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HomeMy WebLinkAboutAudited Financial Report PD Recreational Facilities Corporation (PDRFC) FYE 06/30/2019MEETING DATE REQUEST Recommendation STAFF REPORT XF CITY OF PALM DESERT FINANCE DEPARTMENT February 13, 2020 Jose Luis Espinoza, CPA, Assistant Finance Director Receive and File the Palm Desert Recreational Facilities Corporation audited financial reports for the fiscal year ended June 30, 2019 By Minute Motion, that the City Council receive and file the audited financial statements of the Palm Desert Recreational Facilities Corporation (PDRFC) for the fiscal year ended June 30, 2019. Strategic Plan Objective Not applicable. Committee Recommendation The Audit, Investment and Finance Committee received the audited financial statements for the PDRFC at their February 11, 2020 meeting, and recommended that the statements for the fiscal year ended June 30, 2019 be received and filed by the City Council. Background The Palm Desert Recreational Facilities Corporation is a corporation that provides food and beverage services exclusively to the Desert Willow Golf Resort. Lance, Soll & Lunghard, LLP performed and completed the annual independent audit for the fiscal year ended June 30, 2019. In the auditor's opinion, the basic financial statements present fairly, in all material respects, the financial position of the PDRFC as of June 30. 2019, and the results of its operations of the year then ended are in conformity with accounting principles generally accepted in the United States of America. In conducting the audit, the auditors are also required to test the PDRFC's internal controls. Attached is the report issued by the auditors for the year ended June 30, 2019. Staff requests that the Council receive and file the Palm Desert Recreational Facilities Corporation's audited financial reports for the fiscal year ended June 30, 2019. G.\Finance\Jessika Peltz\Staff Reports\Audit Staff Reports 2019\SR - Council audit 2019 PDRFC.docx Staff Report Receive and file PDRFC reports for Fiscal Year ended June 30, 2019 February 13, 2020 Page 2 of 2 Fiscal Impact There is no fiscal impact associated with this action. LEGAL REVIEW DEPT. REVIEW FINANCIAL REVIEW N/A l Robert W. Hargreaves net M. Moore t M. Moore City Attorney Director of Finance ctor of Finance City Manager Lauri Aylaian: ASSISTANT CITY MANAGER N/A Andy Firestine Assistant City Manager CONTENTS: Palm Desert Recreational Facilities Corporation Audited Financial Report for Fiscal Year Ended June 30, 2019, and the Independent Auditors' Report on Internal Control over Financial Reporting and on. Compliance and Other Matters based on an Audit of Financial Statements Performed in Accordance with Government Auditinq Standards JLE:jp CITY COUNCIL ACTION APPROVER ]RECEIVED* DENTED OTHER MEET G DATIF . AYES: A I NOES- NM u ABSENT° rnko n0 ABSTAIN. None, VERIFIED BY- f20kc r Sr Original on File with City Clerk's Office G:\Finance\Jessika Peltz\Staff Reports\Audit Staff Reports 2019\SR - Council audit 2019 PDRFC.docx PALM DESERT RECREATIONAL FACILITIES CORPORATION ANNUAL FINANCIAL REPORT WITH REPORT ON AUDIT BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FISCAL YEAR ENDED JUNE 30, 2019 PALM DESERT RECREATIONAL FACILITIES CORPORATION TABLE OF CONTENTS June 30, 2019 Independent Auditors' Report Page Number Management's Discussion and Analysis 3 Basic Financial Statements: Statement of Net Position 9 Statement of Revenues, Expenses and Changes in Net Position 10 Statement of Cash Flows 1 I Notes to Basic Financial Statements 12 Independent Auditors' Report on Internal Control over 17 Financial Reporting and Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards LS129�:: INDEPENDENT AUDITORS' REPORT To the Board of Directors Palm Desert Recreational Facilities Corporation Palm Desert, California Report on the Financial Statements We have audited the accompanying financial statements of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Pam Desert, California, as of and for the year ended June 30, 2019, and the related notes to the financial statements, which collectively comprise the Corporation's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management 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 Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America 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 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 opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Pam Desert, as of June 30, 2019, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. O� PrimeGlobal LS12*:: To the Board of Directors Palm Desert Recreational Facilities Corporation Palm Desert, California Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental 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 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 22, 2020 on our consideration of the Corporation'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 solely 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 effectiveness of the Corporation's 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 the Corporation's internal control over financial reporting and compliance. i Brea, California January 22, 2020 PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS June 30, 2019 Our discussion and analysis of the financial performance of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Palm Desert, provides an overview of the Corporation's financial activities for the fiscal year ended June 30, 2019. Please read it in conjunction with the Palm Desert Recreation Facilities Corporation's financial statements. FINANCIAL HIGHLIGHTS • Palm Desert Recreational Facilities Corporation's net position deficit decreased by $100,018 from $837,361 to $ 737343. • Palm Desert Recreational Facilities Corporation's gross income of $2,869,768 decreased by $160,575 (5%) from the previous year. • Palm Desert Recreational Facilities Corporation's gross profit decreased by $162,245 (7%) from last year. The gross profit margin decreased to 71 %. • Palm Desert Recreational Facilities Corporation's cost of goods sold increased by $1.670 from $831,623 to $833,293. • Palm Desert Recreational Facilities Corporation's Selling and Administrative Expense Percentage was increased from 63% to 67%. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The Statement of Net Position and Statement of Revenues, Expenses and Changes in Net Position (on pages 9 and 10) provide information about the activities of the Palm Desert Recreational Facilities Corporation as a whole, and present a long- term view of the Corporation's operations. ' The gross profit margin is calculated by dividing gross profit by gross sales. The gross profit margin indicates how well sales are performing when compared to expectations and the industry. The corporation expected an industry gross profit margin of approximately 68%. Z The selling and administrative expense percentage is calculated by dividing the sum of the Maintenance & Operations and the General & Administrative costs by the gross sales. This percentage indicates how well the corporation's overhead is maintained in relation to sales The goal is to arrive at overhead cost of approximately 64% or lower. See independent auditors' report. -3- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS REPORTING THE COMPONENT UNIT AS A WHOLE The Statement of Net Position and the Statement of Revenues, Expenses and Changes in Net Position: Our analysis of the Palm Desert Recreational Facilities Corporation as a whole begins on page 9. The Corporation plays an independent, yet vital role in completing the overall project known as Desert Willow Golf Resort (a municipal golf course owned by the City of Palm Desert). The Corporation's only function is providing the Food and Beverage operations at the Desert Willow Clubhouse. The restaurant operation within the environment of the golf industry is a necessary complement to a round of golf. The main focus of our analysis of the Palm Desert Recreational Facilities Corporation's operations is the profitability of the food and beverage activities and tailoring the restaurant to meet the expectations of all golf enthusiasts alike. What is the outcome for the food & beverage operations for this fiscal year? The Statement of Net Position and the Statement of Revenues, and the Expenses and Changes in Net Position report information about the Component Unit as a whole and about its activities. This report along with the financial highlights, noted above, illustrates the operations and the profitability of the food and beverage activities. These statements include all assets and liabilities of the Corporation using the accrual basis of accounting. With the accrual basis of accounting, all of the current year's revenues are recognized when earned instead of received, and all expenses are recorded when incurred instead of' when paid. These two statements report the Palm Desert Recreational Facilities Corporation's net position and changes in net position. Net position is the difference between assets and liabilities, which is one way to measure the Corporation's financial health, or financial position. Over time, increases or decreases in the Corporation's net position is an indication of whether its financial health is improving or deteriorating. To determine the profitability of the Corporation, consideration should also be given to other non -financial factors such as the changes in consumer spending as a