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VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY FINANCIAL STATEMENTS SEPTEMBER 30,2010 Together With Independent Auditors' Report BERl'Sl\flTH Co. Certified Public Accountants and Management Consultants VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY FINANCIAL STATEMENTS SEPTEMBER 30,2010 TABLE OF CONTENTS Independent Auditors' Report 1 Management's Discussion and Analysis .3 Basic Financial Statements: Statement of Net Assets 8 Statement of Revenues, Expenses and Changes in Net Assets 9 Statement of Cash Flows l 0 Notes to the Financial Statements 11 Supplementary Information: Combining Statement of Net Assets 19 Combining Statement of Revenues, Expenses and Changes in Net Assets 21 CERTIFIED PUBLIC ACCOUNTANTS AND MANAGEMENT CONSULTANTS INDEPENDENT AUDITORS' REPORT Board of Directors Virgin Islands Economic Development Authority St. Thomas, U.S. Virgin Islands We have audited the accompanying statements of net assets of the Virgin Islands Economic Development Authority (the Authority) as of September 30, 2010, and the related statements of revenues, expenses and changes in net assets and cash flows for the year ended September 30, 20] 0. The Virgin Islands Economic Development Authority is a component unit of the Government of the U.S. Virgin Islands. These financial statements are the responsibility of the Authority's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Authority as of September 30, 2009, were audited by other auditors whose report dated March 8, 20] 0, expressed a qualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 Authority'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 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 provide a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, the financial statements present only the Authority'S financial position and the changes in its financial position and cash flows and do not purport to, and do not, present fairly the financial position ofthe Government of the U.S. Virgin Islands as of September 30, 2010, and changes in its financial position for the year ended, in conformity with U.S. generally accepted accounting principles. In our opinion, the financial statements referred to in the first paragraph presents fairly, in all material respects, the financial position of the Virgin Islands Economic Development Authority as of September 30,2010, and the changes in financial position and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The management's discussion and analysis on pages 3 through 7 is not a required part of the basic 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. Member of the A/CPA Alliance for CPA Firms 1090 Vermont Avenue, N.W .• :. Suite 920 .:. Washington, D.C. 20005 .:. PHONE 202.393.5600 .:. FAX 202.393.5608 (. INTERNET www.bertsrnithco.corn Our audit was conducted for the purpose of forming an opinion on the basic financial statements. The combining financial statements on pages 19 through 21 are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such combining financial statements have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements as a whole. In accordance with Government Auditing Standards, we have also issued our report dated June 27, 2011, on our consideration of the Authority's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grants 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 the audit. Washington D.C. June 27, 2011 -2 - VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED SEPTEMBER 30,2010 The Virgin Islands Economic Development Authority (the Authority) was created on December 21,2000 to assume, integrate and unify the functions of the Government Development Bank, the Economic Development Commission, the Industrial Park Development Corporation, the Small Business Development Agency, and more recently, the Enterprise Zone Commission, and the Tax Increment Financing (hereinafter referred to as GDB, EDC, IPDC, SBDA, EZC, and TIF respectively) under one executive board in order to achieve maximum efficiency, streamline operations, and develop comprehensive programs to promote and enhance the economic development ofthe Territory. The Authority accomplishes its mission by (1) attracting or luring investors from the mainland to establish or relocate their businesses to the Virgin Islands, and (2) providing financial assistance through its lending arms (GDB and SBDA) to emerging and established businesses in the Territory. The Authority is funded primarily by allotments from the Office of Management and Budget via the Department of Finance based on an approved budget authorized by the Legislature of the Virgin Islands. As management of the Virgin Islands Economic Development Authority, we offer the readers of the Authority'S financial statements this narrative overview and analysis of the financial activities of the Authority for the year ended September 30, 2010. We encourage readers to consider the information presented here in conjunction with the Authority'S financial statements. This overview and analysis is required by accounting principles generally accepted in the United States of America ("GAAP"), and Governmental Accounting Standards Board ("GASB") Statement No. 