Loading...
HomeMy WebLinkAboutAudited Financial Reports - Recreational Facilities - FY Ending 06/30/05PALM DESERT RECREATIONAL FACILITIES CORPORATION PALM DESERT, CALIFORNIA FINANCIAL STATEMENTS JUNE 30, 2005 PALM DESERT RECREATIONAL FACILITIES CORPORATION PALM DESERT, CALIFORNIA FINANCIAL STATEMENTS JUNE 30, 2005 PALM DESERT RECREATIONAL FACILITIES CORPORATION TABLE OF CONTENTS JUNE 30, 2005 Page Number Independent Auditors' Report Management's Discussion and Analysis Basic Financial Statements: Exhibit A - Statement of Net Assets Exhibit B - Statement of Revenues, Expenses and Changes in Net Assets Exhibit C - Statement of Cash Flows 10 Notes to Basic Financial Statements 11 INDEPENDENT AUDITORS'REPORT Board of Directors Palm Desert Recreational Facilities Corporation City of Palm Desert, California We have audited the component unit financial statements of the Palm Desert Recreational Facilities Corporation, a component unit of the City of Palm Desert, California, as of and for the year ended June 30, 2005, as listed in the accompanying table of contents. These component unit financial statements are the responsibility of the Palm Desert Recreational Facilities Corporation's management. Our responsibility is to express an opinion on these component unit 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 component unit financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the component unit financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The component unit financial statements referred to above include only the financial activities of the Palm Desert Recreational Facilities Corporation. Financial activities of other component units that form the reporting entity are not included. The management's discussion and analysis is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. In our opinion, the component unit financial statements referred to above present fairly, in all material respects, the financial position of the Palm Desert Recreational Facilities Corporation as of June 30, 2005, and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. -e & L un hard LE9C S 11 LILP CERTIFIED PUBLIC ACCOUN TAN TS Board of Directors Palm Desert Recreational Facilities Corporation In accordance with Government Auditing Standards, we have also issued our report dated September 9, 2005 on our consideration of the City of Palm Desert's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. September 9, 2005 PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Our discussion and analysis of the financial performance of the Palm Desert Recreational Facilities Corporation, a component unit of the City of Palm Desert, provides an overview of the City's financial activities for the fiscal year ended June 30, 2005. Please read it in conjunction with the Palm Desert Recreation Facilities Corporation's financial statements. FINANCIAL HIGHLIGHTS • Palm Desert Recreational Facilities Corporation's net assets deficit increased by $ 5,840 from $401,860 to $407,700. • Palm Desert Recreational Facilities Corporation's gross income of $1,902,398 increased by $171,865 (10%) over last year. • Palm Desert Recreational Facilities Corporation's gross profit increased by $133,173 (11 %) from last year. The gross profit margin' increased to 69% from 68% ; which was the margin for the last three years. • Palm Desert Recreational Facilities overhead (Maintenance & Operations and General & Administrative) increased by $208,702 (19%). • Palm Desert Recreational Facilities Corporation's cost of goods sold increased by $38,692, which represents a 7 percent increase from the previous year. • Palm Desert Recreational Facilities Corporation's Selling and Administrative Expense Percentage 2 increased by 5 % to 69%. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The Balance Sheet and Statement of Revenues, Expenses and Changes in Net Assets (on pages 8 and 9) 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 bN dividing gross profit bN gross sales. The gross profit margin indicates lioNN NNell salesare performing Nflien compared to expectationsand the industr%. The corporation expectedan industrN gross profit margin ofapproxiniatclN 68%,. The sciiiiigiiididiiiiiiistritiN-c expense percentage is calculated bN dividing the suni of the Maintenance Operationsand the General & Administrative costs bN the gross sales. This percentage indicates lioNN NNell the corporation*s overhead is maintained in relation to sales. The goal is to deriveat overhead cost ofapproxiniatclN 64%, or IoNNer. REPORTING THE COMPONENT UNIT AS A WHOLE The Balance Sheet and the Statement of Revenues, Expenses and Changes in Net Assets: Our analysis of the Palm Desert Facilities Corporation as a whole begins on page 8. The Corporation plays a 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 main 