five years , ,263 Total $ 7,070,000 $ 7,066,020 $ 8,785,000 $ 8,767,372 The equity-linked certificates of deposit had unrealized (losses) gains of ($19,363) and $12,888 for the years ended, respectively, which are included in the Statements of Revenues, Expenses and Changes in Fund Balance Reserve for Replacement Fund. 3. Income Taxes The provision for income taxes consisted of the following for the years ended December 31, 2015 and 2014: Reserve for Reserve for Operating Replacement Operating Replacement Total Fund Fund Total Fund Fund Federal $ 19,811 $ 1,003 $ 18,808 $ 7,800 $ 272 $ 7,528 State 2, ,220 1, ,039 $ 22,150 $ 1,122 $ 21,028 $ 8,876 $ 309 $ 8,567 11

14 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Notes to Financial Statements The difference between the provision for income taxes as presented, and the provision calculated by applying the statutory federal rate to the excess of revenues over expenses/expenditures, primarily relates to state income taxes and the exclusion of exempt function income. 4. Management Agreement The Association entered into a management agreement with Essex as the management company for a term consisting of automatic one-year renewals unless sooner terminated by written notice or applicable law. The management company is responsible for the management, maintenance and operations of the facilities, in exchange for an annual fee of 6 1/2% of the annual budget of the Association, including replacement reserves contributions but excluding the management company s compensation. For the years ended, the management fee was $1,191,927 and $1,172,598, respectively, and is recorded in the Statements of Revenues, Expenses and Changes in Fund Balance Operating Fund. 5. Leases The Association leases land, buildings, vehicles and equipment under operating leases which range in expiration dates through The following is a schedule of future minimum rental payments under the operating leases having a remaining noncancelable term in excess of one year as of December 31, 2015: Years Ending December 31, 2016 $ 287, , , , ,123 Thereafter 9,924,936 $ 11,258,290 Rent expense under the operating leases for the years ended was approximately $357,484 and $348,389, respectively, and is included in the Statements of Revenues, Expenses, and Changes in Fund Balance Operating Fund. 6. Related Party Transactions The Hotel pays certain expenses on behalf of the Association for which the Association will reimburse the Hotel. The amounts due to the Hotel at were $962,123 and $737,936, respectively. The net amounts due from the VOA at were $5,023 and $465,195, respectively. 12

15 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Notes to Financial Statements Certain services, including off-site accounting and administration, and reservations, are provided by Marriott Resorts Hospitality Corporation ( MRHC ) and allocated to the Association based on the number of unit weeks, as a percentage of total unit weeks the respective service covers. In addition, Marriott Vacations Worldwide Corporation ( MVWC ), the indirect parent company of MRHC, pays certain expenses on behalf of the Association, subject to reimbursement by the Association. The net amount due to MVWC at was $14,321 and $600,715, respectively. MRHC collects annual maintenance fees on behalf of the Association. The amount of maintenance fees receivable due from MRHC at was $338,286 and $617,569, respectively. 7. Concentrations of Credit Risk Financial instruments which potentially subject the Association to concentrations of credit risk consist principally of cash and cash equivalents and investments. The Association maintains its cash and cash equivalents and investments with what the Board of Directors believes to be high credit quality financial institutions. In addition, the Board of Directors maintains its investments in a portfolio that it believes limits the amount of market exposure. In an effort to fulfill their fiduciary responsibility to protect and maintain assets for the Association, the Board of Directors for the Association has implemented a formal investment policy statement in reference to all cash, cash equivalents and investable funds for the reserve for replacement and operating funds. The investment policy statement stipulates that all funds shall be invested in federally insured or guaranteed vehicles with no risk to principal as long as these investments are held-to-maturity. Since the Board of Directors has incorporated an analysis that identifies the use of these funds at specific times and the investments are structured with maturity dates to coincide with these anticipated expenditures; notwithstanding emergencies not under the control of the Board of Directors, the Association is able to and prepared to hold to these investments to their stated maturity dates. 8. Subsequent Events The Association has performed an evaluation of subsequent events through April 13, 2016, which is the date the financial statements were issued. 13

