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Paris Economic Development Corp. FY 2004-05 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Independent Auditors' Report and Financial Statements For the Year Ended September 30, 2005 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Table of Contents September 30, 2005 Independent Auditors' Report Financial Statements: Governmental Funds Balance Sheet/Statement of Net Assets 2 Statement of Revenues, Expenditures, and Changes in Fund Balances/ Statement of Activity 3 Notes to Financial Statements 4 Required Supplementary Information - Budgetary Comparison Schedule - General Fund 8 Notes to Required Supplementary Information 9 Continuing Disclosure Information (Unaudited) 10 MCCLANAHAN AND HOLMES, LLP CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report 228 SIXTH STREET, S.E. PARIS, TEXAS 75460 903-784-4316 FAX 903-784-4310 304 WEST CHESTNUT DENISON, TEXAS 75020 903-465-6070 FAX 903-465-6093 1400 WEST RUSSEll BONHAM, TEXAS 75418 903-583-5574 FAX 903-583-9453 R. FRANK RAY, CPA R. E. BOSTWICK, CPA STEVEN W. MOHUNDRO, CPA GEORGE H. STRUVE, CPA ANDREW B. REICH, CPA Board of Directors Paris Economic Development Corporation Paris, Texas We have audited the accompanying financial statements of Paris Economic Development Corporation (PEDe), a component unit of the City of Paris, Texas, as of and for the year ended September 30, 2005, as listed in the table of contents. These financial statements are the responsibility ofPEDC's management. Our responsibility is to express an opinion 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 us with a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Paris Economic Development Corporation as of September 30, 2005, and the results of its activities for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The Continuing Disclosure Information is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the financial statements, and accordingly, we express no opinion on it. The budgetary comparison information on Page 8 is not a required part of the financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. 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. PEDC has not presented Management's Discussion and Analysis which accounting principles generally accepted in the United States has determined is necessary to supplement, although not required to be part of, the financial statements. 11k ~~ J //~%, UjJ Certified Public Accountants November 17, 2005 Paris, Texas AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Governmental Funds Balance Sheet/Statement of Net Assets September 30, 2005 General Debt Service Governmental Fund Fund Total Adjustments * Activities ASSETS Cash and Cash Equivalents $ 543,554 $ $ 543,554 $ $ 543,554 Investments 477,464 477,464 477,464 Accounts Receivable - Sales Tax 178,778 178,778 178,778 Accrued Interest Receivable 10,266 10,266 10,266 Restricted Assets Bond Debt Service Fund Cash and Cash Equivalents 29,542 29,542 29,542 Bond Reserve Fund Cash and Cash Equivalents 410,458 410,458 410,458 Notes Receivable 4,436,168 4,436,168 4,436,168 Land Development Costs 1,244,751 1,244,751 1,244,751 Total Assets $ 6,890,981 $ 440,000 $ 7,330,981 $ $ 7,330,981 LIABILITIES Liabilities Payable from Restricted Assets Current Portion of Bonds Payable $ $ $ $ (165,000) $ 165,000 Accrued Interest Payable (18,352) 18,352 Notes Payable - Due Within One Year (389,047) 389,047 Notes Payable - Net of Current Portion (1,049,420) 1,049,420 Bonds Payable- Net of Current Portion (3,130,000) 3,130,000 Total Liabilities (4,751,819) 4,751,819 FUND BALANCES/NET ASSETS Fund Balances: Reserved for Debt Service 256,648 256,648 256,648 Unreserved 6,890,981 183,352 7,074,333 7,074,333 Total Fund Balances 6,890,981 440,000 7,330,981 7,330,981 Total Liabilities and Fund Balances $ 6,890,981 $ 440,000 $ 7,330,981 Net Assets: Restricted for Debt Service (256,648) 256,648 Unrestricted (2,322,514) 2,322,514 Total Net Assets $ $ 2,579,162 *Primarily long-term liabilities not reported in the funds See accompanying notes to fmancial statements. 2 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Statement of Revenues, Expenditures, and Changes in Fund Balances/Statement of Activity For the Year Ended September 30, 2005 *Primarily long-term liabilities not reported in the funds See accompanying notes to fmancial statements. 