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 expectation of all golf enthusiasts alike. What is the outcome for the food & beverage operations for this fiscal year? The Balance Sheet and the Statement of Revenues, and the Expenses and Changes in Net Assets 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 assets and changes in net assets. Net assets are 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 assets are 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 combined net assets deficit increased by $5,840 from $401,860 to $407,700. For the first three years of operations (1997-2000), the corporation operated out of a temporary facility; beginning in April 2000 the corporation moved into and began operating from its permanent restaurant located within the Desert Willow Golf Course Clubhouse. Although the corporation has continued to recognize a deficit net asset, our analysis indicates an upturn in operations and predicts a complete turnaround within a few years. Our analysis below focuses on the net assets (Table 1) and changes in net assets (Table 2) of the Corporation. TABLE 1 NET ASSETS (IN THOUSANDS) As of June 30, 2005 and 2004 Component Unit Activities 2005 2004 Current and restricted assets $ 350,894 $ 447,510 TOTAL ASSETS 350,894 447,510 Other liabilities 758,594 849,370 TOTAL LIABILITIES 758,594 849,370 Net assets (deficit): Invested in capital Unrestricted 407,700 401,860 TOTALNET ASSETS (DEFICIT) $ 407,700 $ 401,860 The fiscal year end loss of $5,840 increased the deficit in net assets by 1%. The major factor in contributing to the fiscal year end loss is the rental rate increase of $7,000 per month. The rent was adjusted by the lessee and approved by the PDRFC Board of Directors effectively July 1, 2004; the current monthly rent is $15,000. Although the corporation continues to experience a deficit in net assets, we expect the corporation will began to recognize net profit which will eventually eliminate the deficit; resulting in a positive net assets. TABLE 2 CHANGES IN NET ASSETS As of June 30, 2005 and 2004 Component Activities 2005 2004 REVENUES: Program Revenues: Food & Beverage $ 1,902,398 $ 1,730,533 TOTALREVENUES 1,902,398 $ 1,730,533 EXPENSES: Cost of Goods Sold $ 590,892 $ 552,200 Maintenance & Operations $ 1,090,015 $ 961,975 General & Administrative $ 227,331 $ 146,669 TOTALEXPENSES $ 1,908,238 $ 1,660,844 INCREASE(DECREASE) IN NET ASSETS (5,840) $ 69,689 5 Component Activities Total revenue increased from $1,730,533 to $1,902,398, a 10% increase. The main factor involved with this increase is the fact that Palm Desert Recreation Facilities has continually become more efficient with operations. This fiscal year was the fifth full year of operations at the Desert Willow Clubhouse. During this fiscal year the corporation was able to market their banquets and outings based on the previous years' history. Factors that contributed to the increase are as follows: • Efficiency in marketing and attracting new business. • Continued patronage of customers and corporate groups. • Increased Banquet operations. 0 Consistency in golf rounds played. As Table 2 above indicates, total expenses increased from $1,660,844 to $1,908,238, a 15% increase. The major factor in the increase in expenditures was the increased rental rate for the restaurant at the Desert Willow Clubhouse, which represented $84,000 (33%) of the $247,394 expense increase. The remaining increase was a normal response to the additional business activities recognized during the fiscal year. The Gross Profit Margin and the Selling and Administrative Expense Percentage were consistent with previous years, indicating that the increase in overall expenses correlate with the increase in business. CAPITAL ASSET 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 detail is presented in the notes to the Financial Statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS In preparing the budget for 2006, management looked at the following economic factors: Energy and fuel cost: Although California appears to be past the energy crisis, the repercussions of increased energy and fuel costs remain. The Palm Desert Recreational Facilities Corporation has taken measures to reduce energy usage in the high peak period without impacting the quantity or quality of service. Prices: The prices for goods and services in the golf industry have remained constant for the last two years. Many public golf facilities have maintained their marketing strategies and held prices constant in response to consumer choices. Unlike previous years where the consumer paid the established prices, with the introduction of several new golf courses and the refurbishing of older ones, the consumer has many choices. At this point, it appears that the pricing for golf and amenities has met the current