direct result of the overall economic indicators, as well as changes in the significant industry factors such as price per golf round and level of tourism. THE. COMPONENT UNIT AS A WHOLE The Palm Desert Recreational Facilities Corporation's net position deficit decreased by $100,018 from $837,361 to $737,343. Management's response to the market in group outings and banquet events allowed them to reduce variable costs to mitigate the reduction in gross revenues resulting in a profit of $100,018 and reduction of the net deficit. See independent auditors' report. -4- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The restaurant operations recognized a 5 % decrease in gross revenues and a net increase in overall costs of 1%. A decline in the Group outing and banquet events resulting from reduced sales momentum impacted by the market and personnel change resulted in the reduction of gross sales. Our analysis below focuses on the Net Position (Table 1) and Changes in Net Position (Table 2) of the Corporation. Assets: Current assets Total Assets Liabilities: Other liabilities Total liabilities Net Position: Unrestricted (Deficit) Total Net Position "fable I Condensed Statements of Net Position Fiscal Year 2019 $ 333,345 $ 333,345 1,070,688 1.070.688 (737,343) Fiscal Year 2018 187,019 187.019 1,024,380 1.024.380 (837,361) $ (737,343) $ (837,361) Current assets increased by $146,326, which is related directly to the increase in the increase in cash generated from operations. Other Liabilities increased by $46,308 (5%), from $1.024,380 in fiscal year end 2018 to $1,070,688 in fiscal year end 2019. The increase from related party liabilities was the main factor in the overall increase in other liabilities. During the year the Desert Willow Golf Resort provided additional cash for operations to PDRFC which increased the related party liability. See independent auditors' report. - 5 - PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Table 2 Condensed Statements of Revenues, Expenses and Changes in Net Position Fiscal Fiscal Year Year 2019 2018 Operating Revenues: Food and beverage sales $ 2.869.768 $ 3,030,343 Total Revenues 2,869,768 3,030,343 Operating Expenses: Cost of goods sold Maintenance and operations General and administrative Total Expenses 833.293 831,623 1,718,639 1,685,460 217,818 225.794 2,769.750 2,742.877 Change in Net Position $ 100,018 $ 287,466 Component Activities Total revenue decreased by $160,575 (5%) from $3,030,343 to $2,869.768. The decline in revenues was directly attributed to a reduction in catering sales resulting from changes in the market. consumer choice, and the changes in personnel directly related to food and beverage sales. This fiscal year was the eighteenth year of operation at the Desert Willow Clubhouse. During this fiscal year the Palm Desert Recreation Facilities Corporation continued to market their banquets and outings aggressively in the national, regional and local markets and advertising campaign to maximize the larger facilities with the focus on: • Attracting new and repeat business. • Continued patronage of customers and corporate groups. • Increased banquet and outing operations. • Marketing to golfers on the golf course. As Table 2 above indicates, total expenses recognized an increase of $26,873 from $2,742.877 to $2,769,750. The majority of the increase was represented in maintenance and operations; specifically payroll costs. The mandated increase in the hourly minimum wage rate from $1 1 to $12 resulted in an overall payroll increase of $21.663. Other costs recognized minimal increases. During the 2018-2019 fiscal year, management continued to focus on retaining repeat business, continued patronage, and growing the corporate and group market as the economy improves. Another key focus of the restaurant during the 2018-2019 fiscal year was efficient management of labor costs and other expenditures in response to the fluctuations in operational activity. See independent auditors' report. -6- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The Gross Profit Margin decreased from 77% to 71%. The Selling and Administrative Expense Percentage was increased from the prior year from 63% to 67%. