SANDS OF KAHANA VACATION CLUB REPORT ON AUDIT OF FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2010
CONTENTS INDEPENDENT AUDITOR'S REPORT PAGE 1 FINANCIAL STATEMENTS: BALANCE SHEET STATEMENT OF OPERATIONS STATEMENT OF CHANGES IN MEMBERS' EQUITY STATEMENT OF CASH FLOWS 2 3 4 5 NOTES TO FINANCIAL STATEMENTS 6-12 SUPPLEMENTARY INFORMATION: REPORT ON SUPPLEMENTARY INFORMATION SUPPLEMENTARY INFORMATION ON FUTURE MAJOR REPAIRS AND REPLACEMENTS 13 14
CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT Board of Directors Sands of Kahana vacation Club We have audited the accompanying balance sheet of Sands of Kahana Vacation Club as of December 31, 2010, and the related statements of operations, changes in members' equity, and cash flows for the then ended. These financial statements are the responsibi ity of the Sands of Kahana Vacation Club's management. 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sands of Kahana Vacation Club as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Honolulu, Hawaii February 12, 2011 Accountants ECA llp FKA ERWIN CABRINHA & AU llp, 598 HAlEKAUWILA STREET HONOLULU, HAWAII 96813 (BOB) 533-4244. FAX (B08) 599-2505 ' TOLL FREE (888) 533-4244. WWW.ECA-ADVISORS,COM
SANDS OF KAHANA VACATION CLUB (A Non-Profit Corporation).!it\.LANCE SHEE'l' PECEMBER 31, 2010 ASSETS CURRENT ASSETS: Cash $ 4,236,286 Accounts receivable: Members, less allowance of $508,300 for doubtful accounts 969,414 Other receivables 72,423 Prepaid expenses 163,155 Real estate units TOTAL CURRENT ASSETS 5,452,278 LAND AND EQUIPMENT, net 11,494,274 DEPOSIT k~~ilities AND MEMBERS' EOUITY $17,134,052 CURRENT LIABILITIES: Accounts payable and accrued expenses $ 311,295 Due to related parties 39,711 Deferred income 1,181,822 Prepaid assessments 813,310 Current portion of long-term debt 987 000 TOTAL CURRENT LIABILITIES 3,333,138 LONG-TERM DEBT, less current portion 8,064,893 COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY See accompanying notes to financial statements. 2
SANDS OF KAHANA VACATION CLUB (A Non-Profit Corporation) STATEMENT OF QPERATIONS YEAR J~NDED DECEMBER 31, 2 010 LAND OPERATING PURCHASE FUND FUND TOTAL REVENUES; Common assessments $ 4,329,803 $ $ 4,329,803 Real property tax 2,236,090 2,236,090 Assessment - Master Association 1,969,193 1, 969,193 Land lease 773,945 773,945 Rental income 710,207 710,207 Other 156,783 156,783 Interest income 138 26 164 10,176,159 26 10,l76,185 EXPENSES: Real property tax 2,125,989 2,125,989 Operating 2,261,656 2,261,656 Assessments - Master Association 1,900,038 1,900,038 Administrative and general 680,666 680,666 Land lease 620,033 620,033 Interest 578,614 578,614 Management fees 485,939 485,939 Utilities 304,627 304,627 Bad debts 202,042 78,097 280,139 Maintenance 207,091 207,091 Reservation fees 92,599 92,599 Taxes, other than income 1 907 150 907 9 656 711 98 EARNINGS 1, 144, 572 656(685) 487,887 OTHER: Replacement of furnishings and equipment 499(085) 499 085 NET EARNINGS 645 487 11 198 See accompanying notes to financial statements. 3
SANDS OF KAHANA VACATION CLUB (A Non-Profit Corporation) STATEMENT OF CHANGES IN MEMBERS' EOUITY YEAR ENDED DECEMBER 31, 2010 BEGINNING BALANCE, January 1, 2010 NET EARNINGS GENERAL FUND ASSESSMENT LAND PURCHASE FUND ASSESSMENT ENDING BALP.NCE, December 31, 2010 LAND OPERATING GENERAL PURCHASE DEFICIT FUND FUND TOTAL ($L 656, 884) $3,764,348 $L 985,271 $4,092,735 645,487 656,685) 11,198) 87,150 87,150 1 67 334 1 567 334 $3,851,498 895 920 5 736 021 See notes to financial statements. 4
SANDS OF KAHANA VACATION CLUB (A Non-Profit Corporation) ~ratement O~H ~LOWS YEAR ENDED DECEMBER 31, 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net losses ($ 11,198) Reconciliation of net losses to net cash used from operating activities Allowance for doubtful accounts 280,140 (Increase) decrease in assets and increase (decrease) in liabilities: Accounts receivable 317(580) Other receivable 71,582) Prepaid expenses 5,032 Inventory 46,500 Accounts payable and accrued expenses 114,481 Related party payable 42(588) Deferred income 218,254) Prepaid assessments Net cash used by operating activities 737,380) CASH FLOWS FROM FINANCING ACTIVITIES: Principal repayments of long-term debt 928(706) Land purchase fund assessment 1, 567,334 General fund assessment 87 0 Net cash provided by financing activities 725,778 NET DECREASE IN CASH 11(602) CASH, January 1, 2010 4,247,888 CASH, December 31, 2010 236 286 SUPPLEMENTARY CASH FLOW INFORMATION: Interest paid during the period 583 428 See accompanying notes to financial statements. 5
