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HOT SPRINGS VILLAGE PROPERTY OWNERS’ ASSOCIATION

FINANCIAL STATEMENTSAND

SUPPLEMENTARY INFORMATION

DECEMBER 31, 2019 AND 2018

(With independent auditor's report thereon)

Contents

Page

Financial Statements

Independent Auditor's Report 1-2

Statement of Financial Position 3

Statement of Revenues and Expenses 4-5

Statement of Membership Equity 6

Statement of Cash Flows 7

Notes to Financial Statements 8-20

Supplementary Information

Schedule of Property and Equipment

for the Year Ended December 31, 2019 21

Schedule of Items Converting in 12 Months or Less

as of December 31, 2019 22

Schedule of Revenues and Expenses by Department

for the Years Ended December 31, 2019 and 2018 23-24

Statement of Operations

for the Years Ended December 31, 2019 and 2018 25

Schedule of Future Major Repairs and Replacements

as of December 31, 2019 (Unaudited) 26

Independent Auditor's Report

Board of DirectorsHot Springs Village Property Owners' Association

Report on the Financial StatementsWe have audited the accompanying financial statements of the Hot Springs Village Property Owners' Association (the “Association”), which comprise the statement of financial position as of December 31, 2019 and 2018, and the related statements of revenues and expenses, membership equity and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial StatementsManagement 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 ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on 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.

2

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Hot Springs Village Property Owners' Association as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Other MatterOur audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary information on pages 21 through 25 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 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. In our opinion, the information is fairly stated in all material respects in relation to the financial statementsas a whole.

Report on Required Supplementary InformationAccounting principles generally accepted in the United States of America require that the supplementary information on future repairs and replacements on page 26 be presented to supplement the basic financial statements. Such information although not a part of the basic financial statements, is required by the Financial Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical reporting for context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

April 1, 2020 Certified Public Accountants & ConsultantsBryant, Arkansas

3

2019 2018

AssetsCash and cash equivalents 2,285,832$ 4,331,450

Designated for non-utility asset repairs and replacements 1,874,832 942,514Designated for public utility asset repairs and replacements 876,625 300,000

Investments 1,541,000 1,541,000Restricted funds

Cash and cash equivalents 458,951 469,545Membership assessments receivable, less allowance

for doubtful accounts of $15,353,349 and $16,712,436in 2019 and 2018, respectively 3,564,035 3,361,594

Other membership receivables 2,138,814 2,185,034Other receivables 184,652 184,652 Inventories 72,871 65,011Prepaid expenses and other assets 242,741 173,654Real estate held for sale, net realizable value 2,607,000 2,500,500Recoverable electric distribution system costs, less

allowance for uncollectibility of $1,736,017 and $1,641,517 in 2019 and 2018, respectively 3,622,000 3,716,500

Property and equipment, net of accumulateddepreciation 64,683,201 64,331,742

Total Assets 84,152,554$ 84,103,196

LiabilitiesAccounts payable 758,896$ 493,467 Accrued expenses 2,718,947 2,385,834Prepaid membership assessments and other fees 2,378,744 2,690,293Security deposits and other deposits 763,710 726,888Bonds payable 2,430,280 2,690,973Note payable 1,183,419 1,470,892

Total Liabilities 10,233,996 10,458,347

Membership EquityUndesignated 71,167,101 72,402,335Designated for future repairs and replacement 2,751,457 1,242,514

Total Membership Equity 73,918,558 73,644,849

Total Liabilities and Membership Equity 84,152,554$ 84,103,196

Liabilities and Membership Equity

Assets

Hot Springs Village Property Owners' AssociationStatement of Financial Position

December 31, 2019 and 2018(See independent auditor's report.)

The accompanying notes are an integral part of these financial statements.

4

2019 2018Membership assessments revenues 17,868,875$ 17,487,642 Miscellaneous membership revenues 818,334 938,398 Less bad debt expense (3,877,266) (3,160,085) New membership assessments revenues 14,809,943 15,265,955

AdministrationExpenses 3,033,542 5,666,214Depreciation 116,670 346,034Revenues (305,940) (446,578)

Net administration 2,844,272 5,565,670

Public safety expensesExpenses 4,647,086 4,462,189 Depreciation 211,542 231,885 Revenues (915,852) (921,445)

Net public safety expenses 3,942,776 3,772,629

Community development & marketingExpenses 1,230,967 164,813 Depreciation 22,734 3,698 Revenues (450,174) (232,449)

Net community development & marketing 803,527 (63,938)

Public works expensesExpenses 4,259,923 2,716,215 Depreciation 415,803 140,552 Revenues (2,431,002) (2,222,238)

Net public works expenses 2,244,724 634,529

Public utilities expensesExpenses 4,525,235 4,282,168 Depreciation 1,390,601 1,321,045 Revenues (6,999,627) (6,729,390)

Net public utilities expenses (revenues) (1,083,791) (1,126,177)

Lake management expensesExpenses 747,880 301,648 Depreciation 30,946 26,645 Revenues (141,333) (126,538)

Net lake management expenses 637,493 201,755

Hot Springs Village Property Owners' Association

(See independent auditor's report.)For the Years Ended December 31, 2019 and 2018

Statement of Revenues and Expenses


5

2019 2018Food and beverage expenses

Expenses 1,784,604 1,522,609 Depreciation 254,421 245,850 Revenues (1,222,171) (1,041,504)

Net food and beverage expenses 816,854 726,955

Golf expensesExpenses 7,831,042 7,494,206 Depreciation 594,699 769,923 Revenues (5,739,608) (5,657,086)

Net golf expenses 2,686,133 2,607,043

Recreation expensesExpenses 2,144,187 2,351,877 Depreciation 509,713 482,289 Revenues (1,096,104) (1,018,027)

Net recreation expenses 1,557,796 1,816,139

Other expense (income)Interest expense 135,645 152,927 Interest income (49,195) (41,837) Other income - (60,170)

Total other expense (income) 86,450 50,920

Excess (deficit) of revenues over expenses 273,709$ 1,080,430

For the Years Ended December 31, 2019 and 2018(See independent auditor's report.)

