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HomeMy WebLinkAbout1996 08 31 Financial Report - Local goverment investment cooperative 0/-31-1996-1995 Toll•RN, The Global Leader LOCAL GOVERNMENT INVESTMENT COOPERATIVE Financial Statements August 31, 1996 and 1995 (With Independent Auditors' Report Thereon) KPMG Peat Marwick LLP KPMG Peat Marwick LLP 2500 City Center Tower it 301 Commerce Street Fort Worth,TX 76102 INDEPENDENT AUDITORS' REPORT The Board of Directors Local Government Investment Cooperative: We have audited the accompanying statements of assets and liabilities of Local Government Investment Cooperative (LOGIC) as of August 31, 1996 and 1995, and the related statements of operations and changes in net assets for the years then ended. These financial statements are the responsibility of LOGIC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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. Our procedures included confirmation of securities owned as of August 31, 1996 and 1995, by correspondence with the custodian and brokers. 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 audits provide 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 Local Government Investment Cooperative as of August 31, 1996 and 1995, and the results of its operations and the changes in its net assets for the years then ended in conformity with generally accepted accounting principles. K�ivt U- P.e m October 4. 1996 Me^ter Firm of {:SAG Inlornahonal LOCAL GOVERNMENT INVESTMENT COOPERATIVE Statements of Assets and Liabilities August 31, 1996 and 1995 1996 1995 Assets: Investments, at amortized cost which approximates fair value (notes 2 and 3) $ 791,262, 582 617, 513, 616 Due from broker 15,468,750 - Accrued interest receivable 2, 661, 383 707,353 809, 392,715 618,220,969 Liabilities: Securities sold under agreements to repurchase (notes 2 and 3) - 59, 877,500 Distributions payable 3,721,327 3, 190, 345 Operating expense payable (note 4) 105, 886 37,692 Management fee payable (note 4) 75, 180 62, 896 Other liabilities 34,063 27, 637 3,936,456 63, 196,070 Net assets: Net assets (equivalent to $1.00 per unit based on 805,456,259 and 555,024,899 units outstanding in 1996 and 1995, respectively) $ 805,456, 259 555,024, 899 See accompanying notes to financial statements. LOCAL GOVERNMENT INVESTMENT COOPERATIVE Statements of Operations Years ended August 31, 1996 and 1995 1996 1995 Investment income - interest, net - $ 40,720, 681 30, 553, 869 Expenses (note 4): 227,675 Operating expense 261, 160 Management fee 1,079,295 758,917 Total expenses 1, 340,455 986,592 Net investment income 39,380,226 29,567,277 Net realized gains on investments (note 3) 43,240 56,099 Net increase in net assets resulting from operations $ 39,423,466 29,623,376 See accompanying notes to financial statements. LOCAL GOVERNMENT INVESTMENT COOPERATIVE Statements of Changes in Net Assets Years ended August 31, 1996 and 1995 1996 1995 Increase in net assets from operations: Net investment income $ 39, 380,226 29, 567,277 Net realized gains on investments 43,240 56,099 Net increase in net assets resulting from operations 39,423,466 29, 623, 376 Distributions to participants: Net investment income (39, 380,226) (29, 567,277) Net realized gains on investments (43, 240) (56,099) Net increase from participant investments: Participant transactions (units): Units sold 2, 026, 174, 091 1, 682,721, 511 Units redeemed (1, 814, 635,214) (1, 299, 389,476) Distributions reinvested 38, 892,483 27,012,560 Total increase 250,431, 360 410, 344,595 Net assets: Beginning of year 555,024, 899 144, 680, 304 End of year $ 805,456, 259 555,024, 899 • See accompanying notes to financial statements. LOCAL GOVERNMENT INVESTMENT COOPERATIVE Notes to Financial Statements August 31, 1996 and 1995 (1) Organization On September 1, 1989, local government investment pools became authorized investments for the majority of public entities in Texas. The Interlocal Cooperation Act was amended by the 71st Texas Legislature to facilitate the creation of local government investment pools in Texas. This Act permits the creation of investment pools to which a majority of political subdivisions (local governments) in Texas may delegate, by contract, the authority to make investments purchased with local investment funds and to hold legal title as custodian of the investment securities. Local Government Investment Cooperative (LOGIC) was organized on May 6, 1994 to conform with the Interlocal Cooperation Act, Chapter 791 of the Texas Government Code, and the Public Funds Investment Act, Chapter 2256 of the Texas Government Code. LOGIC's governing body is a five-member Board of Directors comprised of three government officials or employees and two other persons with expertise in public finance representing the general manager of LOGIC. Day to day administration of LOGIC is performed by Southwest Securities Group, Inc. (General Manager). The portfolio is managed by Patterson & Associates, Austin, Texas (Subadvisor) and SW Capital Corporation, (Administrator) a subsidiary of Southwest Securities Group, Inc. (2) Summary of Significant Accounting Policies (a) Basis of Accounting LOGIC accounts for its assets and liabilities on the accrual basis of accounting. Investment income is recorded when earned and expenses are recorded when incurred. Net investment income is allocated