Contents Independent auditor s report 1-2 Financial statements Balance sheet 3 Statement of revenues, expenses and changes in fund (deficit) balance 4 Statement of cash flows 5 Notes to financial statements 6-10 Required supplementary information on future major repairs and replacements (unaudited) 11 Supplementary information Schedule of revenues and expenses - Operating Fund 12
Emphasis of Matter As discussed in Notes 4 and 6 to the financial statements, the Association has significant transactions and balances with related parties. Our opinion is not modified with respect to this matter. Other Matters Accounting principles generally accepted in the United States of America require that the supplemental information on future major repairs and replacements on page 11 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, which 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. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary schedule of revenues and expenses - Operating Fund is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information, except for that portion marked unaudited, has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. The information marked unaudited has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. In our opinion, except for that portion marked unaudited, the information is fairly stated in all material respects in relation to the financial statements as a whole. Las Vegas, Nevada April 26, 2016 2
Balance Sheet December 31, 2015 Assets Operating Replacement Fund Fund Total Cash $ 542,207 $ 776,047 $ 1,318,254 Restricted cash 56,984-56,984 Certificate of deposit - - - Accounts receivable, net of allowance for doubtful accounts $165,476 13,266-13,266 Prepaid expenses and deposits 32,885-32,885 Capital assets, net 10,362-10,362 Due (to) from other fund (93,973) 93,973 - Due from developer 98,335-98,335 Due from affiliates 893-893 Total assets $ 660,959 $ 870,020 $ 1,530,979 Liabilities and Fund (Deficit) Balance Liabilities: Accounts payable and accrued expenses $ 123,765 $ 32,543 $ 156,308 Prepaid assessments 449,799 97,332 547,131 Due to developer 89,023-89,023 Total liabilities 662,587 129,875 792,462 Commitments (Notes 4 and 5) Fund (deficit) balance (1,628) 740,145 738,517 Total liabilities and fund (deficit) balance $ 660,959 $ 870,020 $ 1,530,979 See notes to financial statements. 3
Statement of Revenues, Expenses and Changes in Fund (Deficit) Balance Year Ended December 31, 2015 Operating Replacement Fund Fund Total Revenues: Member assessments $ 1,122,973 $ 297,892 $ 1,420,865 Other revenue 20,412-20,412 Food and beverage revenue 31,006-31,006 Total revenues 1,174,391 297,892 1,472,283 Expenses: Payroll and related 570,607-570,607 Major repairs and replacements - 281,355 281,355 Management fees 137,424-137,424 Bad debt 127,034-127,034 Developer delinquency contribution (97,449) - (97,449) Bad debt recoveries (11,502) - (11,502) Utilities 113,186-113,186 Administration 97,601-97,601 Insurance 40,668-40,668 Housekeeping 34,559-34,559 Maintenance 34,537-34,537 Administrative 34,494-34,494 Grounds 23,996-23,996 Restaurant 14,535-14,535 Depreciation 5,181-5,181 Total expenses 1,124,871 281,355 1,406,226 Excess of revenues over expenses 49,520 16,537 66,057 Fund (deficit) balance, beginning of year (51,148) 723,608 672,460 Fund (deficit) balance, end of year $ (1,628) $ 740,145 $ 738,517 See notes to financial statements. 4
Statement of Cash Flows Year Ended December 31, 2015 Operating Replacement Fund Fund Total Cash flows from operating activities: Excess of revenues over expenses $ 49,520 $ 16,537 $ 66,057 Adjustments to reconcile excess of revenues over expenses to net cash provided by operating activities: Bad debt 127,034-127,034 Depreciation 5,181-5,181 Changes in: Restricted cash (56,984) - (56,984) Accounts receivable (140,300) - (140,300) Prepaid expenses and deposits 5,346-5,346 Due from developer 162,189-162,189 Due from affiliates 190-190 Accounts payable and accrued expenses 45,915 (1,120) 44,795 Prepaid assessments (5,896) 6,056 160 Due to developer 65,721-65,721 Due to affiliates (25,765) - (25,765) Net cash provided by operating activities 232,151 21,473 253,624 Cash flows from financing activities: Interfund borrowings, net (224,304) 224,304 - Net cash (used in) provided by financing activities (224,304) 224,304 - Net increase in cash 7,847 245,777 253,624 Cash, beginning 534,360 530,270 1,064,630 Cash, ending $ 542,207 $ 776,047 $ 1,318,254 See notes to financial statements. 5
