U.S. Army AFRC Funds Group (A Nonappropriated Fund of the U.S

U.S. Army AFRC Funds Group (A Nonappropriated Fund of the U.S. Government)

Combined Financial Report September 30, 2013 and 2012 TABLE OF CONTENTS

Page

INDEPENDENT AUDITOR’S REPORT 1-2

COMBINED FINANCIAL STATEMENTS

Combined Balance Sheets 3-4

Combined Statements of Operations and Changes in Fund Balance 5

Combined Statements of Cash Flows 6

Notes to Combined Financial Statements 7-16

SUPPLEMENTAL INFORMATION

Combining Balance Sheet as of September 30, 2013 - Schedule I 17-18

Combining Statement of Operations and Changes in Fund Balance for year ended September 30, 2013 - Schedule II 19

Combining Balance Sheet as of September 30, 2012 - Schedule III 20-21

Combining Statement of Operations and Changes in Fund Balance for year ended September 30, 2012 - Schedule IV 22

INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF COMBINED FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 23-24

SCHEDULE OF FINDINGS AND QUESTIONED COSTS SEPTEMBER 30, 2013 25

SCHEDULE OF FINDINGS AND QUESTIONED COSTS UPDATE TO SEPTEMBER 30, 2012 26 INDEPENDENT AUDITOR’S REPORT

Department of the Army Director, U.S. Army Installation Management Command (IMCOM) G-9 Washington, D.C.

Report on the Financial Statements We have audited the accompanying combined financial statements of the nonappropriated fund of the United States Army Installation Management Command (IMCOM) G-9 Armed Forces Recreation Centers (AFRCs) and the Single Fund, together known as the U.S. Army AFRC Funds Group (AFG), which comprise the combined balance sheets as of September 30, 2013 and 2012, and the related combined statements of operations and changes in fund balance, and cash flows for the years then ended, and the related notes to the combined financial statements.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 the combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined 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 combined 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 combined financial statements.

-1- We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the nonappropriated fund of the AFG as of September 30, 2013 and 2012, and the combined 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 Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February 26, 2014, on our consideration of AFG’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering AFG’s internal control over financial reporting and compliance.

Other Matters Our audits were conducted for the purpose of forming an opinion on the combined financial statements taken as a whole. The combining information in Schedules I-IV is presented for purposes of additional analysis of the combined financial statements and is not a required part of the financial statements. The combining financial statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the combined financial statements. Such information for the years ended September 30, 2013 and 2012 has been subjected to the auditing procedures applied in the audits of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or the combined 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 combined financial statements taken as a whole.

Richmond, Virginia February 26, 2014

-2- FINANCIAL STATEMENTS U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combined Balance Sheets September 30, 2013 and 2012

2013 2012 ASSETS

CURRENT ASSETS Cash $ 159,004,990 $ 138,626,221 Receivables Trade accounts (net of allowance for doubtful accounts of $14,477 in 2013 and $17,457 in 2012) 4,897,064 5,060,521 Concessions receivable 413,915 254,989 Interest receivable 66,050 72,188 Other receivables 1,348,524 1,767,044 Inventories 3,201,377 3,656,881 Prepaid expenses 943,700 855,071

Total current assets 169,875,620 150,292,915

LONG TERM RECEIVABLE 3,176,555 -

PROPERTY AND EQUIPMENT (net) 309,659,202 325,426,903

PREPAID GROUND LEASE (net) 29,337,963 29,682,407

Total assets $ 512,049,340 $ 505,402,225

-3- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combined Balance Sheets September 30, 2013 and 2012

2013 2012 LIABILITIES AND FUND BALANCE

CURRENT LIABILITIES Current portion of senior secured notes $ 2,679,000 $ 2,256,000 Current portion of capital lease 86,442 80,456 Accounts payable and accrued expenses 8,694,310 9,171,861 Accrued payroll expenses Salaries and wages 3,156,466 3,249,993 Vacation and bonuses 3,912,249 3,982,444 Unearned income 56,160 70,954 Reservation and other deposits 6,234,260 5,351,066

Total current liabilities 24,818,887 24,162,774

LONG-TERM NOTES PAYABLE (net of current portions) Senior secured notes 110,697,000 114,061,000 Capital lease - 86,442

Total long-term liabilities 110,697,000 114,147,442

Total liabilities 135,515,887 138,310,216

FUND BALANCE 376,533,453 367,092,009

Total liabilities and fund balance $ 512,049,340 $ 505,402,225

See accompanying notes. -4- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combined Statements of Operations and Changes in Fund Balance Years Ended September 30, 2013 and 2012

2013 2012 REVENUES Rooms $ 97,581,855 $ 98,458,829 Food and beverage 52,359,938 52,542,955 Garage 5,138,229 5,121,753 Leisure activities 9,383,345 9,408,710 Telecommunications 151,490 412,491 Game room 4,157,418 4,319,871 Rental and other income 5,668,056 5,876,636 Interest income 786,873 847,968