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Government. Overview of the Financial Statements The financial statements consist of four parts: Management's discussion and analysis, the financial statements, notes to the financial statements and supplementary schedules. The Authority is a component unit of the Government of the U.S. Virgin Islands, and follows enterprise fund reporting. The financial statements, therefore, are presented in a manner similar to that of a private business, using the economic resources measurement focus and the accrual basis of accounting. The financial statements report information for all of the Authority'S operations. The statement of net assets includes all of the Authority'S assets and liabilities. All of the revenues and expenses of the Authority are accounted for in the statements of revenues, expenses and changes in net assets. The notes provide additional information that is essential to a full understanding of the data provided in the Authority'S financial statements. The notes describe the nature of the Authority's reporting entity and the relationship to the Government of the U.S. Virgin Islands as a whole, the basis on which the financial statements were prepared, and the methods used for presentation. Fund financial statements are presented as supplementary schedules. These schedules separate the financial statements and operations for each of the eight major funds. - 3 - Financial Highlights • The Authority's net assets were $15,606,305 in FY 2010, which represents an increase of $1,018,883 or 7% compared to FY 2009. • Total assets exceeded total liabilities by $15,606,305 in FY 2010 compared to $14,587,422 in FY 2009. • Operating revenues for the Authority were $1,461,532 in FY 2010, which reflects an increase of $552,058 or 61% over FY 2009. • Operating expenses were $7,106,892 in FY 2010, which reflects an increase of$1,661,291 or 31% over FY 2009. • Transfers in (appropriations) totaling $4,780,328 received from the Government of the Virgin Islands in FY 2010 was $268,999 or 6% higher than in FY 2009; in addition, $1,746,700 was received from the Virgin Islands Public Finance Authority pursuant to Act No. 7081 issued by the legislature of the Virgin Islands. Financial Analysis of Net Assets The following table presents condensed information of the net assets of the Authority as of September 30, 2010 and 2009. 2010 Current Assets Noncurrent Assets Capital Assets, net Total Assets $ 3,939,255 10,738,163 3,302,096 17,979,514 Current Liabilities Noncurrent Liabilities Total Liabilities 770,636 1,602,573 2,373,209 Net Assets Invested in Capital Assets, net of related debt Restricted Unrestri cted Total Net Assets 3,222,832 9,732,356 2,651,117 $15,606,305 2009 $ 4,919,302 8,429,998 3,740,147 17,089,447 857,630 1,644,395 2,502,025 3,740,147 3,379,018 7,468,257 $14,587,422 Current Assets Current assets decreased by $980,047 or 20% in FY 2010 compared to FY2009. This was due to a decrease in cash and cash equivalents of $755,609 or 19%, due in part to the Authority reserving funds for its loan programs; an increase of $11,472 or 4% in investments; and an increase in accounts receivable of $141,782 or 52% due to compliance and penalty fees assessed to EDC beneficiary during the year and rental payments due from IPDC lessees. In addition, there was a decrease of $377,692 or 83% in prepaid and other assets. Noncurrent Assets Noncurrent assets increased by $2,308,165 or 27% in FY 2010 compared to FY09. This was due to an increase of $1,516,718 or 78% in restricted cash due to the net effect of an appropriation received from the Legislature to implement the Performance Bonding Program and an increase in the loan fund balance as a result of reserves made by the Authority. In addition, restricted investments increased by $626,840 or 25%; while loans receivable increased by $210,210 or 5% primarily due to a slightly higher demand during the fiscal year. - 4 - Capital Assets, net Total capital assets, net decreased by $438,051 or 12% in FY 2010 due mainly to depreciation of the Authority's vehicles and buildings. Current Liabilities The Authority's current liabilities decreased in FY 2010 by $86,994 or 10%, compared to FY 2009. The decrease is the net effect of the following: • Increases in accounts payable and accrued expenses of $86,036 or 590%, and $140,736 or 168%, respectively, as the Authority was slower in paying its vendors in FY 2010; • A decrease of $77,100 or 29% in the current portion of compensated absences; • A total increase of $2, 167 or 12% in interest payab Ie; • A decrease of $35,683 or 17% in the amounts due to the Territorial Scholarship, and Workforce Development Funds; • An increase in the current portion of long term debt of $70,028 or 100%, due to the recognition of amounts due within a year. Noncurrent Liabilities Noncurrent liabilities in FY 2010 totaled $1,602,573, a decrease of $41,822 or 3% over FY 2009, primarily as a result of the following: • An increase of $95,495 or 100% in compensated absences due to annual leave incurred during the year and the recognition of amounts due in over a year; • A decrease of $137,317 or 23% in long term debt, due to debt payments and the reclassification of amounts due within a year to current liabilities. Net Assets The Authority's total net assets increased by $1,018,883 or 7% in FY 2010, as a result of revenues surpassing expenses. The Authority realized increased revenues of $1,618,779 generated as a result of lease income from tour buses in St. Croix, an increase in application and processing fees, interest earned from the various loan programs, transfers in from the Virgin Islands Public Finance Authority, and an increase in allotments from the Government of the Virgin Islands. Expenses increased by $1,671,672 mainly due to increases in personal costs of $407,151 or 13%, and an allowance for uncollectible loans and accounts receivable set up during the year of $1,070,198. Financial Analysis of Revenues, Expenses and Changes in Net Assets The following table represents comparative condensed statements of changes in net assets for the Authority as of September 30, 2010 and 2009. 