Memo. Hot Springs Village Property Owners Association Board of Directors Report

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1 Hot Springs Village Property Owners Association Board of Directors Report Memo To: David Twiggs, COO From: Lesley Nalley, CFO LAN Date: March 18, 2015 Re: February 2015 Financial Report The February 2015 financial report is attached and includes the following items: Discussion on Accounting for Annual & Semi Annual Sales Discussion on Accounting for Internal Water, Sewer, & Sanitation Usage Executive Summary & Financial Dashboard Statement of Financial Position Statement of Revenue and Expenses Statement of Capital Additions Annual Sales Recap Golf Reports

2 ACCOUNTING FOR ANNUAL & SEMI-ANNUAL MEMBERSHIP FEES In February s Board meeting, how to account for annual and semi-annual sales was discussed. In years past, annual sales began in November for the next year and ended in February. The revenue for units sold during November and December was held in prepaid fees, until reclassed as revenue in January. The golf reclass entry split the total evenly between all POA-operated golf courses. Other recreational purchases were reclassed into their respective department. The semi-annual sales were recorded as revenue in the month received; i.e. June/July. The January and February 2015 financial statements were prepared using this historical method, pending a decision for any accounting methodology change. The question to be answered for 2015 and beyond is whether to continue this same method or to spread revenue throughout 12 months. There are three main considerations for the decision: 1. What are the audit or external implications? 2. What is the appropriate method for a twelve month spread? 3. How will a change impact reporting and decision making? Audit or External Implications: Our audit period is the full year and, therefore, not a testing of monthly revenue and expense recognition. We are not under governmental or SEC reporting standards. As such, using the Prepaid and Revenue accounts to ensure sales are captured in the correct year sufficiently meets the audit scope. Spread Method: According to Frost, GAAP guidance recommends a monthly straight-line recognition as the appropriate method for these membership-type fees, rather than an allocation based on usage (i.e. trying to ratably match revenue and expense). The premise is that the service is available to members throughout the year, regardless of their chosen usage. For golf, the spread would evenly cover the courses and time period allowed. Other recreational memberships would follow a similar method, tracking in their specific department. Impact to Reporting & Decision Making: When considering annual sales, both units and revenue are important. Reporting at the unit level is unaffected by the change and would continue as a tool used between November and February to identify positive or negative shifts. Comparative financial statements would contain accounting methodology variances until the last 1/12 th was recognized. Such a variance could be easily identified on the Executive Summary because separate accounts are used for annual versus daily revenues. On a granular basis, only the annual fee accounts would contain year over year variances. However, a failure to consider the change s impact, may lead to misinterpreting the YTD total departmental revenues each month. This is an internal decision on how annual sales recognized in lump sums versus spread evenly throughout the year impacts our ability to forecast future results and maintain accountability over current results.

3 Accounting for Internal Water, Sewer, & Sanitation Usage In years past, POA financials have reflected a bi-monthly journal entry to account for internal usage of water, sewer, and sanitation. The underlying calculation is actual usage in each location multiplied by the standard residential rates for water and sanitation. However, the sewer calculation used was one penny per gallon. The January and February financials were prepared using this historical method. The question to be answered for 2015 and beyond is whether to continue this same method or to use a new calculation method. There are four main considerations for the decision: 1. What are the audit or external implications? 2. What is the appropriate calculation method? 3. What is the estimated difference between methods? 4. How will a change impact reporting and decision making? Audit or External Implications: As a non-governmental and non-publically traded entity, our audit tests the materiality of transactions. The difference between residential rates and commercial rates would be immaterial to the audit scope. Calculation Method: According to Frost, using commercial rates for all three categories would be the most appropriate calculation method. The premise is that POA facilities would have to pay commercial rates, if we did not own/operate the services in question. Additionally, since POA buildings would use greater capacity than residential users, a calculation with commercial rates provides a clearer picture between residential and commercial usage. Estimated Difference: The estimated total annual difference to charge commercial rates for all three services is an increase of $20k or less. Impact to Reporting & Decision Making: While the change would result in a higher credit allocation for Public Works and an equally higher expense for the individual departments, there would be a net impact to the bottom line of $0. Comparative financial statements, both year over year and current year to budget, would contain slight accounting methodology variances for the remainder of A failure to consider the change s impact, may lead to misinterpreting Public Works actual spending as being lower and the affected departments as being higher. This is an internal decision on whether to charge commercial rates for POA-owned utilities and how the decision impacts our ability to forecast future results and maintain accountability over current results.