Total revenues 175,227,204 176,989,213

COSTS AND EXPENSES Rooms 25,694,935 26,043,468 Food and beverage 47,621,571 48,307,623 Leisure activities 7,430,236 7,607,022 Garage 479,479 742,478 Telecommunications 259,845 252,006 Game room 329,527 335,602 General and administrative 10,306,838 10,399,150 Human resources 5,584,287 5,343,979 Marketing 2,530,715 2,576,830 Contracting 1,168,510 1,152,925 Warehouse 1,672,184 1,652,079 Property operations 10,048,138 10,467,612 Landscaping 1,914,267 1,916,430 Utility costs 14,038,266 13,945,390 Rent, insurance, and other 1,266,374 1,407,198 Security 2,706,534 2,761,436 Interest 8,587,605 8,788,645 Other 251,722 50,631

Total costs and expenses 141,891,033 143,750,504

Income before depreciation and amortization and gain (loss) on disposal of assets 33,336,171 33,238,709

GAIN (LOSS) ON DISPOSAL OF ASSETS (6,792) 700 DEPRECIATION AND AMORTIZATION (23,887,935) (23,589,540) INCOME FROM CONTINUING OPERATIONS 9,441,444 9,649,869 DISCONTINUED OPERATIONS

Loss from discontinued component - (5,370,511)

NET INCOME 9,441,444 4,279,358

FUND BALANCE Fund balance at beginning of year 367,092,009 364,237,651 Capital transfer to US Army - (1,425,000)

Fund balance at end of year $ 376,533,453 $ 367,092,009

See accompanying notes. -5- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combined Statements of Cash Flows Years Ended September 30, 2013 and 2012

2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 9,441,444 $ 4,279,358 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 23,887,935 24,036,454 Loss (gain) on disposal of assets 6,792 (700) Loss on disposal of discontinued component - 5,623,694 Changes in assets and liabilities: Receivables 429,189 1,812,545 Inventories 455,504 (350,540) Prepaid expenses (88,629) 685,861 Accounts payable and accrued expenses (477,551) 1,084,083 Accrued payroll expenses (163,722) 168,714 Reservation and other deposits 883,194 (10,116) Net cash provided by operating activities 34,374,156 37,329,353

CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (7,782,582) (5,854,170) Advances on long term receivable (3,176,555) - Net cash used in investing activities (10,959,137) (5,854,170)

CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on senior secured notes (2,941,000) (2,309,000) Principal payments on capital lease obligations (80,456) (74,885) Capital transfer to US Army - (1,425,000) Unearned income (14,794) (516,956) Net cash used in financing activities (3,036,250) (4,325,841)

Net increase in cash 20,378,769 27,149,342

CASH Beginning of year 138,626,221 111,476,879

End of year $ 159,004,990 $ 138,626,221

SUPPLEMENTAL DISCLOSURE OF NON CASH ACTIVITIES Cash paid for interest $ 9,311,396 $ 8,064,854 Disposal of fully depreciated property and equipment $ 2,981,936 $ 741,189

See accompanying notes. -6- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations The Armed Forces Recreation Centers (AFRCs) (Hotels) are affordable Joint Service facilities operated by the United States Army Installation Management Command (IMCOM) G-9 and are collectively known as the U.S. Army AFRC Funds Group (AFG). The AFRCs are located in Seoul, South Korea; Waikiki, Hawaii; Walt Disney World® Resort, Orlando, Florida; Virginia Beach, Virginia (see Note 9); and Garmisch-Partenkirchen, Germany. Their purpose is to provide quality, full-service recreational facilities restricted to active-duty military, retirees, currently employed and retired Department of Defense civilians, reservists, delayed entry recruits, and family members.

The Dragon Hill Lodge is a 394-room hotel. The land on which the Hotel is located is owned by the government of the Republic of Korea and is being provided rent-free.

The Hale Koa is an 817-room hotel. The land on which the Hotel is located is owned by the U.S. federal government and is also being provided rent-free. The Hotel is responsible for the maintenance and upkeep of surrounding park areas, also owned by the U.S. federal government.

The Shades of Green on Walt Disney World® Resort is a 585-room hotel on property owned by Palm Hospitality Company near Orlando, Florida.

The Edelweiss Lodge and Resort is a 258-room hotel and conference center in Garmisch-Partenkirchen, Germany. The operation was reduced from 258 rooms to 238 in July 2013. The land on which the Hotel is located is owned by the Federal Republic of Germany and is being provided rent-free.

During 2012, the AFG dissolved the Cape Henry Inn and Beach Club and returned the property to the U.S. Navy. See Note 9 for further details.

The Single Fund, formerly the United States Army Hospitality Cash Management Fund (HCMF), was established to provide centralized cash management for the five Hotels. The Single Fund finances capital purchases and minor construction requirements of the Hotels and other investment initiatives. The Single Fund does not hold any property or equipment.

(Continued)

-7- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of Accounting and Principles of Combination The AFG presents its combined financial statements in accordance with accounting principles generally accepted in the United States of America. These financial statements have been combined to present a complete presentation of the operations and all significant intercompany balances and transactions have been eliminated.

Revenue Recognition Revenue from operations is recognized when earned. Deferred revenue consists of advanced deposits taken for rooms, banquets, and conferences that have been reserved in advance.

