Loading...
HomeMy WebLinkAboutAudited Financl Reports - Palm Desert Recreational Facilities Corporation (PDRFC) FYE 06/30/2011CITY OF PALM DESERT FINANCE DEPARTMENT Staff Report REQUEST: RECEIVE AND FILE THE PALM DESERT RECREATIONAL FACILITIES CORPORATION AUDITED FINANCIAL REPORTS FOR THE FISCAL YEAR ENDED JUNE 30, 2011 DATE: January 26, 2012 SUBMITTED BY: Paul S. Gibson, Finance Director CONTENTS: 1. Palm Desert Recreational Facilities Corporation Audited Financial Report for Fiscal Year Ended June 30, 2011 2. 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 Recommendation By Minute Motion, that the City Council receive and file the audited financial statements of the Palm Desert Recreational Facilities Corporation for the fiscal year ended June 30, 2011. Committee Recommendation The Audit, Investment and Finance Committee received the audited financial statements for the PDRFC at their January 24, 2012 meeting, and it was recommended that the statements for the fiscal year ended June 30, 2011 be received and filed by the City Council. Background The Palm Desert Recreational Facilities Corporation (PDRFC) is a corporation that provides food and beverage services exclusively to the Desert Willow Golf Resort. White Nelson Diehl Evans LLP performed and completed the annual independent audit for the fiscal year ended June 30, 2011, for the PDRFC in accordance with generally accepted auditing standards. 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, 2011, 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. G:\Finance\Niamh Ortega\Staff Reports\Audit staff reports\Audit Staff Reports 2011\SR - Council audit 2011 PDRFC.docx Staff Report Receive and file PDRFC reports for Fiscal Year ended June 30, 2011 January 26, 2012 Page 2 of 2 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, 2011. 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, 2011. Fiscal Impact There is no fiscal impact associated with this action. Sub itted by: aul S. Gibson, Finance Director/City Treasurer Ahn.. h)lmuth, City Manager PSG:JLE:nmo CITY COUNCILkCCTION APPROVED DENIED RECEIVED OTHER AYES4T47 M1 LVy racer, 11rt,t"i NOES: ww ABSENT: � `J ABSTAIN: VERIFIED BY: Original on File with City k's Office G:\Finance\Niamh Ortega\Staff Reports\Audit staff reports\Audit Staff Reports 2011\SR - Council audit 2011 PDRFC.docx PALM DESERT RECREATIONAL FACILITIES CORPORATION ANNUAL FINANCIAL REPORT WITH REPORT ON AUDIT BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR THE YEAR ENDED JUNE 30, 2011 PALM DESERT RECREATIONAL FACILITIES CORPORATION TABLE OF CONTENTS June 30, 2011 Independent Auditors' Report Page Number Management's Discussion and Analysis 3 Basic Financial Statements: Exhibit A - Statement of Net Assets 9 Exhibit B - Statement of Revenues, Expenses and Changes in Net Assets 10 Exhibit C - Statement of Cash Flows 11 Notes to Basic Financial Statements 12 INDEPENDENT AUDITORS' REPORT Board of Directors Palm Desert Recreational Facilities Corporation Palm Desert, California We have audited the component unit basic financial statements of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Palm Desert, California, as of and for the year ended June 30, 2011, as listed in the table of contents. These component unit basic financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these component unit basic 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Palm Desert Recreational Facilities Corporation's internal control over financial reporting. Accordingly, we express no such opinion. 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 Corporation. Financial activities of other component units that form the reporting entity, that is the City of Palm Desert, are not included. In our opinion, the component unit basic financial statements referred to above present fairly, in all material respects, the financial position of Palm Desert Recreational Facilities Corporation as of June 30, 2011 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. -1- 2875 Michelle Drive, Suire 300, Irvine. CA 92606 • Tel: i 14.9i8.1300 • Fix: i I4.978.7893 {r:,. , O � �s located in OretrtgG and San Diego .;purities In accordance with Government Auditing Standards we have also issued our report dated December 9, 2011 on our consideration of the Corporation's internal control over financial reporting and 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 and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, as identified in the accompanying table of contents, 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 the 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. W k;-& Ne -V cn D LLQ Eirons L,u'-'-, December 9, 2011 Irvine, California -2- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS June 30, 2011 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, 2011. Please read it in conjunction with the Palm Desert Recreation Facilities Corporation's financial statements. FINANCIAL HIGHLIGHTS • Palm Desert Recreational Facilities Corporation's net deficit increased by $407,199 from $966,656 to $1,373,855. • Palm Desert Recreational Facilities Corporation's gross income of $1,983,633 decreased by $22,067 (1.10%) from the previous year. • Palm Desert Recreational Facilities Corporation's gross profit decreased by $23,323 (1.77%) from last year. The gross profit margin] remained constant at 65% over the last two years. • Palm Desert Recreational Facilities Corporation's cost of goods sold increased insignificantly by $1,256, which represents a less than 1 percent change from the previous year. • Palm Desert Recreational Facilities Corporation's Selling and Administrative Expense Percentage-' increased to 86% from the previous year of 79%. 