Statement of Revenues and Expenses (Continued)Hot Springs Village Property Owners' Association

6

Contributions from

Developer and Others

From Operations

Major Repairs and

Replacements

Total Membership

Equity

Balance - January 1, 2018 74,214,770$ (2,108,865) 458,514 72,564,419

Excess of revenues over expenses - 1,080,430 - 1,080,430

Amount allocated to non-utilityasset repairs and replacements - (584,000) 584,000 -

Amount allocated to publicutility asset repairs and replacements - (200,000) 200,000 -

Balance - December 31, 2018 74,214,770 (1,812,435) 1,242,514 73,644,849

Excess of revenues over expenses - 273,709 - 273,709

Amount allocated to non-utilityasset repairs and replacements - (932,318) 932,318 -

Amount allocated to publicutility asset repairs and replacements - (576,625) 576,625 -

Balance - December 31, 2019 74,214,770$ (3,047,669) 2,751,457 73,918,558

Hot Springs Village Property Owners' AssociationStatement of Membership Equity

For the Years Ended December 31, 2019 and 2018(See independent auditor's report.)


7Hot Springs Village Property Owners' Association

Statement of Cash Flows

(See independent auditor's report.)

2019 2018Cash Flows from Operating Activities:

Excess (deficit) of revenues over expenses 273,709$ 1,080,430 Adjustments to reconcile excess (deficit) of revenues over

expenses to net cash provided (required) by operating activities:Depreciation 3,547,129 3,567,921 Amortization of bond issuance cost 9,307 9,307 Provision for bad debts 3,877,266 3,160,085 (Gain) / loss on disposition and sale of assets (51,875) (372,853)

Decrease (Increase) in AssetsPrepaid member assessments and deposits (4,033,487) (4,142,599) Other receivables - 8,103Inventories (7,860) (9,946)Prepaid expenses and other assets (69,087) (157,841) Recoverable electric distribution system costs 94,500 94,500

Increase (Decrease) in LiabilitiesAccounts payable 265,429 (482,366) Accrued expenses 333,113 182,488 Prepaid membership assessments and other fees and deposits (274,727) (64,008)

Net Cash Provided (Required) by Operating Activities 3,963,417 2,873,221

Cash Flows from Investing Activities:Purchases of property, plant, and equipment (3,910,827) (4,892,336) Proceeds from sale of equipment 64,114 422,549 Cost to acquire real estate held of sale (106,500) (215,250)

Net Cash Provided (Required) by Investing Activities (3,953,213) (4,685,037)

Cash Flows from Financing Activities:Borrowings from note payable - 943,618Repayments on bonds and note payable (557,473) (695,599)

Net Cash Provided (Required) by Financing Activities (557,473) 248,019

Increase (Decrease) in Cash and Cash Equivalents (547,269) (1,563,797)

Cash and cash equivalents - beginning of year 6,043,509 7,607,306

Cash and Cash Equivalents - End of Year 5,496,240$ 6,043,509

Supplemental Cash Flows InformationCash paid during the year for interest 136,995$ 154,252

Cash and Cash Equivalents Unrestricted cash and cash equivalents 2,285,832$ 4,331,450Designated cash and cash equivalents 2,751,457 1,242,514Restricted cash and cash equivalents 458,951 469,545

Total Cash and Cash Equivalents 5,496,240$ 6,043,509

For the Years Ended December 31, 2019 and 2018


8Hot Springs Village Property Owners’ Association

Notes to Financial StatementsDecember 31, 2019 and 2018

1. Summary of Significant Accounting Policies

OrganizationHot Springs Village Property Owners’ Association (“the Association”) is a not-for-profit organizationformed April 20, 1970, under the Hot Springs Village Covenants and Restrictions filed by theAssociation and Cooper Communities, Inc. (the “Developer”). The Association is a 26,000 acre gatedcommunity located in central Arkansas. The Association’s revenues are received through assessments,utility usage charges and recreation fees.

The covenants and restrictions require the Developer to construct roads, streets, lakes, golf courses,parks and permanent recreation plots, as it deems feasible. Titles to these properties are transferred tothe Association on or before completion. The Association is required to construct the water and sewersystems, which are part of the common properties, as it deems feasible.

The Association has two classes of membership. Class A membership is attained by the purchase ofproperty within the area known as Hot Springs Village and is terminated upon the sale of that property.Class B membership is reserved for the Developer. Certain actions of the Association require approvalof the majority of both classes of membership.

Cash and Cash EquivalentsThe Association considers all cash on hand, deposits with financial institutions, and any other liquidcash investment with original maturities of less than three months to be cash equivalents.

InvestmentsInvestments consist of certificates of deposit which are classified as held-to-maturity investments.Held-to-maturity investments are those debt securities which the Association has the ability and intentto hold until maturity. Held-to-maturity investments are carried at amortized cost. Investment returnincludes interest income.

The estimated fair value of the investments is based on similar types of investments that are tradedin the market.