Sales and Other Taxes Revenues are reported net of sales and other taxes collected from customers and remitted to government authorities.

Cash Equivalents For purposes of the combined statements of cash flows, the AFG considers all highly liquid investment instruments with original maturities of three months or less, to be cash equivalents. There were no cash equivalents at September 30, 2013 and 2012.

Receivables Trade receivables are carried at anticipated realizable value. An estimate is made for doubtful receivables based on a review of all outstanding amounts at the year-end. Uncollectible accounts are written off during the year in which they are identified.

Inventories Inventories consist primarily of food and beverage and are stated at the lower of cost, determined by the weighted average cost method, or market (net realizable value).

Property and Equipment Property and equipment is stated at historical cost. Depreciation of property and equipment is provided on the straight-line basis over the estimated useful lives of the respective assets. The lives over which property and equipment are being depreciated are as follows:

(Continued)

-8- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded) Buildings 15 to 40 years Buildings improvements 10 to 30 years Furniture, fixtures, and equipment 2 to 10 years Vehicles 2 to 7 years Land improvements 15 to 25 years Income and Other Taxes The Hotels and the Single Fund are instrumentalities of the U.S. Government, and therefore exempt from federal and local income taxes. In addition, Dragon Hill Lodge is exempt from Korean income taxes; Hale Koa is exempt from Hawaii state income, general excise (excluding construction), and transient accommodation taxes except on labor force; and Edelweiss Lodge and Resort is exempt from German income and value-added taxes.

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The AFG’s management has evaluated the impact of this guidance to its combined financial statements. The AFG is not aware of any material uncertain tax positions, and has not accrued the effect of any uncertain tax positions as of September 30, 2013 and 2012.

Financial Statement 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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.

Foreign Currency Transactions The financial statements of the AFG are reported in U.S. dollars. Assets and liabilities retained in a foreign currency are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates of exchange in effect during the year. The resulting cumulative translation gains and losses are included in the combined statements of operations and changes in fund balance.

-9- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 2. INVENTORIES

Inventories consist of the following at September 30: 2013 2012

Food and beverage $ 1,221,817 $ 1,283,939 Attraction tickets 1,168,023 1,523,705 Other 811,537 849,237 Total $ 3,201,377 $ 3,656,881

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at September 30: 2013 2012

Land improvements $ 23,302,440 $ 23,229,164 Building and improvements 542,861,719 540,427,212 Furniture, fixtures, and equipment 96,953,522 96,350,217 Vehicles 2,226,973 2,230,151 Construction in progress 1,876,667 246,120 Total property and equipment 667,221,321 662,482,864 Less accumulated depreciation (357,562,119) (337,055,961)

Net property and equipment $ 309,659,202 $ 325,426,903

NOTE 4. LEASE COMMITMENTS

Hotel and Land Lease AFG entered into a lease with Palm Hospitality Company (as Landlord) on behalf of Shades of Green (as Tenant) for the hotel property and related land. The lease contained an option to purchase the hotel (not including the land) during the first seven years of the lease term.

AFG acquired the hotel property on behalf of Shades of Green for the aggregate purchase price of $31,000,000 and prepaid the land rent for a 100-year term in the amount of $34,100,000.

(Continued)

-10- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 4. LEASE COMMITMENTS (Concluded)

Amortization expense related to the capitalized land lease totaled $344,444 in 2013 and 2012, respectively. Accumulated amortization totaled $4,762,037 and $4,417,593 in fiscal years ending September 30, 2013 and 2012, respectively.

Estimated amortization expense attributed to the Hotel and Land lease for each of the ensuing years through September 30, 2018 is approximately $344,000.

Equipment Leases The Hale Koa had entered into a capital lease agreement for certain operating equipment. The lease expires during 2014. The gross amount of equipment, and related accumulated amortization recorded under capital leases are as follows at September 30: 2013 2012 Equipment at cost $ 889,167 $ 889,167 Accumulated amortization (459,510) (374,943) Total $ 429,657 $ 514,224

Minimum future lease payments under the capital leases as of September 30, 2013 for the remaining life of the lease are:

2014 $ 92,874 Less amount representing interest (6,432) Present value of net minimum future lease payments 86,442 Less current portion (86,442) $ -

NOTE 5. EMPLOYEE BENEFIT PLANS

Retirement Plans The Hotels participate in the U.S. Army Nonappropriated Fund Employee Retirement Plan, a multi-employer defined benefit plan covering all eligible U.S. employees who meet certain age and length of service requirements. The Hotels contribute 7.5 percent of employee’s salaries. Total contributions to the retirement plan amounted to $2,848,821 and $2,737,091 for the years ended September 30, 2013 and 2012, respectively. The information relating to the Hotels associated with this

(Continued)

-11- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 5. EMPLOYEE BENEFIT PLANS (Concluded)

multi-instrumentality plan with respect to the actuarial present value of accumulated benefits and net assets available for benefits is not available.