SANDS OF KAHANA VACATION CLUB (A Non-Profit Corporation) NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2010 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Cluq, a non-profit corporation, was formed March 7, 1994, by Consolidated Maui, Inc. (Developer), to manage the common affairs of the Vacation plan Owners (Owners/Members) in the time-share project under Chapter 514E of the Hawaii Revised Statutes. Owners have purchased an undivided fee interest in a Vacation Plan Unit (Unit) and an undivided percentage leasehold interest in the underlying land together with the right to use and occupy a Unit, the common furnishings contained therein and the common elements of the Sands of Kahana (Project) during a use period, generally one use week, as defined. The Project, located in Lahaina, Hawaii, consists of 196 residential units, of which the Club managed 144 units as of December 31, 2010. In accordance with the Declaration of Covenants the Sands of Kahana Vacation Club (Club,) the Club is authorized to represent all of its owners with the Master Association and to vote accordingly all of the votes associated with the Sands of Kahana Vacation Club. The Master Association manages the common affairs of the condominium homeowners of the Sands of Kahana Condominium. The Vacation Club acts as agent for the Owners in its collection of common assessments levied by the Master Association and in any meetings of the Master Association. Cash collected from the Owners as part of their annual assessment, specifically for the purpose of paying Master Association assessments, lease rent, and property and other taxes, shall be used for the purpose for which such funds were collected. The Club considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Accounts receivable from Members represents unpaid assessments which are billed approximately one month before the due date. The Club provides an allowance for doubtful accounts determined by a percentage of the outstanding balance. Outstanding receivables are written off based on individual credit evaluation and specific circumstances of the Member. 6
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Real estate units consist of Vacation Plan use weeks obtained through foreclosure. Inventories are carried at value determined by applying a risk adjustment discount rate to estimates of future cash flows. It is management's intention to dispose of these use weeks as soon as possible. No carrying period costs are anticipated as management intends to recoup lost common assessments through rental programs. Foreclosure, selling, and other marketing costs are expensed in the period incurred. Prooertv, eauioment, and furnishings that are property of the Owners in common, and improvements and replacements made by the Club are not capitalized in the financial statements. The Club administers the collection and expenditure of funds for the collective replacement and upgrade of Unit furnishings on behalf of the Owners. Expenditures for the repair and replacement of appliances and furniture are expensed in the period in which the expenditure is made. Equipment on the balance sheet is made up of front desk computers and is stated at cost, less accumulated depreciation provided under the straight-line method, over its estimated useful life of five years. Deferred income represents additional property tax assessments billed to members, which was not due or paid as of yearend. Members' general fund is generated through the sales of each use week and is to be used for Club working capital. Revenue. The Club annually assesses each Owner the cost to maintain and service his Unit on the date (anniversary date) he becomes a member of the Club. The assessment is recognized as revenue in the month it is due. Income taxes. Timeshare associations may annually elect to be taxed as regular corporations or as homeowner associations. The Club has elected to be taxed as a homeowner association for 2010. Under that election, the Club is taxed only on nonmembership income, such as rental income and interest earnings, at a higher federal rate and regular state corporate tax rates. In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting for Uncertainty in Income Taxes. The Club evaluated its uncertain tax positions under the guidance of this pronouncement. Due to the differing tax treatments of member and non-member transactions, the Club's method of allocating allowable expenses to the production of these types of transactions may be subject to examination by various taxing authorities for the tax year ended and the three preceding years. 7