2010 2009 Operating Revenue $ 1,461,532 $ 909,474 Operating Expense (7,106,892) (5,445,601) Operating Loss (5,645,360) (4,536,127) Net Non-operating Revenue 137,215 96,574 Loss Before Transfers (5,508,145) (4,439,553) Transfers In - Appropriations 6,527,028 5,511,329 Change in Net Assets 1,018,883 1,071,776 Net Assets, Beginning ofthe Year 14,587,422 13,515,646 Net Assets, End of the Year $ 15,606,305 $ 14,587,422 - 5 - Revenues Operating revenues are generated principally from application and processing fees, interest generated from loans lease income from tour buses in St. Croix and rent received from tenants located in the Industrial Parks in St.' Thomas and St. Croix. Total operating revenues in FY 2010 was $1,461,532, which was $552,058 or 61% higher than in FY 2009. The improvement was due to increases in the number of loans processed, local contractors taking advantage of the bid and performance bonding program, and the addition of a major tenant at the Industrial Park on St. Croix. Operating Expenses Total operating expenses increased $1,661,291 or 31% in FY 2010, due primarily to the allowance for uncollectible loans that were reevaluated and adjusted to reflect the current risk of default; staff salary increases in compliance with the union agreement; and the filling of key vacant positions, necessary to improve the delivery of service. Non-operating Revenues and Expenses Total net non-operating revenues increased by $40,641 or 42% in FY 2010, due to an increase in interest income from certificates of deposit of $62,301; a decrease in other income of $11,279; and an increase in interest expense and finance charges of $10,381. Transfers In To subsidize operating expenses, transfers in (appropriations) totaling $4,780,328 were received from the Government of the Virgin Islands in FY 2010; this reflects an increase of $268,599 or 6%. In addition, $1,746,700 was received from the Virgin Islands Public Finance Authority, pursuant to Act No. 7081 issued in FY 2009. Programs Enterprise Zone Program - This program offers incentives for businesses to invest in severely economically depressed areas in St. Thomas and St. Croix. The program provides tax credits to businesses, which provide employment to residents of the designated areas. During the audit period, extensive promotion was carried out by the Director of this Program in various communities of the territory. Tax-Incentive Program - This 5 year program is aimed at local entrepreneurs who want to develop and expand their current businesses in exchange for various tax exemptions. Micro Loan Program - This program is geared to current and potential business owners who meet certain eligibility criteria. The micro-loans range from $1,000 to $50,000, have an interest rate of 5% and a term of 5 years. The Micro Loan program is administered by the Government Development Bank. Performance Bonding Program - As a new initiative of the Lending Unit, this program started towards the latter part of 20 10. It secures the Iink between local contractors, the department of Property and Procurement, local banking institutions and sureties licensed in the Virgin Islands that allows local contractors to participate in capital development projects by providing payment and performance bonding. During the audit period, the program made it possible for three contractors to secure bid bonds totaling $1,113,744. Tour Bus Program - Cruise lines requested "tour type" buses as a condition to making St. Croix a "port of call." As a result, an advance was received in the amount of $1,000,000 from the Virgin Islands Public Finance Authority to purchase 26 tour buses, some of which have been leased to local tour operators. This initiative was considered an investment in the St. Croix economy. - 6 - Energy Loan and Rebate Program - The Authority serves as a loan processing agent for the Virgin Islands Energy Office, in collaboration with the Virgin Islands Water and Power Authority. The Authority processes loan applications, issues loan and rebate checks and maintains customers' loan balances and files. These transactions are not reflected in the financial statements of the Authority, and as of the end of the audit period a total of312 loans and rebates have been issued valued at $638,006. Department of Agriculture Loan Program - The Authority serves as a loan processing agent for the Virgin Islands Department of Agriculture pursuant to a memorandum of understanding between the parties. The Authority processes loan applications, issues loan checks and maintains customers' loan balances and files. These transactions are not reflected in the financial statements of the Authority. As of September 30, 2010, the Authority had issued loans valued at $600,000. REQUEST FOR INFORMATION - This financial report is designed to provide a general overview of the Authority's finances for all those with an interest in the Authority's operation. Questions concerning any of the information provided in this report or request for additional financial information should be addressed to the Virgin Islands Economic Development Authority, 5055 Norre Gade, St. Thomas, VI 00802. - 7 - VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY STATEMENT OF NET ASSETS AS OF SEPTEMBER 30, 2010 ASSETS Current Assets: Cash and Cash Equivalents Investments Receivable, net Prepaid and Other Assets Total Current Assets $ 3,157,148 289,770 414,415 77,922 3,939,255 Noncurrent Assets: Restricted Cash and Cash Equivalents Restricted Investments Restricted Loans Receivable, net Total Noncurrent Assets 3,464,962 3,164,974 4,108,227 10,738,163 Capital Assets, net 3,302,096 Total Assets $17,979,514 LIABILITIES Current Liabilities: Accounts Payable Accrued Expenses Compensated Absences, current Interest Payable Due to Territorial Scholarship and Workforce Development Funds Long-Term