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets/Debt Administration The Palm Desert Recreational Facilities Corporation does not own or lease any capital assets. subsequently, there is no debt related to capital assets presented on their financial statement. More details are presented in the Notes to the Financial Statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS In preparing the budget for 2019-20, management looked at the following economic factors: • Prices: The prices for goods and services in the golf industry continue to experience downward pressure resulting from the lagging economy. In an effort to maintain the integrity of the products served at the restaurant, The Palm Desert Recreational Facility has increased menu prices between 3-5% in response to the increased pressure on costs associated with labor and supplies. Secondarily, management continues to implemented better cost control measures to eliminate wastage. In addition, the Palm Desert Recreational Facilities Corporation will continue to aggressively market and advertise to secure their market share in the local and regional golf industry. • National Economy: The golf and hospitality industries rely heavily on a strong national and local economy. With a strong national economy, the market demand for leisure activities such as golf and dining is increased, however, in an economic downturn or a slowing of the economy, the typical trend is for consumers to reduce their consumption of leisure activities. The state of the current economy was taken into consideration when budgeting for the 2019-2020 fiscal year. See independent auditors' report. -7- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS • Labor cost: The State of California has mandated increased minimum wage rates, which is scheduled to increase from $12 per hour to $13 per hour effective January 1, 2020. The increase minimum wage rate coupled with the mandated changes in employer provided health care benefits (Affordable Care Act) places pressure on an already fragile food industry. The Palm Desert Recreational Facilities Corporation has taken measures to manage labor costs without affecting customer service, and will continue to seek effective and efficient methods to implement in their daily operations. A copy of the Corporation's 2019-2020 financial plan can be obtained by contacting the Palm Desert Recreational Facilities Corporation (see below). CONTACTING THE CORPORATION'S FINANCIAL MANAGEMENT This financial report is designed to provide the users with a general overview of the Palm Desert Recreational Facilities Corporation, a component unit of the City of Palm Desert. If you have questions about this report or need additional financial information, contact the Controller at the address of the Palm Desert Recreational Facilities Corporation at 38-995 Desert Willow Drive, Palm Desert. California 92260. See independent auditors' report. -8- PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF NET POSITION June 30, 2019 ASSETS: Cash and investments Accounts receivable Prepaid costs Inventories TOTAL ASSETS LIABILITIES: Accounts payable Accrued liabilities Due to Primary Government Unearned revenue TOTAL LIABILITIES NET POSITION (DEFICIT): Unrestricted (deficit) TOTAL NET POSITION See independent auditors' report and notes to basic financial statements. k 268,248 6,038 14,247 44,812 333,345 54,554 15,543 920,718 79.873 1.070,688 (737,343) $ (737,343) PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION Fiscal Year Ended June 30, 2019 OPERATING REVENUE: Food and beverage sales TOTAL OPERATING REVENUE OPERATING EXPENSES: Cost oI'goods sold Maintenance and operations General and administrative TOTAL OPERATING EXPENSES OPERATING INCOME/CHANGE IN NET POSITION NET POSITION - BEGINNING OF YEAR NET POSITION - END OF YEAR See independent auditors' report and notes to basic financial statements. $ 2.869.768 2,869,768 833,293 1,718,639 217.818 2,769.750 100.018 (837,361) $ (737,343) !QI21 PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF CASH FLOWS Fiscal Year Ended June 30, 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from customers $ 2,867.028 Payments to suppliers (2,745,701) NET CASE{ PROVIDED BY OPERATING ACTIVITIES 121,327 CASH FLOWS FROM NONCAPITAL AND RELATED FINANCING ACTIVITIES: Cash received from primary government $ 1,372,297 Cash paid to primary government (1,345.526) NET CASH PROVIDED BY NONCAPITAL AND RELATED FINANCING ACTIVITIES 26.771 NET INCREASE IN CASH AND CASH EQUIVALENTS 148,098 CASH AND CASEI EQUIVALENTS - BEGINNING OF YEAR 120,150 CASH AND CASH EQUIVALENTS - END OF YEAR $ 268,248 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Operating income $ 100.018 Adjustments to reconcile operating income to net cash provided by operating activities: (Increase) decrease in accounts receivables, net (3.161) (Increase) decrease in inventories 2.812 (Increase) decrease in prepaid costs 2,121 Increase (decrease) in accounts payable and accrued liabilities 19,116 Increase (decrease) in unearned revenue 421 NET CASH PROVIDED BY OPERATING $ 121,327 ACTIVITIES --- See independent auditors' report and notes to basic financial statements. PALM DESERT RECREATIONAL FACILITIES CORPORNHON NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2019 1. ORGANIZATION AND DESCRIPTION OF THE REPORTING ENTITY: The Palm Desert Recreational Facilities Corporation (the Corporation) is a Corporation that provides food and beverage services exclusively to the Desert Willow Golf Resort (the Golf Resort). The Corporation is a component unit of the City of Palm Desert (the City) and is reported as an Enterprise Fund in the City's basic financial statements. The Corporation was incorporated on February 25. 