In addition, Dragon Hill Lodge is required to participate in the multi-employer Korean National Pension Plan covering all Korean employees. Pension premiums, which amounted to $195,737 and $202,485 for the years ended September 30, 2013 and 2012, respectively, are based on 4.5 percent of taxable average wages.

Savings Plan The Hotels participate with other nonappropriated fund instrumentalities in the U.S. Army Nonappropriated Fund Employee 401(k) Savings Plan. Regular full-time or part-time employees of the Hotels working at least twenty hours a week may participate. The Hotels contribute one to three percent of employee’s salaries, depending on the employee’s contribution to the savings plan. Employer contributions to the savings plan amounted to $922,315 and $963,965, for the years ended September 30, 2013 and 2012, respectively.

Post Retirement Medical The Morale, Welfare, and Recreation (MWR) Board of Directors approved the funding of post retirement medical with a 2.9 percent surcharge on total payroll, as defined. Total contributions to post retirement medical amounted to $1,011,584 and $1,036,544 for the years ended September 30, 2013 and 2012, respectively.

NOTE 6. RELATED PARTY TRANSACTIONS

During years ending 2013 and 2012, the AFG had the following related party transactions:

Army Banking and Investment Fund (ABIF) The AFG invests funds in excess of normal working capital requirements in a central investment program established at Headquarters, Department of the Army, for qualified nonappropriated fund instrumentalities. Invested funds earn interest at rates established by Headquarters, Department of the Army. The interest rate was .51 and .65 percent at September 30, 2013 and 2012, respectively. Funds may be withdrawn upon demand without penalty. Interest income for the years ended September 30, 2013 and 2012 amounted to $786,873 and $848,315, respectively.

(Continued)

-12- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 6. RELATED PARTY TRANSACTIONS (Continued)

Army and Air Force Exchange Service (AAFES) The Hotels earn income equal to between five and fifteen percent of gross revenues generated by AAFES from the various operations located on the hotel premises, including stores, shops and vending operations.

Income earned for the years ended September 30, 2013 and 2012 amounted to $703,030 and $754,482, respectively, and is included in rental and other income in the combined statements of operations and changes in fund balance.

AAFES operates a franchised food and beverage operation on the premises of Dragon Hill Lodge in which the Hotel earns seventy-five percent of net revenues. Income earned for the years ended September 30, 2013 and 2012 amounted to $173,530 and $169,666, respectively, and is also included in rental and other income in the combined statements of operations and changes in fund balance.

Amounts due from AAFES amounted to $250,411 and $128,571 at September 30, 2013 and 2012, respectively, and are included in concessions receivable in the combined balance sheets.

Army Recreation Machine Program (ARMP) ARMP operates slot machines and video games in Dragon Hill Lodge and Edelweiss Lodge and Resort. The Hotels earn ten percent of the gross collections and thirty percent of net income from the operations of the slot machines. It also earns fifty percent of gross revenues from video games. Income earned amounted to $4,005,287 and $4,178,610 for the years ended September 30, 2013 and 2012, respectively. Amounts due from ARMP amounted to $644,443 and $231,650 at September 30, 2013 and 2012, respectively, and is included in other receivables in the combined balance sheets.

Army Lodging Edelweiss Lodge and Resort provides cleaning services for the Marshall Center Army Lodging operations operated by Army Lodging IMCOM Europe. Edelweiss Lodge and Resort employs a staff of housekeepers that clean guest rooms and common areas in two lodging facilities located on the Sheridan Kasern and the Artillery Kasern in Garmisch, Germany.

(Continued)

-13- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 6. RELATED PARTY TRANSACTIONS (Concluded)

Income earned amounted to $637,944 and $822,383 for the years ended September 30, 2013 and 2012, respectively, and is included in room revenue in the combined statements of operations and changes in fund balance. Amounts due from Army Lodging amounted to $81,802 and $114,593 at September 30, 2013 and 2012, respectively, and is included in trade receivables in the combined balance sheets.

United States Army Office of the Chief of Chaplains (Strong Bonds) The Hotels provide lodging, meals, child care and related services in support of the Army Chief of Chaplains Strong Bonds Program for active and deployed service members and their families. IMCOM G-9 reimburses the Hotels for these services provided through the hosting of retreats coordinated by Army chaplains. Income earned amounted to approximately $3,592,655 and $7,158,456 for the years ended September 30, 2013 and 2012 respectively, and is included in rooms, food, leisure, and other income in the combined statements of operations and changes in fund balance. Amounts due from IMCOM G-9 amounted to approximately $0 and $1,092,367 at September 30, 2013 and 2012, respectively, and is included in the trade receivables in the combined balance sheets.

Texas Roadhouse Group (TXG) At September 30, 2013, the AFG has a long term receivable with TXG in the amount of $3,176,555. $150,000 of the loan represents operational working capital for the first six months of operations. The operational working capital funding plus interest calculated based on the Fiscal Year 2013 ABIF investment average rate of return (0.5% per month) is due upon receipt of the tenant allowance. Repayments against the remaining obligation shall commence on April 15, 2014 (pursuant on net income from operation results in March 2014). No monthly repayments will be made in months were the TXG incurs a negative net income from operations or in months were the acid ratio (as calculated on the last day of the month) is less than 1:1. In all other months, the TXG shall pay the AFG 50% of the realized net income from operations or $10,000 per month, whichever is greater. Interest will start accruing on remaining obligation as of February 1, 2014 at the same rate as noted above. Amounts lent to the TXG will constitute a first-priority loan against the operation’s cash flows after operating expenses. All amounts will be repaid on or before January 1, 2034.