Notes to Financial Statements Note 1. Nature of Organization and Summary of Significant Accounting Policies Nature of organization: Charter Club of Naples Bay Owners Association, Inc. (the Association) was incorporated under the laws of the State of Florida as a not-for-profit corporation for the purpose of managing, operating and maintaining a timeshare condominium located in Naples, Florida. Operations of the Association began in 1979, and the administration was assumed by Island One, Inc., a subsidiary of Diamond Resorts Corporation (the Developer), as of April 2013. At December 31, 2015, the Association consists of 1,683 weekly interval units, of which the Trust owns 303 and the Developer owns 187. As intervals are foreclosed and transferred to the Developer, they are assigned to Diamond Resorts U.S. Collection Members Association (the Trust). At that time, the Trust becomes the owner of the interval and is responsible for payment of the maintenance assessments. Both the Trust and Developer are affiliated with the Association through common management. The Association s financial statements were prepared pursuant to Chapters 718 and 721 of the Florida Statutes. A summary of the Association s significant accounting policies follows: 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. Significant estimates in the financial statements include allowance for doubtful accounts, useful lives of capital assets and reserve funding requirements. Fund accounting: The Association s governing documents provide certain guidelines for governing its financial activities. To ensure observance of limitations and restrictions on the use of financial resources, the Association maintains its accounts using fund accounting. Financial resources are classified for accounting and reporting purposes in the following funds established according to their nature and purpose: Operating Fund: This fund is used to account for financial resources available for the general operations of the Association. Replacement Fund: This fund is used to accumulate financial resources designated for future major repairs and replacements. Accumulated funds are held in separate savings accounts and generally are not available for normal operations. The Board of Directors (the Board) is funding for major repairs and replacements over the remaining estimated useful lives of the components based on estimates of current replacement costs and considering amounts previously accumulated in the Replacement Fund. Accordingly, the funding requirement of $296,627 has been included in the fiscal year 2016 budget. The minimum funding requirement per the Florida Statute 721.07 is $414,894. Funds are being accumulated in the Replacement Fund based on estimates of future needs for repair and replacement of common property components. Actual expenditures may vary from the estimated future expenditures, and the variations may be material. Therefore, the amounts accumulated in the Replacement Fund may not be adequate to meet future needs for major repairs and replacements. If additional funds are needed, the Association has the right, subject to the Board s approval, to increase regular assessments, pass special assessments and/or delay major repairs and replacements until funds are available. 6
Notes to Financial Statements Note 1. Nature of Organization and Summary of Significant Accounting Policies (Continued) Cash: At various times during the year, the Association maintained cash balances at financial institutions in excess of federally insured limits. The Association has not experienced any losses in such accounts. Restricted cash: Restricted cash consists of funds held in escrow for the payment of real estate taxes. Assessments receivable and allowance for doubtful accounts: Assessments receivable represent amounts due from interval owners for maintenance and taxes. The budgeted amount of the annual assessment for the Replacement Fund is funded from annual cash receipts. The Association provides for estimated future losses to be incurred due to uncollectible assessments at amounts deemed to be sufficient to sustain any material losses that may result from unpaid accounts. Member assessments for 2015 were due on January 1, 2015. Interest of 10 percent per annum from the due date and a $25 late fee are assessed on all delinquent accounts after assessments are one day past due, and recognized as income when collected due to uncertainty of realization. Accounts left unpaid on March 1 may be submitted for collection action, resulting in additional collection fees. Some owners are established with anniversary billings and payments are due on the first day of the anniversary month. At December 31, 2015, all outstanding assessments receivable over 90 days past due were fully reserved, and an estimate for outstanding balances less than 90 days is recorded at year-end. Delinquent 2015 Operating Fund assessments are covered under the delinquent Interval Recovery and Assignment Agreement (IRAA) as described in Note 6. For the year ended December 31, 2015, the Association recorded net bad debt expense of $18,083. Prepaid expenses and deposits: Prepaid expenses and other assets consist primarily of 2016 insurance expenses paid to various insurance companies as well as other general prepaid operating expenses. Capital assets: Real and common