COMPREHENSIVE ANNUAL - Lexington North Carolina

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					fiscal year ended
  june 30, 2003
COMPREHENSIVE ANNUAL
  FINANCIAL REPORT
           City of Lexington
      Fiscal Year Ended June 30, 2003




                           City Council
                    Richard L. Thomas, Mayor

 Larry G. Beck, Mayor Pro-Tem                        Helen S. Brinkley
 C. Phillip Head                                    Donald K. McBride
 George L. Clifton                                   John T. Walser, Jr.
 Louise G. Miller                                       Leroy Pearson

                            City Manager
                            John L. Gray

                       Assistant City Manager
                           J. Alan Carson

                         Director of Finance
                          Terra A. Greene

           Prepared by the City of Lexington Finance Department
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                                          City of Lexington, North Carolina
                                        Comprehensive Annual Financial Report
                                        For the Fiscal Year Ended June 30, 2003

                                                 TABLE OF CONTENTS
                                                                                  Exhibit No.   Page No.
INTRODUCTORY SECTION
Letter of Transmittal                                                                              i-x
GFOA Certificate of Achievement                                                                     xi
Organizational Chart                                                                               xii

FINANCIAL SECTION
Independent Auditors' Report                                                                     1-2
Management's Discussion and Analysis                                                             3 - 15

Basic Financial Statements:
   Statement of Net Assets                                                             1         16 - 19
   Statement of Activities                                                             2         20 - 21

Fund Financial Statements:
   Balance Sheet - Governmental Funds                                                  3         22 - 24
   Statement of Revenues, Expenditures and Changes in Fund
       Balances - Governmental Funds                                                   4         25 - 26
   Reconciliation of the Statement of Revenues, Expenditures and Changes
      in Fund Balances of Governmental Funds to the Statement of
      Activities - Government Wide                                                     5           27
   General Fund - Statement of Revenues, Expenditures and Changes in Fund
      Balances - Budget and Actual                                                     6         28 - 29
   Statement of Net Assets - Proprietary Funds                                         7         30 - 33
   Statement of Revenues, Expenses and Changes in Fund Net Assets -
       Proprietary Funds                                                               8         34 - 37
   Statement of Cash Flows - Proprietary Funds                                         9         38 - 41
   Notes to the Basic Financial Statements                                                       42 - 88

Required Supplemental Financial Data:
   Schedule of Funding Progress - Law Enforcement Officers' Special
      Separation Allowance                                                           A-1           89
   Schedule of Employer Contributions - Law Enforcement Officers' Special
      Separation Allowance                                                           A-2           90

Combining and Individual Fund Statements and Schedules:

Nonmajor Governmental Funds:
   Combining Balance Sheet                                                            B-1          91
   Combining Statement of Revenues, Expenditures and Changes in Fund Balances         B-2          92
                                                                                   Exhibit No.   Page No.
General Fund:
   Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget
      and Actual (with comparative actual amounts)                                    C-1        94 - 107

Nonmajor Special Revenue Funds:
   Combining Balance Sheet                                                            D-1        109 - 110
   Combining Statement of Revenues, Expenditures and Changes in Fund
      Balances                                                                        D-2        111 - 112
   Community Development Block Grant Special Revenue Fund - Statement of
      Revenues, Expenditures and Changes in Fund Balances - Authorized and
      Actual                                                                          D-3        113 - 114
   Controlled Substance Tax Distribution Special Revenue Fund - Statement of
      Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
      (with comparative actual amounts)                                               D-4        115 - 116
   Public Safety Grant Special Revenue Fund - Statement of Revenues,
      Expenditures and Changes in Fund Balances - Budget and Actual (with
      comparative actual amounts)                                                     D-5        117 - 118
   Special Taxing District Special Revenue Fund - Statement of Revenues,
      Expenditures and Changes in Fund Balances - Budget and Actual (with
      comparative actual amounts)                                                     D-6        119 - 120

General Obligation Debt Service Fund:
   Statement of Revenues, Expenditures and Changes in Fund Balances - Budget
       and Actual (with comparative actual amounts)                                   E-1        122 - 123

Capital Project Fund:
   Nonmajor Five-Year Capital Improvements Project Fund - Balance Sheet                F-1         125
   Nonmajor Five-Year Capital Improvements Project Fund - Schedule of
      Revenues, Expenditures and Changes in Fund Balances - Authorized and
      Actual                                                                           F-2       126 - 129

Enterprise Funds:
   Electric Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Budget and
          Actual (Non-GAAP) (with comparative actual amounts)                         G-1        131 - 135
       Electric Rate Stabilization Fund - Schedule of Revenues and Expenses -
           Authorized and Actual (Non-GAAP)                                           G-2        136 - 137
       Construction in Progress - Schedule of Revenues and Expenses - Authorized
          and Actual (Non-GAAP)                                                       G-3        138 - 141

   Water and Sewer Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Budget and
          Actual (Non-GAAP) (with comparative actual amounts)                         G-4        142 - 148
       Construction in Progress - Schedule of Revenues and Expenses - Authorized
          and Actual (Non-GAAP)                                                       G-5        149 - 152
                                                                                   Exhibit No.   Page No.
   Natural Gas Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Budget and
          Actual (Non-GAAP) (with comparative actual amounts)                         G-6        153 - 157
       Construction in Progress - Schedule of Revenues and Expenses - Authorized
          and Actual (Non-GAAP)                                                       G-7        158 - 159

   Golf Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Budget and
          Actual (Non-GAAP) (with comparative actual amounts)                         G-8        160 - 164
       Construction in Progress - Schedule of Revenue and Expenses - Authorized
          and Actual (Non-GAAP)                                                       G-9        165 - 166

Internal Service Funds:
   Combining Statement of Net Assets                                                  H-1        168 - 171
   Combining Statement of Revenues, Expenses and Changes in Fund Net Assets           H-2        172 - 175
   Combining Statement of Cash Flows                                                  H-3        176 - 179
   Garage Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Financial Plan
          and Actual (Non-GAAP) (with comparative actual amounts)                     H-4        180 - 184
   Group Insurance Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Financial Plan
          and Actual (Non-GAAP) (with comparative actual amounts)                     H-5        185 - 186
   Telephone Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Financial Plan
          and Actual (Non-GAAP) (with comparative actual amounts)                     H-6        187 - 189

   Risk Management Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Financial Plan
          and Actual (Non-GAAP) (with comparative actual amounts)                     H-7        190 - 192
   Utility Administration Fund:
       Schedule of Revenues, Expenses and Changes in Net Assets - Financial Plan
          and Actual (Non-GAAP) (with comparative actual amounts)                     H-8        193 - 199
       Utility Administration Capital Reserve Fund - Schedule of Revenues,
           Expenditures and Changes in Net Assets - Authorized and Actual
           (Non-GAAP)                                                                 H-9        200 - 201
       Utility Administration Rate Stabilization Fund - Schedule of Revenues,
           Expenses and Changes in Net Assets - Authorized and Actual
           (Non-GAAP)                                                                 H-10       202 - 203
       Construction in Progress - Schedule of Revenues and Expenses - Authorized
          and Actual (Non-GAAP)                                                       H-11       204 - 205

Supplemental Financial Data:
   Schedule of Ad Valorem Taxes Receivable                                             I-1         206
   Analysis of Current Tax Levy                                                        I-2         207
                                                                   Exhibit No.   Page No.
    Analysis of Current Tax Levy                                       I-3         208

STATISTICAL SECTION
Graph of General Fund Expenditures by Category                          1          210
General Governmental Expenditures by Function and Department            2        211 - 212
General Governmental Revenues by Source                                 3        213 - 214
General Governmental Tax Revenues by Source                             4          215
Property Tax Rates - Direct and Overlapping Governments and
   Assessed Valuation, and Tax Levies and Collections                   5          216
Assessed Valuation and Collections and Percentage of Collections       5A          216
Schedule of Assessed Value of Taxable Property                          6          217
Schedule of Principal Taxpayers                                         7          218
Computation of Legal Debt Margin                                        8          219
Ratio of Net General Obligation Bonded Debt to Assessed Value
    and Net General Obligation Bonded Debt per Capita                   9          220
Ratio of Annual Debt Service Expenditures for General Obligation
    Bonded Debt to Total General Governmental Expenditures             10          221
Computation of Direct and Overlapping Bonded Debt - General
   Obligation Bonds                                                    11          222
Graph of Enterprise Funds Revenue                                      12          223
Electric Fund KWHRs Sold, Number of Customers, and Revenues            13          224
Electric Statement of Revenues and Expenses                            14        225 - 226
Electric Fund Revenue Bond and General Obligation Bond Coverage        15          227
Water and Sewer Fund CCFs Sold, Number of Customers,
   and Revenues                                                        16          228
Water and Sewer Statement of Revenues and Expenses                     17        229 - 230
Water and Sewer Fund Revenue Bond and General Obligation
   Bond Coverage                                                       18          231
Natural Gas MCF/DT Sold, Number of Customers, and Revenues             19          232
Natural Gas Statement of Revenues and Expenses                         20        233 - 234
Natural Gas Fund Revenue Bond and General Obligation Bond
   Coverage                                                            21          235
Golf Fund Rounds Played, Number of Customers, and                      22          236
   Revenues
Golf Statement of Revenues and Expenses                                23        237 - 238
Demographic Statistics                                                 24          239
Miscellaneous Statistics                                               25          240
                                                                            Exhibit No.   Page No.
COMPLIANCE SECTION
Report on Compliance and on Internal Control over Financial Reporting
   based on an Audit of Financial Statements Performed in Accordance with
   Government Auditing Standards                                                          241 - 242
Report on Compliance with Requirements Applicable to each Major Federal
   Program and Internal Control over Compliance in Accordance with
   OMB circular A-133 and the State Single Audit Implementation Act                       243 - 244
Report on Compliance with Requirements Applicable to each Major State
   Program and Internal Control over Compliance in Accordance with
   OMB circular A-133 and the State Single Audit Implementation Act                       245 - 246
Schedule of Findings and Questioned Costs                                                 247 - 248
Schedule of Expenditures of Federal and State Awards                                        249
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October 15, 2003


       To the Honorable Mayor, members of the City Council and the Citizens of the City of
Lexington, North Carolina:

        I am pleased to present the Comprehensive Annual Financial Report (CAFR) of the City of
Lexington, NC for the fiscal year ended June 30, 2003. I am extremely proud that this report has
been prepared virtually in its entirety by the City’s Finance Department. The financial statements
and supplemental schedules contained herein have been audited by the independent, certified public
accounting firm of Martin Starnes and Associates, and that firm’s unqualified opinion is included in
the Financial Section of this report. Responsibility for both the accuracy of the data, and the
completeness and fairness of the presentation, including all disclosures, rests with management. To
the best of our knowledge and belief, the enclosed data are accurate in all material respects and are
reported in a manner that presents fairly the financial position and results of operations of the
various funds, account groups and component units of the City of Lexington, North Carolina. All
disclosures necessary to enable the reader to gain the maximum understanding of the City of
Lexington's financial activities have been included.