Restricted and Designated CashRestricted cash represents cash that has been restricted by the bond trust indenture.

Designated cash represents cash that has been board-designated for future repairs and replacement.

Accounts ReceivableAccounts receivable are stated at the amount billed to property owners. The Association provides anallowance for doubtful accounts on all accounts in which members owe one year or more ofassessments billed. Additional allowances are provided as necessary based upon a review ofoutstanding receivables, historical collection information and existing economic conditions.Membership receivables are due and recognized monthly. Delinquent receivables are written offbased on payment history, specific circumstances of the property owner, and due to the statute oflimitations any receivables five years or older.



InventoryInventories are stated at the lower of cost or market. Costs are determined using the first-in, first-out method.

Property and EquipmentProperty and equipment are depreciated over the estimated useful life of each asset on the straight-line basis. Purchased and constructed assets are recorded at cost including overhead related to the construction.

Included in property and equipment are common property assets that have been contributed to the Association by the Developer. These assets consist of land, roads, lakes, golf courses, parks, community centers and other common properties. These assets are recorded at the Developer’s cost including overhead (which approximated market value at the transfer date for those assets for which a market value is reasonably determinable). These assets are recorded when titles to the assets are transferred to the Association. The Association is responsible for the preservation and maintenance of the common property.

RevenueThe Association recognizes revenue only when all of the following criteria have been met:

a) Persuasive evidence of an arrangement exists;b) Delivery has occurred or services have been rendered;c) The fee for the arrangement is fixed or determinable; andd) Collectability is assured.

Revenue for the Association consists of member assessments, fees for use of the various Association’sfacilities and fees associated with use of water and sewer facilities of the Association. Revenues are presented net of discounts. The financial statements present the revenues of the various services as an offset to expenses for those services.

Income TaxesThe Association qualifies as a homeowner’s association under Section 528 of the Internal Revenue Code. As a homeowner’s association, certain revenues and expenses (primarily membership assessments and public utilities, Hot Springs Village administration and public safety expenses) are excluded in determining taxable income. Thus, tax operating losses have been incurred for all years through 2019, resulting in no income tax expense or liability for the Association.

FASB ASC 740, Income Taxes requires certain disclosures about uncertain income tax positions. When tax returns are filed, it is probable that most tax positions would be sustained upon examination by taxing authorities. However, it is also possible that some positions might be subject to uncertainty and result in a loss contingency if the amount can be reasonably estimated. The amount recognized is subject to estimation and the amount ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. Currently, management does not believe that any uncertain tax positions exist under the provisions of FASB ASC 740 or ASC 450, Contingencies. No penalties or interest by the Internal Revenue Service (“IRS”) or a state taxing authority were incurred and recorded in these financial statements. The Association has filed or will file all applicable Federal and state income tax returns. Federal income tax statutes dictate



that tax returns filed in any of the previous three reporting periods remain open to examination. Currently, the Association has no open examinations with the Internal Revenue Service.

The Association is no longer subject to U.S. federal and state tax examinations by tax authorities for the years before 2016. The Association’s federal and state tax returns are not currently under examination. The Association recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2019 and 2018, the Association did not recognize any interest or penalties. The Association did not have any interest or penalties accrued at December 31, 2019 or 2018.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and 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.

AdvertisingThe Company expenses advertising costs as incurred. Advertising expense for the years ending December 31, 2019 and 2018, was $257,053 and $312,670, respectively.

Recent Accounting PronouncementsIn February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability on their balance sheet. The right-of-use asset and related lease liability will be initially measured at the present value of the remaining lease payments; however, if the original term of the lease is less than twelve months and the lease does not contain a purchase option that is reasonably certain to be exercised, a lessee may account for the lease as an operating lease. ASU 2016-02 is effective for interim periods and fiscal years beginning after December 15, 2019. While the Association continues to evaluate the effect that ASU 2016-02 will have on its financial position, results of operations, and its financial statement disclosures, the adoption of ASU 2016-02 is expected to result in leased assets and related lease liabilities to be included on its balance sheet.

Recently Adopted PronouncementsDuring the year ended December 31, 2019, the Association retrospectively applied the provisions of ASU 2018-16, Restricted Cash. ASU 2016-18 requires that the statement of cash flow present all changes during the period of total cash and cash equivalents and amounts generally described as restricted cash and cash equivalents. The application of this pronouncement did not have a significant impact on the financial position, results of operations or its financial statement disclosures. The standard did result in amounts being presented as restricted or designated in the statement of financial position being included in the statement of cash flows as cash and cash equivalents.

ReclassificationsCertain reclassifications have been made to the 2019 financial presentation to correspond to the current year’s format. These reclassifications had no impact on prior year deficit of revenues over expenses, as previously reported.



Subsequent EventsManagement has evaluated subsequent events through April 1, 2020, the date the financial statements were available to be issued.

2. Financial Instruments with Risk of Accounting Loss

The Association maintains its cash and certificates of deposit balances at several financial institutions. Accounts at each financial institution are secured by the Federal Deposit Insurance Corporation up to $250,000. As of December 31, 2019 and 2018, uninsured balances were $4,581,250 and $5,302,577respectively.