3 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Notes to Financial Statements September 30,2005 Note 1: Organization The Paris Economic Development Corporation (PEDe) is a governmental non-profit corporation established July 19, 1993, funded by a quarter percent sales tax. PEDC was organized exclusively for the purpose of benefiting and accomplishing public purposes of the City of Paris, Texas, by promoting, assisting, and enhancing economic development activities for the City as provided by the Development Corporation Act of 1979. PEDC is a component unit of the City of Paris, Texas, and the business and affairs are managed by a five-member board of directors appointed by the governing body of the City of Paris, Texas. Note 2: Summary of Significant Accounting Policies A. Measurement Focus, Basis of Accounting, and Basis of Presentation The accounting policies of PEDC conform to accounting principles generally accepted in the United States of America as applicable to governments. The following is a summary of the more significant accounting policies: Financial Statements - Combined Governmental Funds and Government-wide Statements PEDC's financial statements include both government-wide (reporting the unit as a whole) and fund fmancial statements (reporting PEDC's major funds). In the Statement of Net Assets, the governmental activities column is reported on a full accrual, economic resource basis, which recognizes all long-term assets and receivables as well as long- term debt and obligations, if any. Net assets are reported in two parts - restricted for debt expense and unrestricted net assets. The Statement of Activities reports both the gross and net cost of PEDC's function (economic development). Economic development is supported by general government revenues (sales tax, interest on investments, etc.). The fmancial transactions of PEDC are reported in two individual funds in the combined fmancial statements. These funds are accounted for by providing a separate set of self-balancing accounts that comprise their assets, liabilities, fund equity, revenues, and expenditures/expenses. The focus of the governmental funds' measurement (in the fund statements column) is upon determination of financial position and changes in financial position (sources, uses, and balances of financial resources) rather than upon net income. The following is a description of the governmental funds ofPEDC: General Fund . The General Fund is the general operating fund and is used to account for all fmancial resources except those required to be accounted for in another fund. Debt Service Fund - The Debt Service Fund is used to account for the accumulation of resources for, and the payment of, general long-term debt. 4 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Notes to Financial Statements (Continued) September 30, 2005 Note 2: Summary of Significant Accounting Policies (Continued) B. Assets, Liabilities, and Net Assets 1) Deposits and Investments Cash and cash equivalents are considered to be cash on hand, demand deposits, and short- term investments with original maturities of three months or less from the date of acquisition. Investments are stated at market value. 2) Restricted Assets Certain resources set aside for repayment of revenue bonds and related interest are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. The Debt Service Fund is used to accumulate resources for debt service payments over the next twelve months. The Reserve Fund is accumulated for the purpose of retiring the last of any bonds as they become due or for debt service when the Debt Service Funds are insufficient. 3) Fixed Assets Fixed assets are valued at historical cost or estimated historical cost if actual historical cost is not available. 4) Use of Estimates The preparation of fmancial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. Note 3: Deposits and Investments PEDC maintains accounts in several fmancial institutions. At September 30, 2005, the carrying amount of demand deposits and certificates of deposit was $577,561 and' the bank balance was $626,739, which was covered by federal depository insurance in the amount of $625,421, leaving $1,318 which was exposed to custodial credit risk since all deposits were not insured. Note 4: Public Funds Investment Pools Public funds investment pools in Texas (Pools) are established under authority of the Interlocal Cooperation Act, Chapter 79 of the Texas Government Code, and are subject to the provisions of the Public Funds Investment Act (the Act), Chapter 2256 of the Texas Government Code. In addition to other provisions of the Act designed to promote liquidity and safety of principal, the Act requires Pools to: 1) have an advisory board composed of participants in the Pool and other persons who do not have a business relationship with the Pool and are qualified to advise the Pool; 2) maintain a continuous rating of no lower than AAA or AAA-m or an equivalent rating by at least one nationally recognized rating service; and 3) maintain the market value of its underlying investment portfolio within one-half of one percent of the values of its shares. 