demand; hence, prices are held constant. Nonetheless, the Palm Desert Recreational Facilities Corporation continues to aggressively market and advertise to secure their market share in the local 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 the consumer to reduce their consumption of leisure activities. The current increases in fuel costs will increase the cost of food and beverage inventory, causing upward pressure on the prices at the restaurant, resulting in a reduction in sales. The Palm Desert Recreational Facilities Corporation does not know the extent of the impact that the rising fuel costs would have on tourism to the Coachella Valley, but since the golf industry relies heavily on the local tourism industry for their revenue, a downturn in tourism would affect the corporation's revenue. The high worker's compensation costs to employers throughout the State of California will continue to place upward pressure on the cost of providing services and supplies. Although the corporation recognized a reduction in the overall costs of worker's compensation, it still represents over 15% of the total payroll costs. There is still some uncertainty on the State's administrative impact on the overall costs of worker's compensation and how it would affect the overall costs of services and supplies. The Palm Desert Recreational Facilities Corporation will continue to observe the effects on their costs and will adjust prices accordingly, if appropriate. A copy of the City's 2005-2006 financial plan can be obtained by contacting the City of Palm Desert's Finance Department (See below). CONTACTING THE CITY'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 City of Palm Desert's Finance Department, at the City of Palm Desert, 73-510 Fred Waring Drive, Palm Desert, California 92260-2578, or (760) 346-0611. PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2005 Note 1: Summary of Significant Accounting Policies a. General 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 discrete 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. b. Basis of Accounting On July 1, 2000, the Corporation adopted the provisions of GASB Statement No. 34 ("Statement 34") of the Governmental Accounting Standards Board, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments. Statement 34 established standards for external financial reporting for all state and local government entities, which includes a balance sheet, a statement of revenues, expenses and changes in net assets and a statement of cash flows. It requires the classification of net assets into three components - invested in capital assets, net of related debt; restricted; and unrestricted. These classifications are defined as follows: Invested in capital assets, net of related debt - This component of net assets consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds are not included in the calculation of invested in capital assets, net of related debt. Rather, that portion of the debt is included in the same net assets component as the unspent proceeds. Restricted - This component of net assets consists of constraints placed on net asset used through external constraints imposed by creditors (such as through debt covenants), grantors, contributors or laws or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted net assets - This component of net assets consists of net assets that do not meet the definition of "restricted" or "invested in capital assets, net of related debt". The adoption of Statement No. 34 had no effect on the basic financial statements except for the classification of net assets in accordance with the statement and the reflection of capital contributions as a change in net assets. See Independent Auditors' Report 11 Palm Desert Recreational Facilities Corporation Notes to Financial Statements (Continued) Note 1: Summary of Significant Accounting Policies (Continued) The Corporation reports its activities as an enterprise fund, which is used to account for operations that are financed and operated in a manner similar to a private business enterprise, where the intent of the Corporation is that the costs (including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. Revenues and expenses are recognized on the accrual basis. Revenues are recognized in the accounting period in which they are earned and expenses are recognized in the period incurred, regardless of when the related cash flow takes place. Operating revenues, such as food and beverage sales, result from exchange transactions associated with the principal activity of the Corporation. Exchange transactions are those in which each party receiving and gives up essentially equal values. The Corporation has elected under GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Activities that Use Proprietary Fund Accounting, to