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 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 (CONTINUED) June 30, 2011 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 Recreational Facilities Corporation as a whole begins on page 9. 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 expectations of all golf enthusiasts. 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 deficit increased by $407,199 from $966,656 to $1,373,855. The weak economy continues to impact the tourism and retail market which in turn continues to directly affect the utilization of the restaurant for corporate outings, weddings and banquets. Another contributor to the net assets deficit recognized this fiscal year is directly related to the expansion project of the clubhouse kitchen, restaurant and terrace facility that closed the operations for 6 and one-half months of the fiscal year. With, the expansion completed and the facility operational for the whole 2011-2012 fiscal year, it is expected that the operations will recognize an increase in business that will begin to erode the net deficit. See independent auditors' report. -4- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2011 THE COMPONENT UNIT AS A WHOLE (CONTINUED) Our analysis below focuses on the net assets (Table 1) and changes in net assets (Table 2) of the Corporation. Table 1 Condensed Statements of Net Assets Fiscal Fiscal Year Year 2011 2010 Assets: Current and restricted assets $ 250,815 $ 264,754 Total Assets 250,815 264,754 Liabilities: Other liabilities 1,624,670 1,231,410 Total Liabilities 1,624,670 1,231,410 Net Assets (Deficit): Unrestricted (1.373,855) (966,656) Total Net Assets $ (1,373,855) $ (966.656) The major change in the current assets is a decrease of inventory held at June 30, 2011 of $10,079 from the prior year. Changes in the summer menu directly impacted the overall cost of inventory at fiscal year end and allowed for less inventory required. All other changes in the assets remained consistent with the prior years. The total liabilities changed by $393,260. The major change in the overall liabilities was an increase of $376,973 due to Desert Willow directly related to the increased costs of the larger facility. Other changes in liabilities remained consistent with prior years. This fiscal year the restaurant was closed for 6 and one-half months due to the renovation of the terrace outside dining area, and the expansion of the kitchen and inside dining and bar areas. The restaurant reopened in Mid -January. During the season the restaurant recognized maximum activity with approximately 800 lunch dining covers a day. Even though this operating year was truncated by the renovation, the overall expenditures exceeded last year's by $115,859. The majority of the increase resulted from the increased cost of maintenance of operation, which counted for $67,828 of the overall cost increase. See independent auditors' report. -5- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2011 THE COMPONENT UNIT AS A WHOLE (CONTINUED) The restaurant generated $1.9 million of gross revenues during the fiscal year despite having a shortened operating year. Given the constant activity recognized by 800 dining covers per day during the season, an anticipated increase of banquets, and a full year of operations, it is expected that the Corporation will began to recognize net profit and eventually eliminate the deficit, resulting in positive net assets. Table 2 Condensed Statements of Revenues, Expenses and Changes in Net Assets Fiscal Fiscal Year Year 2011 2010 Operating Revenues: Food and beverage sales $ 1,983,633 $ 2,005,700 Total Revenues 1,983,633 2,005,700 Operating Expenses: Cost of goods sold 688,540 687,284 Maintenance and operations 1,386,634 1,318,806 General and administrative 315,658 268,883 Total Expenses 2,390,832 2,274,973 Change in Net Assets (407,1991 $ (269.273) Component Activities Total revenue decreased by 1% from $2,005,700 to $1,983,633. The most important point is that the restaurant fell short of the prior year's revenue by 1 % in only six months of operations, as it was closed for renovation for most of the beginning of the fiscal year. During the fiscal year the corporate events and banquets markets remained flat. This fiscal year was the eleventh 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 focus the advertising campaign to minimize the impact of the economic downturn, and maximize the newer larger facilities with the emphasis 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. See independent auditors' report. M PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2011 