Debt, current Total Current Liabilities $ 100,629 224,482 184,891 20,412 170,194 70,028 770,636 Noncurrent Liabilities: Compensated Absences Security Deposits Deferred Revenue Long-Term Debt Total Noncurrent Liabilities 95,495 34,404 1,000,000 472,674 1,602,573 Total Liabilities 2,373,209 Net Assets: Invested in Capital Assets, net of related debt Restricted Net Assets Unrestricted Net Assets 3,222,832 9,732,356 2,651,117 Total Net Assets $15,606,305 The accompanying notes are an integral part of these financial statements. - 8 - VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 Operating Revenues: Application and Processing Fees Rental Income Interest Income from Loans Other Operating Income $ 592,616 535,113 207,742 126,061 Total Operating Revenues 1,461,532 Operating Expenses: Personnel Costs Occupancy Advertising Professional Services Travel Other Administrative Expenses Bad Debt Depreciation Total Operating Expenses 3,476,635 308,312 168,369 295,715 233,674 1,037,138 1,070,198 516,851 7,106,892 Operating Loss (5,645,360) Non-operating Revenues (Expenses): Interest Income Other Income Interest Expenses and Finance Charges 129,038 22,500 (14,323) Total Net Non-operating Revenues 137,215 Net Loss Before Transfers (5,508,145) Transfers In 6,527,028 Total Transfers 6,527,028 Change In Net Assets 1,018,883 Net Assets Beginning of Year, restated (Note 1) 14,587,422 Net Assets End of Year $15,606,305 The accompanying notes are an integral part of thesefinancial statements. - 9 - VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY STATEMENT OF CASH FLOWS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 Cash Flows from Operating Activities Cash Received from Application and Processing Cash Received from Tenants Cash Received from Loan Repayments Cash Received from Other Operating Income Cash Paid for Goods and Services Cash Paid to Employee for Services Loan Disbursements Net Cash Used in Operating Activities Cash Flows from Non-capital Financing Activities Cash Received from Appropriations and Other Transfers In Trust Fund Payments Other Income Interest Expense and Finance Charges Net Cash Provided by Non-capital Financing Activities Cash Flows from Capital Related Financing Activities Debt Payments Net Cash Used in Capital and Related Financing Activities Cash Flows from Investing Activities Interest Income Purchase of Investments Acquisition of Property and Equipment Net Cash Used in Investing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year Reconciliation of Operating Loss to Net Cash Used in Operating Activities: Operating Loss Adjustments to Reconcile Excess of Expenses Over Revenues to Net Cash Used in Operating Activities Depreciation Bad Debt Changes in Assets and Liabilities: (Increase) in Accounts Receivable Decrease in Prepaid Expenses (Increase) in Loans Receivable Increase in Accounts Payable and Accrued Expenses Increase in Compensated Absences Increase in Due to Other Funds Net Cash Used in Operating Activities The accompanying notes are an integral part of these financial statements - 10 - $ 419,127 483,381 761,119 126,061 (1,711,922) (3,458,240) (1,704,743) (5,085,217) 6,527,028 (35,683) 22,500 (14,323) 6,499,522 (67,289) (67,289) 131,205 (638,312) (78,800) (585,907) 761,109 5,861,001 $ 6,622,110 $ (5,645,360) 516,851 1,070,198 (225,220) 377,692 (1,151,367) 226,772 18,395 (273,178) $ (5,085,217) VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30,2010 NOTEl SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: The Virgin Islands Economic Development Authority (the "Authority"), was created on December 21, 2000, as an umbrella authority to assume, integrate and unify the functions of the Government Development Bank, the Economic Development Commission, the Industrial Park Development Corporation and the Small Business Development Agency under an executive board, which consists of seven members appointed by the Governor. The Authority is a public corporation and a semi- autonomous instrumentality of the Government of the Virgin Islands and operates under the provisions of Act of 6390, approved by the Twenty-Third Legislature of the Virgin Islands of the United States Virgin Islands. The general purposes and functions of the Authority were previously carried out by the Government Development Bank for the United States Virgin Islands which was created originally in ]978 by Act No. 902, and subsequently amended in 1995 and 1996. The mission of the Authority is to accelerate the economic development of the Virgin Islands by providing financial and technical assistance to industrial commercial enterprises to create and save jobs in the community. In this regard, the Authority is authorized, among other things, to make loans to eligible small business enterprises. The Authority'S sustainability depends primarily on appropriations from the Government of the Virgin Islands. In addition, it earns income from application fees, processing fees, compliance fees, and rental income from its Industrial Park facilities. During fiscal year ended September 30, 2010, the Authority received transfers in (appropriations) totaling $4,780,328 from the Government of the Virgin Islands, together with $1,746,700 in transfers from the Virgin Islands Public Finance Authority pursuant to Act No. 7081; and 1,598,747 of revenue earned from its various revenue-generating sources. Basis of Presentation: The Authority'S financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) as applied to government units. The Authority uses the economic resources measurement focus and follows the accrual basis of accounting. In accordance with the provisions of Government Accounting Standards Board (GASB) Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the Authority applies only Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board opinions, and Accounting Research Bulletins issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. The Authority distinguishes between operating and nonoperating revenues and expenses. Operating revenues and expenses generally result from providing services in connection with the Authority'S principal ongoing business operations. Operating expenses include costs and losses resulting from services, administrative expenses, and depreciation expense. All other revenues and expenses are reported as nonoperating revenues and expenses. The accounts of the Authority are organized on the basis of funds, each of which is considered to be a separate accounting entity. All transactions are recorded in a separate set of self-balancing accounts, which include assets, liabilities, fund net assets, revenues and expenses. - 11 - NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During fiscal year ended September 30, 2010, the Authority maintained eight (8) major funds, or activities which constitute the major transactions of the Authority: The following is a summary of the nature of these funds: • Government Development Bank Fund (GDB) accounts for the locally funded Micro Loan Program. This fund accounts for interest income from the operating account and certificate of deposit, local government appropriations made to the Authority, and administrative costs. The Authority'S administration and processing of loan applications on behalf of the Virgin Islands Department of Agriculture and the Virgin Islands Energy Office also occur within this fund. Those transactions have however been excluded from the Authority'S financial statements. • Economic Development Commission Fund (EDq accounts for application, activation and annual compliance fees. Local government appropriations are also accounted for in this account together with related administrative costs. • Small Business Development Agency (SBDA) accounts for the Federal Economic Development Administration Loan Funds from the U.S. Department of Agriculture and for the local loans of Fanners and Fishermen, Frederiksted Revolving Loan Fund and the SDBA Direct Loan Fund. Appropriations from the central government and administrative costs are also accounted for under this fund. The SBDA legislation does not allow interest earned from its loan portfolio to be used for administrative purposes. The interest income is restricted and is used for issuing new loans. • Industrial Park Development Corporation Fund (IPDq accounts for the activities conducted by the IPDC. The IPDC was established in March 1984 to acquire, operate, and improve industrial parks in order to provide suitable sites for the location of industries to the Virgin Islands. The IPDC accounts for rental and investment income, and administrative costs associated with its operation. The IPDC does not receive any appropriations from the local government. • Intermediary Relending Program (IRP) accounts for loans that are funded by the United States Department of Agriculture Rural Development Program. The interests income earned from these loans are applied to the program's administrative costs. • Enterprise Zone Commission (EZq accounts for funds committed to the task of offering incentives to businesses that invest in severely economically depressed designated areas of St. Thomas and St. Croix, and as a result of which, employment opportunities are provided to residents of the areas so designated. • Economic Development Authority (EDA) fund accounts for loans that are funded through U.S. Department of Agriculture. • Tax Increment Financing (TIF) this fund allows projects to be financed by pledging the increases in tax revenues that can be reasonably anticipated to be collected by the government once the financed project or activity is completed. Cash and Cash Equivalents: All cash and all highly liquid investments available for current use with an initial maturity of three months or less are considered to be cash or cash equivalents. Investments: Investments in marketable securities or other short-term investments of cash with readily determinable fair values, and all investments in debt securities are reported at their fair values in the Authority'S statement of net assets. - 12 - NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Restricted Cash and Cash Equivalents: This consists of cash and cash equivalents to be used for specific purposes as specified by legislation or by a grant agreement. Loan Receivables: These amounts are reported at their unpaid principal balances, net of the allowance for loan losses. The loans bear interest ranging from 4% to 12%. Allowance for Uncollectible Accounts: The Authority provides for losses when a specific need for an allowance is indicated. The provision for loan losses charged to operating expenses is the amount necessary to report the net asset at its estimated realizable value. In determining the adequacy of the allowance, management considers the composition of the loan portfolio, economic factors, historical loss experience, and value and sufficiency of collateral in the current level of the allowance. CapitalAssets: It is the policy of the Authority to capitalize property and equipment at cost at the time of acquisition. Purchased property and equipment is capitalized at cost and depreciated using the straight line method. The estimated economic lives ofthe Authority's property and equipment varied as follows: Equipment Furniture and Fixtures Vehicles Buildings and Leasehold Improvements 3-5 Years 3-5 Years 5 Years 5-27 Years Compensated Absences: The Authority has recognized the liability for annual leave, which is payable to employees upon separation. Sick leave balances