1997. The Board of Directors of the Corporation consists of two members of the City Council and two members of the public at large. The annual Board of Director's meetings is held the second Monday of June at 11:00 a.m. at the principal office of the Corporation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: a. Basic Financial Statements: The basic financial statements are comprised of the Statement of Net Position, the Statement of Revenues, Expenses and Changes in Net Position, the Statement of Cash Flows and the notes to the basic financial statements. b. Basis of Presentation: The basic financial statements of the Palm Desert Recreational Facilities Corporation have been prepared in conformity with the accrual basis of accounting principles as applicable to government units. The Governmental Accounting Standards Board is the accepted standard -setting body for establishing governmental accounting and financial reporting principles. The accounts of the Corporation are an enterprise fund. An enterprise fund is a Proprietary type fund used to account for operations (a) that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes. See independent auditors' report. -12- PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL. STATEMENTS (CONTINUED) June 30, 2019 2. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (CONTINUED): c. Measurement Focus and Basis of Accounting: Measurement focus is a term used to describe "which" transactions are recorded within the various financial statements. Basis of accounting refers to "when" transactions are recorded regardless of the measurement focus applied. The accompanying financial statements are reported using the "economic resources measurement focus", and the "accrual basis of accounting". Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. d. Net Position: In the Statement of Net Position, net position is classified in the following categories: • Net investment in capital assets - This amount consists of' capital assets net of accumulated depreciation and reduced by outstanding debt that is attributed to the acquisition, construction, or improvement of the assets. • Restricted net position - This amount is restricted by external creditors, grantors, contributors, or laws or regulations of other governments. • Unrestricted net position - This amount is all net position that do not meet the definition of "net investment in capital assets" or "restricted net position". When both restricted and unrestricted resources are available for use, the Corporation may use restricted resources or unrestricted resources based on the Board's discretion. e. Operating Revenues: Operating revenues, such as food and beverage sales, resulting from exchange transactions associated with the principal activity of the Corporation. Exchange transactions are those in which each party receives and gives up essentially equal values. f. Cash and Investments: For purposes of the Statement of Cash Flows, the Corporation considers all unrestricted highly liquid investments with an initial maturity of three months or less to be cash equivalents. The carrying value was $288,131 and the deposit value was $268,248. The difference is represented by $10,199 of deposits in transit and checks outstanding totaling $30,082 for a net total of $19.883. See independent auditors' report. - 13 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIE'S (CONTINUED): f. Cash and Investments (Continued): The City has implemented GASB Statement No. 40, "Deposit and Investment Risk Disclosures". This pronouncement is an amendment to GASB Statement No. 3. GASB No. 40 establishes and modifies disclosure requirements related to deposit and investment risks. The information required by GASB Statement No. 40 related to authorized investments, credit risk, etc., is available in the annual report of the City. g. Inventories and Prepaid: Inventories in the amount of $44.812 consisted of merchandise for sales of food and beverages, are reported at lower of cost or market. Certain payments to vendors that reflect costs applicable to future accounting periods are recorded as prepaid costs in the financial statements. At June 30, 2019 the prepaid balance was $14,247. h. Budgetary Policies: Kemper Sports Management, Inc. is required to submit to the City an operating budget containing