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Advertising costs are expensed as they are incurred. The total advertising expense for the year approximated $6,200. Estimates and assumotions that affect certain reported amounts and disclosures are required of management in the preparation of financial statements in conformity with generally accepted accounting principles the United States. Actual results could differ from those estimates. B. LAND AND EQUI PMENT Land and equipment consists of the following: Land $11,494,274 Equipment 3,079 Accumulated depreciation 3(079) $11.494(274 There was no depreciation expense incurred in 2010. In May 2008, the Club purchased the fee title to the land underlying the Sands of Kahana building. There is a sublease on the property through June 2036. Refer to Note F for further discussion of the sublease. C. LONG-TERM DEBT Long-term debt consists of a 6.02% first mortgage note payable to a bank, due in monthly installments of approximately $126,000, due in full April 2018, and secured by substantially all land, property, and equipment of the Club. Aggregate annual principal payments applicable to long-term debt for the five years subsequent to December 31, 2010, are as follows: 2011 $ 987,000 2012 1,047,600 2013 1,114,700 2014 1, 184,700 2015 1,259,100 Thereafter 3,458,793 $9(051.893 8
D. COMMON ASSESSMENTS FROM MASTER ASSOCIATIONS The Club was assessed certain fees by the Master Association approximately as follows: Common assessments $1,900,00Q Front desk fees The balance receivable from the Master Association at December 31, 2010, was approximately $8,700. The Master Association leases a hospitality lounge, maintenance shop, and housekeeping storage to the Club. The lease is cancelable upon 60 days' notice by either party. Rent for the year was $21,000. E. MANAGEMENT AGREEMENT The Club is managed by Consolidated Resorts Management, LLC (Consolidated). The management agreement expired on December 31, 2009 and is automatically renewed for consecutive three year terms if not terminated in writing. As compensation for managing the Club in 2010, Consolidated received $3.86, plus tax per interval per month. Management fees were approximately $485,900 in 2010. At December 31, 2010 there were no management fees due to Consolidated. Consolidated functions as the common paymaster for multiple timeshare operations. Payroll and related taxes and benefits are billed to the appropriate club based on actual employee time expended. Consolidated also acts as the conduit for office expenses for the Maui customer service office. Expenses are shared among eight timeshare clubs in Hawaii. The Club incurred approximately $1,618,200 and $40,800 in payroll expenses and shared office expense, respectively. December 31, 2010, approximately $47,700 was due to Consolidated. At Solei1 Management, LLC (Soleil), an affiliate of Consolidated, operates a reservation and accounting center for multiple timeshare operations. Fees are assessed to each timeshare operation in proportion to the number of units in each club. The Club incurred approximately $92,600 and $63,300 in 2010 for reservation and accounting fees, respectively. At December 31, 2010, approximately $800 was due to Soleil. 9
---------- ~ ~-~~~~ F. GROUND LEASES In 2008 the Club purchased the fee title to the land (Note B) and amended the sublease agreement with the current sublessor. Under the amended sublease agreement, annual payments have been reduced by the sublessor's portion of lease payments to the land owner. The Club collects land lease assessments from the owners and remits to the sublessor under the sublease expiring in June 2036. For the five year periods beginning July I, 2012, July I, 2022, and July I, 2032, rent will be equal to the fair market rental value of the land, but in any event not less than 25% or more than 40% higher than the annual rental for the preceding five year period. The annual rent for the five year periods beginning July I, 2017, and July I, 2027, will be increased by a minimum of 25% over the annual rent for the preceding five year period. In addition, the sublease provides for payment of general excise tax, property tax and other charges. The Club assessed its membership approximately $773,900 and paid the sublessor approximately $620,000 in land lease fees. Future minimum rental payments by periods required under the sublease are as follows: 2011 $ 620,400 2012 698,000 2013 775,500 2014 775,500 2015 775,500 Thereafter 27,216,639 $30! 