16 Association of Apartment Owners of Marriott s Kaua i Resort and Beach Club Supplementary Information on Future Major Repairs and Replacements (Unaudited) Year Ended December 31, 2015 On behalf of the Board of Directors, a reserve study was completed during 2014 to estimate the remaining useful lives and the replacement costs of the components of common property. The following table is based on the study with subsequent review by the Board of Directors and presents significant information about the components of common property. Components Estimated Estimated of Fund Remaining Current 2016 Balance at Useful Lives Replacement Funding December 31, (Years) Costs Requirement 2015 Roof replacement 12 $ 4,042,268 $ 172,267 $ 754,714 Furniture and fixtures 8 30,537,853 1,961,157 5,592,701 Building painting 3 3,478, ,562 1,340,591 Pavement resurfacing 12 2,545,430 18,096 2,200,119 Common area rehabilitation 6 10,386, ,119 5,624,556 Total $ 50,990,176 $ 3,099,201 $ 15,512,681 14

17 Marriott s Kaua i Beach Club Owners Association, Inc. Financial Statements

18 Marriott s Kaua i Beach Club Owners Association, Inc. Index Page(s) Report of Independent Certified Public Accountants Financial Statements Balance Sheets... 3 Statements of Revenues, Expenses and Changes in Fund Balance Operating Fund... 4 Statements of Revenues, Expenditures and Changes in Fund Balance Reserve for Replacement Fund... 5 Statements of Cash Flows... 6 Notes to Financial Statements Other Financial Information Supplementary Information on Future Major Repairs and Replacements (Unaudited)... 14

19 Report of Independent Certified Public Accountants The Board of Directors of Marriott s Kaua i Beach Club Owners Association, Inc. We have audited the accompanying financial statements of the Marriott s Kaua i Beach Club Owners Association, Inc. (the Association ), which comprise the balance sheets as of December 31, 2015 and 2014 and the related statements of revenues, expenses and changes in fund balance - operating fund, of revenues, expenditures and changes in fund balance - reserve for replacement fund, and of cash flows for the years then ended. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the 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. Independent Certified Public Accountants Responsibility Our responsibility is to express an opinion on the 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 from 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 our 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, we consider internal control relevant to the Association 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 Association 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Marriott s Kaua i Beach Club Owners Association, Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP, 4040 West Boy Scout Boulevard, Suite 1000, Tampa, FL T: (813) , F: (813) ,

20 Other Matter Accounting principles generally accepted in the United States of America require that the Supplementary Information on Future Major Repairs and Replacements (Unaudited) 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. April 13,

21 Marriott s Kaua i Beach Club Owners Association, Inc. Balance Sheets 2015 Reserve for Operating Replacement Fund Fund Total 2014 Assets Cash and cash equivalents $ 5,521,130 $ 3,785,129 $ 9,306,259 $ 3,078,072 Investments 245,000 3,003,975 3,248,975 7,699,000 Maintenance fees receivable, less allowance for doubtful accounts of approximately $150,000 and $129,000 in 2015 and 2014, respectively 162,280 71, , ,564 Maintenance fees receivable due from MRHC 541, , ,906 Accrued interest receivable - 1,164 1,164 2,215 Prepaid expenses and other assets 88,211-88, ,365 Income tax receivable 23,491-23,491 30,217 Due from Marriott Vacations Worldwide Corporation 25,369-25, ,446 Due from Operating Fund - 246, , ,631 Due to Reserve for Replacement Fund (246,451) - (246,451) (169,631) Total assets $ 6,360,532 $ 7,108,467 $ 13,468,999 $ 12,281,785 Liabilities and Fund Balances Liabilities Accrued expenses $ 14,734 $ 71,353 $ 86,087 $ 12,690 Unearned maintenance fees 4,078, ,860 4,972,843 4,116,173 Income tax payable - 7,327 7,327 8,452 General excise tax payable 20,989-20, ,652 Due to Association of Apartment Owners of Marriott's Kaua'i Resort and Beach Club 5,023-5, ,195 Due to HPTMI Hawaii Inc. 687, , ,228 Total liabilities 4,807, ,540 5,779,781 5,751,390 Fund balances 1,553,291 6,135,927 7,689,218 6,530,395 Total liabilities and fund balances $ 6,360,532 $ 7,108,467 $ 13,468,999 $ 12,281,785 The accompanying notes are an integral part of these financial statements. 3