         The report is presented in four sections: Introductory, Financial, Statistical and Compliance.
The Introductory Section, which is not audited, includes this letter of transmittal and information
about the City’s organization. The Financial Section is composed of the management’s discussion
and analysis, the basic financial statements on a government-wide basis and individual fund financial
statements and schedules, as well as the independent auditor's report. The Statistical Section, which
is also not audited, includes selected fiscal and economic data, generally presented on a multi-year
basis. Finally, the Compliance Section presents reports and schedules required by the federal and
state Single Audit Acts, which are discussed in the Financial Information section of this letter.

        The financial reporting entity of the City includes all the funds of the primary government,
the City of Lexington, North Carolina, as well as its component units. Component units are legally
separate entities for which the primary government is financially accountable. Discretely presented
component units are reported in a separate column in the basic financial statements to emphasize
that they are legally separate from the primary government and to differentiate their financial
position and results of operations from those of the primary government. The ABC Board and the
Lexington Tourism Authority are reported as discretely presented component units. The ABC
Board is reported in the financial statements in a manner similar to a Proprietary Fund; while the
Lexington Tourism Authority is presented in a manner similar to a Governmental Fund.

                                                  -i-
Description of the City

         The City of Lexington, North Carolina, was settled in the industrial region of North Carolina
known as the "Piedmont Triad Area" in 1775. Lexington incorporated in 1828 under North
Carolina General Statutes and became the county seat of Davidson County in 1847. Lexington land
area is 17.5 square miles with a population of 20,327. The City has a Council-Manager form of
government and is governed by an eight-member City Council consisting of two members elected at
large and six elected by ward. The Council operates under the guidance of a popularly-elected
Mayor. Council members are elected on a nonpartisan basis for staggered four-year terms, and the
Mayor is elected on a nonpartisan basis for a two-year term. The Mayor may vote only in case of a
tie among members of the City Council. The City Council is responsible for establishing policy,
passing ordinances, adopting the budget, appointing committees and hiring the City's chief
administrative officer, the City Manager, and the City's legal counsel. The City Manager is
responsible for carrying out the policies and ordinances of the governing board, for overseeing the
day-to-day operations of the City, and for the appointment of the Department Heads.

         The “Statement of Purpose of the City of Lexington City Council” is a document in which
the Council identifies its mission, vision for the future, values, roles of the Council and strategic
goals. The Council wants to maintain as high a service level to its citizens as is possible but is
consistent with maintaining the City in sound financial condition. The strategic goals of the Council
will be accomplished by the City’s management through long-term planning, prudent use of debt,
and use of citizens’ committees to review and recommend operating standards in managing the
City’s resources.

          The City provides a full range of services including police and fire protection, sanitation
services, the construction and maintenance of streets and infrastructure, recreational activities,
cemetery services, and cultural events. In addition, the City of Lexington owns and operates four
utility services: a water treatment and distribution system, a sewer treatment and collection system,
an electric distribution system, and a natural gas distribution system. These enterprise funds serve
portions of the county in addition to servicing the City. The City also owns and operates a golf
course.

         The City extends financial support to certain boards, agencies and commissions to assist
their efforts in serving the citizens. Support efforts are largely centered on partnership efforts for
essential economic development and neighborhood revitalization. Among these are the Davidson
County Economic Development Commission, Davidson County Airport Authority, Lexington
Appearance Commission, Lexington Civic Center, Lexington Housing Community Development
Corporation, and Uptown Lexington, Incorporated.

Economic Conditions and Outlook

        Internationally known artist Bob Timberlake, a Lexington native and resident, has a
beautifully constructed gallery and welcome center just off Interstate 85 within the City limits.
Richard Childress, president of Richard Childress Racing Enterprises, held a grand opening in May
2003 of his newly expanded museum, another Lexington area tourist attraction showcasing five
decades of auto racing history. In years past, approximately 50,000 fans visited the old museum
annually. Expectations indicate that number of tourists tripling in the coming year to this new
multimillion dollar RCR museum, which is housed in a 47,000 square foot building at the 35-acre
RCR Enterprises complex just a few miles north of Lexington.

                                                   -ii-
          With Bob Timberlake well established on the east side of the gateway entrance to the City of
Lexington, Richard Childress now has additional development plans to anchor the west gateway
entrance with a 60-acre winery complex, at the intersection of US Highways 64 and 52. Effective
August 11, 2003, the property was voluntarily annexed into the corporate limits and the
groundbreaking began in September 2003. The plans encompass about 25 acres of the tract to be
planted in grapes with another 15 acres available for a hotel, restaurant, and retail shop space to be
known as Vineyards Crossing. An amphitheatre for concerts is also planned for the future. With an
initial investment of between $6 and $8 million, the 34,000 square foot winery is set to open in
August 2004. Within three years, Childress Vineyards is projected to produce 30,000 cases of 10
different wines including chardonnay, viognier, vidal, cabernet sauvignon, merlot, petit verdot,
cabernet franc, sangiovese, syrah and malbec. Nationwide, North Carolina is ranked 12th in wine
production and 15th in grape production and acreage. Childress along with other growers in the
region envision an opportunity to reclaim some of the area’s agricultural heritage, which is
disappearing as tobacco farms diminish in importance to the area economy.

         In the fall of 1999, an executive director of the Lexington Convention and Visitors Bureau,
Inc., the marketing arm of the Lexington Tourism Authority, was employed and opened the City’s
first Visitors Information Center. The Authority having recently developed a strategic marketing
plan has won five statewide awards of recognition from the NC Association of Convention and
Visitors Bureaus, the most prestigious of which is the CVB Rising Star Award in 2003. The Rising
Star Award, highly coveted, honors an outstanding CVB that has undergone a significant
restructuring and changed its image in the past five years to position itself as a newly redefined
destination. The Lexington Tourism Authority is funded by a hotel/motel room six percent
occupancy tax which aids in boosting tourism promotional activity.

         The Uptown Lexington, Incorporated project began in 1993 when local businesses elected
to tax themselves an additional $.20 per $100 assessed valuation to generate funding for the
revitalization of the uptown business district. Investments of up to $1 million a year have resulted,
with the total of public and private investment reaching over $21 million to date. The boast over the
past two years has been two properties donated for historic rehabilitation. One of those properties,
Grimes Mill, is listed on the National Register of Historic Places and represents a $900,000
investment to restore this building, one of the first roller mills in the State. Uptown Lexington is
exploring possibilities of renovating the other property, known as the former Belk building, to
convert it into a mixed commercial and residential complex located in the heart of the uptown
district. All of these efforts in combination with the Barbecue Festival, 19th annual in 2002, are
helping to make the City’s goal to build tourism become a reality.

       The City completed its most recent annexation effective June 30, 1998 in an effort to build
and diversify the tax base. This annexation resulted in a 5.84 square mile addition coincident with
Lexington’s planning area for future growth. This annexation also complimented the existing
population by 2,061 and increased Lexington’s tax base by more than $150 million in assessed value.
The increased value was recognized in fiscal year 1998-1999.

        The City of Lexington's economy has been experiencing a downturn for over two years, with
a high unemployment rate of 8.4% compared to the national and state unemployment rates of 6.4%
and 6.6%, respectively, at the end of the fiscal year. The unemployment rate is affected by the
economic recession as a whole and also by adverse market conditions in the furniture and
manufacturing industries. Several local businesses have experienced reduced production and sales,
closings, and layoffs; the most significant of which has affected the furniture industry. There were 6

                                                 -iii-
business and plant closings in fiscal year 2002-03 compared to 2 in the prior year. However, various
other restructuring and business declines resulted in a total of 940 layoffs for the current year,
compared to 805 in the prior year. Manufacturing jobs made up 52 percent of Davidson County’s
workforce in 1990, with 20 percent of that total in furniture. By the end of 2002, manufacturing
jobs accounted for 35 percent of the work force, with 13.5 percent of those in furniture.
Diversification of the employment base and job creation is critical to the future of Lexington.

         The number one electric utility customer and the second largest taxpayer and water/sewer
utility customer for the City, Lexington Home Brands (LHB), contributed one furniture plant
closing of the 6 and affected 550 of the 940 layoffs for the current year. Since November of 2000,
LHB has laid off about 1,334 people and closed five plants, with the largest in its 102-year history
yet to come. In August 2003, LHB announced the October closing of Plant #1 with 400 jobs being
eliminated, which is particularly sobering considering the 9-acre downtown complex has been a
fixture in Lexington dating back to the manufacturer’s founding company, Dixie Furniture. With
this closure, Lexington Home Brands could be left with as few as 1,250 employees at its remaining
two plants and warehouse; when as recently as the 1990’s, the company employed more than 6,000.
Intense global competition for industry is driving continuous change to the industrial base,
increasing the chance for further losses of manufacturing jobs.