4 Hot Springs Village POA Executive Summary as of February 28, 2015 CASH: HSVPOA ended the month of February with $6.9mil (1) of cash/cash equivalents and planned future spending according to the reconciliation below. The $2.1mil year over year decrease in cash correlates to the increased assets from capital projects (mainly water plant) and the outstanding assessments receivable. ASSESSMENTS RECEIVABLE: In January 2015, the late fee was increased to $7 and assessed on the 31 st day. The previous method was to calculate a penalty and interest after two months. As of March, this change begins to impact the number of members in good standing, since unpaid late fees are considered in the 61 st day of delinquency calculation. Through February 2015, we are collecting more assessments (meaning dollar amount collected) than during the same period in 2014 and The stronger focus on collecting within the first 30 days is producing positive cash results. However, more members are considered not in good standing as a result of unpaid late fees. As a reminder, assessments are due on the first day of each month and a late fee is assessed if any balance remains on the last day. As of February, $14.2mil of assessments have been outstanding for more than a year. With the advice of Mitchell Williams Law Firm, all delinquencies are being evaluated for collectability. Any balances over one year old that are deemed not to be legally or financially feasible to collect will begin to be written off in The Board will be kept apprised of these efforts. Additionally, a recommendation on resuming foreclosure proceedings will be made once the analysis is complete. POA LOTS: As previously mentioned, the Real Estate Held for Resale (19) line on the Statement of Financial Position and related monthly transactions were reviewed with Frost. In years past assessments were calculated on POA owned lots and then partially written off, which impacted the value of POA owned lots, gross revenue, and the allowance for doubtful accounts. GAAP requires these lots to be valued at the lower of cost or market. A $381k lot value adjustment (decrease) will be reflected on the March financials. LIABILITIES: Total liabilities equal $8.3mil (2), with $2.2mil (3) relating to 2015 prepaids, $3.1mil (4) in outstanding operating liabilities, and $1.8mil (5) in bond debt. REVENUE: YTD Gross Revenues total $5.3mil (6), with $503k(7) accrued for assessment bad debt. The YTD comparison reflects two accounting methodology differences. Assessment revenue and bad debt provision each reflect elimination of interest, increase in late fee, and elimination of assessment calculations on POA-owned lots. Public Works reflects the unbilled revenue change. Additionally, golf revenue reflects(12) lower rounds YTD, in addition to lower annual sales.

5 Note that the budgeted Recreation Revenue has been reduced to reflect an audit adjustment made by Frost. The 2015 budget originally included a $439k line related to DeSoto proceeds. Because the funds had not yet been spent on the project, they were being held as unrecognized revenue on the Statement of Financial position. However, Frost advised that the proper treatment was to recognize in 2014 since the insurance claim was closed. The cash remains in our bank, is reserved, and is unaffected by the audit adjustment. The adjustment will be explained during the April audit report presentation. EXPENSE: YTD Operational Expenses total $3.4mil (13), which was $110k less than in The $126k(22) decrease in Golf relates to the change in fertilizer purchase and usage as discussed in the January financial report. The decrease in Administration(21) is mainly a reflection of additional employee contributions for insurance, in accordance with the multiple year change to the amount paid by the POA for employee insurance. The $85k(25) increase in Public Works reflects both spending timing and changes to building and vehicle expense calculations. In past years, these two departments had the majority of their expenses allocated to other departments, both in expense lines and in capital lines, making them difficult to comprehensively assess without detailed analysis. In talking with Frost, it was determined that allocations should be limited, with a deliberate and well defined basis. The timing of road repairs accounts for the remaining Public Works expense difference. While it does not appear to be an actual increase in spending, it is does indicate the need to improve accruals on contract work. We anticipate having better encumbrance tools once the new accounting system is in place and will work to improve our manual systems until that time. The $21.7k(26) decrease in Food & Beverage relates to activities at Desoto and Isabella. NET OPERATING RESULTS: Net excess before depreciation and capital was $1.45mil (14), as compared to $1.74mil in The main contributor to this difference is unbilled revenue recognition. Assuming other activities track to budget, this gap will close once the 2015 Unbilled Revenue entry is made in December. CAPITAL: Capital Spending totals $160k(15) of the $4.6mil budgeted for 2015 and $57k(16) carried forward from HSVPOA's Net Worth is $73mil(18). As a reflection of assets minus liabilities, this number will continue to be analyzed against any fluctuations in the valuation of common property and POA owned lots.