22 Marriott s Kaua i Beach Club Owners Association, Inc. Statements of Revenues, Expenses and Changes in Fund Balance Operating Fund Years Ended Revenues Maintenance fees $ 16,534,201 $ 16,118,860 Association of Apartment Owners of Marriott Kaua'i Resort and Beach Club assessment (8,354,601) (8,394,820) Maintenance fees, net 8,179,600 7,724,040 Interest 8,257 6,394 Miscellaneous income 8,420 7,424 Late fee income and finance charges 164, ,229 Total revenues 8,360,331 7,908,087 Expenses Accounting and administration 1,079,676 1,007,557 Audit fees 14,333 15,996 Activities, net 118, ,181 Bad debt expense 53,256 35,039 Billing and collection expense 110, ,920 Board of Directors' expense 23,776 14,263 Cable television 100,176 80,237 Credit card 164, ,859 Front desk 1,429,579 1,349,619 General excise (benefit) tax (59,326) 397,596 Housekeeping 2,723,277 2,404,503 Income tax expense 1, Insurance 20,079 12,132 Loss prevention 5,546 5,562 Maintenance fee 752, ,296 Management fee 782, ,168 Owner services 401, ,525 Postage and printing 26,632 31,866 Real estate and property taxes 1,353,178 1,023,307 Total expenses 9,100,412 8,776,146 Deficit of revenues over expenses (740,081) (868,059) Fund balance Beginning of year 2,293,372 3,161,431 End of year $ 1,553,291 $ 2,293,372 The accompanying notes are an integral part of these financial statements. 4

23 Marriott s Kaua i Beach Club Owners Association, Inc. Statements of Revenues, Expenditures and Changes in Fund Balance Reserve for Replacement Fund Years Ended Revenues Reserve for replacement assessment $ 2,075,342 $ 1,960,381 Late fee income 15,452 16,199 Interest income 21,014 24,228 Unrealized gain on investments 18,975 78,050 Total revenues 2,130,783 2,078,858 Expenditures Furniture and fixtures 224,557 3,288,470 Income tax expense 7,322 7,587 Total expenditures 231,879 3,296,057 Excess (deficit) of revenues over expenditures 1,898,904 (1,217,199) Fund balance Beginning of year 4,237,023 5,454,222 End of year $ 6,135,927 $ 4,237,023 The accompanying notes are an integral part of these financial statements. 5

24 Marriott s Kaua i Beach Club Owners Association, Inc. Statements of Cash Flows Years Ended 2015 Reserve for Operating Replacement Fund Fund Total 2014 Cash flows from operating activities (Deficit) excess of revenues over expenses/expenditures $ (740,081) $ 1,898,904 $ 1,158,823 $ (2,085,258) Adjustments to reconcile (deficit) excess of revenues over expenses/expenditures to net cash (used in) provided by operating activities Bad debt expense 53,256-53,256 35,039 Unrealized gain on fair value instruments - (18,975) (18,975) (78,050) Changes in operating assets and liabilities Decrease in maintenance fees receivable 130,966 36, ,280 42,931 Decrease (increase) in maintenance fees receivable due from MRHC 214, ,404 (755,906) Decrease in accrued interest receivable ,051 1,654 Decrease (increase) in prepaid expenses and other assets 18,154-18,154 (23,106) Decrease in income tax receivable 6,726-6,726 6,131 Decrease (increase) in due from Marriott Vacations Worldwide Corporation 130, ,077 (155,446) Increase (decrease) in accrued expenses 2,044 71,353 73,397 (10,436) Increase (decrease) in unearned maintenance fees 794,493 62, ,670 (2,010,040) Decrease in income tax payable - (1,125) (1,125) (13,623) (Decrease) increase in general excise tax payable (481,663) - (481,663) 8,512 (Decrease) increase in due to Association of Apartment Owners of Marriott's Kaua'i Resort and Beach Club (371,684) (88,489) (460,173) 449,781 Decrease in due to Marriott Vacations Worldwide Corporation (585,662) Increase in due to HPTMI Hawaii Inc. 41,285-41, ,050 Increase (decrease) in due from/to Operating/ Reserve for Replacement Funds 76,820 (76,820) - - Net cash (used in) provided by operating activities (124,769) 1,883,956 1,759,187 (4,916,429) Cash flows from investing activities Purchases of investments (1,660,000) - (1,660,000) (10,593,000) Proceeds from maturity of investments 5,394, ,000 6,129,000 6,369,000 Net cash provided by (used in) investing activities 3,734, ,000 4,469,000 (4,224,000) Net increase (decrease) in cash and cash equivalents 3,609,231 2,618,956 6,228,187 (9,140,429) Cash and cash equivalents Beginning of year 1,911,899 1,166,173 3,078,072 12,218,501 End of year $ 5,521,130 $ 3,785,129 $ 9,306,259 $ 3,078,072 Supplemental disclosure of cash flow information Cash (received) paid during the year for income taxes $ (5,547) $ 8,447 $ 2,900 $ 15,599 The accompanying notes are an integral part of these financial statements. 6