        Major industries include tissue products, furniture manufacturing, textiles, battery
manufacturing, printing and banking. Kimberly Clark Corporation, a global consumer products
company, continues to be the City’s largest taxpayer, with 5.41% of the City’s assessed valuation.
Lexington Home Brands and Duracell USA round out the top three at 4.66% and 3.95%,
respectively, of the assessed valuation. Please refer to Table 7 for the Schedule of Principal
Taxpayers in the Statistical Section for a complete list. In an effort to attract new industry, the City
continues to support the Davidson County Economic Development Commission. The Commission
maintains a data bank to provide information regarding the area to industrial prospects and
expanding industries, of which a great deal revolve around the Lexington Business Center Industrial
Park (LBC).

        In March 1995, the City of Lexington, the County of Davidson and Energy United formed a
project partnership to enhance economic development through building an industrial park. The
goals established then for building the LBC were to build $100 million in tax base in ten years,
provide higher paying jobs, provide diversity in manufacturing and employment, and to the extent
practical, slow the migration of workers to other counties. During fiscal year 1997-1998, the LBC
was granted Foreign Trade Zone designation along with five other sites in the “Piedmont Triad
Area.” Since the partnership agreement, the LBC has been fully served with water, sewer, natural
gas, and electric utilities as well as road infrastructure. Three shell buildings have also been built and
sold in Phase I of the development totaling to approximately $30 million increased tax base. A local
company, a national firm, and an international firm are the tenants. In November 1999, Phase II
began when Energy United entered a contract to purchase an additional 20.36 acres to construct a
fourth 100,000 square foot shell building. This facility is being marketed and the City is currently in
the process of updating the business plan for the LBC.

         To further accommodate economic development, Davidson County opened a new airport in
2000 located within the City limits, with some limited funding contributions from the City. The
airport, owned by the County, replaced a 40 year old Lexington Municipal Airport. Currently, 65
planes have accumulated to be based at the airport to date, with five of those belonging to Richard
Childress Racing Air which has its own private hangar. The County has built four T-hangars and

                                                   -iv-
has been successful in leasing all the spaces. The ensuing property tax gain for the City has now
ranked RCR Air 9th in the top ten taxpayers (refer to Table 7 for the Schedule of Principal Taxpayers
in the Statistical Section). On the horizon in the coming year, the airport has a new maintenance
facility under construction and is in the process of obtaining an Instrument Landing System which
makes it easier for planes to land in inclement weather. The airport has also recently landed a new
corporate client, Wings Aviation Management, which will result in a new hangar being built and the
potential for 3-5 new planes relocating from Burlington, NC.

        With the revitalization of the uptown area, the potential tourism boosts, the growth of the
industrial park, and the expanding airport, it is anticipated that Lexington’s economic base will be
sustained somewhat despite the ensuing drastic losses in the local furniture industry or further
economic recession.

Major Initiatives

         For the Year. The “Statement of Purpose of the Lexington City Council” revised and
adopted in March 1999, continues to provide the focus for the City’s efforts. The strategic goals
include the following: open communication with citizens, customers and employees; improve
financial strength and integrity of City government; shift from government solving problems to
community solving problems through citizen involvement and partnerships; City utilities and other
enterprises to be operated in a businesslike manner; improve quality of life; and promote a strong,
diversified economy. In working toward these goals among others, the following projects and
initiatives have been accomplished.

         Not unlike much of the nation, the City of Lexington experienced financial pressures in all
aspects of City government due to the economic recession, the ongoing State budget crisis, and the
terrorist attack events of September 11, 2001. These factors placed intense pressure to hold down
spending, which the City managed to accomplish in several service areas, and to maximize revenue
opportunities. One of the revenue opportunities was to enact a half cent local option sales tax
effective December 1, 2002 which brought in excess of $300,000 in revenues. These spending
curtailments along with additional revenues proved essential in order to offset escalating insurance
costs, the loss of interest income with the federal funds rate reaching the lowest it has been in 45
years since 1958, the reduction in sales tax revenue due to e-commerce, and industrial load resulting
in reductions in utility sales.

         The City was tremendously affected by a December 5, 2002 ice storm disaster that resulted
in significant power outages and debris cleanup efforts. As a result, the City incurred extraordinary
expenditures and filed a Federal Emergency Management Agency claim of $1.36 million for
reimbursement.

         The Natural Gas Fund expansion project funded by a revenue bond in July 1996 has been
completed for a few years. This project was directed at acquiring new customers in areas not being
served by natural gas and that were not located in the City-owned electric system service area. The
Natural Gas Fund has lost consumption from its primary industrial customer but the 1996
expansion has mitigated the severity of the impact. Due to the success of the last expansion, a
comprehensive market research feasibility study was completed in January 2003 to assist in targeting
potential areas for growth and develop strategies for dealing with existing capacity contracts. The
results presented a five-year expansion plan with 13 identified potential new service areas that could
add approximately 2000 customers. Two of the larger areas, Becks Church Road scheduled for 2004

                                                  -v-
and Southmont scheduled for 2005, could result in an additional $4.5 million in debt in the Natural
Gas Fund.

         A $4.8 million installment financing agreement was issued June 13, 2003 for wastewater
plant improvements. The plant construction upgrade is necessary to meet an April 2004 deadline of
stricter standards of nutrient removal from treated wastewater. Phosphorous, nitrogen and other
dissolved elements in wastewater contribute to algae blooms that endanger fish downstream and in
High Rock Lake. The financing agreement with Bank of America settled on a 3.69% loan for fifteen
years, increasing the Water and Sewer Fund’s annual debt service by $419,156.

         In conjunction with technological advancement, the City released an improved web site at
www.lexingtonnc.net   with the most notable improvements in the economic development and natural
gas service pages, as well as the ability to now view this report and the annual budget on-line. A
comprehensive technological plan will be developed in fiscal year 2003-04 to identify the priorities
for the best use of economic and personnel resources to progress the City towards technological
efficiencies and improved customer service capabilities. Already approved as part of this city-wide
plan is a new Automated Outage Reporting call center system. This customer service technological
improvement will aid in logging power interrupted services during severe outages as opposed to
solely relying on a limited number of customer service representatives; the system is scheduled to be
implemented by December 2003.

        Additional information regarding this fiscal year’s major initiatives along with the financial
implications can be found in the Management’s Discussion and Analysis beginning on page 3.

         For the Future. The primary focus for the future has been planning for potential
deregulation of the electric industry. Federal regulations have been passed which encourage
wholesale competition among utility power producers. Similar regulations are contemplated for
retail competition at the state level. However, because of other states’ experiences with deregulation,
momentum has slowed significantly in North Carolina; and effective February 2002, the study was
placed on hold pending further review. Regardless, due to the magnitude of the problem, the single
greatest threat to the City in the next five years is the deregulation of the electric industry. The
arrival of deregulation in the electric industry without the resolution of the “stranded costs”
obligation associated with the North Carolina Municipal Power Agency Number 1 could have severe
negative consequences for the City’s future. This threat has driven and resulted in concern and
energies being focused to reduce the potential impact. While deregulation has been delayed and no
decision by the legislature is expected prior to 2005, the City has and will continue to commit a great
deal of staff resource time to deregulation transition planning, legislation monitoring, and future
financial planning.

         Another primary work program that will continue for the near term is funding to provide the
platform for continued economic growth in the city limits as well as provide for infrastructure needs.
 Major financial planning was utilized to find the most effective means to finance the infrastructure
in the industrial park and the most recent shell building sold in fiscal year 1998-1999; and bond
proceeds funded sewer improvements to the annexation area in 1998. Another debt financing may
be on the horizon in the next two years to provide sewer, relocate utility lines, and to construct a
roadway bypass along an economic development corridor. An engineering design contract for what
is to be known as the West Bypass was approved October 13, 2003. To achieve the goal of
furthering economic development, continual investments will have to be made in needed
infrastructure for future growth and quality of life potential for City residents and utility customers.

                                                   -vi-
         The City Manager’s performance goals for fiscal year 1998-1999 included the strategic goal
of “shift from government solving problems to community solving problems by stimulating more
citizen involvement, empowering boards, commission, and staff to do more and developing
partnerships.” One of the ways this goal is being obtained is through the update of the Lexington
Challenge Strategic Plan throughout fiscal years’ 1999-2000 and 2000-2001. The original Plan
developed between 1988 and 1991 has proven to be the most successful citizen-led, long-range
planning effort in the history of the City – with over 100 citizens involved; 22 recommendations
were made, of which 19 have been accomplished. The new Challenge Committee, comprised of 27
members, began its work April 26, 1999. The committee completed an update of recommendations
and the City Council adopted the Lexington Challenge 2000 Plan. Challenge 2000 is the City’s
blueprint to improve education, economic development, quality of life, and transportation. The City
began incorporating these goals in the last two fiscal years by focusing on City school performance
and community development strategic planning. Unfortunately, anticipated committed funding for
these efforts have been deferred in the coming year due to budgetary constraints; however, the Plan
remains as the blueprint guide for initiatives in the future.

         Citizen involvement was definitely the key word for the Lexington Golf Club Planning
Committee, which was formulated in 2002 to thoroughly evaluate a feasibility study to renovate the
Lexington Municipal Golf Course. The Committee reviewed various options in an effort to deal
with the poor playing conditions, ultimate decline in revenues for the golf course, and increasing
subsidy from the City’s General Fund. The course was built in the late 1930’s with the irrigation
system installed around the greens and tees and then later in the fairways in the late 1960’s and
1980’s, respectively. Three holes were reworked over the span of 1997-99; however, no other
significant improvements have been made throughout the life of the course. Various options were
considered and studied such as: lease the course, sell the course, make minimal investments, make a
major investment, or take no action and allow the General Fund to further increase the subsidy of
the course operations. The recommendations of the Committee were presented to City Council in
December 2002; and plans to close the course from November 2003 through September 2004 are
underway, which should result in an estimated $1.9 million debt financed renovation of the entire
golf course.

        In conjunction with the golf course renovations, the City has filed for a $1 million grant
from the Clean Water Management Trust Fund. If received, the City plans to build a small
wastewater package treatment plant on the golf course site and would irrigate the course using
effluent recycled water. This innovative approach could result in a win-win situation: by lowering
operating costs for the golf course which uses regular treated water now, and could stretch the
existing wastewater treatment plant capacity extending the need for plant expansion further into the
future.