area property acquired from the Developer and others, and related improvements to such property, are not recognized in the Association s financial statements. Those properties are owned by the individual unit owners in common and not by the Association. Replacements, major repairs and the purchase of additional commonly owned assets are accounted for as expenditures in the Replacement Fund. Prepaid assessments: Prepaid assessments consist of 2016 and future assessments received by the Association in 2015. Revenue recognition: Annual member assessments are due on the first day of the second month following the billing date. Since the Association collects member assessments revenue before it is earned, the Association recognizes revenue according to the proportional performance method. All other revenues are recognized when earned, which is when services are provided and collection is certain. Income taxes: The Association accounts for income taxes utilizing 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 bases 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. The Association has no temporary differences relating to the recognition of income and expenses for financial and tax reporting purposes. Accordingly, no deferred tax assets or liabilities have been recorded. 7
Notes to Financial Statements Note 1. Nature of Organization and Summary of Significant Accounting Policies (Continued) The Association has elected to be taxed as an exempt homeowners association pursuant to Internal Revenue Code Section 528. Section 528 allows electing timeshare associations to be taxed at a rate of 32 percent on their timeshare association taxable income, which is the excess of the association s gross income, excluding exempt function income, over related expenditures. Exempt function income includes membership dues, fees and assessments (less related expenses) from timeshare owners rights to use, or timeshare ownership interests in, real property. The Association follows guidance issued by the Financial Accounting Standards Board (FASB) on accounting for uncertainty in income taxes. The Association has evaluated its tax positions and concluded that the Association has taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. Generally, the Association is no longer subject to income tax examinations by the U.S. federal tax authorities for years prior to 2012. Recent accounting pronouncement: In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in accounting principles generally accepted in the United States of America when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 one year, making it effective for annual reporting periods beginning after December 15, 2018. The Association has not yet selected a transition method and is currently evaluating the effect that the standard will have on the consolidated financial statements. Subsequent events: Subsequent events have been evaluated through April 26, 2016, the date the financial statements were available to be issued. Note 2. Member Assessments Pursuant to the Timeshare Declaration and By-Laws of the Association, assessments (both regular and special) are allocated to the unit owners in the proportions or percentages provided in the declaration. The annual budget and member assessments are determined by the Board. The 2015 annual assessments to weekly interval owners were as follows: Maintenance $ 667 Replacement Fund 177 Real estate taxes $ 41 885 The Association is collecting assessments for real estate taxes and remits real estate tax payments on behalf of individual unit owners. Therefore, the real estate tax assessments and the related expenses are not presented on the Association s statement of revenues, expenses and changes in fund (deficit) balances. 8
Notes to Financial Statements Note 3. Capital Assets Capital assets consist of the following as of December 31, 2015: Furniture and fixtures $ 25,905 Less accumulated depreciation (15,543) Capital assets, net $ 10,362 Note 4. Management Agreement The property and affairs of the Association are managed by Diamond Resorts Management, Inc. (the Management Company), a subsidiary of the Developer. Under the terms of the management agreement, the Association agrees to pay a monthly management fee of 14 percent of the estimated cost of providing the services set forth in the estimated operating budget, excluding reserves. Management fees incurred under this agreement during the year ended December 31, 2015 amounted to $137,424. The agreement is automatically renewed for a period of three years unless terminated under provisions of the agreement. The current term expires in December 2017. Note 5. Replacement Fund The Association s governing documents and Florida Statutes require the Association to accumulate funds for future major repairs and replacements. The funds are held in segregated accounts and all interest and investment income earned on these accounts is