25 Marriott s Kaua i Beach Club Owners Association, Inc. Notes to Financial Statements 1. Summary of Significant Accounting Policies Marriott s Kaua i Beach Club Owners Association, Inc. (the "Association") was incorporated on February 20, 1995 in the State of Hawaii, and commenced operations on October 1, The purpose of the Association is to administer and manage the vacation ownership project created and established as Marriott s Kaua i Beach Club Vacation Ownership Program at the Marriott s Kaua i Resort and Beach Club condominium project (the Ownership Condominium ). As of, the Ownership Condominium consisted of 12,000 unit weeks. The Association s declaration of interval ownership provides that each unit week owner has an undivided interest in the facilities, and, accordingly, the condominium assets are not recorded on the financial records of the Association. The Association is managed under an agreement with Marriott Resorts Hospitality Corporation ( MRHC ). Under an on-site management agreement, MRHC delegated on-site management of the Association to Essex House Condominium Corporation ( Essex ), a subsidiary of Marriott International. Use of 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. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating Fund The Association's fees and earnings from operations, which are restricted for the use and benefit of Association members, are recorded in the Operating Fund. Reserve for Replacement Fund The Association is accumulating funds for future major repairs and replacements. Accumulated funds are held in separate savings accounts and generally are not available for normal operations. Essex, on behalf of the Association s Board of Directors, engages a third-party vendor to conduct ongoing studies to estimate the remaining useful lives and the replacement costs of the components of common property. The table included in the Supplementary Information on Future Major Repairs and Replacements (Unaudited) is based on these studies. The Association will provide funding for major repairs and replacements over the remaining estimated useful lives of the components based on the study s estimates of current replacement costs and considering amounts previously accumulated in the Reserve for Replacement Fund. Accordingly, a funding requirement of $2,138,010 has been included in the 2016 budget. Funds are being accumulated in the Reserve for Replacement Fund based on estimates of future needs for repairs and replacements of common property components. Actual expenditures may vary from the estimated future expenditures, and the variations may be material. Therefore, amounts accumulated in the Reserve for Replacement Fund may not be adequate to meet all future needs for major repairs and replacements. If additional funds are needed, the Association has the right, subject to the Board of Directors' approval, to increase regular assessments, pass special assessments, or delay major repairs and replacements until funds are available. 7

26 Marriott s Kaua i Beach Club Owners Association, Inc. Notes to Financial Statements Cash and Cash Equivalents The Association considers money in checking accounts, money market funds, and certificates of deposit with an original maturity of three months or less, at date of purchase, to be cash equivalents. The Association places its cash and cash equivalents with financial institutions in the United States of America. The Federal Deposit Insurance Corporation ( FDIC ) provides for deposits at FDIC-insured institutions to be insured up to $250,000. Investments Investments consist of certificates of deposit and equity-linked certificates of deposit. The Association s certificates of deposit are carried at amortized cost, as the Association has both the intent and ability to hold them until maturity. Certain certificates of deposit are considered depository accounts and are insured by the FDIC. The Association s equity-linked certificates of deposit are principal-protected structured products. At maturity, the Association will receive their principal plus a supplemental payment or minimum interest, if any, that is based on the performance of an underlying index or market measure. Equity-linked certificates of deposit and treasury inflation-protected securities are adjusted to fair value at the end of each period, with unrealized gains or losses shown as a component of revenues (the Fair Value Option ). The Fair Value Option selected by the Association is considered to provide a more transparent presentation to users of the financial statements. Fair Value Measurements The Association measures certain assets at fair value in accordance with current accounting standards on fair value measurements. The standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. A fair value hierarchy is utilized which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels may be used to measure fair value: Level 1 quoted prices in active markets for identical assets or liabilities. Level 2 quoted prices for similar assets and liabilities in active markets or inputs that are observable. Level 3 inputs that are unobservable (for example cash flow modeling inputs based on assumptions). A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. 8