         Comprehensive long range financial planning is essential to maintain the sound fiscal
integrity of the City’s financial position in an ever changing environment with issues on the horizon
such as: electric deregulation, potential loss of revenues due to recessional impacts, escalating health
care costs, and capital infrastructure needs. These impacts will affect the City’s fiscal condition and
the City’s five-year Financial Planning Model will be used to help discover future weaknesses. The
information provided will be used to help the City forge strategies for the future to maintain the goal
of a strong financial condition. Therefore, the City is committed to updating the Financial Planning
Model a minimum of annually in concert with budget development.



                                                  -vii-
         The business plans for the utilities were completely evaluated and updated in the prior fiscal
year. The plans identified and recommended ways to effectively deal with areas of uncertainty,
higher levels of competition, and increased risks due to changes in the economy and service
provisions. Current factors necessitate that these plans be monitored and adjusted annually to aid in
long range scenario financial planning within the utilities. The City uses these plans along with the
Financial Planning Model to adjust to various pressures in each of the utilities. The Electric Fund is
facing potential electric deregulation, system reliability issues, continual wholesale power increases,
and significant industrial load loss. The Natural Gas Fund is experiencing impending threats of load
losses from the primary customer and remains challenged to steady retail rates while combating
volatile commodity costs. The costs associated with federal and state mandates in water and
wastewater compliance standards, increasing needs for wastewater treatment capacity and capital
improvements, as well as the effects of adverse weather conditions are resulting in extraordinary
pressures in the Water and Sewer Fund. All of these pressures must be balanced with meeting the
overall changing customer demands identified for each of the utilities and warrant considerable
attention within the City’s strategic forecast.

        In summary, the City will be focused on programs to meet the mission of the City which
leverages City resources and increases operational effectiveness, while maintaining basic City
services. That being said, the City has adopted a “reserve the right to play” strategy that necessitates
cautious spending and operational efficiency maneuvers until the economic and State budget
conditions return to some sort of financial stability.

Financial Information

         In government, much more than in business, the budget is an integral part of a unit’s
accounting system and daily operations. The City, in accordance with North Carolina General
Statutes, operates under an appropriation act which provides extensive budgetary controls. The
appropriation act applies to all City funds, including governmental funds and proprietary funds. The
object of these controls is to ensure compliance with legal provisions embodied in the annual
appropriated budget approved by the City Council. Multi-year project budgets are prepared for the
Community Development Block Grant Special Revenue Fund, Capital Improvements Project Fund,
Utility Administration Capital Reserve and Rate Stabilization Funds, and the Enterprise and Internal
Service Construction in Progress Funds. The level of budgetary control (i.e., an appropriated
amount) is at the departmental level within each fund. The government also maintains an
encumbrance accounting system as one method of maintaining budgetary control. Encumbrance
amounts lapse at year-end but are re-appropriated as part of the following year’s budget; therefore,
these amounts are reported in the financial statements as reservations of fund balances.

         In accordance with State law, the City’s budget is prepared on the modified accrual basis, and
its accounting records are also maintained on that basis. Under modified accrual accounting,
revenues are recorded when they are both measurable and available. Expenditures are recorded
when a fund liability is incurred, except for unmatured principal and interest on long-term debt and
certain compensated absences, claims and judgments. Governmental fund types are reported on the
modified accrual basis in the fund financial statements. The Proprietary Funds are reported on the
full accrual basis in the financial statements, under which revenues are recorded when earned and
expenditures are recorded when incurred.

        The City of Lexington, North Carolina is required by State law (North Carolina General
Statute 159-34) to have an annual independent financial audit. A compliance audit on federal and

                                                  -viii-
state financial assistance programs is also required under the federal Single Audit Act of 1984 and
the State Single Audit Implementation Act of 1987, and the related U.S. Office of Management and
Budget’s Circular A-133. The City’s auditors, Martin Starnes and Associates, were selected through
a formal request for proposals process. Generally accepted auditing standards and the standards set
forth in the General Accounting Office’s Government Auditing Standards were used by the auditors
in conducting the engagement. The auditors’ report on the basic financial statements, fund
statements, and schedules are included in the Financial Section of this report. The auditors’ reports
required as part of a single audit are found in the Compliance Section of this report.

        Management is responsible for the accounting system and for establishing and maintaining
an internal control structure. The internal control structure is designed to provide a reasonable, but
not absolute, assurance regarding: (1) the safeguarding of assets against loss from unauthorized use
or disposition; (2) the reliability of financial records for preparing financial statements in conformity
with generally accepted accounting principles and maintaining accountability for assets; and (3)
compliance with applicable laws and regulations related to federal and state financial assistance
programs. The concept of reasonable assurance recognizes that: (1) the cost of a control should not
exceed the benefits likely to be derived, and (2) the evaluation of cost and benefits requires estimates
and judgments by management.

         All internal control evaluations occur within the above framework. We believe that the
City’s internal accounting controls adequately protect assets and provide reasonable assurance of the
proper recording of financial transactions. As part of the City's single audit, the independent auditor
performed a review of the City’s internal control structure. This review was not an audit and no
opinion was issued on the City’s internal control structure; however, the procedures performed by
the independent auditor did not indicate any material internal control weaknesses or reportable
conditions.

         This Comprehensive Annual Financial Report for the year ended June 30, 2003 is in
compliance with the new accounting standard known as the GASB 34 Statement. Additional
financial information regarding this presentation change as well as additional information analyzing
the statements can be found in the Management’s Discussion and Analysis beginning on page 3. As
illustrated by the statements and schedules included in the Financial Section of this report, the City
continues to meet its responsibility for sound financial management. All amounts presented in the
Management’s Discussion and Analysis, Financial Section and in the remainder of this letter are
expressed in whole dollars.

        Cash Management. During the year, all temporary idle cash was invested in certificates of
deposit, commercial paper, agency paper, the local government investment pool, and interest-
bearing bank accounts. The City received an average yield on the investments including bond
proceeds of 1.71%, one hundred and forty basis points below last year. The average yield excluding
bond proceeds was 1.75%. The yield returned $417,703 in interest earned during the year, a
$368,053 decrease from the prior year. This decrease is a direct result of economic conditions;
again, the federal funds rate dipped the lowest it has been in 45 years since 1958.

        The City's investment policy is to minimize credit and market risks while earning a
competitive yield on its investment portfolio. Safety, liquidity, followed by yield is prioritized in that
order in the management of City funds. The total investments, net of bond proceeds, averaged
$22,732,855 during the fiscal year - the majority of which were certificates of deposit. An average
bond proceed cash amount of $1,690,066 was also invested throughout the year.

                                                   -ix-
         Risk Management. The City operates the Risk Management Fund, which covers various
risks related to: torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to
employees; and natural disasters. The City's self-insured exposure is an aggregate limited to
$870,000 for workers' compensation, general liability and property coverage, with per occurrence
limits as explained in detail in the notes to the basic financial statements. The City's Risk Safety
Manager monitors and provides training to City employees, as well as leads the City's Safety
Committee. This group helps ensure that proper uniforms, equipment, and procedures are being
used to accomplish their respective tasks. The City is also self-insured for health and dental
coverage, and has an internal service fund to account for its claims, stop-loss coverage, and third-
party administrative costs.

Other Information

        Awards. The Government Finance Officers Association of the United States and Canada
(GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of
Lexington for its comprehensive annual financial report for the fiscal year ended June 30, 2002.
This marked the eleventh consecutive year that the City has received this prestigious award. In
order to be awarded a Certificate of Achievement, the government must publish an easily readable
and efficiently organized comprehensive annual financial report. This report satisfied both generally
accepted accounting principles and applicable legal requirements.

         A Certificate of Achievement is valid for a period of one year only. We believe that our
current comprehensive annual financial report continues to meet the Certificate of Achievement
Program's requirements and we are submitting it to the GFOA to determine its eligibility for another
certificate.

         Acknowledgments. The preparation of this comprehensive annual financial report is
accomplished through the collective efforts and dedicated service of the entire staff of the Finance
Department. I wish to express my appreciation to all members of the department for their team
effort, dedication and hard work in preparing this report. In particular, I would like to mention and
credit Kelly Mason, Kathy Whitman, Susan Camp, Tracey White, and Heather Forrest for their
extraordinary efforts and contributions in converting the financial reporting to comply with the
GASB Statement 34 first year implementation.

        I would like to express my appreciation and give credit to the Mayor, City Council and City
Manager for their support and interest in providing the resources necessary to accomplish this
project. In addition, I am grateful for their support in planning and conducting the operations of
the City of Lexington in a responsible and progressive manner.


Respectfully submitted,




Terra Greene
Director of Finance



                                                   -x-
               City of Lexington, North Carolina
                      Organizational Chart


                                        City of
                                       Lexington
                                        Citizens

                                         Mayor
                                      City Council


                                      City Manager

                                Assistant
                              City Manager


 General             Public     Highways &           Sanitation   Culture &          Proprietary
Government           Safety       Streets                         Recreation         Operations

  Administrative     Police      Engineering                        Recreation         Electric
  Finance            Fire        Street                             Public Grounds     Water & Sewer
  Legal               Community                                                        Natural Gas
  Human Resources    Development                                                       Golf
  Information                                                                          Garage
  Technologies                                                                         Group Insurance
  Public Buildings                                                                     Risk Management
                                                                                       Utility Administration


                                             -xii-
                   MANAGEMENT’S DISCUSSION AND ANALYSIS

As management of the City of Lexington, we offer readers of the City’s financial statements
this narrative overview and analysis of the financial activities for the fiscal year ended June
30, 2003. We encourage readers to read the information presented here in conjunction with
the transmittal letter on pages i-x and the City’s financial statements, which begin on page 16.

