Association of Apartment Owners of The Phase 2 Keauhou Gardens

Transcription

1 Financial Statements and Supplementary Information Year Ended December 31, 2012

2 Contents Independent Auditor s Report 3 4 Financial Statements Balance Sheet 5 Statement of Revenues, Expenses and Changes in Fund Balances 6 Statement of Cash Flows 7 Notes to Financial Statements 8 15 Supplementary Information Supplementary Information on Future Major Repairs and Replacements 17 2

3 Independent Auditor s Report Board of Directors Association of Apartment Owners of We have audited the accompanying financial statements of Association of Apartment Owners of The Phase 2 Keauhou Gardens (the Association ), which comprise the balance sheet as of December 31, 2012, and the related statements of revenues, expenses and changes in fund balances and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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. Auditor s Responsibility 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 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 the auditor s 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, the auditor considers internal control relevant to the entity 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 entity 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 Association of Apartment Owners of as of December 31, 2012, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the supplementary information on future major repairs and replacements, on page 17, be presented to supplement the basic financial statements. Such information, although not a required 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. This required 201 S. Orange Avenue, Suite 800 Orlando, FL Fax: Lakeland Tampa Winter Haven

4 supplementary information is the responsibility of management. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America. These limited procedures 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. May 9, 2013 Certified Public Accountants 4

5 Balance Sheet December 31, Operating Fund 2012 Replacement Fund Total Assets Cash and cash equivalents $375,025 $432,110 $ 807,135 Investments (Note 2) 380, ,396 Accounts receivable 4,711 4,711 Income tax refund receivable 1,625 1,625 Prepaid expenses 50,199 50,199 Due from replacement fund 32,806 32,806 Liabilities and Fund Balances $464,366 $812,506 $1,276,872 Liabilities: Accounts payable and accrued expenses 99,871 $ $ 99,871 Due to The Phase 2 Kona Coast Resort Owners Association (Note 3) 16,133 16,133 Due to SVC-Management Hawaii LLC (Note 4) 32,359 32,359 Advance deposits 4,000 4,000 Due to operating fund 32,806 32,806 Total liabilities 152,363 32, ,169 Fund balances 312, ,700 1,091,703 $464,366 $812,506 $1,276,872 See accompanying notes to financial statements. 5

6 Statement of Revenues, Expenses and Changes in Fund Balances Year ended December 31, Operating Fund 2012 Replacement Fund Total Revenues: Condominium fee assessments (Note 3) $1,910,195 $763,200 $2,673,395 Marketing fees (Notes 4 and 5) 70,173 70,173 Interest income 399 1,938 2,337 Total revenues 1,980, ,138 2,745,905 Expenses: Maintenance and repairs (Note 4) 593, ,802 Utilities 471, ,070 Housekeeping (Note 4) 355, ,089 Security (Note 4) 218, ,529 Insurance (Note 4) 187, ,441 General and administrative (Note 4) 180, ,336 Professional fees 13,623 13,623 General excise taxes 3,640 3,640 Major repairs and replacements 568, ,354 Total expenses 2,023, ,354 2,591,884 Excess (deficiency) of revenues over expenses before income taxes (42,763) 196, ,021 Income taxes (522) (522) Excess (deficiency) of revenues over expenses (43,285) 196, ,499 Fund balances, beginning of year 355, , ,204 Fund balances, end of year $ 312,003 $779,700 $1,091,703 See accompanying notes to financial statements. 6

7 Statement of Cash Flows Year ended December 31, Operating Fund 2012 Replacement Fund Total Cash flows from operating activities: Excess (deficiency) of revenues over expenses $ (43,285) $196,784 $153,499 Adjustments to reconcile excess (deficiency) of revenues over expenses to net cash provided by (used for) operating activities: Cash provided by (used for): Accounts receivable (1,227) (1,227) Income tax refund receivable 9,732 9,732 Prepaid expenses (12,884) (12,884) Accounts payable and accrued expenses (60,375) (60,375) Due to The Phase 2 Kona Coast Resort Owners Association 16,333 16,333 Due to SVC-Management Hawaii LLC (2,910) (2,910) Net cash provided by (used for) operating activities (94,616) 196, ,168 Cash flows from investing activities: Purchases of investments (1,100,000) (1,100,000) Proceeds from maturities of investments 909, ,677 Net cash used for investing activities (190,323) (190,323) Cash flows from financing activities: Interfund borrowings 148,964 (148,964) Net increase (decrease) in cash and cash equivalents 54,348 (142,503) (88,155) Cash and cash equivalents, beginning of year 320, , ,290 Cash and cash equivalents, end of year $375,025 $432,110 $ 807,135 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 1,625 $ $ 1,625 See accompanying notes to financial statements. 7