6 Cash & Cash Equivalent Balance $ 6,962,873 Petty Cash & Act 833 Funds (54,341) Outstanding Accounts Payable (841,205) *These items were identified in the 2015 Accrued 2015 Spendingv (2,147,934) budget as desired reserves and represents Remaining Projected Cash Yield from Operations 1,888,281 a total of $2.9mil. A bottom line deficit Remaining 2015 Budgeted Capital (4,569,109) means that all budgeted spending and desired Deferred Vehicle & Equipment Purchase Reserves (750,000) * reserves are not yet fully funded. Deferred Road & Culvert Maintenance Reserve (350,000) * Building Failure Reserve (300,000) * Reserve & spending prioritization will be discussed Balboa Projects Reserve (750,000) * throughout 2015, in accordance with actual Pickleball Reserve (174,000) * operational results. Desired Emergency Reserve (600,000) * Bond Reserve (280,000) Forecasted Available Excess (Deficit) Funds $ (1,965,435) * v - Mainly relates to accrued payroll, insurance, and property taxes Hot Springs Village POA Financial Dashboard as of February 28, 2015 Reconciliation of Projected Cash Usage At a Glance Comparison of Select Financial Data YTD 2015 vs. YTD YTD 2015 YTD Inc/(Decr) %Change $ 2,254,133 $ 2,461,993 Assessments Received $ 207, % $ 3,299,913 $ 2,857,546 Operational Revenue* $ (442,367) % $ 3,553,807 $ 3,443,096 Operating Expenses* $ (110,711) -3.12% $ 425,853 $ 160,852 Capital Spending $ (265,001) % $ 9,064,404 $ 6,962,873 Cash and Cash Equivalents $ (2,101,531) % 17,017 16,255 Golf Rounds (762) -4.48% $ 1,419,477 $ 1,346,355 Golf Revenue $ (73,121) -5.15% 10 6 New Home Permits (4) % Addition Permits % Home Sales % *Does not include penalty revenue, or bad debt expense

7 Hot Springs Village POA Financial Dashboard as of February 28, 2015 Property & Population Statistics Total Commercial & Residential Properties Subject To Assessments 34,418 Total Standing Current Deeded Lots Not Owned by the POA 31,666 24,654 7,012 Lots Owned by the POA 2,364 2,364 - Mortgage held by CCI (Class B) Lots Owned by CCI Time share units Good Samaritan Units* Mt Carmel Units *Beginning in March Good Sam will be billed for 111 units 34,418 27,392 7,026 Good Not Improved vs. Unimproved Lots Improved Lots 8,952 8, Unimproved Lots Not Owned by the POA 23,102 16,196 6,906 Unimproved Lots Owned by the POA 2,364 2,364-34,418 27,392 7,026 Cooper's Commercial Reserved Property (no voting rights, pays a square footage fee) 8 Water Meters Sanitation Service Residential Meters 8,706 At House 579 Under Construction 16 Curbside 8,127 Commercial 152 Commercial 152 Sprinkler Svc only 76 Sprinkler Svc Only 76 POA & Other 113 POA & Other 113 Good Sam 1 Good Sam 1 Mt Carmel 1 Mt Carmel 1 Total Water Meters 9,065 Under construction 16 Total Sanitation 9,065 Population Estimate Residential Meters 8,706 GAC Population Formula 1.60 Estimated Population 13,930

Hot Springs Village POA Financial Dashboard as of February 28, 2015 Assessments Received &

February March April May June July August September October November December 2013

$812,278 $584,739 $2,176,606 2014 $1,525,960 $728,173 $822,844 $866,220 $627,975 $900,293

Assessment Aging Note: The total under 365 days (with penalties) equals $319k of the $14.