estimates of all the Corporation expenses for the next operating year, including expenditures for: (a) property operation and maintenance, ( b) repairs, replacements and alterations that do not constitute capital improvements, (c) furnishings and equipment and operating inventory, and (d) advertising, sale and business promotion. The budget is required to be reviewed and approved by the City prior to July 1 each year. 3. DUE TO PRIMARY GOVERNMENT AND UNEARNED REVENUE: Due to primary government: As of June 30, 2019, the Corporation owed the following amounts to primary government: Desert Willow Golf Course $ 692,718 City of Palm Desert 228,000 $ 920.718 The Corporation amounts owed to primary government represent amounts owed to the Desert Willow Golf Resort for monies provided for operations and rent due to the City of Palm Desert per the operating lease with the City for use of the facilities (see Note 4). See independent auditors' report. - 14- PALM DESERT RECREATIONAL, FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2019 3. DUE TO PRIMARY GOVERNMENT AND UNEARNED REVENUE, (continued): Unearned revenue: The balance of $79,873 represents the unused portions of prepaid banquets. 4. COMMITMENTS AND CONTINGENCIES: Operating Leases: The Corporation has an operating lease with the City for use of the facilities. The original terms of the lease indicated a lease rate of $8,000 per month beginning June 4, 1997. On May 18, 2004, the Corporation approved an increase in the lease payment commencing begin on July I, 2004. The July I, 2004 lease amendment stipulated a new lease payment of $15,000 per month. On May 12. 2009. the Board of Directors approved a decrease in the lease payment from $15,000 to $8,000 commencing on July I, 2009. The rent expense for the year ended June 30, 2019 was $96,000. At June 30, 2019. the Corporation owed $228.000 in rent in arrears to the City of Palm Desert. Management Agreement: The Corporation is managed by Kemper Sports Management, Inc., under an agreement to manage and operate Desert Willow Golf Course. On April 13. 2017, a new contract was approved and with a commencement date of July 2017 and a termination date of July 1, 2020. There are two 1-year options to extend the management agreement. On May 23, 2019 both 1-year options were exercised and approved. The term was extended to July 1, 2022. 5. RISK MANAGEMENT: The Golf Resort is covered by insurance purchased by Kemper Sports Management Inc., which includes commercial liability, automobile, workers' compensation and overall umbrella excess liability insurance through Aon Risk Services, Inc. of Illinois. The Corporation is named as additional insured. 6. OTHER DISCLOSURES: The Corporation has a net deficit of $ 737,343. which will be eliminated by increasing revenues through banquet and dining reservations. See independent auditors' report. - 15 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2019 6. OTHER DISCLOSURES (continued): The Corporation has federal and state income tax Net Operating losses (NOL) carryforwards of $539.898, which will expire in the next 14 years as follows: 201 1-2031 $ 395,413 2012-2032 109,556 2013-2033 34,929 $ 539,898 The corporation anticipates that it is more likely than not the benefit for each certain State and Federal NOL carryforwards will be realized prior to their respective expiration. See independent auditors' report. - 16- LS129':: INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors Palm Desert Recreational Facilities Corporation City of Palm Desert, California 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 financial statements of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Palm Desert, as of and for the year ended June 30, 2019, and the related notes to the financial statements, which collectively comprise the Corporation's basic financial statements, and have issued our report thereon dated January 22, 2020. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Corporation's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control. Accordingly, we do not express an opinion on the effectiveness of the Corporation'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 entity's 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. 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 Corporation's 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. PrimeGlobal LS[2,o::: ..as A1�-: A';. `i as To the Board of Directors Palm Desert Recreational Facilities Corporation City of Palm Desert, California 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 Corporation'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 Corporation's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. "C-4 -gr-4V�� Brea, California January 22, 2020 18