8 Notes to Financial Statements Note 1. Nature of Operations and Significant Accounting Policies Nature of Operations Association of Apartment Owners of (the Association ) is a notfor-profit entity responsible for the maintenance of the common area of the condominium property regime known as (the Property ) located on the island of Hawaii. The Association was incorporated on January 1, 1991 and was organized to act as the governing association and management entity within the meaning of the Hawaii Condominium Act (Chapter 514A, Hawaii Statutes). The Association s primary source of revenue is maintenance assessments received from The Phase 2 Kona Coast Resort Owners Association, its sole owner. The Phase 2 Kona Coast Resort Owners Association consists of all the individual unit week owners. The Association and The Phase 2 Kona Coast Resort Owners Association are governed by the same Board of Directors. The affairs of the Association are managed and conducted by the Board of Directors in accordance with the Association s bylaws. Directors are elected to the Board by the membership in accordance with the Association s bylaws. SVC-Hawaii, L.P. (the Developer ), formerly the Kona Coast Resort Limited Partnership which was merged with SVC-Hawaii, L.P., has the right to use and transact on the property any business necessary to consummate the sale, resale and rental of all the unit weeks owned in the Phase 2 of The Kona Coast Resort Interval Owners Association by the Developer until December 31, The Association and the Developer have agreed to continue under the terms of this agreement until a new agreement is executed. The Property is a phased residential timeshare facility. The interval ownership portion of the Property consists of 199 individual units representing 10,147 unit weeks. Individual unit types include one-bedroom and two-bedroom configurations along with certain common elements and amenities. Each unit of the property is subdivided into 51 use weeks and one maintenance week. Under certain circumstances, either the Developer or an owner can convert a fixed-use week to a floating-use plan. Once converted to a floating-use plan, such commitment is irrevocable. In September 2012, the Developer, its parent company and related affiliates were purchased by Wyndham Vacation Resorts, Inc. This change in ownership did not have any impact on the Association s contracts and operating agreements with these entities as of and for the year ended December 31,

9 Notes to Financial Statements Liquidity Assets are presented in the accompanying balance sheet according to their nearness of conversion to cash and liabilities according to their nearness of maturity and resulting use of cash. Fund Accounting To ensure and facilitate the fiduciary responsibility required of the Association regarding restrictions placed on the use of resources available to it, the accounts are maintained in accordance with the principles of fund accounting. The purposes of the various funds and the restrictions on the use of their assets are as follows: Operating Fund All revenues not allocable to the replacement fund are recorded in this fund and are available for normal operating expenditures. Replacement Fund This fund represents funds collected by the Association from the members to fund future replacement, major repairs and purchases of additional commonly owned assets. Expenditures from this fund are restricted to those items for which assessments were paid. Cash Equivalents and Concentration of Credit Risk The Association considers highly liquid investments with an initial maturity of three months or less at date of purchase to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Association has never experienced any losses related to these balances. All of the Association s non-interest bearing cash balances were fully insured at December 31, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and the Association s non-interest bearing cash balances may again exceed federally insured limits. The Association does not believe it is exposed to any significant credit risk on cash and cash equivalents. 9

10 Notes to Financial Statements Investments Investments consist of certificates of deposit, which are carried at amortized cost. The Association intends to hold these securities to maturity. Property and Equipment Real property and common areas acquired from the Developer and related improvements to such property are not recorded in the Association s financial statements because these properties are owned by the individual unit week owners in common and not by the Association. Additions and improvements to real property and common areas are accounted for as major repairs and replacements by the replacement fund. Replacement Fund Hawaii Statutes and the Declaration of Condominium Property Regime require that the Association accumulate funds for future major repairs and replacements. Therefore, a portion of the annual maintenance fee is assessed to fund future major repairs and replacements. Accumulated funds are held in separate interest-bearing bank and investment accounts and are not available to expend for normal operations. The Board of Directors annually approves the budgeted amounts needed to fund the major repair and replacement components of common property. The Association is funding for major repairs and replacements over the estimated remaining useful lives of the components based on a study performed by an independent consulting firm during 2010 and updated internally in 2012, of the components estimated current replacement costs and consideration of amounts previously accumulated in the replacement fund. Actual expenditures may vary from the estimated future expenditures and variations may be material. Therefore, amounts accumulated in the 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 Board of Director approval, to increase regular assessments, pass special assessments, or delay major repairs and replacements until funds are available. Revenue Recognition The Association derives revenue principally through owner assessments. Assessments are billed to the owner annually. Assessments are approved by the Association based upon budgeted expenditures and the owner is assessed accordingly. In the event that assessments exceed the 10