THE COMPONENT UNIT AS A WHOLE (CONTINUED) As Table 2 above indicates, total expenses recognized a minor 5% increase from $2,274,973 to $2,390,832. The increase was a direct result of the increased maintenance, operation, and administrative cost associated with the increased size of the facilities and increase in operations of the restaurant. The Gross Profit Margin was consistent with previous years, indicating that the decrease in overall expenses correlates with the decrease in business. The Selling and Administrative Expense Percentage increased by 7% from 79% to 86% from the prior year. The increase is directly related to the shortened operating year resulting from the expansion of the facilities. Next year's percentage should be in line with expectations. 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 detail is presented in the notes to the Financial Statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS In preparing the budget for 2011-12, management looked at the following economic factors: Prices: The prices for goods and services in the golf industry have had downward pressure resulting from the collapse of the financial market and economy. In an effort to maintain the integrity of the products served at restaurant, The Palm Desert Recreational Facility held prices constant and 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 the consumer to reduce their consumption of leisure activities. The state of the current economy was taken into consideration when budgeting for the 2011-2012 fiscal year. During the 2010-2011 fiscal year, the clubhouse restaurant was expanded in the areas of the outside terrace dining area as well as the kitchen and inside bar areas. The space is now large enough to allow for various banquet functions to be held simultaneously. See independent auditors' report. -7- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS. (CONTINUED) June 30, 2011 ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS (CONTINUED) • Energy and fuel cost: Although the erratic changes in energy and fuel costs have been controlled, some uncertainty lingers regarding the cost of fuel and energy in California and 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. A copy of the Corporation's 2011-2012 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 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 ASSETS June 30, 2011 ASSETS: Cash and cash equivalents Accounts receivable Inventories Prepaid expenses TOTAL ASSETS LIABILITIES: Accounts payable Accrued liabilities Advances from related party Unearned revenues TOTAL LIABILITIES NET ASSETS (DEFICIT): Unrestricted (deficit) TOTAL NET ASSETS (DEFICIT) See independent auditors' report and notes to basic financial statements. -9- Exhibit A $ 187,609 9,235 45,349 8,622 250,815 64,521 25,654 1,480,297 54,198 1,624,670 (1,373,855) $ (1,373,855) Exhibit B PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS For the year ended June 30, 2011 OPERATING REVENUES: Food and beverage sales TOTAL OPERATING REVENUES OPERATING EXPENSES: Cost of goods sold Maintenance and operations General and administrative TOTAL OPERATING EXPENSES OPERATING LOSS CHANGE IN NET ASSETS NET ASSETS (DEFICIT) - BEGINNING OF YEAR NET ASSETS (DEFICIT) - END OF YEAR See independent auditors' report and notes to basic financial statements. -10- $ 1,983,633 1,983,633 688,540 1,386,634 315,658 2,390,832 (407,199) (407,199) (966,656) $ (1,373,855) Exhibit C PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF CASH FLOWS For the year ended June 30, 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from customers $ 2,014,469 Payments to suppliers (2,390,105) NET CASH USED BY OPERATING ACTIVITIES (375,636) CASH FLOWS FROM NON -CAPITAL AND RELATED FINANCING ACTIVITIES Cash received from other funds 376,973 NET CASH PROVIDED BY NON -CAPITAL AND RELATED FINANCING ACTIVITIES 376,973 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,337 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 186,272 CASH AND CASH EQUIVALENTS - END OF YEAR $ 187,609 RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES: Operating loss $ (407,199) Adjustments to reconcile operating loss to net cash used by operating activities: Changes in assets and liabilities: (Increase) decrease in accounts receivables 9,358 (Increase) decrease in inventory 10,080 (Increase) decrease in prepaid expenses (4,162) Increase (decrease) in accounts payable and accrued liabilities (5,192) Increase (decrease) in unearned revenues 21,479 NET CASH USED BY OPERATING ACTIVITIES $ (375,636) See independent auditors' report and notes to basic financial statements. - 11 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO, BASIC FINANCIAL STATEMENTS June 30, 2011 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 Assets, the Statement of Revenues, Expenses and Changes in Net Assets, 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 generally accepted 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 FICILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENT (CONTINUED) June 30, 2011 2. SUMMARY OF SIGNIFICANT ACCOUNTING 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 Assets: In the Statement of Net Assets, net assets are classified in the following categories: Invested in capital assets, net of related debt - 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 assets - This amount is restricted by external creditors, grantors, contributors, or laws or regulations of other governments. Unrestricted net assets - This amount is all net assets that do not meet the definition of "invested in capital assets, net of related debt" or "restricted net assets". 