apply all GASB pronouncements as well as any applicable pronouncements of the Financial Accounting Standards Board (FASB), the Accounting Principals Board (APB), or any Accounting Research Bulletins (ARB) issued on or before November 30, 1989, unless they contradict or conflict with GASB pronouncements. c. Capital Assets and Depreciation Capital assets are defined by the Corporation as assets with an initial cost of more than $500 and an estimated life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Machinery and equipment are depreciated using the straight-line method over the following estimated useful lives: Assets Years Machinery and equipment 3-7 As of June 30, 2005, the Corporation did not have any capital assets or related depreciation expense. d. Budgets 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 which 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 of each year. See Independent Auditors' Report 12 Palm Desert Recreational Facilities Corporation Notes to Financial Statements (Continued) Note 1: Summary of Significant Accounting Policies (Continued) e. Cash, Cash Equivalents and Credit Risk For purpose 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 $294,975 and the deposit value was $289,450. 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. f. Inventories Inventories are stated at the lower cost or market (no adjustments were made to reduce inventory below cost) with cost determined using the Weighted Average Cost Method. At June 30, 2005, inventory consisted of $26,296 in merchandise for sales of food and beverages. g. Leases Leases, which in substance transfer all of the benefits and risks equivalent to ownership of the property are classified as capital leases. The related assets and liabilities are recorded at amounts equal to the lesser of the present value of the minimum lease payments or the fair value of the leased property at the beginning of the respective leased terms. Generally, such assets are amortized over their economic lives. Interest expense relating to the lease liabilities is recorded to effect constant rates of interest over the terms of the leases. All other leases are classified as operating leases and related rentals are charged to expense as incurred. h. Income Tax Status The Corporation went through the process of obtaining exemption from federal income and state franchise taxes. Required applications to obtain exempt status from the Internal Revenue Service and Franchise Board were filed. The application filed with the Internal Revenue Service was not approved. i. Use of Estimates The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of 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. See Independent Auditors' Report 13 Palm Desert Recreational Facilities Corporation Notes to Financial Statements (Continued) Note 2: Related Party Transactions Advances From Related Party As of June 30, 2005, the Corporation owed the following amounts to related parties: Desert Willow Golf Resort $ 149,460 City of Palm Desert 468,000 The Corporation has an operating lease with the City of Palm Desert for use of the facilities (see Note 3). Note 3: Commitments and Contingencies Operating Leases Obligations under operating leases are as follows: The Corporation has an operating lease with the City of Palm Desert for use of the facilities. The terms of the lease are $8,000 per month beginning June 4, 1997. The lease is a month -to -month lease with no expiration date. On May 18, 2004, the Corporation approved an increase in the lease payment to begin on July 1, 2004. The new lease payment is $15,000 per month. Total rent expense incurred for the year ended June 30, 2005 under this lease was $180,000. Management Agreement The Corporation is managed by Kemper Sports Management, Inc., under an agreement to manage and operate Desert Willow Golf Course, a component unit of the City of Palm Desert. This agreement commenced on April 10, 2003 and will expire on June 30, 2006. Note 4: Risk Management The Golf Resort is covered by insurance purchased by Kemper Sports Management Inc., general managers, which includes commercial liability, automobile, worker's compensation and overall umbrella excess liability insurance through Aon Risk Services, Inc. of Illinois. Note 5: Other Disclosures The Palm Desert Recreational Facilities Corporation has a net asset deficit of $407,700, which will be eliminated by increasing revenues through banquet reservations. See Independent Auditors' Report 14 MANAGEMENT'S DISCUSSION AND ANALYSIS Our discussion and analysis of the financial performance of the Palm Desert Recreational Facilities Corporation, a component unit of the City of Palm Desert, provides an overview of the City's financial activities for the fiscal year ended June 30, 2005. Please read it in conjunction with