-14- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 7. ARMY MORALE, WELFARE, AND RECREATION FUND (AMWRF) SENIOR SECURED NOTES

The Morale, Welfare, and Recreation Board of Directors (MWR BOD) approved funding for the design and construction of the Edelweiss Lodge and Resort, and the expansion of Shades of Green. These projects have received Army, DoD, and Congressional approval.

The MWR BOD gave approval to the Single Fund to obtain a $135,000,000 commercial loan to finance the projects and the Single Fund issued senior secured notes in the amount of $135,000,000 through a private placement offering, which was closed on May 23, 2002 and matures in May 2032. The notes bear an interest rate of 7.467% and is secured by a first priority pledge of the Single Fund’s interest in all monies payable to the Single Fund from the Hotels and any proceeds from the sale of their assets or properties.

Principal payments on the notes during the year ended September 30, 2013 and 2012 totaled $2,941,000 and $2,309,000, respectively, leaving a balance due of $113,376,000 and $116,317,000 at September 30, 2013 and 2012, respectively. Scheduled maturities over the next five years and in the aggregate are as follows: 2014 2,679,000 2015 3,139,000 2016 3,382,000 2017 3,644,000 2018 3,923,000 Thereafter 96,609,000 $ 113,376,000

NOTE 8. CONTINGENCIES

Legal Proceedings From time to time, the Hotels are involved in legal proceedings arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings will not materially affect the financial statements.

-15- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Notes to Combined Financial Statements September 30, 2013 and 2012

NOTE 9. DISCONTINUED OPERATIONS

The AFG divested of the Cape Henry Inn (Inn) and Beach House effective September 30, 2012. All real property not owned by the Inn was returned to the U.S. Navy. The remaining assets and liabilities were transferred to the Single Fund. Revenues and expenses for the Inn for September 30, 2012 are as follows: 2012 Revenue $ 2,820,409 Less Expenses: Food and Beverage 159,983 Rooms 896,979 Telecommunication 23,216 General and Administrative 411,542 Property and Landscaping 348,789 Rent, Insurance, and Other 279,803 Depreciation 446,914 Loss on Discontinued Component 5,623,694 Net Loss $ (5,370,511)

NOTE 10. SUBSEQUENT EVENTS

The AFG has evaluated all events subsequent to the combined balance sheet date of September 30, 2013 through February 26, 2014, which is the date these financial statements were available to be issued. The AFG has determined that there are no subsequent events that require disclosure pursuant to the FASB Accounting Standards Codification.

-16- SUPPLEMENTAL INFORMATION U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combining Balance Sheet - Schedule I September 30, 2013

2013 Shades of Edelweiss Lodge Interfund ` Dragon Hill Hale Koa Green & Resort Single Fund Eliminations Total ASSETS

CURRENT ASSETS Cash (bank overdraft) $ 776,664 $ 15,812 $ (219,748) $ 499,687 $ 157,932,575 $ - $ 159,004,990 Receivables Trade accounts (net of allowance for doubtful accounts of $14,477) 1,026,514 2,044,033 924,453 902,064 - - 4,897,064 Concessions receivable 143,625 174,233 68,024 28,033 - - 413,915 Interfund receivables - - - - 318,583 (318,583) - Interest receivable - - - - 66,050 - 66,050 Other receivables 653,486 64,531 1,159,360 232,630 52,523 (814,006) 1,348,524 Inventories 664,688 852,930 983,648 700,111 - - 3,201,377 Prepaid expenses 319,651 19,012 300,907 301,227 2,903 - 943,700

Total current assets 3,584,628 3,170,551 3,216,644 2,663,752 158,372,634 (1,132,589) 169,875,620

LONG TERM RECEIVABLE - - - - 3,176,555 - 3,176,555

PROPERTY AND EQUIPMENT (net) 29,946,647 132,250,569 86,061,885 61,689,092 (288,991) - 309,659,202

PREPAID GROUND LEASE (net) - - 29,337,963 - - - 29,337,963

INTERFUND BALANCE 133,427,738 124,505,162 70,035,044 40,744,468 - (368,712,412) -

Total assets $ 166,959,013 $ 259,926,282 $ 188,651,536 $ 105,097,312 $ 161,260,198 $ (369,845,001) $ 512,049,340

-17- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combining Balance Sheet - Schedule I September 30, 2013

2013 Shades of Edelweiss Lodge Interfund Dragon Hill Hale Koa Green & Resort Single Fund Eliminations Total LIABILITIES AND FUND BALANCE