89,615 Delinquent Amounts Delinquent Units 44,147 99,488 80,322 37,129 86,347 Under 61,

8 Hot Springs Village POA Financial Dashboard as of February 28, 2015 Assessments Received & Cash Trending 3 Year Comparison $2,100,000 $1,600,000 $1,100,000 $600,000 $100,000 January February March April May June July August September October November December 2013 $1,626,021 $719,069 $834,990 $876,381 $656,413 $936,276 $1,132,871 $623,734 $733,083 $812,278 $584,739 $2,176, $1,525,960 $728,173 $822,844 $866,220 $627,975 $900,293 $1,120,375 $599,342 $766,794 $803,869 $519,045 $1,981, $1,790,439 $671,554 Assessment Aging Note: The total under 365 days (with penalties) equals $319k of the $14.5mil outstanding. 89,615 Delinquent Amounts Delinquent Units 44,147 99,488 80,322 37,129 86,347 Under 61, 1,968 Under 61 86,001 14,242,120 72, , ,919,048 Over 365, 5, , , 195 Assessment Only Assessment w/ Penalties & Interest Over 365

9 HOT SPRINGS VILLAGE POA Comparative Statement of Financial Position as of February 28, 2015 February February ASSETS CASH AND CASH EQUIVALENTS (1) $ 6,962,873 $ 9,064,404 MEMBERSHIP ASSESSMENT RECEIVABLE GROSS 14,562,346 11,407,212 LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS (14,133,139) (11,050,421) OTHER MEMBERSHIP RECEIVABLES 1,119,099 1,046,814 OTHER RECEIVABLES 2,880 8,619 INVENTORIES 599, ,536 PREPAID EXPENSES 209, ,539 REAL ESTATE HELD FOR SALE, NET REALIZABLE VALUE (19) 2,151,110 1,763,983 RECOVERABLE ELECTRIC COSTS GROSS 8,000,000 8,000,000 LESS ALLOWANCE FOR UNCOLLECTIBILITY (4,000,000) (4,000,000) PROPERTY AND EQUIPMENT, Net of Accumulated Depr. 65,850,365 65,595,318 TOTAL ASSETS $ 81,324,707 $ 82,905,005 LIABILITIES AND MEMBERSHIP EQUITY LIABILITIES ACCOUNTS PAYABLE (4) $ 841,205 $ 767,801 ACCRUED EXPENSES (4) 2,344,825 1,726,494 PREPAID MEMBERSHIP ASSESSMENTS AND OTHER FEES (3) 2,261,565 2,357,741 SECURITY DEPOSITS & OTHER DEPOSITS 1,048, ,655 BONDS PAYABLE (5) 1,815,000 2,085,000 TOTAL LIABILITIES (2) 8,311,281 7,715,692 MEMBERSHIP EQUITY UNDESIGNATED 71,914,279 71,914,279 DESIGNATED FOR FUTURE REPAIRS & REPLACEMENT 1,099,146 3,275,034 TOTAL MEMBERSHIP EQUITY (18) 73,013,425 75,189,313 TOTAL LIABILITIES AND MEMBERSHIP EQUITY $ 81,324,707 $ 82,905,005