are not paid out upon termination, however, a liability for the balances do exist in the event an employee transfers to another government agency; such liability is recognized at the time ofthe transfer. Operating and Nonoperating Revenues: Operating revenues of the Authority consists of revenues generated from the primary activities of each of the Authority's funds. This includes application and compliance fees, rental income, and interest on loans. Nonoperating revenues consist of interest generated from restricted and unrestricted investments in short term investment instruments. Net Assets: Net assets comprise the various net earnings from operating and non-operating revenues, expenses and contribution of capital and are classified in the following three components: Invested in capital assets, net of related debt - These consist of all capital assets, net of accumulated depreciation and reduced by outstanding debt that is attributable to the acquisition, construction and improvement of those assets. Restricted net assets - These result when constraints placed on net assets' use are either externally imposed by creditors, grantors, contributors, and the like, or imposed by law through constitutional provisions or enabling legislation. Unrestrictednet assets - These consist of nets assets, which do not meet the definition of the two preceding categories. Unrestricted net assets often times can be designated to indicate that management does not consider them to be available for general operations; these designations can be removed or modified. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. - 13 - NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Restatement: The Authority restated its prior year financial statements due to the reclassification of balances among liability and net asset classifications. The net effect on net assets at September 30, 2010, was an increase of$II,863,882. Net Assets, as previously reported Revolving Loan Funds Due to Other Funds Net Assets, as restated $ 2,723,540 11,159,361 704,521 $ 14,587,422 NOTE 2 CASH AND CASH EQUIV ALENTS Cash and cash equivalents consisted ofthe following at September 30,2010: Unrestricted Restricted Total Cash and Cash Equivalents $3,157,148 $3,464,962 $6,622,110 Custodial Risk Cash consists of cash on hand held by depository institutions and trustees in the Authority's name. During the fiscal year, including the final date of the period, September 30, 2010, accounts at each financial institution were insured by the Federal Deposit Insurance Corporation up to $250,000. Cash in excess of this limit is $9,813,968, and is fully collateralized. Restricted Cash and Cash Equivalents The restricted cash and cash equivalents at September 30,2010 consists of the following: Micro Credit Loan Program Farmers and Fishermen Loan Fund Frederiksted Revolving Loan Fund Performance Bonding Loan Fund Intermediary Relending Loan Fund SBDA Revolving Loan Fund SBDA Administration Loan Fund I SBDA Administration Loan Fund II Territorial Scholarship Fund Board Up Grant $1,117,330 259,345 259,341 1,240,887 170,018 214,992 40,016 135,308 17,725 10,000 $3,464,962 The restnctions above relate to revolving loan funds established through legislation to offer direct assistance to various industries and businesses and to aid in the creation of economic opportunities within the United States Virgin Islands. Committed Funds The Authority considers certain income as committed. These funds are set aside by management or the Board of Directors to carry out various mandates or to achieve certain objectives. Workforce Development Fund - This is a fund authorized by the Board of Directors to implement a training program to assist residents in obtaining the necessary skills to enter the workforce. Receipts from fines imposed for violation of Economic Development Commission CEDC) rules and regulations are committed to this fund. - 14 - NOTE 3 INVESTMENTS Investments at September 30, 2010 were comprised of certificates of deposits and funds held in a money market fund totaling $3,344,768 and $109,976, respectively. Balances in excess of $250,000 maintained in depository institutions are collateralized. NOTE 4 RESTRICTED NET ASSETS The restricted net assets at September 30, 2010 consists ofthe following: Micro Credit Loan Program GDB Funds - Start Up Farmers and Fishermen Loan Fund Frederiksted Revolving Loan Fund Performance Bonding Loan Fund Intermediary Relending Loan Fund SBDA Revolving Loan Fund SBDA Administration Loan Fund I SBDA Administration Loan Fund II Territorial Scholarship Fund Board Up Grant $2,736,301 2,597,404 302,626 259,319 1,749,771 492,094 938,341 282,751 351,831 17,725 4,193 $9,732,356 NOTES LOANS RECEIVABLE The net loans receivable totaling $4,108,227 as of September 30, 2010 represent outstanding loans from borrowers in the amount of $11,150,272 net of an allowance for doubtful accounts of $7,042,045. The allowance includes majority of the SBDA loans which were assumed by the Authority at its inception; additional allowances established in FY 2010 was $986,759. NOTE 6 RECEIVABLES The receivable balances as of September 30, 2010. Receivables, Receivables Allowance net Due from Vendor $ 8,636 $ $ 8,636 Interest Receivable 8,753 8,753 Rent Receivable 204,728 111,781 92,947 EDC Fees & Charges 442,424 168,360 274,064 Tax Increment Financing Fund 30,015 30,015 Total $ 694,556 $ 280,141 $ 414,415 Total provision for uncollectible accounts during FY 2010 was $83,439. - 15 - NOTE 7 CAPITAL ASSETS As of September 30, 2010, capital assets are composed ofthe foIIowing: Beginning Ending Balance Additions Disposals Balance Building and Building Improvements $9,148,427 $ $ $ 9,148,427 Leasehold Improvements 428,431 428,431 Equipment 555,658 