FINANCIAL HIGHLIGHTS

       The assets of the City of Lexington exceeded its liabilities at the close of the fiscal
       year by $135,238,797 (net assets).
       The government’s total net assets increased by $3,591,191, primarily due to increases
       in the business-type activities’ net assets.
       As of the close of the current fiscal year, the City of Lexington’s governmental funds
       reported combined ending fund balances of $16,190,424 which is a decrease of
       $116,984 in comparison with the prior year. Approximately 46 percent of this total
       amount, or $7,479,385, is available for spending at the government’s discretion
       (unreserved fund balance).
       The greatest portion of the reserved fund balance, or $7,107,264, resulted from the
       City’s former charter, prior to the amendment in 1986, which required a commitment
       to transfer all of the Electric Fund’s profits to the General Fund. The previously
       established advance commitment was reduced this fiscal year by the amount of the
       Electric Fund transfer to the General Fund, or $1,050,000.
       At the end of the current fiscal year, unreserved fund balance for the General Fund
       was $7,012,377, or 47.7 percent of total general fund expenditures for the fiscal year.
       The City of Lexington filed $1,360,303 in Federal Emergency Management Agency
       (FEMA) filings for the December 5, 2002 ice storm disaster. The majority of the
       expenditures were incurred in the Sanitation department of the General Fund and in
       the Electric Fund; however, various departments assisted in the power restoration and
       debris cleanup efforts. City-wide intergovernmental receivables totaling $322,376
       were still pending FEMA review and reimbursement to the City as of June 30, 2003;
       the majority of which is recorded in the General and Electric Funds, at $115,223 and
       $197,961 respectively.
       The City of Lexington’s total debt is $21,454,223, increased by $3,709,587 (20.9%)
       during the current fiscal year. Offset by debt retirements, the key factor in this
       increase was the issuance of an installment financing agreement on June 13, 2003 of
       $4,800,000 at a rate of 3.69% for State mandated phosphorous removal at the
       wastewater treatment plant.
       The City of Lexington maintained its A+ and A3 bond ratings for the 5th consecutive
       year.

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis is intended to serve as an introduction to the City of Lexington’s
basic financial statements. The City’s basic financial statements consist of three components:
1) government-wide financial statements, 2) fund financial statements, and 3) notes to the

                                           -3-
financial statements (see Figure 1). The basic financial statements present two different views
of the City through the use of government-wide statements and fund financial statements. In
addition to the basic financial statements, this report contains other supplemental information
that will enhance the reader’s understanding of the financial condition of the City of
Lexington.

                    Required Components of Annual Financial Report
                                           Figure 1




                    Management’s                            Basic

                    Discussion and                        Financial

                        Analysis                        Statements




  Government-wide                           Fund                        Notes to the

       Financial                         Financial                        Financial

      Statements                        Statements                       Statements




                   Summary                                     Detail


Basic Financial Statements

The first two statements (Exhibits 1 and 2) in the basic financial statements are the
Government-wide Financial Statements. They provide both short and long-term
information about the City’s financial status.

The next statements (Exhibits 3 through 9) are Fund Financial Statements. These
statements focus on the activities of the individual parts of the City’s government. These
statements provide more detail than the government-wide statements. There are three parts to


                                           -4-
the Fund Financial Statements: 1) the governmental funds statements, 2) the budgetary
comparison statements, and 3) the proprietary fund statements.

The next section of the basic financial statements is the Notes to the Basic Financial
Statements. The Notes explain in detail some of the data contained in those statements.
Following the notes, additional schedules are provided to show details about the City’s
individual funds. Budgetary information required by the North Carolina General Statutes also
can be found in this section of the statements.

Government-wide Financial Statements

The government-wide financial statements (Exhibits 1 and 2 on pages 16 through 21) are
designed to provide the reader with a broad overview of the City’s finances, similar in format
to a financial statement of a private-sector business by using the accrual basis of accounting.
The government-wide statements, including the Statement of Net Assets and the Statement of
Activities, provide longer term information about the City’s financial status as a whole.

The two government-wide statements report the City’s net assets and how they have changed.
Net assets are the difference between the City’s total assets and total liabilities. Increases or
decreases in the City’s net assets are one indicator of whether its financial health is improving
or deteriorating. However, measuring net assets is only one way to gauge the City’s financial
condition. The reader should consider other non-financial factors, such as changes in the
City’s property tax base and utility customer base as well as the condition of the City’s
infrastructure, to assess the overall health of the City.

The government-wide statements are divided into three categories: 1) governmental
activities, 2) business-type activities, and 3) component units. The governmental activities
include most of the City’s basic services such as general administration, public safety,
highways and streets, sanitation, and culture and recreation. Property taxes, sales taxes,
intergovernmental revenues, user fees, along with various State and Federal grants finance
most of these activities.

The City charges a fee to customers to cover all or most of the cost of providing the second
category of business-type services. These business-type activities include the City’s utilities
of electric, water and sewer, and natural gas, as well as a municipal golf course.

The final category is the component unit. The City includes two separate legal entities as
component units in its report – the Lexington ABC Board and the Lexington Tourism
Authority. Although legally separate entities from the City, the ABC Board and the Tourism
Authority are important because the City exercises control over each Board by appointing its
members.

Fund Financial Statements

The fund financial statements, beginning on page 22, provide a more detailed look at the
City’s most significant activities. A fund is a grouping of related accounts that is used to


                                            -5-
maintain control over resources that have been segregated for specific activities or objectives.
The City of Lexington, like all other governmental entities in North Carolina, uses fund
accounting to ensure and reflect compliance (or non-compliance) with finance-related legal
requirements, such as the General Statutes, the City’s budget ordinance, or bond covenants.
The City of Lexington’s funds can be divided into two categories: governmental funds and
proprietary funds, each of which uses different accounting approaches.

Governmental Funds – Governmental funds are used to account for those functions reported
as governmental activities in the government-wide financial statements. Most of the City’s
basic services are accounted for in governmental funds. These funds, using a modified
accrual accounting method, focus on how assets can be readily converted into cash flow in
and out and what monies are left at year-end that will be available for spending in the next
year. As a result, the governmental fund financial statements give the reader a detailed short-
term spending focus and view that helps him or her determine if there are more or less
financial resources available to finance the City’s programs in the near future. The
relationship between government activities (reported in the Statement of Net Assets and the
Statement of Activities) and governmental funds is described in a reconciliation that is a part
of the fund financial statements.

The City of Lexington adopts an annual budget for its General Fund, as required by the
General Statutes. The budget is a legally adopted document that incorporates input from the
citizens of the City, the management of the City, and the decisions of the Board about which
services to provide and how to pay for them. It also authorizes the City to obtain funds from
identified sources to finance these current period activities. The budgetary statement provided
for the General Fund demonstrates how well the City complied with the budget ordinance and
whether or not the City succeeded in providing the services as planned when the budget was
adopted. The budgetary comparison statement uses the budgetary basis of accounting and is
presented using the same format, language, and classifications as the legal budget document.
The statement shows four columns: 1) the original budget as adopted by the Board 2) the
final budget as amended by the Board, 3) the actual resources, charges to appropriations, and
ending balances in the General Fund, and 4) the difference or variance between the final
budget and the actual resources and charges.

Proprietary Funds – The City of Lexington has two different kinds of proprietary funds.
Enterprise Funds are used to report the same functions presented as business-type activities in
the government-wide financial statements. The City uses enterprise funds to account for its
electric, water and sewer, and natural gas utility operations, as well as the municipal golf
course activity. These funds are the same as those functions shown in the business-type
activities in the Statement of Net Assets and the Statement of Activities. Internal Service
Funds are an accounting device to accumulate and allocate internal costs to provide supplies
and services for the City’s other programs. The City uses internal service funds to account for
the following activities: central garage, employee and retiree group insurance, risk
management insurance and claims, and utility administration operations that primarily serve
the City utilities, such as billing and meter reading. With the exception of utility
administration, the majority of the internal service funds benefit predominantly governmental



                                           -6-
rather than business-type activities; and thus, have been included within the governmental
activities in the government-wide financial statements.

Notes to the Basic Financial Statements

The notes provide additional information that is essential to a full understanding of the data
provided in the government-wide and fund financial statements. The notes to the financial
statements can be found on pages 42 through 88 of this report.

Other Information

In addition to the basic financial statements and accompanying notes, this report includes
certain required supplementary information concerning the City of Lexington’s progress in
funding its obligation to provide pension benefits to its employees. Required supplementary
information can be found beginning on page 89 of this report.

FINANCIAL ANALYSIS OF THE CITY GOVERNMENT-WIDE

The government-wide financial statements for the fiscal year ended June 30, 2003 are the
beginning of a new era in financial reporting for the City of Lexington and many other units
of government across the United States. Prior to this year, the City maintained their
governmental and proprietary fund groups as two separate and very distinct types of
accounting without any type of consolidated statement that accurately reflected the operations
and net assets of the government as a whole. There was a total column that appeared on the
financial statements, but it was a memorandum total only. No attempt was made to adjust the
statements in such a way that the total column would represent the overall financial condition
of the City of Lexington. These statements were basically the equivalent of the fund financial
statements that appear in this report with fiduciary funds and two account groups, the long-
term debt and the general fixed assets, added in.

This historical reporting changed with the release of Governmental Accounting Standards
Board (GASB) Statement 34, which mandated monumental changes in the financial statement
reporting model. GASB Statement 34 dictated the changes you see in the City of Lexington’s
financial reports as well as those of many other units of government. While the City of
Lexington was required to implement these changes for the fiscal year ended June 30, 2003,
other units were required to implement GASB Statement 34 in 2002; and any remaining
governments will be implementing in 2004.

Because of the new reporting model, comparative data for all facets of this report are not
available. When comparative numbers are accessible, they have been included, such as with
net assets. Future years’ reports will have additional comparative data that will allow more
opportunities for comparative analysis.