3. Investments and Investment Return

The Association held investments in marketable securities that were classified as held-to-maturity as follows:

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses Fair Value

December 31, 2019

Held-to-maturity Certificates of deposit 1,541,000$ 7,025 - 1,548,025

December 31, 2018

Held-to-maturity Certificates of deposit 1,541,000$ - (35,481) 1,505,519

At December 31, 2019, contractual maturities of held-to-maturity investments are as follows:

Amortized

Cost Fair Value

Held-to-maturity

Due in one year or less 448,000$ 448,458

Due after one year through five years 1,093,000 1,099,567 1,541,000$ 1,548,025

As of December 31, 2019 and 2018, interest income was $49,195 and $41,837, respectively, and consisted primarily of interest earned on cash and cash equivalents, and certificates of deposit.

Fair ValueFinancial accounting standards for fair value measurements define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a framework that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the



highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Level 1 include inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Association has the ability to access. Level 2 inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability. Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Association’s certificates of deposits are measured using the Level 2 inputs.

4. Inventories

Inventories consisted of the following at December 31:

2019 2018

Food and beverage 59,316$ 50,483

Fuel 5,853 7,644

Other 7,702 6,88472,871$ 65,011

5. Real Estate Held for Sale

Real estate held for sale amounting to $2,607,000 and $2,500,500 as of December 31, 2019 and 2018,respectively, consists of lots obtained from property owners through deed in lieu of foreclosure as a result of failure by the property owners to pay membership assessments or relinquishment. Amounts are the Association’s costs to acquire the property which primarily consists of attorney fees, filing fees and any related property taxes that have been paid by the Association. The Association expects to recoup all costs through the ultimate sale of the lots.

6. Property and Equipment

Property and equipment consisted of the following at December 31:



2019 2018

Land and land improvements 83,787,083$ 83,532,052

Buildings 25,518,417 25,278,776

Furnishings and facilities equipment 13,249,079 12,853,150

Autos, trucks, communications, and construction

equipment 6,322,608 5,697,719

Water plant and distribution facilities 39,094,538 38,988,501

Sewer plant and treatment facilities 34,562,627 33,956,901

Construction in progress 1,214,456 56,285

203,748,808 200,363,384

Less accumulated deprecation (139,065,607) (136,031,642)

64,683,201$ 64,331,742

Property and equipment includes total contributions since inception by the Developer of $66,155,785as of December 31, 2019 and 2018. Depreciation expense totaled $3,544,213 and $3,567,921 for the years ended December 31, 2019 and 2018, respectively.

7. Letter of Credit

The Association has a letter of credit for $200,000 with Regions Bank. As of December 31, 2019 and 2018, the Association had not drawn any of the available funds. The letter of credit guarantees theAssociation’s performance under its workers’ compensation self-insurance program as required by the State of Arkansas. The letter expires in February 2021.

8. Bonds Payable

The Association has entered into agreements with the Garland County, Arkansas, Waterworks and Sewer Facilities Board (the “Facilities Board”) in connection with tax-exempt bonds issued by the Facilities Board under which the Association is obligated to provide for the retirement of such bonds and related interest payments.

During the year ended December 31, 2016, the Facilities Board issued the 2016A and 2016B Bonds which were issued with a principal amount of $1,350,000 and $2,045,000, respectively. The 2016A and 2016B Bonds are dated May 6, 2016. The Series 2016A Bonds shall mature serially on November 1, 2021, and the Series 2016B Bonds shall mature serially on November 1, 2027, with interest payable semiannually at a rate of 3%. The proceeds of the Series 2016A and 2016B Bonds refinanced the Series 2009A Bonds and provided additional funds for water and sewer improvements. The bonds are secured by a trust indenture dated May 6, 2016. The Association’s water and sewer and assessment revenues are pledged as security for the Series 2016A and 2016B Bonds.

The Series 2016A Bonds are not subject to optional redemption prior to maturity on November 1, 2021. The Series 2016B Bonds may be subject to optional redemptions at the option of the Association’s Board of Directors on or after November 1, 2021, in whole at any time or in part on any interest payment date at a redemption price equal to the principal amount being redeemed plus accrued interest to the



date of redemption. The bonds are subject to mandatory redemption in the event monthly assessments are reduced and other revenues are not available to replace the decrease in assessments revenue.

A summary of the scheduled payments of these issues as of December 31, 2019, is as follows:

Year Principal Interest Total

2020 280,000$ 74,700 354,700

2021 290,000 66,300 356,300

2022 295,000 57,600 352,600

2023 305,000 48,750 353,750

2024 315,000 39,600 354,600

Thereafter 1,005,000 60,900 1,065,900

2,490,000$ 347,850 2,837,850

Unamortized debt issuance costs total $59,720 and $69,027 respectively and are presented as a reduction of the bond payable in the Statement of Financial Position at December 31, 2019 and 2018, respectively.

9. Notes Payable

At December 31, 2019 and 2018, the Company’s notes payable consisted of the following:

2019 2018

Note payable to a financial institution, collateralized

by substantially all company assets, due in monthly

installments of $27,280 with an interest rate

of 3.44%. Unpaid principal due in January 2021. 347,323$ 656,844


by a vehicle, due in monthly installments of

$17,553 with an interest rate of 4.41%.

Unpaid principal due in April 2023. 635,626 814,048


by a vehicle, due in monthly installments of

$6,853 with an interest rate of 4.35%.