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 Cash Equivalents: 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 $187,609 and the deposit value was $215,401. The difference is represented by $8,488 of deposits in transit and checks outstanding totaling $36,280, for a net total of $27,792. See independent auditors' report. -13- PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): f. Cash and Cash Equivalents (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: Inventories are stated, at the lower of cost or market (no adjustments were made to reduce inventory below cost) with cost determined using the Weighted Average Cost Method. At June 30, 2011, inventories consisted of $45,349 in merchandise for sales of food and beverages. 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 which do not constitute capital improvements, (c) fiirnishings 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. RELATED PARTY TRANSACTIONS: Advances from Related Party: As of June 30, 2011, the Corporation owed the following amounts to related parties: Desert Willow Golf Course $ 1,195,297 City of Palm Desert 285,000 The Corporation has an 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, 2011 4. COMMITMENTS AND CONTINGENCIES: Operating Leases: The Corporation has an operating lease with the City for use of the facilities that has been amended several times. 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 to begin on July 1, 2004. The July 1, 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 1, 2009. The rent expense for the year ended June 30, 2011 was $96,000. In addition, at June 30, 2011, the Corporation owed $285,000 in rent 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 May 13, 2008, the Palm Desert Recreational Facilities Corporation renewed their management agreement with Kemper Sports Management, Inc. This agreement expired on June 30, 2011. The management agreement also includes two one-year options to extend at the City of Palm Desert's discretion. Subsequently, on May 22, 2008, the City of Palm Desert renewed their agreement with Kemper Sports Management, Inc. for three years commencing on July 1, 2008 and ending on June 30, 2011. The first option to extend the agreement was approved for the 2011-2012 fiscal year. 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 $1,373,855, which will be eliminated by increasing revenues through banquet and dining reservations. During the 2010-2011 fiscal year the kitchen and the outside dining terrace was renovated to increase the size of the kitchen and banquet space . The expansion project increased the restaurant and kitchen area by 5,000 square feet and the outside terrace seating capacity by and additional 200 seats. The expanded kitchen and terrace allows for larger banquets and normal dining to be served simultaneously. See independent auditors' report. -15- 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 Board of Directors Palm Desert Recreational Facilities Corporation Palm Desert, California We have audited the component unit basic financial statements of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Palm Desert, California, as of and for the year ended June 30, 2011, and have issued our report thereon dated December 9, 2011. 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. Internal Control Over Financial Reporting Management of the Corporation is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the Corporation's internal control over financial reporting as a basis for designing our auditing procedures 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 over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Corporation's internal control over financial reporting. A deficiency in internal control exists when the design or operation • of a control does not allow management or employees, in the 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 Corporation's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. -1- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • TeL 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Counties Compliance and Other Matters As part of obtaining reasonable assurance about whether the Palm Desert Recreational Facilities Corporation's financial statements are free of 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 and other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Board of Directors, management of the Palm Desert Recreational Facilities Corporation and others within the Corporation, and is not intended to be and should not be used by anyone other than these specified parties. t c" iVzL-r o L D L hL Evans L. uO December 9, 2011 Irvine, California -2-