76,624 632,282 Furniture and Fixtures 368,057 2,173 370,230 Vehicles 1,135,018 1,135,018 Leasehold Equipment 20,585 20,585 Total Capital Assets 11,656,176 78,797 11,734,973 Less Accumulated Depreciation: Building and Building Improvements (6,777,527) (232,987) (7,010,514) Leasehold Improvements (95,301) (14,761) (110,062) Equipment (597,883) (46,406) (644,289) Furniture and Fixtures (152,067) (15,404) (167,471) Vehicles (272,663) (207,293) (479,956) Leasehold Equipment (20,585) (20,585) Total Accumulated Depreciation (7,916,026) (516,851) (8,432,877) Capital Assets, net $3,740,150 $ (438,054) $ $ 3,302,096 The related depreciation expense for the year ended September 30,2010 totaled $516,851. NOTE 8 LONG TERM DEBT The Authority entered into an Intermediary Relending Program loan agreement (IRP) with the United States Department of Agriculture Rural Business Cooperative Services on April 21, 1998. This agreement requires the repayment of the approved loan principal of $670,530 to begin after three (3) years in twenty- seven (27) equal annual installments. An interest rate of 1% accrues on the outstanding balance. As of September 30,2010, the balance ofthe debt for USDA IRP was $463,439. Also, the Industrial Park Development Corporation (IPDC) through the Virgin Islands Economic Development Authority issued a note in the amount of $350,000, on May 22, 2002, with an interest rate of 8% to Blak Corporation. The loan is to be repaid in 120 equal monthly instaIIment of $4,246. At September 30,2010, the outstanding principal balance on the note was $79,263. Due Beginning Ending Within Balance Additions Deductions Balance One Year Loan Payable $ 487,986 $ $ (24,547) $ 463,439 $ 23,739 Note Payable 122,005 (42,742) 79,263 46,289 $ 609,991 $ $ (67,289) $ 542,702 $ 70,028 - 16 - Future minimum payments to the U.S. Department of Agriculture and Blak Corporation are as follows: 2011 2012 2013 2014 2015 2016 - 2020 2021 - 2025 2026 - 2029 Total $ 70,028 55,466 22,717 22,944 23,173 119,389 125,479 103,506 $542,702 NOTE 9 COMPENSATED ABSENCES Compensated absences balance as of September 30, 2010 was $280,386, of which $184,891 is due within a year. The Authority accrued balances attributed to sick leave for the first time during the year, due to the liability that exists in the event the employee transfers to another governmental agency. The changes in the balance are as follows: Compensated Absences Beginning Balance $ 261,991 Additions $ 122,980 Deductions $ (104,585) Ending Balance $ 280,386 NOTE 10 LEASES Lessor The Authority leased a total of ten buses to two tour bus operators on the island of St. Croix during the year. These leases are for two-year terms, with monthly payments dependent on revenues earned from the operation of the buses. The tour bus operators pay the Authority 20% of earned revenue in the months less than four cruise ships dock at the Frederiksted Pier and 30% when more than four cruise ships dock. The Authority also leases commercial properties it owns through the Industrial Park Development Corporation. The terms of the leases vary from one to five years, with monthly rent payments dependent on the amount of square footage occupied and the location of the property. Minimum non-cancelable lease payments to be received are as follows: 2011 2012 2013 Total $293,041 187,313 112,770 $593,124 Lessee The Authority leases office space on a month to month basis for $17,568 per month. In addition, the Industrial Park buildings are located on parcels of leased land. The land is rented under a 30 year term lease which expires May 2013. Two additional ten-year option periods are available to the Industrial Park with the rental amounts based upon the Bureau of Labor Statistics' Consumer Price Index. Rent expense for the year ending September 30, 2010 was $308,312. - 17 - At September 30, 2010, rmrnmum lease payments September 30, for each of the remaining three succeeding fiscal years of the original term of the lease are as follows: 2011 $ 36,984 2012 36,984 2013 24,656 Total $98,624 NOTE 11 DEFERRED REVENUE In October 2009, the Virgin Islands Public Finance Authority (VIPFA) issued $87 million in bonds of which $5 million was allotted to the Authority. These funds are to be utilized for developmental loan programs and are drawn down from VIPF A as such loans are issued. Deferred revenue represents advanced funds received from VIPF A in fiscal year 2009; revenue will be realized and deferred revenue relieved as additional loans are made in the future. NOTE 12 RETIREMENT PLAN The Government Employees Retirement System of the Virgin Islands (GERS) is a cost sharing, multiple employer public employee retirement system, established by the Government of the Virgin Islands to provide retirement, death and disability benefits to its employees. The Authority's part-time employees who at the time of employment are under age 55 years with one year of government service are eligible to participate in the system. The Authority's required contribution for the fiscal year ended September 30, 2010, 2009 and 2008 were 17.5%, 17.5% and 14.5%, respectively, of the member's annual salary. Member contributions were 8% of annual salary for the fiscal year 2010,2009 and 2008. The Authority's contribution to the retirement plan over the past three fiscal years was $439,444 in fiscal year 2010, $351,302 in fiscal year 2009, and $288,320 in fiscal years 2008. The financial report of the retirement system can be obtained from the Government Employees' Retirement System, 3438 Kronprindens Gade, Saint Thomas, Virgin Islands, 00802. NOTE 13 COMMITMENTS AND CONTINGENCIES In the normal course of business, the Authority has various outstanding commitments at September 30, 2010 which includes outstanding