Unpaid principal due in August 2022. 200,470 -

1,183,419 1,470,892

Less current portion (580,831) (487,288) Long-term debt, less current portion 602,588$ 983,604

Principal maturities of notes payable for the years following the most recent balance sheet are as follows:



2020 580,831$

2021 298,825

2022 250,417

2023 53,346

2024 -1,183,419$

10. Line of Credit

The Association has a $1,000,000 revolving line of credit expiring in October 2020. As of December31, 2019 and 2018, the Association had no borrowings against this line. This line is secured by theAssociations Cetera investment services account. Interest is subject to change based on changes inthe Prime Rate of the Lender (“the Index”). Interest on the unpaid principal balance will be calculatedat a rate of prime plus .530 percentage points over the index, resulting in an initial rate of 5.280%per annum, under no circumstances will the interest rate be less than 4.750% per annum or more thanthe maximum rate allowed.

11. Operating Leases

The Association has entered into operating leases for various golf carts, office and constructionequipment. Generally, these leases are cancelable by either party at any time. Future minimumpayments under these leases with commitments beyond one year are $76,524 for 2020 through 2023and $19,131 in 2024.

Rent and equipment lease expenses associated with these leases were $286,359 and $96,968 for theyears ended December 31, 2019 and 2018, respectively.

12. Restricted Funds

The agreement with the Facilities Board, regarding Series 2016A and 2016B Bonds discussed in Note10, requires that deposits be made by the Association into certain restricted debt service reserve andbond funds. The debt service reserve and bond funds are required to maintain a balance equal to thelesser of 125% of the average annual debt service related to the bonds, the maximum annual debtservice on the bonds, or 10% of original principal amount of all Bonds at the time outstanding. Bondfunds are maintained at the amount necessary to pay debt service for the next 12 months.

Additionally, the Association restricts certain funds as reserves for debt repayment and Act 833.Restricted funds consist of cash and cash equivalents and certificates of deposit. A summary ofrestricted funds is as follows:



2019 2018

Restricted cash and cash equivalents

Bond fund 81,794$ 102,968

Debt service reserve fund 339,500 339,501

Act 833 37,657 27,076 458,951$ 469,545

13. Club Service Contracts

The Association leases facilities to certain facilities to vendors for the operation of restaurants. Theterms of the contracts vary among each of the facilities, but generally provide that, major repairs andmaintenance are paid by the Association. Contracts are generally for one year with two renewal optionperiods of two years each, with terms and conditions to be negotiated prior to each renewal. The costof the facilities and the accumulated depreciation were $4,546,839 at December 31, 2019 and 2018.Future minimum rentals under these leases with commitments beyond one year are $53,327 for 2020,$21,181 for 2021 and $1,083 for 2022. The Association recognized $50,448 and $43,400 of rentalrevenue from operating leases for the year ended December 31, 2019 and 2018, respectively.

14. Accrued Expenses

Accrued expenses consist of the following:

2019 2018

Self-insured workers' compensation 25,182$ 119,562

Accrued payroll and related taxes 561,023 576,558

Accrued vacation 1,071,399 1,064,021

Accrued interest 12,450 13,800

Accrued property and real estate taxes 430,747 422,467

Accrued sales, beverage and use taxes 155,446 146,457

Other accrued expenses 462,700 42,969

2,718,947$ 2,385,834

15. Retirement Plan

The Association has a defined contribution retirement plan covering substantially all full-time employees. The Association may contribute to the plan 2% of each participant’s salary plus 4% of each participant’s salary over $10,000. The Association also offers a 401(k) employee contribution savings plan whereby the Association matches the first 3% of employees’ contribution and matches the next 2% of the employees’ contribution at 50%. Retirement contributions (excluding Arkansas Local Police and Fire Retirement System) were $232,874 and $191,078 for the years ended December 31, 2019 and 2018, respectively.

Arkansas Local Police and Fire Retirement System (“LOPFI”)The LOPFI is a statewide agent multiple-employer retirement program that provides retirement, disability and survivor benefits to police and fire employees of political subdivisions of the State of Arkansas. The LOPFI was created by Act 364 of the 1981 General Assembly. The authority to establish



and amend benefit provisions is set forth in Arkansas statutes and is vested in the Arkansas Legislature with the concurrence of the Governor. Employees hired after January 1, 1983, whose political subdivision had a retirement system in effect at July 1, 1981, are eligible to participate in the plan.

The LOPFI issues a publicly available financial report that includes financial statements and required supplementary information of the plan, which may be obtained by contacting the following:

Arkansas Local Police and Fire Retirement SystemP.O. Drawer 34164, Little Rock, Arkansas 72203(501) 682-1745

Funding Policy. Contribution requirements are set forth in Arkansas statute. The LOPFI members were required to contribute 8.5% of their annual covered salary. The Association is required to contribute at an actuarially determined rate, which was 23.5% and 23.5% for participating police and firemen for the years December 31, 2019 and 2018, respectively.

The Association’s contributions to the plan were $258,169 and $283,455 for the years ended December 31, 2019 and 2018, respectively, and represented approximately 10% of covered payroll for each ofthose years. The contributions provisions applicable to the POA are established by the LOPFI board, and shall be based on the actuary’s determination of the rate required to fund the Plan.

16. Commitments and Contingencies

General LitigationThe Association is subject to claims and lawsuits that arise primarily in the ordinary course of business.It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuitswill not have a material adverse effect on the financial position of the Association. It is reasonablypossible that management’s estimate of losses will change by a material amount in the near term.