27 Marriott s Kaua i Beach Club Owners Association, Inc. Notes to Financial Statements The following table summarizes the Association s investments recorded at fair value on a recurring basis at : 2015 Fair Value Measurements Using Level 1 Level 2 Level 3 Total Equity-linked certificates of deposit $ - $ 943,975 $ - $ 943, Fair Value Measurements Using Level 1 Level 2 Level 3 Total Equity-linked certificates of deposit $ - $ 925,000 $ - $ 925,000 Maintenance Fees Receivable Maintenance fees receivable represents an amount due from owners. Effective January 1, 2010, the Association entered into a Foreclosed Inventory Purchase Agreement with Marriott Ownership Resorts, Inc. ("MORI"). This agreement shall automatically renew for any number of additional one (1) year terms, unless either party terminates the agreement with a 45-day written notice. The agreement provides that MORI shall purchase the Association's foreclosed inventory subject to the terms of the agreement. Should either party terminate the agreement, there could be potential exposure regarding the allowance for doubtful accounts and bad debt expense. As of April 13, 2016 the agreement is in full effect and has automatically renewed, and neither party has opted to terminate the agreement. Unearned Maintenance Fees Maintenance fees for all unit weeks are receivables as of the beginning of each timeshare year. Unearned maintenance fees represent prepayment of the next year's maintenance fees. The fees for the unit weeks prior to the Association's year-end are classified as revenues; the remainder is considered unearned maintenance fees. Income Taxes The Association accounts for income taxes in accordance with ASC 740, Income Taxes. ASC 740 utilizes the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax impact attributable to differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered. 9

28 Marriott s Kaua i Beach Club Owners Association, Inc. Notes to Financial Statements Timeshare associations may elect to be taxed as exempt homeowners associations pursuant to Internal Revenue Code Section 528 ( Section 528 ) if they meet certain income, expenditure, and organizational requirements. Section 528 allows electing timeshare associations to be taxed at a 32% rate on their "homeowners association taxable income," which is the excess of the association's gross income, excluding "exempt function income," over related deductions. "Exempt function income" includes membership dues, fees and assessments (less related expenses) from owners of timeshare rights to use, or timeshare ownership interests in, real property. The Association made this election for 2014; accordingly, deferred taxes were not provided for temporary differences related to exempt function income during Timeshare associations may also elect to be taxed as a homeowners association pursuant to Internal Revenue Code Section 277 ( Section 277 ). Under Section 277, the Association is taxed on their nonmembership activities. In addition, the Association may also be taxed on any excess membership income over membership expense. The Association may elect to defer the recognition of the excess membership income under Rev. Rule The Association elected to be taxed pursuant to Section 277 in 2015; as a result, the Association recognized the corresponding deferred tax assets and liabilities at December 31, 2015 for existing temporary differences at that time. The Association has evaluated the effects of the guidance provided by generally accepted accounting principles related to accounting for uncertainty in income taxes. The Association has determined that it had no uncertain income tax positions that could have a significant effect on the financial statements for the year ended December 31, The Association's federal income tax returns for 2012, 2013 and 2014 are subject to examination by the Internal Revenue Service, generally for a period of three years after the federal income tax returns were filed. Cost Allocation Methodology The complex is comprised of HPTMI Hawaii Inc. (the "Hotel"), the Association, Marriott Kaua'i Ownership Resorts, Inc. ( MKORI") and Marriott Ownership Resorts, Inc. (the Developer ). The Hotel s back office accounting system is utilized to record all expenses of these four entities. At the end of each month, allocations are made based on different methodologies to credit the Hotel books and allocate costs to the timeshare and condominium operations. The allocation methodology was developed by a private consultant in 1994 at the request of the Developer with the assistance of Marriott International. These methodologies were then used by the Developer to register the property as a condominium with a hotel and timeshare operation and as the basis for allocating cost since opening in The management company (currently Essex) continues to use these methodologies in allocating costs between the owners of the Condominium Association. The various allocation methodologies are documented in the management company s standard operating procedures. Examples of the major allocation bases are: 1) check-ins, 2) bays cleaned, 3) guest mix, and 4) square footage ownership. Reclassifications Certain items in the 2014 financial statements have been reclassified to conform to the 2015 presentation. The reclassifications had no effect on the (deficit) excess of revenues over expenses/expenditures or fund balances. 10