allocated to the Replacement Fund. An independent specialist conducted a study in 2015 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, which is unaudited, is based on the study, as updated by management. The following table presents the activity in the Replacement Fund by component for the year ended December 31, 2015: Fund Balance Fund Balance (Deficit) (Deficit) December 31, December 31, Components 2014 Additions Expenditures 2015 Building and equipment $ (132,318) $ 23,666 $ 63,953 $ (172,605) Common area (23,674) 11,049 96,547 (109,172) Exterior building (10,024) 12,866-2,842 Furniture, fixtures and equipment 834,355 229,015 120,855 942,515 Mechanical and electrical 277 1,990-2,267 Pavement and resurfacing 22,606 6,418-29,024 Roofing 32,386 12,888-45,274 $ 723,608 $ 297,892 $ 281,355 $ 740,145 At December 31, 2015, the Association had a payable from the Operating Fund to the Replacement Fund in the amount of $93,973. 9
Notes to Financial Statements Note 6. Related-Party Transactions The Association is affiliated through common ownership and management with other owners associations through its relationship with the Developer and Management Company. In addition, one Board member of the Association is an employee of the Developer and Management Company. In January 2015, the Association entered into the IRAA with the Developer for the recovery of delinquent member interval assessments. Under the agreement, the Developer has agreed to pay the cost of recovery on the intervals from delinquent owners in exchange for the assignment of ownership rights of the recovered intervals. Upon recovery of each interval, the Association shall execute a deed transferring ownership of the interval directly to the Developer. The agreement automatically renews annually on January 1, and the Developer is responsible for the current year s regular maintenance and tax assessments on delinquent intervals at the measurement date in accordance with the agreement. Member assessments determined to be delinquent under the agreement and payable by the Developer were $97,449 at December 31, 2015, all of which was for 2015 assessments. During 2015, the Association recorded the following assessment revenue from related parties: Operating Replacement Fund Fund Total Developer $ 30,240 $ 18,560 $ 48,800 Trust 279,573 61,803 341,376 Due from Developer consists of amounts due under the IRAA for maintenance fees billed and unpaid as of December 31, 2015. Due from affiliates represents amounts owed to the Association by other homeowners associations affiliated through common management. Due to Developer represents amounts paid on the Association s behalf and amounts due for management fees. Amounts due to and from related parties are unsecured, noninterest bearing and due on demand. Management assesses the collectibility of amounts due from related parties based on estimated net cash flows to be generated by the related parties and has determined that receivables from related parties are not impaired. 10
Required Supplementary Information on Future Major Repairs and Replacements (Unaudited) The Board estimated the remaining useful lives and the replacement costs of the components of common property. Replacement costs were based on the estimated costs to replace the common property components at the date of the study. The following table is based on that study, as updated by management, and presents significant information about the components of common property: Estimated Estimated 2016 Fund Balance Remaining Current Minimum 2016 (Deficit) Useful Lives Replacement Funding Budgeted December 31, Components (Years) Cost Requirement Funding 2015 Building and equipment 1-14 $ 282,234 $ 192,766 $ 137,818 $ (172,605) Common area 1-13 131,772 119,308 85,299 (109,172) Exterior building 1-20 153,439 7,530 5,383 2,842 Furniture, fixtures and equipment 1-23 2,731,189 77,768 55,600 942,515 Mechanical and electrical 1-9 23,734 2,385 1,705 2,267 Pavement and resurfacing 1-9 76,543 5,280 3,775 29,024 Roofing 11 153,700 9,857 7,047 45,274 $ 3,552,611 $ 414,894 $ 296,627 $ 740,145 11
Schedule of Revenues and Expenses - Operating Fund Year Ended December 31, 2015 Budget Actual (Unaudited) Revenues: Member assessments $ 1,122,973 $ 1,122,973 Other revenue 20,412 20,830 Food and beverage revenue 31,006 37,427 Total revenues 1,174,391 1,181,230 Expenses: Payroll and related 570,607 576,167 Management fees 137,424 137,424 Bad debt 127,034 52,817 Developer delinquency contribution (97,449) - Bad debt recoveries (11,502) (52,817) Utilities 113,186 117,736 Administration 97,601 75,164 Insurance 40,668 35,700 Housekeeping 34,559 46,213 Maintenance 34,537 43,476 Administrative 34,494 34,494 Grounds 23,996 25,271 Restaurant 14,535 17,285 Depreciation 5,181 - Front desk - 2,165 Occupancy/accommodation tax - 3,366 Net surplus - 66,769 Total expenses 1,124,871 1,181,230 Excess of revenues over expenses $ 49,520 $ - 12