10 HOT SPRINGS VILLAGE POA Comparative Statements of Revenue and Expenses Months ended February 28, 2015 and February 28, 2014 Actual YTD 2015 Increase Budget Budget Feb Feb (Decrease) Remaining Membership Assessment Revenue 15,377,638 2,405,295 2,521,163 (115,868) 12,972,343 Assessment Penalties & Other 1,024, , ,278 (20,206) 888,927 Provision for future Bad Debt (7) (3,453,080) (503,542) (678,010) (174,468) 2,949,538 Net Assessment Revenue 12,948,558 2,036,825 1,998,431 Administration REVENUE 511,600 63,898 70,419 (6,520) 447,702 EXPENSE(21) (2,989,960) (545,070) (563,135) (18,064) 2,444,890 Net Administration (2,478,360) (481,172) (492,716) Public Safety REVENUE 755, , , ,889 EXPENSE (4,249,271) (662,669) (697,243) (34,575) 3,586,602 Net Public Safety (3,493,651) (522,938) (557,687) Public Works REVENUE 6,828, ,924 1,284,914 (346,990) 5,890,546 EXPENSE(25) (7,345,846) (952,088) (866,587) 85,501 6,393,758 Net Public Works (517,376) (14,164) 418,327 Planning & Inspection REVENUE 140,000 22,393 34,335 (11,943) 117,607 EXPENSE (400,270) (43,229) (41,620) 1, ,041 Net Planning & Inspection (260,270) (20,837) (7,285) Food & Beverage REVENUE 244,400 21,753 18,280 3, ,647 EXPENSE(26) (402,560) (41,483) (63,235) (21,752) 361,077 Net Food & Beverage (158,160) (19,729) (44,955) Golf REVENUE (12) 6,501,540 1,346,355 1,419,477 (73,121) 5,155,185 EXPENSE (22) (7,669,548) (829,768) (956,601) (126,833) 6,839,780 Net Golf (1,168,008) 516, ,875 Recreation REVENUE 1,030, , ,932 (7,441) 705,354 EXPENSE (2,564,022) (368,789) (365,385) 3,404 2,195,233 Net Recreation (1,533,176) (43,297) (32,453) 15 Budget 15 Actual 14 Actual Inc/(Decr) Budg. Rem. Gross Revenue (6) $ 32,414,114 $ 5,397,913 $ 5,976,354 $ (578,441) 27,016,201 Bad Debt Expense (3,453,080) (503,542) (678,010) (174,468) 2,949,538 Operational Expense (13) (25,621,477) (3,443,096) (3,553,807) (110,711) 22,178,381 Excess (Deficit) Before Depr. (14) $ 3,339,557 $ 1,451,276 $ 1,744,537 1,888,281 Depreciation $ (600,051) $ (566,915) $ 33,136 $ 600,051

11 HOT SPRINGS VILLAGE POA Statement of Capital Additions as of February 28, 2015 YTD Annual Budget 2015 Budget Remaining 2014 Projects Carried Forward $ 35,000 $ 57,000 $ 22,000 Administration 42, , ,883 Public Safety 18,201 58,000 39,799 Public Works 27, , ,186 Club Services and Facilities - 2,211,000 2,211,000 Golf - 849, ,681 Parks and Recreation 33, , ,291 Construction 5, , ,269 Total Capital Additions (15) $ 160,852 $ 4,729,961 $ 4,569,109 Projects carried over from 2014: PW Striping Machine $ 5,000 IT - Total e Budgeted but not yet billed (Funds now used) 35,000 Recreation Bridge Project 17,000 Total 2014 Capital to be Carried forward to 2015 (16) 57,000

12 HOT SPRINGS VILLAGE POA Annual Sales Recap February 28, 2014 vs. February 28, FINAL Increase 11/30/ /31/2013 1/31/2014 2/28/ /31/2014 1/31/2015 2/28/2015 (Decrease) GREEN FEES* GREEN FEES 6 MO* CART LEASE~ CART LEASE 6 MO~ HANDICAP PRIVATE CART DAILY PRIVATE CART PRIVATE CART Grandfather CORONADO FITNESS CENTER CORONADO TENNIS PICKLE, BOCCE & LAWN BOWLING MOTORIZED BOATS NON-MOTORIZED BOATS VEHICLES REGISTERED PET REGISTRATIONS *Total Green Fees ~Total Cart Lease Note: The 2015 totals do not include any no charge items such as employee decals, fitness center volunteers, etc. The 2014 totals were taken as presented in the previous CFO's reports.