                                            -7-
                                          City of Lexington
                               Condensed Balance Sheet as of June 30, 2003
                                                 Figure 2

                                          Governmental    Business-Type
                                            Activities      Activities             Total
                                              2003            2003                 2003

Current and other assets                  $ 19,131,971   $     23,313,473    $    42,445,444
Capital assets (net)                        43,380,170         78,611,014        121,991,184
       Total assets                         62,512,141        101,924,487        164,436,628

Current liabilities                            584,240          5,517,345          6,101,585
Long-term debt liabilities outstanding       5,106,191         17,990,055         23,096,246
      Total liabilities                      5,690,431         23,507,400         29,197,831

Net assets:
   Invested in capital assets, net of
    related debt                            39,493,659         61,043,301        100,536,960
   Restricted                                  336,771                  -            336,771
   Unrestricted                             16,991,280         17,373,786         34,365,066
       Total net assets                     56,821,710         78,417,087        135,238,797

       Total liabilities and net assets   $ 62,512,141   $    101,924,487    $   164,436,628



     As noted earlier, net assets may serve over time as one useful indicator of a government’s
     financial condition. The assets of the City of Lexington exceeded liabilities by $135,238,797
     as of June 30, 2003. The City’s net assets increased by $3,591,191 for the fiscal year ended
     June 30, 2003. However, the largest portion (74%) reflects the City’s investment in capital
     assets (e.g. land, buildings, machinery and equipment, infrastructure such as roads and
     bridges, and plants and distribution systems), less any related debt still outstanding that was
     issued to acquire those items. The City of Lexington uses these capital assets to provide
     services to citizens; consequently, these assets are not available for future spending. Although
     the City of Lexington’s investment in its capital assets is reported net of the outstanding
     related debt, the resources needed to repay that debt must be provided by other sources, since
     the capital assets cannot be used to liquidate these liabilities. A small portion of the City of
     Lexington’s net assets ($336,771) represents resources that are subject to external restrictions
     on how they may be used. The remaining balance of $34,365,066 is unrestricted.

     Several particular aspects of the City’s financial operations positively influenced the total
     unrestricted governmental net assets:

             An additional ½ cent local option sales tax became effective December 1, 2002 which
             offset the loss of State shared revenues and recessional impacts.
             Colder winter weather conditions increased electric and natural gas utility sales, which
             positively affected the financial condition of those business-type activities.



                                                 -8-
            A commitment by City Management and employees to offset recessional impacts by
            deferring employee merits several months as well as holding down operational
            spending in the current fiscal year.

                                           City of Lexington
                                          Changes in Net Assets
                                                Figure 3
                                             Governmental      Business-type
                                               Activities        Activities           Total
                                                 2003              2003               2003

Revenues:
  Program revenues:
     Charges for services                   $     3,183,178    $   69,479,016    $    72,662,194
     Operating grants and contributions           1,628,400           823,802          2,452,202
     Capital grants and contributions                82,598                 -             82,598
  General revenues:                                                                            -
     Property taxes                               6,700,384                 -          6,700,384
     Other taxes                                    359,192                 -            359,192
     Other general revenues                       4,209,151           610,249          4,819,400
        Total revenues                           16,162,903        70,913,067         87,075,970

Expenses:
  General government                              5,624,374                 -          5,624,374
  Public safety                                   6,519,363                 -          6,519,363
  Highways and streets                            2,152,307                 -          2,152,307
  Sanitation                                      2,114,047                 -          2,114,047
  Culture and recreation                            900,663                 -            900,663
  Economic and physical development                 194,446                 -            194,446
  Interest on long-term debt                        165,705                 -            165,705
  Electric                                                -        40,965,108         40,965,108
  Water and sewer                                         -         5,499,834          5,499,834
  Natural gas                                             -        18,812,051         18,812,051
  Golf                                                    -           536,881            536,881
         Total expenses                          17,670,905        65,813,874         83,484,779

Increase in net assets before transfers          (1,508,002)        5,099,193          3,591,191

Transfers                                          516,314           (516,314)                 -

Increase (decrease) in net assets                  (991,688)        4,582,879          3,591,191
Net assets, July 1                               57,813,398        73,834,208        131,647,606

Net assets, June 30                         $    56,821,710    $   78,417,087    $   135,238,797




                                                -9-
Governmental activities - Governmental activities decreased the City’s net assets by
$991,688. Key elements of this decrease are as follows:

       The General Fund forfeited the transfer related to a payment in lieu of taxes from the
       Water and Sewer Fund in the amount of $237,675. Due to adverse weather conditions
       spanning the gamut of drought conditions to excessive spring rains over the past year,
       it was essential to retain those funds in the water and sewer utility to sustain its
       independent financial integrity.
       The Electric Fund transfer to the General Fund in the amount of $1,050,000 was
       allocated to pay down the advance owed to the General Fund; thus, the negative
       change in governmental activities’ net assets is adversely affected by this amount
       compared to prior year historical trends.

Business-type activities - Business-type activities increased the City of Lexington’s net
assets by $4,582,879, which offset the decrease in governmental activities. This net effect
resulted in total growth in the government’s net assets. Key elements of this increase are as
follows:

       Both the Electric and the Natural Gas utilities experienced increased consumptions
       and corresponding revenues from sales. Despite industrial load loss, electric
       residential and commercial customers purchased more electricity from the City due to
       colder winter conditions. In addition to winter weather conditions, optimal market
       conditions for off-system sales affected natural gas sales favorably as well. Increased
       sales resulted in boosts to operating income for both of these utilities as indicated
       below.
       Operating income for the Electric Fund as of June 30, 2003 is $3,041,894 compared to
       $936,815 in the prior year, an increase of $2,105,079.
       Operating income for the Natural Gas Fund as of June 30, 2003 is $1,599,180
       compared to $828,652 in the prior year, an increase of $770,528.
       The Electric Fund transfer to the General Fund in the amount of $1,050,000 was
       allocated to pay down the advance owed to the General Fund; thus, the positive
       change in business-type activities net assets is inflated by this amount compared to
       prior year historical trends.

FINANCIAL ANALYSIS OF THE CITY’S FUNDS

As noted earlier, the City of Lexington uses fund accounting to ensure and demonstrate
compliance with finance-related legal requirements.

Governmental Funds - The focus of the City of Lexington’s governmental funds is to
provide information on near-term inflows, outflows, and balances of usable resources. Such
information is useful in assessing the City of Lexington’s financing requirements.
Specifically, unreserved fund balance can be a useful measure of a government’s net
resources available for spending at the end of the fiscal year.




                                          - 10 -
The General Fund is the chief operating fund of the City of Lexington. At the end of the
current fiscal year, total unreserved fund balance of the General Fund was $7,012,377; while
total fund balance reached $15,693,756. As a measure of the General Fund’s liquidity, it may
be useful to compare both unreserved fund balance and total fund balance to total fund
expenditures. Unreserved fund balance represents 47.7 percent of total General Fund
expenditures; while total fund balance represents 106.8 percent of that same amount.

The total fund balance percentage of 106.8% is extraordinarily inflated by a $7,107,264
reserved fund balance for an advance due from the Electric Fund. This reserve resulted from
the City’s former charter, prior to the amendment in 1986, which required a commitment to
transfer all of the Electric Fund’s profits to the General Fund. The previously established
advance commitment was reduced this fiscal year by the amount of the Electric Fund transfer
to the General Fund, or $1,050,000.

The primary reasons for the General Fund’s financial position mirror the governmental
activities analysis highlighted on pages 10. In addition, these other factors should be noted:

           The General Fund incurred $531,683 in debris removal and support expenditures
           related to the FEMA filing for the December 5, 2002 ice storm.
           Despite extraordinary departmental expenditures related to the winter ice storm,
           total General Fund expenditures were $15,082,036 for the current year compared
           to $15,148,026 for the prior year, a $65,990 decrease.

At June 30, 2003, the governmental funds of the City of Lexington reported a combined fund
balance of $16,190,424, which is a $116,984 or .7% decrease from last year. Included in this
change in fund balance are decreases in fund balance in both the Special Revenue and Capital
Projects Funds.

General Fund Budgetary Highlights – Over the course of the fiscal year, the City revised
the budget on several occasions. Generally, budget amendments fall into one of three
categories: 1) amendments made to adjust the estimates that are used to prepare the original
budget ordinance once exact information is available, 2) amendments made to recognize new
funding amounts from external sources, such as Federal and State grants, and 3) increases in
appropriations that become necessary to maintain services.

The amendments to the General Fund budget for the current fiscal year primarily revolved
around three actions. First, the State of North Carolina approved legislation to eliminate
several State shared revenue sources such as the intangibles tax, inventory tax, homestead
exemption, and food stamp exemption. The loss of these revenue streams were replaced with
a half cent local option sales tax that went into effect December 1, 2002.

Second, the City of Lexington filed $1,360,303 in Federal Emergency Management Agency
(FEMA) filings for the December 5, 2002 ice storm disaster. A budget amendment for
$531,684 of that amount was recorded for General Fund miscellaneous revenues with the
majority of the expenditures being incurred in the Sanitation department for debris cleanup
efforts.


                                           - 11 -
And finally, as the 2002 drought and the extraordinary spring rains of 2003 adversely affected
water and sewer consumption levels and ultimately financial position, it was determined to be
in the best interest of the City for the General Fund to amend its original budget and forfeit
the Water and Sewer Fund transfer for a payment in lieu of taxes in the amount of $237,675
for fiscal year 2002-03.

Revenues in total exceeded budgeted amounts by $25,274. However, expenditures were over
$2 million below the final budgeted amounts. The significant positive variances resulted from
deferring capital outlay purchases, curtailing operational spending, as well as deferring
employee merits. These pay for performance merits would have typically been received in
the fall of 2002 but instead were deferred until January 1, 2003. Favorable variances were
recognized in all departments by utilizing the aforementioned techniques to offset recessional
impacts and continue to maintain a healthy fund balance.

Proprietary Funds - The City of Lexington’s proprietary funds provide the same type of
information found in the government-wide statements but in more detail. Unrestricted net
assets for the Electric, Water and Sewer, Natural Gas, and Golf Funds at the end of the fiscal
year amounted to $772,374, $7,234,634, $4,688,139, and ($43,264), respectively. The
negative unrestricted net assets in the Golf Fund is attributable to preliminary engineering
services being performed and paid for prior to the issuance of debt for major renovations to
the golf course. The total growth in net assets for all funds was $3.6 million, which improved
the financial position of the enterprises. Other factors concerning the financial position of
these funds have already been addressed in the discussion of the City of Lexington’s business-
type activities.