On November 26, 2018, the Association filed a complaint against International Securities Networks,Inc. (“ISN”). ISN contracted with the Association in 2017 to perform upgrades to the Association’ssecurity gates (the “Project”). The lawsuit alleges that ISN failed to adhere to deadlines for deliverablesunder the contract. The lawsuit seeks to recover the amount the Association paid to ISN and theCompany’s attorneys’ fees and costs. On February 1, 2019, ISN answered the complaint and filed acounterclaim against the Association alleging breach of contract and asserting that contract delays werecaused by changes made by the association. The counterclaim was answered on February 28, 2019.The Association intends to vigorously pursue its claim against ISN and anticipates a favorableoutcome. Discovery is still ongoing in the case and Association attorneys are not yet in a position toprovide an opinion on the probability of an unfavorable outcome, in the event of a judgement againstHSVPOA and ISN, the Association’s estimate a potential loss of approximately $450,000. The amountthat the Association has paid to ISN for the work performed under the Project totals $147,173 and isincluded in other receivables.

Health Benefits Self-InsuranceUnder the Association’s insurance programs, coverage is obtained for catastrophic exposures, as wellas those risks required to be insured by law or contract. The Association, however, retained a significantportion of certain expected losses related to employee health claims beginning January 1, 2004, at whichtime health claims became self-insured by the Association. Provision for losses expected under theprogram was recorded based on the Association’s estimates of the aggregate liability for claims



incurred. There was no provision for losses at December 31, 2019 or 2018. The amount of actual losses incurred could differ materially from the estimates reflected in the accompanying financial statements.The Associations has accrued $161,657 and $151,408 related to outstanding health insurance claims at December 31, 2019 and 2018, respectively.

The Association entered into a stop-loss insurance agreement with an insurance company to limit its losses on individual claims. Under the terms of this agreement, the insurance company will reimburse the Association approximately 100% of the covered costs of each member’s annual hospital services, in excess of a $100,000 deductible.

In the event the Association ceases operations, (1) plan benefits will continue for members who are confined in an acute care hospital on the date of insolvency until their discharge and (2) plan benefits will continue for any other member until the end of the contract period for which premiums have been paid.

Workers’ Compensation Self-InsuranceUnder the Association’s Workers’ Compensation Insurance Program, reinsurance is obtained for large exposures, as well as those risks required to be insured by law or contract. The Association self-insures each incident below $350,000 with $600,000 applicable to police/fire and first responders. An allowance for losses expected under these programs is recorded based upon approximately two times the Association’s stop-loss coverage. The Associations has accrued $25,182 and $119,562related to outstanding workers’ compensation claims at December 31, 2019 and 2018, respectively.The amount of actual losses incurred could differ materially from the estimates reflected in these financial statements.

Recoverable Electric Distribution System CostsCosts incurred by the Association in the installation of underground electrical distribution systems are recovered from homebuilders through connection fees of $630 as new construction is commenced. During 1997, the Association began recording an allowance related to the recoverable costs in an amount so that net recoverable costs will not exceed approximately $4,000,000. During the year ended December 31, 2016, the Association evaluated the progress of the build out and determined the reserve would be reduced over time, based on development results. The Association will review the annual development results against established goals. If these expectations are not met the receivable will be written down accordingly.

Information concerning recoverable electric distribution system costs is as follows:

2019 2018

Total lots with electrical services available 21,594 21,594 Lots extended service (7,813) (7,753)

Lots available to receive service 13,781 13,841

Current connection fee X 630$ 630

8,682,030$ 8,719,830



Actual costs incurred on the electric distribution system to date are as follows:

2019 2018

Total electrical distribution costs 8,682,030$ 8,719,830

Costs reimbursed from lots sold (3,324,013) (3,361,813)

Reserve for uncollectible costs (1,736,017) (1,641,517)

Net recoverable electric distribution system costs 3,622,000$ 3,716,500

Ultimate connections to the remaining lots are not determinable; therefore, the amount of recoverable costs could differ materially from the estimates reflected in these financial statements.

RevenuesDuring the year ended December 31, 2019, the Association billed approximately 10% of its total assessment revenues to three parties; these parties hold approximately 2,627 lots. The gross accounts receivable balances, before allowance, for this party totaled $6,992,074 as of December 31, 2019.

During the year ended December 31, 2018, the Association billed approximately 10% of its total assessment revenues to three parties; these parties hold approximately 2,650 lots. The gross accounts receivable balance, before allowance, for these parties totaled $8,414,998 as of December 31, 2018.

Current Economic ConditionsRecent economic conditions have presented the Association with circumstances and challenges, which in some cases have resulted in large declines in the fair value of investments, real estate and other assets, declines in property owners, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Association. Should volatility in economic conditions arise, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in investment values, real estate values and allowances for accounts receivable that could negatively impact the Association’s ability to maintain sufficient liquidity.

17. Future Repairs and Replacement

In 2012, management prepared a twenty (20)-year capital improvement and maintenance plan (“CIP”)for years 2013 to 2032 that included all existing buildings, golf courses, utilities, roads, gates and rollingstock. The CIP incorporated the original in-service date and value. The CIP projected the constructionor replacement value based on an inflation factor, useful life and the estimated year. The table includedin the unaudited supplementary information on future major repair and replacements is based on the20-year CIP. This CIP will be updated annually, through Section 6 of the Comprehensive Master Plan,and incorporated into the budget.

During the year ended December 31, 2019, the Association’s governing documents require funds to beaccumulated specifically for future major repairs and replacements. The Association is to maintain threeseparate funds as follows:

The Public Utility Reserve



This is to be funded through net utility profits and used for water or waste water projects. One year of annual depreciation (water and waste water assets) shall be minimum targeted funded level. As of December 31, 2019 and 2018, the balance of the fund totaled $876,625 and $300,000, respectively.