CURRENT LIABILITIES Current portion of senior secured notes $ - $ - $ - $ - $ 2,679,000 $ - $ 2,679,000 Current portion of capital lease - 86,442 - - - - 86,442 Accounts payable and accrued expenses 987,453 2,155,624 4,713,174 1,020,307 950,341 (1,132,589) 8,694,310 Accrued payroll expenses Salaries and wages 396,939 1,730,737 501,627 527,163 - - 3,156,466 Vacation and bonuses 1,446,905 1,589,090 288,489 571,882 15,883 - 3,912,249 Unearned income 45,783 - 2,021 8,356 - - 56,160 Reservation and other deposits 29,619 3,687,153 2,456,888 60,600 - - 6,234,260

Total current liabilities 2,906,699 9,249,046 7,962,199 2,188,308 3,645,224 (1,132,589) 24,818,887

LONG-TERM NOTES PAYABLE (net of current portions) Senior secured notes - - - - 110,697,000 - 110,697,000 Interfund balance - - - - 368,712,412 (368,712,412) -

Total long-term liabilities - - - - 479,409,412 (368,712,412) 110,697,000

Total liabilities 2,906,699 9,249,046 7,962,199 2,188,308 483,054,636 (369,845,001) 135,515,887

FUND BALANCE 164,052,314 250,677,236 180,689,337 102,909,004 (321,794,438) - 376,533,453

Total liabilities and fund balance $ 166,959,013 $ 259,926,282 $ 188,651,536 $ 105,097,312 $ 161,260,198 $ (369,845,001) $ 512,049,340

-18- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combining Statement of Operations and Changes in Fund Balance - Schedule II Year Ended September 30, 2013

2013 Shades of Edelweiss Lodge Dragon Hill Hale Koa Green & Resort Single Fund Total REVENUES Rooms $ 20,010,629 $ 42,447,622 $ 22,027,481 $ 13,096,123 $ - $ 97,581,855 Food and beverage 11,975,504 25,700,127 7,857,016 6,827,291 - 52,359,938 Garage - 4,525,021 613,208 - - 5,138,229 Leisure activities 633,061 105,344 3,493,073 5,151,867 - 9,383,345 Telecommunications 25,590 99,505 3,621 22,774 - 151,490 Game room 3,931,038 - - 226,380 - 4,157,418 Rental and other income 1,891,315 2,387,920 816,431 572,390 - 5,668,056 Interest income 2,435 3,364 1,587 1,663 777,824 786,873

Total revenues 38,469,572 75,268,903 34,812,417 25,898,488 777,824 175,227,204 COSTS AND EXPENSES Rooms 3,485,866 11,183,549 7,076,478 3,949,042 - 25,694,935 Food and beverage 10,489,592 24,355,304 7,273,872 5,502,803 - 47,621,571 Leisure activities 819,402 918,617 1,860,178 3,832,039 - 7,430,236 Garage - 479,479 - - - 479,479 Telecommunications 14,181 108,440 124,645 12,579 - 259,845 Game room 329,527 - - - - 329,527 General and administrative 2,011,710 3,638,173 2,657,430 1,999,525 - 10,306,838 Human resources 1,221,440 2,461,124 570,008 1,331,715 - 5,584,287 Marketing 648,119 981,477 454,003 447,116 - 2,530,715 Contracting 183,007 384,526 335,183 265,794 - 1,168,510 Warehouse 356,471 720,625 184,340 410,748 - 1,672,184 Property operations 1,875,316 3,350,239 1,999,800 2,822,783 - 10,048,138 Landscaping 166,830 1,298,057 449,380 - - 1,914,267 Utility costs 2,454,701 6,075,353 1,986,819 3,521,393 - 14,038,266 Rent, insurance, and other 167,499 514,439 215,089 369,347 - 1,266,374 Security 629,486 988,572 663,292 425,184 - 2,706,534 Interest - 10,423 - - 8,577,182 8,587,605 Other - - - - 251,722 251,722

Total costs and expenses 24,853,147 57,468,397 25,850,517 24,890,068 8,828,904 141,891,033 Income (loss) before depreciation and amortization and loss on disposal of assets 13,616,425 17,800,506 8,961,900 1,008,420 (8,051,080) 33,336,171

LOSS ON DISPOSAL OF ASSETS - (3,682) (3,110) - - (6,792) DEPRECIATION AND AMORTIZATION (4,527,266) (8,300,594) (6,561,399) (4,498,676) - (23,887,935) NET INCOME (LOSS) 9,089,159 9,496,230 2,397,391 (3,490,256) (8,051,080) 9,441,444 FUND BALANCE Fund balance at beginning of year 154,963,155 241,181,006 178,291,946 106,399,260 (313,743,358) 367,092,009

Fund balance at end of year $ 164,052,314 $ 250,677,236 $ 180,689,337 $ 102,909,004 $(321,794,438) $ 376,533,453

-19- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combining Balance Sheet - Schedule III September 30, 2012

2012 Shades of Edelweiss Lodge Interfund Dragon Hill Hale Koa Green & Resort Cape Henry Single Fund Eliminations Total ASSETS