CAPITAL ASSET AND DEBT ADMINISTRATION

Capital Assets – As of June 30, 2003, the City of Lexington had $121,991,184 invested in a
broad range of capital assets for its governmental and business–type activities. This amount
includes assets such as land, buildings, vehicles and equipment, roads and bridges, park
facilities, and various utility plants, substations, and distribution system infrastructure.

Major capital asset transactions during the year include the following:

       Construction in progress for electric system reliability improvements were finalized
       and capitalized as distribution system additions in the amount of $1,344,576.
       Construction in progress in the amount of $1,029,241 for natural gas system
       improvements and expansions were completed and capitalized as distribution system
       additions.
       Discoveries in the amount of $500,000 were recorded for wastewater lift stations that
       were built and donated in prior years but inadvertently were never recorded.
       No major demolitions or disposals were recorded this year.




                                          - 12 -
                                           City of Lexington’s Capital Assets
                                                  (Net of Depreciation)
                                                            Figure 3

                                             Governmental              Business-type
                                               Activities                Activities                         Total
                                                 2003                      2003                             2003

Land                                        $        1,887,206         $        1,794,673          $         3,681,879
Buildings                                            4,401,348                  1,139,110                    5,540,458
Other improvements                                   1,230,503                     44,709                    1,275,212
Machinery & equipment                                2,662,465                  1,218,557                    3,881,022
Infrastructure                                      27,835,324                          -                   27,835,324
Plant & distribution systems                                 -                 64,459,352                   64,459,352
Construction in progress                             5,363,324                  9,954,613                   15,317,937
Total                                       $       43,380,170         $       78,611,014          $       121,991,184



Additional information on the City’s capital assets can be found on pages 49 through 50,
pages 57 through 64, and page 75 in the Notes to the Basic Financial Statements.

Long-term Debt - As of June 30, 2003, the City of Lexington had total bonded debt
outstanding of $14,989,000. Of this, $11,755,000 is debt backed by the full faith and credit of
the City. The remainder of the City’s bonded debt represents bonds secured solely by
specified revenue sources (i.e. revenue bonds).
                                      City of Lexington’s Outstanding Debt
                                     General Obligation and Revenue Bonds
                                                            Figure 4
                                                G o v e rn m e n ta l B u s in e s s -typ e
                                                   A c tiv itie s        A c tiv itie s                      T o ta l
                                                       2003                  2003                            2003

  G e n e ra l o b lig a tio n b o n d s        $    2 ,9 8 0 ,0 0 0       $    8 ,7 7 5 ,0 0 0        $ 1 1 ,7 5 5 ,0 0 0

  R evenue bonds                                                   -            3 ,2 3 4 ,0 0 0        $    3 ,2 3 4 ,0 0 0
  T o ta l                                      $    2 ,9 8 0 ,0 0 0       $   1 2 ,0 0 9 ,0 0 0       $ 1 4 ,9 8 9 ,0 0 0



The City of Lexington also has $6,465,223 in lease purchase installment debt. The vast
majority of that amount is attributable to a $4.8 million issuance for State mandated
phosphorous removal at the wastewater treatment plant, which resulted in new debt in the
current year. Therefore, the City’s total debt tallies $21,454,223 as of June 30, 2003, an
increase of $3,709,587 or 20.9% from the prior year.




                                                            - 13 -
As mentioned in the financial highlights section of this document, the City of Lexington
maintained for the 5th consecutive year, its A3 bond rating from Moody’s Investor Service
and A+ rating from Standard and Poor’s Corporation. This bond rating is a clear indication of
the sound financial condition of the City of Lexington. Excellent bond ratings are a primary
factor in keeping interest costs low on the City’s outstanding debt.

State of North Carolina General Statutes limit the amount of general obligation debt that a
unit of government can issue to 8 percent of the total assessed value of taxable property
located within that government’s boundaries. The legal debt margin for the City of Lexington
is $102,054,564. The City has no bonds authorized but un-issued at June 30, 2003.

Additional information regarding the City of Lexington’s long-term debt can be found in the
notes to the financial statements on pages 76 through 80 of this report.

ECONOMIC FACTORS AND NEXT YEAR’S BUDGETS AND RATES

Economic Factors

       Unemployment in the State of North Carolina was 6.6% as of June 30, 2003; however,
       the Davidson County unemployment rate was much higher at 8.4%. The State
       unemployment has slightly decreased from 6.7% as of June 30, 2002; whereas, the
       decline of the local furniture industry over the last year has had a detrimental impact
       on the current unemployment rate in Davidson County increasing it substantially from
       5.7% a year ago.
       Several local businesses have experienced reduced production and sales, closings, and
       layoffs; the most significant of which has affected the furniture industry. There were 6
       business and plant closings in fiscal year 2002-03 compared to 2 in the prior year.
       However, various other restructuring and business declines resulted in a total of 940
       layoffs for the current year, compared to 805 in the prior year.
       The number one electric utility customer and the second largest taxpayer and
       water/sewer utility customer for the City, Lexington Home Brands, contributed one
       plant closing of the 6 and affected 550 of the 940 layoffs for the current year.
       The nationwide recession, the September 11, 2001 terrorist attack impact,
       unemployment rates, and Lexington’s local furniture industry demise have adversely
       affected the area’s economic condition.

Budget Highlights for the Fiscal Year Ending June 30, 2004

Governmental Activities - Property taxes (adversely affected from the economic downturn)
were budgeted to remain consistent with current year figures; thus, no growth is anticipated in
fiscal year 2003-04. Instead General Fund balance reserves, built up in the current fiscal year
through reduced spending initiatives, were appropriated in the amount of $1.5 million to
sustain governmental services in the coming year at existing spending levels.

Business–type Activities – Rates for electricity were approved to increase by an average of
1.62% July 1, 2003, necessary to mitigate a 2.1% wholesale power increase from the NC


                                          - 14 -
Municipal Power Agency #1 and lower consumption levels due to industrial load loss. The
water and sewer rates in the City will increase by 10% effective December 1, 2003. These
increases are essential to cover the new debt service payments for the wastewater treatment
plant mandated phosphorous removal debt issuance of $4.8 million, as well as to offset
recessional and recent adverse weather impacts on water and sewer consumption levels.

Rates for the City’s natural gas customers were approved to increase by an average of 10%
effective July 1, 2003 to cover expansion initiatives, primarily related to new debt service
payments for main line extensions and increases in operating costs for marketing efforts and
service line extensions. And finally, the Municipal Golf Course will close November 1, 2003
for course renovations. Thus, Golf Fund revenues were budgeted to decrease significantly in
the coming year which is to be offset by a General Fund transfer subsidy.

REQUESTS FOR INFORMATION

This report is designed to provide our citizens, customers, and investors and creditors with a
general overview of the City’s finances and to demonstrate the City’s accountability for the
money received for the reporting period of July 1, 2002 through June 30, 2003. If you have
any questions concerning any of the information found in this report or you have interest in
receiving additional information, please contact the City of Lexington Finance Department,
28 West Center Street, Lexington, NC 27292.




                                           - 15 -
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BASIC FINANCIAL STATEMENTS
This page has been left blank intentionally.
                                           City of Lexington, North Carolina
                                                Statement of Net Assets
                                                     June 30, 2003


                                                                                Primary Government
                                                                   Governmental    Business-type
                                                                    Activities       Activities            Total
ASSETS
 Cash and cash equivalents                                         $    9,601,901    $    8,766,322    $   18,368,223
 Receivables (net of allowances for uncollectibles):
   Taxes                                                                  464,212                 -           464,212
   Accounts - billed                                                       87,591         3,349,321         3,436,912
   Accounts - unbilled                                                    109,623         4,352,522         4,462,145
   Intergovernmental                                                    1,398,276           332,632         1,730,908
   Interest                                                                18,116            28,053            46,169
 Internal balances                                                        (78,301)           78,301                 -
 Due from component units                                                  29,207                 -            29,207
 Due from primary government                                                    -                 -                 -
 Inventories                                                              109,472         1,830,601         1,940,073
 Prepaid items                                                                  -            47,293            47,293
 Advances to (from) other activities                                    7,080,803        (7,080,803)                -
 Restricted assets:
   Cash and cash equivalents                                             311,071         11,609,231        11,920,302
 Capital assets:
   Land, land improvements, and construction in progress                7,250,530       11,749,286        18,999,816
   Other capital assets, net of depreciation                           36,129,640       66,861,728       102,991,368
 Total capital assets                                                  43,380,170       78,611,014       121,991,184
TOTAL ASSETS                                                       $   62,512,141    $ 101,924,487     $ 164,436,628




The notes to the financial statements are an integral part of this statement.



                                                          - 16 -
                                                                                Exhibit 1
                                                                                  Page 1
                                       City of Lexington, North Carolina
                                            Statement of Net Assets
                                                 June 30, 2003


                                             Component Units
                                                        Tourism
                                         ABC Board     Authority

                                         $    307,769             $    97,575

                                                    -                       -
                                                    -                       -
                                                    -                       -
                                                    -                       -
                                                    -                       -
                                                    -                       -
                                                    -                       -
                                                    -                  16,460
                                              220,237                       -
                                                4,872                       -
                                                    -                       -

                                                     -                      -

                                               60,963                       -
                                              161,780                       -
                                              222,743                       -
                                         $    755,621             $   114,035




The notes to the financial statements are an integral part of this statement.



                                                         - 17 -
                                            City of Lexington, North Carolina
                                                 Statement of Net Assets
                                                      June 30, 2003


                                                                                Primary Government
                                                                   Governmental    Business-type
                                                                    Activities       Activities           Total
LIABILITIES
Accounts payable                                                   $     536,775    $    4,977,696   $     5,514,471
Due to component units                                                    16,460                 -            16,460
Due to primary government                                                      -                 -                 -
Deposits                                                                  31,005           539,649           570,654
Long-term liabilities:
  Due in one year                                                         671,214        1,636,530         2,307,744
  Due in more than one year                                             4,434,977       16,353,525        20,788,502
Total liabilities                                                       5,690,431       23,507,400        29,197,831

NET ASSETS
Invested in capital assets, net of related debt                        39,493,659       61,043,301       100,536,960
Restricted for:
  General government                                                       76,836                -            76,836
  Economic and physical development                                       233,358                -           233,358
  Public safety                                                            26,577                -            26,577
Unrestricted                                                           16,991,280       17,373,786        34,365,066
Total net assets                                                       56,821,710       78,417,087       135,238,797




The notes to the financial statements are an integral part of this statement.