The Non-Utility Asset Repairs and ReplacementsThis is to be funded through net operating profits (excluding water and waste water operations) and used for capital projects that maintain and/or improve property value and asset conditions or emergency asset repairs. One year of annual depreciation shall be the minimum targeted funding level. As ofDecember 31, 2019 and 2018, the balance of the fund totaled $1,874,832 and 942,514, respectively.

Operating ReservesThis is to be funded through a combination of net operating profits and available line of credit access. These funds will be used for priority operational needs during a short-term cash shortage. One month of average budgeted operating expense shall be the minimum targeted funding level. The minimum funding levels described above are projected to be in place within three more years and will be a component of the annual budget process. The Association has a $1,000,000 line of credit and $1,541,000 investments available for the operating reserves.

18. Uncertainty

Subsequent to December 31, 2019, local, U.S., and world governments have encouraged self-isolationto curtail the spread of the global pandemic, coronavirus disease (COVID-19), by mandating temporarywork stoppage in many sectors and imposing limitations on travel and size and duration of groupmeetings. Most industries are experiencing disruption to business operations and the impact of reducedconsumer spending. There is unprecedented uncertainty surrounding the duration of the pandemic, itspotential economic ramifications, and any government actions to mitigate them. Accordingly, whilemanagement cannot quantify the financial and other impact to the association as of April 1, 2020,management believes that a material impact on the association's financial position and results of futureoperations is reasonably possible.

Purchased Assets

Land

Operating and common property 876,704$ - - 876,704

Lakes and dams 10-20 72,576 - - 72,576

Land improvements

Operating and common property 5-20 3,558,942 166,807 - 3,725,749

Golf courses 4-20 17,896,790 - - 17,896,790

Streets 10-20 905,311 88,224 - 993,535

Buildings 5-25 20,549,414 239,641 - 20,789,055

Leasehold improvements 15 56,712 - - 56,712

Office equipment 1-5 662,165 - - 662,165

Furnishings 3-10 211,275 25,897 - 237,172

Food and beverage equipment 3-12 696,345 16,252 - 712,597

Maintenance and operating equipment 1-6 8,735,976 453,921 239,422 8,950,475

Recreation equipment 1-5 1,081,573 131,526 3,351 1,209,748

Public safety equipment 3-5 350,568 - - 350,568

Communications equipment 3-5 358,301 102,175 - 460,476

Auto and trucks 3-6 4,690,920 805,345 205,735 5,290,530

Construction equipment 3-10 648,497 - 76,895 571,602

Software 1-3 987,074 11,105 - 998,179

Water plant 4-25 38,177,929 106,037 - 38,283,966

Sewer plant 4-25 33,634,242 605,726 - 34,239,968

Construction in progress 56,285 1,158,171 - 1,214,456

Total Purchased Assets 134,207,599 3,910,827 525,403 137,593,023

Contributed Assets

Land

Operating and common property 2,871,853 - - 2,871,853

Lakes and dams 10,775,699 - - 10,775,699

Land improvements

Operating and common property 10 598,402 - - 598,402

Golf courses 10-20 5,894,185 - - 5,894,185

Streets 10-20 40,081,590 - - 40,081,590

Buildings 18-40 4,672,650 - - 4,672,650

Recreation equipment 5-20 26,777 - - 26,777

Water and sewer facilities 5-15 1,133,231 - - 1,133,231

Equipment 5-10 1,000 - - 1,000

Furnishings 3-10 100,398 - - 100,398

Total Contributed Assets 66,155,785 - - 66,155,785

Total Property and Equipment 200,363,384$ 3,910,827 525,403 203,748,808

Deletions/

Transfers

Ending

Balance


Cost or Basis

Estimated

Life

Beginning

Balance

Additions/

Transfers

(See independent auditor's report on supplementary information.)