the Palm Desert Recreation Facilities Corporation's financial statements. FINANCIAL HIGHLIGHTS • Palm Desert Recreational Facilities Corporation's net assets deficit increased by $ 5,840 from $401,860 to $407,700. • Palm Desert Recreational Facilities Corporation's gross income of $1,902,398 increased by $171,865 (10%) over last year. • Palm Desert Recreational Facilities Corporation's gross profit increased by $133,173 (11 %) from last year. The gross profit margin' increased to 69% from 68% ; which was the margin for the last three years. • Palm Desert Recreational Facilities overhead (Maintenance & Operations and General & Administrative) increased by $208,702 (19%). • Palm Desert Recreational Facilities Corporation's cost of goods sold increased by $38,692, which represents a 7 percent increase from the previous year. • Palm Desert Recreational Facilities Corporation's Selling and Administrative Expense Percentage 2 increased by 5 % to 69%. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The Statement of Net Assets and Statement of Revenues, Expenses and Changes in Net Assets (on pages 8 and 9) 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 bN dividing gross profit bN gross sales. The gross profit margin indicates lioNN NNell salesare performing Nflien compared to expectationsand the industn. The corporation expectedan indtistr% gross profit margin ofapproxiniatclN 68%. The sell ing and adiiiiiiistrat ive expense percentage is calculated bN dividing the stini of the Maintenance & Operationsand the General & Administrative costs bN the gross sales. This percentage indicates lioNN NNell the corporation*s overlicad is maintained in relation to sales. The goal is to derive at overlicad cost ofapproxiniatclN 64% or IoNNer. REPORTING THE COMPONENT UNIT AS A WHOLE The Statement of Net Assets and the Statement of Revenues, Expenses and Changes in Net Assets: Our analysis of the Palm Desert Facilities Corporation as a whole begins on page 8. The Corporation plays a 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 main 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 expectation of all golf enthusiasts alike. What is the outcome for the food & beverage operations for this fiscal year? The Statement of Net Assets and the Statement of Revenues, and the Expenses and Changes in Net Assets 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 assets and changes in net assets. Net assets are 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 assets are 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 combined net assets deficit increased by $5,840 from $401,860 to $407,700. For the first three years of operations (1997-2000), the corporation operated out of a temporary facility; beginning in April 2000 the corporation moved into and began operating from its permanent restaurant located within the Desert Willow Golf Course Clubhouse. Although the corporation has continued to recognize a deficit net asset, our analysis indicates an upturn in operations and predicts a complete turnaround within a few years. Our analysis below focuses on the net assets (Table 1) and changes in net assets (Table 2) of the Corporation. 11 TABLE 1 NET ASSETS (IN THOUSANDS) As of June 30. 2005 and 2004 Component Unit Activities 2005 2004 Current and restricted assets $ 350,894 $ 447,510 TOTAL ASSETS 350,894 447,510 Other liabilities 758,594 849,370 TOTAL LIABILITIES 758,594 849,370 Net assets (deficit): Invested in capital Unrestricted 407,700 401,860 TOTALNET ASSETS (DEFICIT) $ 407,700 $ 401,860 The fiscal year end loss of $5,840 increased the deficit in net assets by 1 %. The major factor in contributing to the fiscal year end loss is the rental rate increase of $7,000 per month. The rent was adjusted by the lessee and approved by the PDRFC Board of Directors effectively July 1, 2004; the current monthly rent is $15,000. Although the corporation continues to experience a deficit in net assets, we expect the corporation will began to recognize net profit which will eventually eliminate the deficit; resulting in a positive net assets. TABLE 2 REVENUES: Program Revenues: Food & Beverage TOTALREVENUES EXPENSES: Cost of Goods Sold Maintenance & Operations General & Administrative TOTALEXPENSES INCREASE(DECREASE) IN NET ASSETS Component Activities CHANGES IN NET ASSETS As of June 30, 2005 and 2004 Component Activities 2005 2004 $ 1,902,398 $ 1,730,533 1,902,398 $ 1,730,533 $ 590,892 $ 552,200 $ 1,090,015 $ 961,975 $ 227,331 $ 146,669 $ 1,908,238 $ 1,660,844 (5,840) $ 69,689 Total revenue increased from $1,730,533 to $1,902,398, a 10% increase. The main factor involved with this increase is the fact that Palm Desert Recreation Facilities has continually become more efficient with operations. This fiscal year was the fifth full year of operations at the Desert Willow Clubhouse. During this fiscal year the corporation was able to market their banquets and outings based on the previous years' history. Factors that contributed to the increase are as follows: • Efficiency in marketing and attracting new business. • Continued patronage of customers and corporate groups. • Increased Banquet operations. 