5 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Notes to Financial Statements (Continued) September 30, 2005 Note 4: Public Funds Investment Pools (Continued) PEDC's investments in Pools are reported at an amount determined by the fair value per share of the Pool's underlying portfolio, unless the Pool is 2a 7 -like, in which case they are reported at share value. A 2a7-like Pool is one which is not registered with the Securities and Exchange Commission (SEe) as an investment company, but nevertheless has a policy that it will, and does, operate in a manner consistent with the SEe's Rule 2a7 of the Investment Company Act of 1940. Temporary investments at September 30, 2005, are invested in Lone Star Investments ($391,995) (Texas Political Subdivisions Investment Pool) and MBIA Municipal Investors Service Corp. ($491,462). These investments are reported with the bank accounts as Cash and Cash Equivalents. Note 5: Notes Receivable PEDC has a note receivable bearing interest at 7.00% from a corporation located in Paris, Texas, to assist with the purchase of an existing business. The note is due in monthly installments of principal and interest of $32,000 through April 15, 2017, at which time the remaining principal is due. This note is secured by a security agreement, which lists PEDC as having a subordinate interest in all respects to the financial institution involved and to other individuals as listed in the security agreement. The balance of this note at September 30,2005, was $3,036,168. PEDC has a second non-interest bearing note receivable from a Minnesota corporation to assist with plans to create and operate a computer services business in Paris, Texas. The note is due in annual installments of $100,000 beginning June 15, 2005, with the provision that the corporation shall receive credits against the annual principal installments equal to $1 for every $10 in salaries which the corporation pays during the preceding year to all new employees working for the corporation in Paris, Texas. The balance of this note at September 30, 2005, was $1,400,000. The maximum amount of the credit allowed in any twelve month period shall not exceed the annual loan payment. Note 6: Notes and Bonds Payable PEDe has executed a note payable to fund an incentive agreement with a corporation planning to create and operate a computer services business in Paris, Texas. The note bears interest at a rate of 3.692% with principal and interest payments due on a monthly basis. The note is secured by a tax assignment and security agreement. It also contains, to the extent permitted by law, a right of setoff in all accounts PEDC has with the lender. The balance of the note at September 30, 2005, was $573,083. A second note has also been executed to fund this incentive agreement and funding for an industrial park. This note bears interest at a rate of 4.942% with principal and interest payments due on a monthly basis. The note is secured by a tax assignment and security agreement. It also contains, to the extend permitted by law, a right of setoff in all accounts PEDC has with the lender. The balance of the note at September 30, 2005, was $865,384. PEDC has outstanding Paris Economic Development Corporation Taxable Sales Tax Revenue Bonds, Series 1998 originally issued at $4,200,000, bearing interest at 6.625% to 7.75%. Principal payments are due serially in varying annual amounts to September 1, 2018, from $165,000 to $365,000. 6 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Notes to Financial Statements (Continued) September 30, 2005 Note 6: Notes and Bonds Payable (Continued) Sales and Use Taxes (one-quarter of one percent) levied by the City of Paris, Texas, within its boundaries under the Development Corporation Act of 1979, are pledged for payment of bonds and interest. The resolution authorizing the issuance of the bonds requires that monthly deposits be made to the Debt Service Fund in an amount sufficient to pay the next maturing bonds and interest. A Reserve Fund is required to be maintained with a balance of at least $388,708, the average annual principal and interest requirements of the bonds. At September 30, 2005, the balances in the Debt Service Fund and Reserve Fund are $29,542 and $410,458, respectively. Debt Service requirements related to these bonds and the note are as follows: Year Ending Bonded Debt Requirements Note Payable Note Payable September 30, Principal Interest Principal Interest Principal Interest Total 2006 $ 165,000 $ 220,224 $ 201,620 $ 18,018 $ 187,427 $ 39,074 $ 831,363 2007 180,000 207,436 209,299 10,340 197,023 29,477 833,575 2008 190,000 193,486 162,164 2,549 207,058 19,442 774,699 2009 200,000 178,761 217,733 8,767 605,261 2010 215,000 166,261 56,143 473 437,877 2011-2015 1,320,000 605,471 1,925,471 2016-2018 1,025,000 138,394 1,163,394 $ 3,295,000 $1,710,033 $ 573,083 $ 30,907 $ 865,384 $ 97,233 $ 6,571,640 Note 7: Commitments There are currently no outstanding incentive agreements by PEDC except the one discussed in Note 5. Note 8: Risk Management PEDC is exposed to various risks of loss and has obtained insurance related to general liability, loan enforcement liability, errors and omissions liability, and automobile liability. 