11 Notes to Financial Statements related expenditures in any one year, the excess may be deferred and used to reduce assessments in the subsequent year. Taxes on Income The Association is subject to federal and state income taxes. In determining the amount of income tax liability, the Association must annually decide between two methods of taxation. Under the first method (Form 1120), the excess of revenues from members over related expenses is subject to taxation unless the excess of revenues over expenses is either refunded to members, applied against future assessments or transferred to the replacement fund. Under the second method (Form 1120H), taxation is based on non-exempt function income, which generally consists of income from sources other than member assessments. Under either method, the Association may be subject to taxation on investment and other non-exempt income, but at different tax rates. For the year ended December 31, 2012, the Association filed Form 1120H. The Association also files a Hawaii state corporate income tax return. The Association s federal and state income tax returns remain subject to examination by the Internal Revenue Service for three years from the date of filing. The Association identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. If there were an unrecognized tax benefit, the Association would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Association did not have any unrecognized tax benefits as of December 31, 2012 and does not expect this to change significantly over the next 12 months. As of December 31, 2012, the Association has not accrued any interest or penalties related to uncertain tax positions. Fair Value of Financial Instruments The Association measures and reports its financial assets and liabilities using a three-tier hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to adjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). 11

12 Notes to Financial Statements Level 1 Valuation based on quoted market prices in active markets for identical assets and liabilities. Level 2 Valuation based on quoted market prices for similar assets and liabilities in active markets. Level 3 Valuation based on unobservable inputs that are supported by little or no market activity, therefore requiring management s best estimate of what market participants would use as fair value. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, The Association uses the market approach to measure fair value for its Level 1 financial assets, which include cash equivalents. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, income tax refund receivable, accounts receivable, accounts payable and accrued expenses, and due to related parties. 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events The Association has evaluated events and transactions occurring subsequent to December 31, 2012 as of May 9, 2013, which is the date the financial statements were available to be issued. Subsequent events occurring after May 9, 2013 have not been evaluated by management. No material events have occurred since December 31, 2012 that require recognition or disclosure in the financial statements. 12

13 Notes to Financial Statements Note 2. Investments The Association invests cash balances in certificates of deposit held at various financial institutions, which are insured by the FDIC up to $250,000, and may from time to time exceed insured limits. These investments are maintained to manage the short-term cash requirements of the Association, as well as to provide funds needed to execute the Association s asset replacement programs. Maturity Date Fair Market Value Unrealized Gain (Loss) Amortized Cost of Investment Certificates of deposit 1/28/13 6/12/13 $380,396 $ $380,396 Note 3. Condominium Fee Assessments The Association receives condominium fee assessments from The Phase 2 Kona Coast Resort Owners Association for expenses incurred relative to common area maintenance, insurance and replacement reserves. For the year ended December 31, 2012, condominium fee assessments amounted to $2,673,395. In addition, during 2012, The Phase 2 Kona Coast Resort Owners Association paid for certain property improvements on behalf of the Association. At December 31, 2012, $16,133 was due to The Phase 2 Kona Coast Resort Owners Association for reimbursement of amounts paid for the property improvements. Note 4. Related Party Transactions Shell Vacations LLC Shell Vacations LLC ( Shell Vacations ), the parent company of the Developer, provides assistance to the Association in arranging for insurance coverage. During 2012, allocated insurance premiums amounted to $205,963, of which $21,819 of workers compensation insurance is included in housekeeping, maintenance and repairs, and general and administrative expenses and the remainder is included in insurance expense in the accompanying Statement of Revenues, Expenses and Changes in Fund Balances. As of December 31, 2012, no amounts were due to Shell Vacations. 13