13 Revenue FEBRUARY 2014 MTD 2015 MTD Difference 2014 YTD 2015 YTD Difference Member Green Fee $ 75,269 $ 58,350 ($16,919) $140,025 $149,151 $9,126 Family Green Fee $ 1,186 $ 3,183 $1,997 $1,964 $6,208 $4,244 NPO Green Fee $ 5,352 $ 480 ($4,872) $7,892 $1,667 ($6,225) Annual Greens Fee $ 20,944 $ 2,216 ($18,728) $665,896 $632,023 ($33,873) Semi-annual Greens Fee $ 3,472 $ 2,680 ($792) $104,944 $89,736 ($15,208) Total Annual Greens Fee $ 24,416 $ 4,896 ($19,520) $ 770,840 $ 721,759 ($49,081) Driving Range $ 7,580 $ 5,119 ($2,461) $12,640 $12,925 $285 Cart Flags $ 400 $ 160 ($240) $472 $160 Member Carts $ 37,705 $ 27,067 ($10,638) $68,065 $67,580 ($485) Family Carts $ 719 $ 1,711 $992 $1,089 $3,313 $2,224 NPO Carts $ 2,917 $ 395 ($2,522) $4,276 $1,105 ($3,171) Unlimited Annual Cart Reg. $ 2,648 $ 1,424 ($1,224) $133,264 $126,264 ($7,000) Daily Annual Cart Reg. $ 728 $ 464 ($264) $18,408 $19,128 $720 Daily Use Cart Fee $ 1,714 $ 1,336 ($378) $3,057 $3,352 $295 Annual Cart Seat Lease $ 6,152 $ 1,152 ($5,000) $186,928 $166,192 ($20,736) Semi-annual Cart Seat Lease $ 792 $ 392 ($400) $33,312 $30,080 ($3,232) Total Annual Cart Seat Lease $ 6,944 $ 1,544 ($5,400) $ 220,240 $ 196,272 ($23,968) Handicap $ 2,200 $ 1,336 $37,112 $36,848 Vending Income $ 124 $124 $83 $343 $260 Contractual Receipts/Misc $ 48 $ 145 $97 $50 $280 $230 Administration $0 $0 Total $ 169,826 $ 107,734 ($62,092) $ 1,419,477 $ 1,346,355 ($73,122) Rounds 2014 MTD 2015 MTD Difference 2014 YTD 2015 YTD Difference DeSoto ,683 1,683 Cortez 1, (729) 3,257 2,530 (727) Coronado (197) 1,294 1, Balboa (469) 1,794 1,586 (208) Ponce de Leon 1,580 1,085 (495) 2,647 2,584 (63) Magellan 1, (534) 1,708 1,358 (350) Isabella 1,898 1,265 (633) 3,593 3,014 (579) Granada 1, (517) 2,724 2,188 (536) Total 9,353 6,381 (2,972) 17,017 16,255 (762) 2015 Golf Reports.xlsx Printed 3/13/2015 9:17 AM

14 Rounds and Revenue 2015 Budget vs. Actual 2015 February YTD February YTD Rounds Rounds Revenue Revenue Budget Actual Budget Actual Budget Actual Budget Actual Desoto ,695 1,683 $38,185 $11,014 $198,435 $160,283 Cortez 1, ,832 2,530 $26,700 $16,750 $175,250 $172,720 Coronado ,653 1,312 $12,585 $8,202 $149,425 $151,131 Balboa 1, ,967 1,586 $11,025 $8,457 $150,975 $155,493 Ponce 1,243 1,085 2,388 2,584 $27,320 $18,443 $171,840 $174,271 Magellan 1, ,623 1,358 $15,975 $10,310 $155,210 $154,356 Isabella 1,618 1,265 3,259 3,014 $32,660 $19,369 $184,235 $176,478 Granada 1, ,158 2,188 $25,510 $13,687 $172,750 $164,613 Admin $2,180 $1,502 $42,210 $37,010 Misc Totals 9,863 6,381 19,575 16,255 $192,140 $107,734 $1,400,330 $1,346, vs vs February YTD February YTD 2015 Rounds Rounds Revenue Revenue Desoto ,683 $3,018 $11, ,527 $160,283 Cortez 1, ,257 2,530 $22,334 $16, ,675 $172,720 Coronado ,294 1,312 $29,831 $8, ,409 $151,131 Balboa ,794 1,586 $21,380 $8, ,908 $155,493 Ponce 1,580 1,085 2,647 2,584 $13,184 $18, ,016 $174,271 Magellan 1, ,708 1,358 $31,224 $10, ,909 $154,356 Isabella 1,898 1,265 3,593 3,014 $16,677 $19, ,370 $176,478 Granada 1, ,724 2,188 $29,577 $13, ,075 $164,613 Admin $2,602 $1,502 37,588 $37,010 Misc $0 $ - Totals 9,353 6,381 17,017 16,255 $169,826 $107,734 1,419,477 $ 1,346, Golf Reports.xlsx Printed 3/13/2015 9:17 AM

Memo. Hot Springs Village Property Owners Association Board of Directors Report

Memo. Hot Springs Village Property Owners Association Board of Directors Report Hot Springs Village Property Owners Association Board of Directors Report Memo To: David Twiggs, COO From: Lesley Nalley, CFO LAN Date: February 18, 2015 Re: January 2015 Financial Report The January 2015