to participant accounts daily on a pro rata basis based on account balance. All gains from sales of securities are allocated to participants' accounts over a maximum of thirty days based on the straight-line amortization method. (b) Expenses Expenses applicable to all participants, which are paid in the form of a management fee (the Management Fee) to the General Manager and an estimated direct fund expense (the Operating Expense), are allocated between all participants as an adjustment to the daily investment yield so that only net income is credited to participants' accounts. The Board has the responsibility under the provisions of the LOGIC Participation Agreement to approve any modifications or other amendments of the Management Fee structure. The estimate of direct fund expense is accrued monthly to fund the payment of various program costs such as audit expenses, legal fees, custodial fees, insurance premiums and approved start-up expenditures. (Continued) 2 LOCAL GOVERNMENT INVESTMENT COOPERATIVE Notes to Financial Statements (2) Summary of Significant Accounting Policies, Continued - (c) Investments Investments are stated at amortized cost (carrying value), which does not vary materially from fair value due to the short term nature of the investments, unless there is permanent impairment of value in which case the investments are valued at market. Securities transactions are recorded on a settlement date basis which does not vary materially from the trade date basis which is required by generally accepted accounting principles (d) Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase (Reverse Repurchase Agreements) involve the sale of securities held by LOGIC, with a simultaneous agreement that LOGIC will repurchase such securities at an agreed upon date at the same price plus a contract rate of interest. LOGIC will use the proceeds of a Reverse Repurchase Agreement (which are considered to be borrowings) to purchase other permitted investments either maturing at a date simultaneous with or prior to the expiration of the Reverse Repurchase Agreement. LOGIC enters into Reverse Repurchase Agreements only when the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. Reverse Repurchase Agreements are secured by LOGIC assigning U.S. Government agency or Treasury securities and are carried at the amount which the securities will subsequently be repurchased as specified in the agreements. The market value of securities assigned under Reverse Repurchase Agreements normally exceeds the cash received, providing the dealers a margin against a decline in market values of the securities. If the dealers default on their obligations to resell these securities to the investors or provide securities or cash of equal value, the investors would suffer an economic loss equal to the difference between the market value plus accrued interest on the underlying securities and the Reverse Repurchase Agreement obligation, including accrued interest. However, LOGIC's Reverse Repurchase Agreements have not required the provision of any excess market value, therefore, LOGIC has not been subject to any loss or potential loss from dealer default. (e) Federal Income Taxes LOGIC is an entity that is treated as an association taxable as a corporation. However, all of the income of LOGIC accrues to the benefit of the state, municipalities and subdivisions thereof and, therefore is excluded from the income of LOGIC under Internal Revenue Code Section 115. Accordingly, LOGIC does not incur any income tax liability. (Continued) 3 LOCAL GOVERNMENT INVESTMENT COOPERATIVE Notes to Financial Statements (2) Summary of Significant Accounting Policies, Continued (f) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. (g) Fair Value of Financial Instruments Due to the short term nature of LOGIC's assets and liabilities, the carrying value as recorded in the statements of assets and liabilities approximates fair value. (3) Investments Investments of LOGIC are to be only those authorized by the Texas Public Funds Investment Act governing pools for local governments. LOGIC's Board of Directors has further restricted the authorized investments. As stated in LOGIC's Information Statement and Investment Policy, the portfolio may include the following: 1. Obligations of the United States or its agencies and instrumentalities; 2. Other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the United States; 3. Fully collateralized repurchase agreements having a defined termination date, secured by obligations described in (1) or(2) above; and 4. Money market funds, if LOGIC receives funds too late to be otherwise invested, authorized by the Public Funds Investment Act, which invest only in obligations described in (1), (2) or (3) above. LOGIC is designated to be highly liquid in order to give participants immediate access to their account balance. Therefore, the weighted average maturity of the investments of LOGIC cannot exceed 60 days. At August 31, 1996 and 1995 LOGIC's investments' weighted average maturity was 31 and 30 days, respectively. The net interest income of the portfolio, as defined in LOGIC's Information Statement and Investment Policy, is determined each business day, and consists of the sum of(a) interest accrued, (b) discount earned (including both original issue and market discount), and (c) realized capital gains (amortized