14 Notes to Financial Statements SVC-Management Hawaii LLC The Association entered into a management agreement with Shell Management Hawaii, Inc. which was later assigned to SVC-Management Hawaii LLC (the Manager ), an entity related through common ownership with the Developer. The agreement automatically renews itself for periods of one year each, commencing January 1, until terminated by written notice. The management agreement may be terminated by either party under certain specified conditions. The Manager has the authority to provide all services incidental to management and operation of the property through employees and experts retained by it. These services include administrative and accounting services. Management fees are incurred based upon the amount agreed upon by the Manager and the Board of Directors. Management fees were not incurred during 2012 as agreed to by the Manager and the Board of Directors. During 2012, administrative fees totaled $141,292, and are included in general and administrative expenses in the accompanying Statement of Revenues, Expenses and Changes in Fund Balances. Certain, but not all, operating expenses common to the Association and the resort hotel operations have been allocated to the Association on a pro rata basis according to the number of unit weeks represented. These expenses include, but are not limited to, maintenance, security and landscaping expenses. Taxes and utilities, which are separately metered, are charged directly to the Association. During 2012, operating expenses allocated to the Association amounted to $32,359. The Manager provides all personnel required to operate the property. During 2012, payroll, employee benefit costs and payroll taxes related to these personnel totaled $1,040,883 and are included in housekeeping, security, maintenance and repairs, and general and administrative expenses in the accompanying Statement of Revenues, Expenses and Changes in Fund Balances. At December 31, 2012, $32,359 was due to the Manager. Marketing Fees The Developer entered into several agreements with the Association to market and sell timeshares at the resort. In consideration, the Association is entitled to a marketing fee. The fee is subject to an increase or decrease based on the change in the Consumer Price Index. In January 2012, the combined monthly marketing fee increased from $5,537 to $5,622 plus applicable Hawaii general excise tax. The agreements expired on December 31, 2012, however, the Association and the Developer agreed to continue under the terms of the agreements until new agreements are executed. As of December 31, 2012, no amounts were due from the Developer. 14

15 Notes to Financial Statements Note 5. Leases The Association entered into a five-year lease agreement with the Developer effective January 21, 2009 for use of restaurant space at no cost. As part of the same lease agreement, the Association has sublet this space to a tenant for a term of five years with an option to extend for one consecutive five-year period. The tenant was scheduled to begin paying monthly rent of $1,500 to the Association starting in November In December 2011, the lease agreement was amended to provide rent abatement to the tenant on a monthly basis if certain conditions, as defined, are met by the tenant for the month. If the conditions are not met, rent of $1,500 will be due for the month. The conditions were met by the tenant for all but one month during Accordingly, the Association recognized rental income of $1,500 during 2012 which is included in marketing fees in the accompanying Statement of Revenues, Expenses and Changes in Fund Balances. Note 6. Commitment The Association entered into a Power Purchase Agreement with Sunetric on December 30, 2011, under which Sunetric will install, own, operate and maintain an energy system on the Property. Pursuant to this agreement, the Association has agreed to purchase all of the energy produced by the system. The agreement commenced on December 30, 2011 and will continue for a term of 20 years, with an option to extend the agreement for one additional 10-year term. At the expiration of the original term, the Association has the option to purchase the system for the lesser of the fair market value or 3% of the system install cost on the expiration date. For each month during the term, the Association shall pay Sunetric $0.31 per kilowatt-hour for the amount of energy generated by the system. The foregoing monthly energy price of $0.31 per kilowatt-hour will increase each month by %. If the published electric utility effective rate (the Effective Rate ), as defined, is less than $0.31 per kilowatt-hour, the Association will pay to Sunetric the Effective Rate then in effect for energy generated for that billing period. Concurrent with the execution of the Power Purchase Agreement, the Association entered into a lease with Sunetric pursuant to which it will lease the area of the Property upon which the energy system will be installed for $1. The term of the lease will commence on the effective date of the Power Purchase Agreement and will terminate automatically on the date that is ninety days after the date of expiration or termination of the Power Purchase Agreement. Both the Power Purchase Agreement and the Property lease may be terminated upon certain conditions, as defined. 15

16 Supplementary Information

17 Supplementary Information on Future Major Repairs and Replacements A study was conducted by an independent consulting firm in 2010 which was updated internally by the Manager in 2012 to estimate the remaining useful lives and the replacement costs of the components of common property. The estimates were based on current replacement costs. Funding requirements consider an annual inflation rate of 1.40% and an interest rate of.75% on amounts funded for future major repairs and replacements. The Board of Directors does not designate funds for specific components of common property. Actual replacement costs may vary from these estimates and the variations may be material. The following information is based on the study and presents significant information about the components of common property: Component Estimated Current Replacement Cost 2013 Funding Requirements Replacement Fund Balance at December 31, 2012 Unit furnishings, equipment and other capital expenditures with various remaining useful lives from 1 to 50 years $5,724,965 $638,200 $779,700 17