7 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Required Supplementary Information Budgetary Comparison Schedule - General Fund For the Year Ended September 30, 2005 Variance with Final Budget Budgeted Amounts Actual Favorable Original Final Amounts (Unfavorable) Revenues: Sales Tax $ 940,000 $ 940,000 $ 1,013,371 $ 73,371 Investment Earnings 5,000 5,000 237,591 232,591 Total Revenues 945,000 945,000 1,250,962 305,962 Expenditures: Industrial Support and Incentives 782,726 782,726 464,422 318,304 Office Supplies and Postage 15,500 15,500 18,158 (2,658) Commuications 1,000 1,000 2,966 (1,966) Special Service Fees 2,500 2,500 2,500 Insurance and Bonds 7,514 (7,514) Travel Expenses 24,000 24,000 30,772 (6,772) Public Notices 1,000 1,000 685 315 Miscellaneous 2,764 2,764 1,002 1,762 Contractual Associations 3,000 3,000 2,183 817 Promotional Advertising 30,000 30,000 23,002 6,998 Administration Fee 10,000 10,000 10,000 Personnel Compensation 108,522 108,522 109,314 (792) Legal and Accounting 3,750 3,750 3,950 (200) Contingency 1,000 1,000 65 935 Debt Service Principal 219,638 219,638 328,865 (109,227) Interest 69,346 (69,346) Total Expenditures 1,205,400 1,205,400 1,072,244 133,156 Excess of Revenues Over Expenditures (260,400) (260,400) 178,718 439,118 Other Financing Sources/Uses: Note Proceeds 153,430 153,430 Net Gain on Property Sold '8,798 8,798 Transfer to Debt Service Fund (389,000) (389,000) (393,515) (4,515) Total Other Financing Sources/Uses (389,000) (389,000) (231,287) 157,713 Net Change in Fund Balances (649,400) (649,400) (52,569) 596,831 Fund BalancesfBeginning of the Year 6,943,550 6,943,550 6,943,550 End of the Year $ 6,294,150 $ 6,294,150 $ 6,890,981 $ 596,831 8 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Notes to Required Supplementary Information September 30,2005 Budgetary Date PEDe's fiscal year commences October 1 and ends September 30. A budget for the forth coming fiscal year shall be submitted to, and approved by the Board in June and delivered to the City on or before June 30. After Board approval, the budget on appropriate forms is submitted to the City Manager for inclusion in the annual budget of the City of Paris. The budget is to include projected operating expenses and such other budgetary information as shall be useful to or appropriate for the Board and the City. The proposed budget shall contain such classifications and shall be in such form as may be prescribed from time to time by the Council of the City of Paris. The budget shall not be effective until it has been approved by the City Council. The Budgetary Comparison Schedule presented as Required Supplementary Information for the General Fund is presented to provide a meaningful comparison of actual results with the budget. For the year ended September 30, 2005, expenditures exceeded budgeted amounts in the General Fund in various categories as indicated on the Budgetary Comparison Schedule. 9 Paris Economic Development Corporation (A Component Unit of the City of Paris, Texas) Continuing Disclosure Information (Unaudited) Sales Tax Collections The following table shows Sales Tax Collections for the Paris Economic Development Corporation's 1/4% sales tax for the five years ended September 30,2005: October November December January February March April May June July August September Totals Fiscal Year 2004-05 $ 70,285.42 100,256.78 67,281.60 72,957.02 118,587.03 69,789.83 68,029.22 101,310.24 73,271.56 77,849.58 100,414.56 80,952.28 $1,000,985.12 Fiscal Year 2003-04 $ 65,923.96 94,123.54 70,572.68 65,910.92 108,397.88 69,157.00 65,462.23 99,416.34 70,797.62 73,846.17 101,302.10 78,887.97 $ 963,798.41 Fiscal Year 2002-03 $ 68,571.50 103,503.28 67,994.97 67,958.27 104,726.44 62,995.32 60,076.19 92,500.48 70,048.21 76,369.23 86,326.04 75,461.24 $ 936,531.17 Fiscal Year 2001-02 $ 45,155.74 93,197.03 71,448.97 60,777.95 123,239.11 56,620.80 61,840.09 88,392.63 69,311.76 68,869.33 90,410.02 73,235.34 $ 902,498.77 Fiscal Year 2000-01 $ 66,497.71 99,768.29 60,942.36 64,076.18 103,782.78 57,137.58 64,253.56 94,763.07 64,898.16 68,482.69 92,248.31 70,576.38 $ 907,427.07 Pro Forma Bonded Debt Service Coverage Maximum Annual Debt Service Requirement (2018) $ 389,181 Projected Annual Sales Tax Receipts 2005-06 970,000 (Pledged Revenues are gross 1/4 cent sales tax) Estimated Pro Forma Coverage 2.49x Average Annual Remaining Debt Service at September 30,2005 $ 385,003 Projected Annual Sales Tax Receipts 2005-06 970,000 (Pledged Revenues are gross 1/4 cent sales tax) Estimated Pro Forma Coverage 2.52x Condensed Corporation Operating Statement Fiscal Year Ended September 30 2005 2004 2003 2002 2001 Operating Revenues: Sales Taxes $ 1,013,371 $ 958,941 $ 945,281 $ 914,999 $ 907,427 *Other Income (Loss) (43,268) (47,377) 6,280 16,469 62,368 Total Revenues 970,103 911,564 951,561 931,468 969,795 Operating Expenses: Projects 464,422 221,204 575,561 612,253 741,628 Administration and Promotion 209,611 204,713 271,819 246,458 191,274 Total Expenditures 674,033 425,917 847,380 858,711 932,902 Net Available for Additional Economic Incentives or Debt Service $ 296,070 $ 485,647 $ 104,181 $ 72,757 $ 36,893 Source: Information received from the Issuer. * The net of interest income, interest expense, and gain or loss on the sale of assets. 10