over a 30-day period) less the sum of (a) amortization of premium, (b) the estimated expenses of the portfolio applicable to that distribution period, and (c) realized capital losses (amortized over 30 day period). All net interest income of the portfolio is accrued daily and declared as earnings to participants each day. Earnings accrue throughout the month and are distributed on the first business day of the following month, at which time they are reinvested as additional units at the current net asset value, unless the participant has elected to have them paid out. As of August 31, 1996 and 1995, there were no undistributed gains on the sale of investments and total realized gains of $43,240 and $56,099, respectively. (Continued) 4 LOCAL GOVERNMENT INVESTMENT COOPERATIVE Notes to Financial Statements (3) Investments, Continued Securities purchased under agreements t9 resell (Repurchase Agreements), which are treated as investments, are collateralized by negotiable and eligible government securities and are carried at the amounts at which the securities were purchased as specified in the respective agreements. LOGIC takes possession of collateral on Repurchase Agreements upon entering into the Repurchase Agreement. The collateral is marked to market daily to ensure its market value as being at least equal to 102% of the resale price of the Repurchase Agreement. Agreements for one business day or less require collateral equal to at least 100% of the resale price of the Repurchase Agreement. As of August 31, 1996 and 1995, LOGIC's weighted average collateral percentages were 102%, respectively. A summary of investments held at August 31, 1996 follows: Average Carrying Fair Investment type yield value value Repurchase Agreements: Fuji Securities 5.36% $ 178, 058, 778 178,058, 778 Lehman Brothers 5.29 50, 546,454 50, 546,454 First Chicago 5.35 124, 320, 845 124, 320, 845 Bank of America 5.41 225. 837,477 225, 837,477 Total repurchase agreements 578. 763, 554 578,763. 554 , U.S. Treasury Securities - U.S. Treasury bills 5.26 14. 577,266 14,565. 500 U.S. Government Agency Securities: Federal Farm Credit Bank 5.50 12, 165,796 12, 163, 051 Federal Home Loan Bank 5.54 95, 346, 866 95,279,478 Federal Home Loan Mortgage Corporation 5.43 13, 718, 829 13,715, 144 Federal National Mortgage Association 5.42 66,714, 377 66, 697, 680 Tennessee Valley Authority 5.42 9, 975, 894 9, 973,400 197. 921,762 197, 828, 753 Total investments $ 791,262, 582 791. 157, 807 (Continued) 5 LOCAL GOVERNMENT INVESTMENT COOPERATIVE Notes to Financial Statements (3) Investments, Continued A summary of investments held at August 31, 1995 follows: Average Carrying Fair Investment type yield value value Repurchase Agreements: Donaldson, Lufkin and Jenrette Securities Group 5.88% $ 76, 396, 732 76, 396,732 First Chicago Capital Markets, Inc. 5. 89 175,559,788 175,559, 788 Bank of America 5.92 261. 138,000 261, 138, 000 Total repurchase agreements 513, 094,520 513,094, 520 U.S. Treasury Securities: U.S. Treasury bills 6.41 39, 662, 665 39,710,400 U.S. Treasury notes 5. 89 35,019,591 35,067, 300 Total U.S. Treasury securities 74, 682,256 74,777,700 U.S. Government Agency Securities - Federal Farm Credit Bank 6.30 29,736, 840 29,756,250 Total investments 617, 513, 616 617, 628,470 Less securities sold under agreement to repurchase (59. 877, 500) Net investments $ 557, 636, 116 All repurchase agreements were made with primary dealers as required by statute and investment policy. • (4) Management Fee and Operating Expenses LOGIC pays a Management Fee to the General Manager for day-to-day administrative services under an administration agreement that provides for fees to be computed at an annual rate of .15% of LOGIC's average daily net assets. The General Manager pays fees for investment management and advisory services under investment advisory and sub- advisor agreements. The Operating Expense was revised from .045% to .025% as of March 1, 1996. kPiind Ii The Global Leader LOCAL GOVERNMENT INVESTMENT COOPERATIVE No Material Weaknesses Letter August 31, 1996 KPMG Peat Marwick LLP .....Temntemeimperiotorems KPMG Peat Marwick LLP 2500 City Center Tower II 301 Commerce Street Fort Worth,TX 76102 October 4, 1996 The Board of Directors Local Government Investment Cooperative Dallas, Texas Ladies and Gentlemen: We have audited the financial statements of Local Government Investment Cooperative (LOGIC), for the year ended August 31, 1996, and have issued our report thereon dated October 4, 1996. In planning and performing our audit of the financial statements of LOGIC we considered internal control in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on internal control. A material weakness is a condition in which the design or operation of internal control components does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements beinc, audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of internal control would not necessarily disclose all matters in internal control that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. However, we noted no matters involving internal control and its operation that we consider to be material weaknesses as defined above. This report is intended solely for the information and use of the Board of Directors, management and LOGIC's participants. Very truly yours, etA.A" LL Mern0e,Pam ol KFMG International