0 Consistency in golf rounds played. As Table 2 above indicates, total expenses increased from $1,660,844 to $1,908,238, a 15% increase. The major factor in the increase in expenditures was the increased rental rate for the restaurant at the Desert Willow Clubhouse, which represented $84,000 (33%) of the $247,394 expense increase. The remaining increase was a normal response to the additional business activities recognized during the fiscal year. The Gross Profit Margin and the Selling and Administrative Expense Percentage were consistent with previous years, indicating that the increase in overall expenses correlate with the increase in business. CAPITAL ASSET 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 detail is presented in the notes to the Financial Statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS In preparing the budget for 2006, management looked at the following economic factors: Energy and fuel cost: Although California appears to be past the energy crisis, the repercussions of increased energy and fuel costs remain. The Palm Desert Recreational Facilities Corporation has taken measures to reduce energy usage in the high peak period without impacting the quantity or quality of service. Prices: The prices for goods and services in the golf industry have remained constant for the last two years. Many public golf facilities have maintained their marketing strategies and held prices constant in response to consumer choices. Unlike previous years where the consumer paid the established prices, with the introduction of several new golf courses and the refurbishing of older ones, the consumer has many choices. At this point, it appears that the pricing for golf and amenities has met the current demand; hence, prices are held constant. Nonetheless, the Palm Desert Recreational Facilities Corporation continues to aggressively market and advertise to secure their market share in the local 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 the consumer to reduce their consumption of leisure activities. The current increases in fuel costs will increase the cost of food and beverage inventory, causing upward pressure on the prices at the restaurant, resulting in a reduction in sales. The Palm Desert Recreational Facilities Corporation does not know the extent of the impact that the rising fuel costs would have on tourism to the Coachella Valley, but since the golf industry relies heavily on the local tourism industry for their revenue, a downturn in tourism would affect the corporation's revenue. The high worker's compensation costs to employers throughout the State of California will continue to place upward pressure on the cost of providing services and supplies. Although the corporation recognized a reduction in the overall costs of worker's compensation, it still represents over 15% of the total payroll costs. There is still some uncertainty on the State's administrative impact on the overall costs of worker's compensation and how it would affect the overall costs of services and supplies. The Palm Desert Recreational Facilities Corporation will continue to observe the effects on their costs and will adjust prices accordingly, if appropriate. A copy of the City's 2005-2006 financial plan can be obtained by contacting the City of Palm Desert's Finance Department (See below). CONTACTING THE CITY'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 City of Palm Desert's Finance Department, at the City of Palm Desert, 73-510 Fred Waring Drive, Palm Desert, California 92260-2578, or (760) 346-0611. PALM DESERT RECREATIONAL FACILITIES CORPORATION Exhibit C STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2005 Cash Flows From Operating Activities: Receipts from customers $ 1,891,596 Payments to suppliers (2,002,291) Net Cash Provided (Used) by Operating Activities (110,695) Net Increase in Cash and Cash Equivalents (110,695) Cash and Cash Equivalents - Beginning of the Year 405,670 Cash and Cash Equivalents - End of the Year $ 294,975 Reconciliation of Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities: Operating income (loss) $ (5,840) Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Change in assets and liabilities: Receivables (14,691) Prepaid 902 Inventories (290) Accounts and other payables (2,701) Accounts payable related parties (91,964) Unearned revenue 3,889 Net Cash Provided (Used) by Operating Activities (110,695) See independent auditors' report and notes to financial statements. 10