861. 539 G. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK The principal business activity of the Club is the repair and maintenance of certain property and equipment and common realty elements of certain timeshare units in the Sands of Kahana Condominium and the use thereof in club operations. The Club dependent upon the collection of current maintenance fee and operations assessments from its members to conduct its business in an effective manner. The Club maintains most of its cash balances at one financial institution. In 2010, the federally insured limit was permanently increased to $250,000 per depositor. Non-interest bearing cash accounts are fully insured through December 31, 2012. 10
G. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK (continued) There was no cash in excess of the federally insured limit at December 31, 2010. The Club had approximately $666,000 invested in allowable U.S. Treasury and Governmental agency securities. H. COMMITMENTS AND CONTINGENCIES The Club has committed to provide various units on a weekly basis through January 5, 2013 under agreements between Consolidated Resorts Management and various vacation exchange network companies. In exchange, the Club is guaranteed a fee including taxes and cleaning. Rental revenue received under these agreements in 2010 was approximately $348,000. Future minimum rental income in 2011 and 2012 will approximate $584,200 and $543,900, respectively. In 2007, the Department of Taxation of the State of Hawaii (Tax Department) filed a claim against the Club regarding additional General Excise Tax (GET) and Transient Accommodations Tax (TAT) owed. The club had adopted its filing positions regarding these taxes based upon a verbal sanction of the position by the Tax Department and interpretation of certain statutes by tax attorneys and accountants. In January 2009 the tax department issued a final assessment of approximately $756,200 in additional get and TAT. In February 2009, appeals were filed and the trial for these cases has been scheduled for June 27, 2011. Management and legal counsel have asserted that the assessments are without merit and intend to vigorously defend the club. I. FUTURE MAJOR REPAIRS AND REPLACEMENTS The board of directors and management conducted a study in December 2010 to determine the estimated funding needed for future major repairs and replacements. Reserves have not been segregated for the exclusive purpose of funding repairs and replacement of major common elements however, approximately $91,800 currently available for this purpose. Those funds are held exclusively in the cash furniture fund bank account and the cash investment bank account. In addition, the Club intends to use current or special assessments when funds are needed or required for future major repairs and replacements. The table included in the unaudited supplementary information on Future Major Repairs and Replacements is based on the study. 11
J. EVALUATION OF SUBSEQUENT EVENTS The Club has evaluated subsequent events through February 12, 2011, the date which the financial statements were available to be issued. 12
CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Sands of Kahana Vacation Club The accompanying schedule of supplementary information on future major repairs and replacements on page 14 is not a required part of the basic financial statements but is supplementary information required by the American Institute of Certified Public Accountants. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. ~;:;//':"/J cer~ied Public Accountants Honolulu, Hawaii February 12, 2011 ECA llp. FKA ERWIN CABRINHA & AU llp 598 halekauwila STREET HONOLULU, HAWAII 96813 (808) 533-4244' FAX (80B) 599-2505 TOll FREE (888) 533-4244 WWW.ECA-ADVISORS.COM 13
SANDS OF KAHANA VACATION CLUB (A Non-Profit Corporation) SUPPLEMENTARY INFORMATION ON FUTURE MAJOR REPAIRS AND REPLACEMENTS DECEMBER 31, 2010 (Unaudited) The board of directors and management conducted a study in December 2010 based on vendor quotes to estimate the remaining useful lives and the replacement costs of the components of common elements and furnishings in each Vacation plan Unit. The following table is based on the study and presents significant information about the components of common elements and furnishings in each Vacation Plan Unit. ESTIMATED REMAINING USEFUL TOTAL CURRENT COMPONENTS LIVES (YEARS) REPLACEMENT COSTS TILE CARPET BLINDS PAINT APPLIANCES FURNITURE MISCELLANEOUS 11 7 2 3 3 3 1 $ 279,400 702,800 276,200 214,800 591,500 2,431,200 181, 400 $4,677,300 14