CURRENT ASSETS Cash $ 609,378 $ 702,214 $ (6,313) $ 63,773 $ - $ 137,257,169 $ - $ 138,626,221 Receivables Trade accounts (net of allowance for doubtful accounts of $17,457) 1,398,906 1,652,928 997,668 1,011,019 - - - 5,060,521 Concessions receivable 119,260 80,073 36,293 19,363 - - - 254,989 Interest receivable - - - - - 72,188 - 72,188 Other receivables 285,390 381,735 109,361 978,732 - 11,826 - 1,767,044 Inventories 593,604 852,537 1,341,669 869,071 - - - 3,656,881 Prepaid expenses 276,809 41,689 313,210 220,452 - 2,911 - 855,071

Total current assets 3,283,347 3,711,176 2,791,888 3,162,410 - 137,344,094 - 150,292,915

PROPERTY AND EQUIPMENT (net) 32,998,594 138,948,632 87,943,998 65,436,762 - 98,917 - 325,426,903

PREPAID GROUND LEASE (net) - - 29,682,407 - - - - 29,682,407

INTERFUND BALANCE 121,742,370 107,998,056 63,961,156 39,952,665 - - (333,654,247) -

Total assets $ 158,024,311 $ 250,657,864 $ 184,379,449 $ 108,551,837 $ - $ 137,443,011 $ (333,654,247) $ 505,402,225

-20- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combining Balance Sheet - Schedule III September 30, 2012

2012 Shades of Edelweiss Lodge Interfund Dragon Hill Hale Koa Green & Resort Cape Henry Single Fund Eliminations Total LIABILITIES AND FUND BALANCE

CURRENT LIABILITIES Current portion of senior secured notes $ - $ - $ - $ - $ - $ 2,256,000 $ - $ 2,256,000 Current portion of capital lease - 80,456 - - - - - 80,456 Accounts payable and accrued expenses 1,159,025 2,653,840 3,410,787 940,798 - 1,007,411 - 9,171,861 Accrued payroll expenses Salaries and wages 397,941 1,705,763 423,035 515,543 - 207,711 - 3,249,993 Vacation and bonuses 1,426,294 1,678,324 256,352 621,474 - - - 3,982,444 Unearned income 42,203 9,386 5,079 14,286 - - - 70,954 Reservation and other deposits 35,693 3,262,647 1,992,250 60,476 - - - 5,351,066

Total current liabilities 3,061,156 9,390,416 6,087,503 2,152,577 - 3,471,122 - 24,162,774

LONG-TERM NOTES PAYABLE (net of current portions) Senior secured notes - - - - - 114,061,000 - 114,061,000 Interfund balance - - - - - 333,654,247 (333,654,247) - Capital lease - 86,442 - - - - - 86,442

Total long-term liabilities - 86,442 - - - 447,715,247 (333,654,247) 114,147,442

Total liabilities 3,061,156 9,476,858 6,087,503 2,152,577 - 451,186,369 (333,654,247) 138,310,216

FUND BALANCE BEFORE TRANSFERS 154,963,155 241,181,006 178,291,946 106,399,260 3,836,723 (317,580,081) - 367,092,009 TRANSFERS - - - - (3,836,723) 3,836,723 - - FUND BALANCE 154,963,155 241,181,006 178,291,946 106,399,260 - (313,743,358) - 367,092,009

Total liabilities and fund balance $ 158,024,311 $ 250,657,864 $ 184,379,449 $ 108,551,837 $ - $ 137,443,011 $ (333,654,247) $ 505,402,225

-21- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Combining Statement of Operations and Changes in Fund Balance - Schedule IV Year Ended September 30, 2012

2012 Shades of Edelweiss Lodge Dragon Hill Hale Koa Green & Resort Cape Henry Single Fund Total REVENUES Rooms $ 20,613,603 $ 40,771,606 $ 22,337,415 $ 14,736,205 $ - $ - $ 98,458,829 Food and beverage 11,762,101 25,611,040 6,934,698 8,235,116 - - 52,542,955 Garage - 4,513,486 608,267 - - - 5,121,753 Leisure activities 673,712 111,678 2,984,068 5,639,252 - - 9,408,710 Telecommunications 29,530 262,762 55,928 64,271 - - 412,491 Game room 4,014,463 - - 305,408 - - 4,319,871 Rental and other income 1,820,889 2,365,524 891,142 799,081 - - 5,876,636 Interest income 3,481 3,364 1,389 2,904 - 836,830 847,968

Total revenues 38,917,779 73,639,460 33,812,907 29,782,237 - 836,830 176,989,213 COSTS AND EXPENSES Rooms 3,526,032 11,193,293 6,936,941 4,387,202 - - 26,043,468 Food and beverage 10,169,918 25,122,461 6,655,490 6,359,754 - - 48,307,623 Leisure activities 872,909 920,626 1,773,694 4,039,793 - - 7,607,022 Garage - 742,478 - - - - 742,478 Telecommunications 14,518 112,254 108,924 16,310 - - 252,006 Game room 335,602 - - - - - 335,602 General and administrative 2,006,577 3,794,944 2,536,901 2,060,728 - - 10,399,150 Human resources 1,165,028 2,364,481 575,167 1,239,303 - - 5,343,979 Marketing 596,177 1,065,549 348,412 566,692 - - 2,576,830 Contracting 182,118 332,401 413,641 224,765 - - 1,152,925 Warehouse 414,694 771,988 87,516 377,881 - - 1,652,079 Property operations 1,746,452 3,525,382 1,945,454 3,250,324 - - 10,467,612 Landscaping 169,598 1,369,806 377,026 - - - 1,916,430 Utility costs 2,245,831 6,382,343 2,082,310 3,234,906 - - 13,945,390 Rent, insurance, and other 169,313 526,139 313,233 398,513 - - 1,407,198 Security 643,910 979,046 577,268 561,212 - - 2,761,436 Interest - 16,132 - - - 8,772,513 8,788,645 Other - - - - - 50,631 50,631