For the Year Ended December 31, 2019

Schedule of Property and Equipment

21

- - - -

72,154 422 - 72,576

2,464,102 158,220 - 2,622,322

16,154,949 173,837 - 16,328,786

480,280 54,252 - 534,532

16,570,857 663,093 - 17,233,950

8,332 3,780 - 12,112

652,837 8,957 - 661,794

145,080 31,902 - 176,982

632,240 27,959 - 660,199

7,559,582 531,220 248,071 7,842,731

939,774 106,930 3,354 1,043,350

295,025 25,279 - 320,304

263,458 54,951 - 318,409

3,043,011 362,801 205,735 3,200,077

598,487 16,739 56,004 559,222

905,666 55,367 - 961,033

30,249,044 769,904 - 31,018,948

29,109,498 498,983 - 29,608,481

- - - -

110,144,376 3,544,596 513,164 113,175,808

- - - -

- - - -

112,412 - - 112,412

120,618 - - 120,618

19,730,729 2,533 - 19,733,262

4,672,650 - - 4,672,650

26,777 - - 26,777

1,133,232 - - 1,133,232

1,000 - - 1,000

89,848 - - 89,848

25,887,266 2,533 - 25,889,799

136,031,642 3,547,129 513,164 139,065,607

Accumulated Depreciation

Beginning

Balance

Additions/

Transfers

Deletions/

Transfers Ending Balance

22

Items

Converting in

12 Months or

Less Other Total

Assets

Cash and cash equivalents 2,285,832$ - 2,285,832

Designated for non-utility asset repairs and replacements 1,874,832 - 1,874,832

Designated for public utility asset repairs and replacements 876,625 - 876,625

Investments 448,000 1,093,000 1,541,000

Restricted funds

Cash and cash equivalents 58,531 400,420 458,951

Membership assessments receivable, less allowance

for doubtful accounts of $15,353,349 3,564,035 - 3,564,035

Other membership receivables 2,138,814 - 2,138,814

Other receivables 184,652 - 184,652

Inventories 72,871 - 72,871

Prepaid expenses and other assets 242,741 - 242,741

Real estate held for sales, net of estimated expenses - 2,607,000 2,607,000

Recoverable electric distribution system costs, less

allowance for uncollectibility of $1,736,017 - 3,622,000 3,622,000

Property and equipment, net of accumulated depreciation - 64,683,201 64,683,201

Total Assets 11,746,933$ 72,405,621 84,152,554

Liabilities

Accounts payable 758,896$ - 758,896

Accrued expenses 2,693,765 25,182 2,718,947

Prepaid membership assessments and other fees 2,378,744 - 2,378,744

Security deposits and other deposits 323,385 440,325 763,710

Bonds payable 280,000 2,150,280 2,430,280

Note payable 580,831 602,588 1,183,419

Total Liabilities 7,015,621 3,218,375 10,233,996

Membership equity

Undesignated 4,731,312 66,435,789 71,167,101

Designated - 2,751,457 2,751,457

Total Membership Equity 4,731,312 69,187,246 73,918,558

Total Liabilities and Membership Equity 11,746,933$ 72,405,621 84,152,554

Liabilities and Membership Equity


Schedule of Items Converting in 12 Months or Less

December 31, 2019


Assets

23

2019 2018

Membership assessments revenues 17,868,875$ 17,487,642 Miscellaneous membership revenues 818,334 938,398 Less bad debt expense (3,877,266) (3,160,085) New membership assessments revenues 14,809,943 15,265,955

AdministrationRevenues 305,940 446,578Expenses (3,033,542) (5,666,214)

Net administration (2,727,602) (5,219,636)

Public safetyRevenues 915,852 921,445 Expenses (4,647,086) (4,462,189)

Net public safety (3,731,234) (3,540,744)

Community Development and MarketingRevenues 450,174 232,449 Expenses (1,230,967) (164,813)

Net community development and marketing (780,793) 67,636

Public works Revenues 2,431,002 2,222,238 Expenses (4,259,923) (2,716,215)

Net public works (1,828,921) (493,977)

Public utilitiesRevenues 6,999,627 6,729,390 Expenses (4,525,235) (4,282,168)

Net public utilities 2,474,392 2,447,222

Lake managementRevenues 141,333 126,538Expenses (747,880) (301,648)

Net lake management (606,547) (175,110)

Food and beverageRevenues 1,222,171 1,041,504Expenses (1,784,604) (1,522,609)

Net food and beverage (562,433) (481,105)

GolfRevenues 5,739,608 5,657,086Expenses (7,831,042) (7,494,206)

Net golf (2,091,434) (1,837,120)

Hot Springs Village Property Owners' AssociationSchedule of Revenues and Expenses by DepartmentFor the Years Ended December 31, 2019 and 2018


24

2019 2018Recreation

Revenues 1,096,104 1,018,027Expenses (2,144,187) (2,351,877)

Net recreation (1,048,083) (1,333,850)

InterestInterest income 49,195 41,837Interest expense (135,645) (152,927)

Net interest (86,450) (111,090)

Other income - 60,170

Revenues over expenses before depreciation 3,820,838 4,648,351

Depreciation (3,547,129) (3,567,921)

Excess (deficit) after depreciation 273,709$ 1,080,430

For the Years Ended December 31, 2019 and 2018(See independent auditor's report on supplementary information.)

Hot Springs Village Property Owners' AssociationSchedule of Revenues and Expenses by Department (Continued)

25

2019 2018

Revenues

Revenues 37,989,020$ 36,821,295

Cost of revenues 552,742 535,871

Gross profit 37,436,278 36,285,424

Expenses

Operating expenses 30,098,187 26,367,285

General and administrative expenses 7,029,807 9,099,411

Total operating expenses 37,127,994 35,466,696

Income from operations 308,284 818,728

Other income (expense)

Interest income 49,195 41,837

Interest expense (135,645) (152,927)

Gain/loss on sale of property, plant and equipment 51,875 372,792

Other expense, net (34,575) 261,702

Income before income taxes 273,709 1,080,430

Income tax benefit - -

Net income 273,709$ 1,080,430


Statement of Operations

December 31, 2019 and 2018


26

Estimated Estimated

Remaining 2019 2019 2020 2020

Useful Lives Replacement Funds Expense Capital

Components (in Years) Costs Accumulated Budgeted Budgeted

Streets 1-100 41,798,047$ - 275,000 1,190,000

Lakes & Dams (Land) 1-100 11,039,204 - 310,500 -

Golf Course (Land) 1-100 24,704,239 - 710,689 -

Other Land Improvements 1-100 3,905,711 - 38,150 160,500

Buildings 1-40 25,967,541 1,874,832 200,000 494,500

Water & Sewer Infrastructure 1-100 74,953,531 876,625 689,702 1,669,376

Office furnishings and equipment 1-20 1,017,330 - 38,800 37,500

Vehicles & heavy equipment 1-10 15,799,466 - 407,291 734,330

Software & Communications 1-5 1,484,328 - 225,000 255,000

Recreation 1-5 1,258,288 - 56,350 45,000

Fire & Police Equipment 1-5 356,738 - 10,000 25,000

202,284,423$ 2,751,457 2,961,482 4,611,206

December 31, 2019

Schedule of Future Major Repairs and Replacements (Unaudited)


(See independent auditor's report on additional information.)

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