loan commitments in the process of being approved by the Board of Directors which are not reflected on the statement of net assets. The Authority asserts that there have not been any material claims, suits or complaints filed nor are any pending against the Authority. In the opinion of management, all other matters which are asserted or unasserted are without merit and would not have a significant effect on the financial position or results of operations if they were disposed of unfavorably. NOTE 14 RISK MANAGEMENT The Authority faces various risks of loss related to torts; theft of, damage to and destruction of assets; and natural disasters for which the Authority has commercial insurance coverage. Annual premium payments are made in proportion to the anticipated exposure to the liability losses assessed. - 18 - SUPPLEMENTARY INFORMATION VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY COMBINING STATEMENT OF NET ASSETS SEPTEMBER 30, 2010 GOB EOC SBDA IPOC IRP EZC EOA TlF Eliminations 2010 ASSETS Current Assets: Cash and Cash Equivalents $ 2,092,362 $ 732,609 $ 99,334 $ 226,707 $ $ $ $ 6,136 $ $ 3,157,148 Investments 289,770 289,770 Accounts Receivable, net 17,389 274,064 92,947 30,015 414,415 Due from Other Fund 140,167 5,119 3,079 (148,365) Prepaid and Other Assets 63,870 181 6,726 7,145 77,922 Total Current Assets 2,313,788 1,011,973 106,060 619,648 36,151 (148,365) 3,939,255 Noncurrent Assets: Restricted Cash and Cash Equivalents 2,358,217 17,725 733,678 170,018 10,000 175,324 3,464,962 Restricted Investments 3,164,974 3,164,974 Restricted Loan Receivable, net 2,560,285 766,608 322,076 459,258 4,108,227 Total Noncurrent Assets 8,083,476 17,725 1,500,286 492,094 10,000 634,582 10,738,163 Capital Assets, net 896,850 73,085 150,633 2,180,514 1,014 3,302,096 Total Assets $11,294,114 $1,102,783 $1,756,979 $2,800,162 $492,094 $11,014 $634,582 $36,151 $ (148,365) $17,979,514 Legend: GDB -- Government Development Balik Fund EDC --- Economic Development Commission SMDA --- Small Business Development Agency IDPC =-Lndustrial Park Development Corporation IRP =-Lntermediary Relending Program EZC --- Enterprise Zone Commission EDA --- Economic Development Authority Tl F --- Tax Increment Financing - 19 - VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY COMBINING STATEMENT OF NET ASSETS (Continued) FOR THE YEAR ENDED SEPTEMBER 30,2010 GOB EOC SBDA IPOC lRP EZC EDA TrF Eliminations 2010 L1ABILITrES Current Liabilities: Accounts Payable $ 38,735 $ 32,383 $ 6,556 $17,148 $ $ 5,807 $ $ $ $ 100,629 Accrued Expenses 10,637 135,417 39,344 15,515 589 22,980 224,482 Compensated Absences, current 8,165 92,345 36,814 22,853 24,714 184,891 Interest Payable 18,245 2,167 20,412 Due to Other Fund 560 1,934 586 139,991 5,294 (148,365) Due to Territorial Scholarship and Workforce Development Fund 170,194 170,194 Long- Term Debt, current 46,289 ~739 70,028 Total Current Liabilities 76,342 432,273 83,300 241,796 26,495 58,795 (148,365) 770,636 Noncurrent Liabilities: Compensated Absences 4,368 53,642 9,654 15,523 12,308 95,495 Security Deposit 34,404 34,404 Deferred Revenue 1,000,000 1,000,000 Long-Term Debt 32,974 ~700 472,674 Total Non-Current Liabilities 1,004,368 53,642 9,654 82,901 439,700 ~308 1,602,573 Total Liabilities 1,080,710 485,915 92,954 324,697 466,195 71,103 (148,365) 2,373,209 NET ASSETS Invested in Capital Assets, net of related assets 896,850 73,085 150,633 2,101,250 1,014 3,222,832 Restricted Net Assets 7,083,476 17,725 1,500,286 492,094 4,193 634,582 9,732,356 Unrestricted Net Assets 2,233,078 526,058 13,106 374,215 (466,195) (65,296) 36,151 2,651,117 Total Net Assets $10,213,404 $ 616,868 $1,664,025 $2,475,465 $25,899 $ (60,089) $634,582 $36,151 $ $15,606,305 - 20- VIRGIN ISLANDS ECONOMIC DEVELOPMENT AUTHORITY COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 20]0 GDB EDC SBDA IPDC IRP EZC EDA TIF 2010 Operating Revenues: Application and Processing Fees $ 51,295 $ 538,271 $ 2,050 $ $ $ $ 1,000 $ $592,616 Rental Income 535,113 535, 113 Interest from Loans 87,418 59,381 24,789 36,154 207,742 Other Operating Revenue 54,967 68,643 2,451 126,061 Total Operating Revenue 193,680 538,271 61,431 603,756 ~240 37,154 1,461,532 Operating Expenses: Personnel Costs 341,359 1,712,973 579,297 386,091 18,599 438,316 3,476,635 Occupancy 21,364 124,765 68,278 48,181 45,724 308,312 Advertising 7,699 158,026 1,664 980 168.369 Professional 9,417 225,625 18,385 765 12,799 28,724 295,715 Travel 35,610 178,614 6,976 4,161 7,438 875 233,674 Other Administrative Expenses 341,955 340,044 102,676 181,458 70,818 187 1,037.138 Bad Debt 1,107,878 83,440 (47,644) (94,010) 20,534 1,070,198 Depreciation 233,362 17,936 13,549 250,767 1,237 516,851 Total Operating Expenses 2,098,644 2,841,423 743,181 871,423 (75,411) 577,312 20,721 29,599 7,106,892 Operating Profit (Loss) (\ ,904,964) (2,303,152) (681,750) (267,667) 102,651 (577,312) 16,433 (29,599) (5,645,360) Non-operating Revenues (Expenses): Interest Income 105,607 10,359 13,072 129,038 Other Income 12,500 10,000 22,500 Interest Expense and Finance Charges (8,216) (6,084) (23) (14,323) Total Non-operating Revenues (Expenses) 105,607 12,500 10,359 4,856 (6,084) 10,000 (23) 137,215 Net Loss Before Transfers (1,799,357) (2,290,652) (671,391) (262,811) 96,567 (567,312) 16,410 (29,599) (5,508,145) Transfers In 3,198,977 2,161,430 593, III 18,010 535,796 19,704 6,527,028 Changes in Net Asset 1,399,620 (129,222) (78,280) (262,811) 114,577 (31,516) 16,410 (9,895) 1,018,883 Net Assets, Beginning of Year 8,813,784 746,090 1,742,305 2,738,276 (88,678) (28,573) 618,172 46,046 14,587,422 Net Assets, End of Year $10,213,404 $ 616,868 $1,664,025 $2,475,465 $ 25,899 $ (60,089) $634,582 $36,151 $15,606,305 - 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