Total costs and expenses 24,258,677 59,219,323 24,731,977 26,717,383 - 8,823,144 143,750,504 Income (loss) before depreciation and amortization and loss on disposal of assets 14,659,102 14,420,137 9,080,930 3,064,854 - (7,986,314) 33,238,709 GAIN ON DISPOSAL OF ASSETS - - 700 - - - 700 DEPRECIATION AND AMORTIZATION (4,479,419) (7,929,141) (6,712,650) (4,468,330) - - (23,589,540) INCOME (LOSS) FROM CONTINUING OPERATIONS 10,179,683 6,490,996 2,368,980 (1,403,476) - (7,986,314) 9,649,869

DISCONTINUED OPERATIONS Loss from operations of discontinued component - - - - (5,370,511) - (5,370,511)

NET INCOME (LOSS) 10,179,683 6,490,996 2,368,980 (1,403,476) (5,370,511) (7,986,314) 4,279,358 FUND BALANCE Fund balance at beginning of year 144,783,472 234,690,010 175,835,510 107,802,736 9,207,234 (308,081,311) 364,237,651 Capital transfer to US Army - - - - (1,425,000) (1,425,000) Fixed asset transfer - - 87,456 - - (87,456) -

Fund balance at end of year $ 154,963,155 $ 241,181,006 $ 178,291,946 $ 106,399,260 $ 3,836,723 $ (317,580,081) $ 367,092,009

-22- INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF COMBINED FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

Department of the Army Commander, U.S. Army Family, and Morale, Welfare, and Recreation Command Washington, D.C.

We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the combined financial statements of the nonappropriated fund of the United States Army Installation Management Command (IMCOM) G9 Armed Forces Recreation Centers (AFRCs) and the Single Fund, together known as the U.S. Army AFRC Funds Group (AFG), as of and for the year ended September 30, 2013, and the related notes to the combined financial statements, which collectively comprise AFG’s combined financial statements, and have issued our report thereon dated February 26, 2014.

INTERNAL CONTROL OVER FINANCIAL REPORTING

In planning and performing our audit of the combined financial statements, we considered the AFG’s internal control over financial reporting (internal control) to determine audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the combined financial statements, but not for the purpose of expressing an opinion on the effectiveness of the AFG’s internal control. Accordingly, we do not express an opinion on the effectiveness of the AFG’s internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the AFG’s combined financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

-23- Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

COMPLIANCE AND OTHER MATTERS

As part of obtaining reasonable assurance about whether the AFG’s combined financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion.

The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

PURPOSE OF THIS REPORT

The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

Richmond, Virginia February 26, 2014

-24- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Schedule of Findings and Questioned Costs September 30, 2013

AAA-1, Cash Receipts Control

Statement of Condition

During the audit it was noted that daily cash drops to the general cashier at the Edelweiss Lodge and Resort had various instances of required witness evidence missing. It was noted that Management identified the weakness during internal inspections and that action was taken to correct the matter.

It is our understanding that this control over cash receipts is required per the policies and procedures. This issue was noted in the prior audit at the Dragon Hill Lodge.

Since cash is so readily subject to error and mishandling it is essential that proper controls are in place and operating effectively.

Recommendation

We recommend that Management perform surprise cash audits within the front desk/general cashier transactions processes to ensure controls are operating as designed.

Auditor Noncompliance Code: Internal Control

Management Response

Management concurs with our comments and is continuing to develop methods to ensure that policies and procedures are operating as intended.

-25- U.S. ARMY AFRC FUNDS GROUP (A Nonappropriated Fund of the U.S. Government) Schedule of Findings and Questioned Costs Update to September 30, 2012

(2012) AAA-1, Cash Receipts Control

Statement of Condition

It is our understanding that this control over cash receipts is required per the policies and procedures. This issue was noted at the Dragon Hill Lodge in a previous audit year.

Since cash is so readily subject to error and mishandling it is essential that proper controls are in place and operating effectively.

Recommendation

We recommended that Management perform surprise cash audits within the front desk/general cashier transactions processes to ensure controls are operating as designed.

Auditor Noncompliance Code: Internal Control

Management Response

As soon as the deficiency was noted, Management put together training for its staff and is continuing to closely monitor this area to ensure control is operating effectively.

2013 Update

During the audit it was noted that cash drop witness evidence was still lacking at times.

-26-