                                                          - 18 -
                                                                                Exhibit 1
                                                                                  Page 2
                                       City of Lexington, North Carolina
                                            Statement of Net Assets
                                                 June 30, 2003


                                             Component Units
                                                        Tourism
                                         ABC Board     Authority

                                         $    103,123            $     1,226
                                                    -                      -
                                               44,313                      -
                                                    -                      -

                                                    -                      -
                                                    -                      -
                                              147,436                  1,226


                                              222,743                      -

                                                    -                      -
                                                    -                      -
                                                    -                      -
                                              385,442                112,809
                                              608,185                112,809




The notes to the financial statements are an integral part of this statement.



                                                        - 19 -
                                                City of Lexington, North Carolina
                                                      Statement of Activities
                                              For the fiscal year ended June 30, 2003

                                                                                              Program Revenues

                                                                         Charges for     Operating Grants and Capital Grants and
Functions/Programs                                       Expenses         Services          Contributions       Contributions
Primary government:
Governmental Activities:
  General government                                 $     5,624,374 $          1,806,063 $            160,953 $               -
  Public safety                                            6,519,363              218,819              175,867            82,598
  Highways and streets                                     2,152,307              109,276              710,176                 -
  Sanitation                                               2,114,047              933,358              470,064                 -
  Culture and recreation                                     900,663               98,085               67,577                 -
  Economic and physical development                          194,446               17,577               43,763                 -
  Interest on long-term debt                                 165,705                    -                    -                 -
    Total governmental activities                         17,670,905            3,183,178            1,628,400            82,598

Business-type activities:
 Electric                                                 40,965,108        43,342,084                 798,250                 -
 Water and Sewer                                           5,499,834         5,585,840                  17,708                 -
 Natural gas                                              18,812,051        20,121,022                   7,844                 -
 Golf                                                        536,881           430,070                       -                 -
    Total business-type activities                        65,813,874        69,479,016                 823,802                 -
Total primary government                             $    83,484,779 $      72,662,194 $             2,452,202 $          82,598

Component units:
 ABC Board                                                 2,464,482            2,476,169                   -                  -
 Tourism Authority                                           188,535                    -                   -                  -
Total component units                                $     2,653,017 $          2,476,169 $                 - $                -


                                                    General revenues:
                                                     Property taxes, levied for general purpose
                                                     Property taxes, levied for special taxing district
                                                     Other taxes
                                                     Unrestricted intergovernmental revenues
                                                     Grants, contributions, and revenues not restricted to specific programs
                                                     Unrestricted investment earnings
                                                     Gain (Loss) on the sale of property
                                                     Miscellaneous
                                                    Transfers
                                                          Total general revenues and transfers
                                                    Change in net assets
                                                    Net assets-beginning
                                                    Net assets-ending




The notes to the financial statements are an integral part of this statement.




                                                                - 20 -
                                                                                                         Exhibit 2
                                                                                                           Page 1
                                         City of Lexington, North Carolina
                                               Statement of Activities
                                       For the fiscal year ended June 30, 2003

                               Net (Expense) Revenue and Changes in Net Assets
                            Primary Government                            Component Units
               Governmental      Business-type                                      Tourism
                 Activities        Activities         Total          ABC Board      Authority


           $        (3,657,358) $                   - $ (3,657,358)
                    (6,042,079)                     -    (6,042,079)
                    (1,332,855)                     -    (1,332,855)
                      (710,625)                     -      (710,625)
                      (735,001)                     -      (735,001)
                      (133,106)                     -      (133,106)
                      (165,705)                     -      (165,705)
                   (12,776,729)                     -   (12,776,729)


                             -             3,175,226        3,175,226
                             -               103,714          103,714
                             -             1,316,815        1,316,815
                             -              (106,811)        (106,811)
                             -             4,488,944        4,488,944
                   (12,776,729)            4,488,944       (8,287,785)


                                                                           $     11,687 $           -
                                                                                      -      (188,535)
                                                                                 11,687      (188,535)




                    6,621,273                      -     6,621,273                     -           -
                       79,111                      -        79,111                     -           -
                      359,192                      -       359,192                     -     208,969
                    4,052,158                      -     4,052,158                     -           -
                        2,275                      -         2,275                     -           -
                      174,876                241,916       416,792                 4,425         905
                      (30,659)               368,333       337,674                     -           -
                       10,501                      -        10,501                     -           -
                      516,314               (516,314)            -                     -           -
                   11,785,041                 93,935    11,878,976                 4,425     209,874
                     (991,688)             4,582,879     3,591,191                16,112      21,339
                   57,813,398             73,834,208   131,647,606               592,073      91,470
           $       56,821,710 $           78,417,087 $ 135,238,797         $     608,185 $   112,809




The notes to the financial statements are an integral part of this statement.




                                                         - 21 -
                                                                                                              Exhibit 3
                                                                                                                Page 1
                                              City of Lexington, North Carolina
                                                        Balance Sheet
                                                    Governmental Funds
                                                        June 30, 2003

                                                                General       Other Governmental    Total Governmental
                                                                 Fund               Funds                  Funds
Assets
 Cash and cash equivalents                                  $     7,632,654   $         450,811     $        8,083,465
 Receivables (net of allowance for uncollectibles):
   Property taxes                                                   463,117                1,095               464,212
   Accounts billed                                                   81,188                    -                81,188
   Accounts unbilled                                                109,623                    -               109,623
   Intergovernmental                                              1,292,992               59,763             1,352,755
   Interest                                                          13,650                  845                14,495
 Intrafund due (to) from                                             10,872              (10,872)                    -
 Due from component unit                                             29,207                    -                29,207
 Inventories                                                          7,010                    -                 7,010
 Advances to other funds:
   Electric fund                                                  7,107,264                    -             7,107,264
   Golf fund                                                         73,539                    -                73,539
 Restricted Assets:
   Cash and cash equivalents                                        31,043                    -                 31,043
     Total assets                                           $   16,852,159    $         501,642     $       17,353,801




The notes to financial statements are an integral part of this statement.



                                                             - 22 -
                                                                                                             Exhibit 3
                                                                                                               Page 2
                                              City of Lexington, North Carolina
                                                        Balance Sheet
                                                    Governmental Funds
                                                        June 30, 2003

                                                                General       Other Governmental   Total Governmental
                                                                 Fund               Funds                 Funds
Liabilities and fund balances
Liabilities:
  Accounts payable                                          $       173,769   $           3,879    $          177,648
  Due to component units                                             16,460                   -                16,460
  Deferred revenues                                                 937,169               1,095               938,264
  Deposits                                                           31,005                   -                31,005
     Total liabilities                                            1,158,403               4,974             1,163,377

Fund balances:
 Reserved for:
  Encumbrances                                                      365,712              29,660               395,372
  Acquisition of assets                                                  38                   -                    38
  Inventory - central purchasing                                      7,010                   -                 7,010
  Advances                                                        7,180,803                   -             7,180,803
  State statute                                                   1,063,480                   -             1,063,480
  General government                                                 64,336                   -                64,336
 Unreserved:
  General fund                                                   7,012,377                    -             7,012,377
  Capital project fund                                                   -              440,431               440,431
  Special revenue funds                                                  -               26,577                26,577
Total fund balances                                             15,693,756              496,668            16,190,424

     Total liabilities and fund balances                    $   16,852,159    $         501,642    $       17,353,801




The notes to financial statements are an integral part of this statement.



                                                             - 23 -
                                                                                                            Exhibit 3
                                                                                                              Page 3
                                            City of Lexington, North Carolina
                                            Reconciliation of the Balance Sheet
                                   of Governmental Funds to the Statement of Net Assets
                                                       June 30, 2003

Fund balances as reported on the Balance Sheet of Governmental Funds                                  $   16,190,424
Amounts reported for governmental activities in the statement of net assets are different because:
Capital assets used in governmental activities are not financial resources and therefore are
  not reported in the funds.                                                                              43,116,821
Receivables that are not available to pay for current-period expenditures and are deferred in
  the funds.                                                                                                938,264
Internal services funds used to allocate costs among the funds are included in the statement
  of net assets.                                                                                           1,652,208
Some liabilities are not payable in the current period and therefore are not reported in the funds.       (5,076,007)
Net assets of governmental activities                                                                 $   56,821,710




The notes to financial statements are an integral part of this statement.



                                                             - 24 -
                                                                                                                  Exhibit 4
                                                                                                                    Page 1
                                              City of Lexington, North Carolina
                              Statement of Revenues, Expenditures and Changes in Fund Balances
                                                     Governmental Funds
                                            For the fiscal year ended June 30, 2003

                                                                                Other Governmental     Total Governmental
                                                             General Fund             Funds                   Funds
Revenues:
 Ad valorem taxes                                            $    6,579,087     $                -     $         6,579,087
 Special ad valorem taxes                                                 -                 79,111                  79,111
 Other taxes and licenses                                           359,192                      -                 359,192
 Unrestricted intergovernmental revenues                          4,048,725                      -               4,048,725
 Restricted intergovernmental revenues                              738,590                209,360                 947,950
 Permits and fees                                                   176,600                      -                 176,600
 Sales and services                                               1,163,774                100,897               1,264,671
 Interest                                                           141,337                  8,131                 149,468
 Miscellaneous revenues                                             588,192                 42,388                 630,580
          Total revenues                                         13,795,497                439,887              14,235,384

Expenditures:
 General government                                                1,917,736                     -               1,917,736
 Public safety                                                     7,372,988               238,977               7,611,965
 Highways and streets                                              1,215,918               282,208               1,498,126
 Sanitation                                                        2,304,617                     -               2,304,617
 Culture and recreation                                            1,082,908                 6,900               1,089,808
 Economic and physical development                                         -               213,571                 213,571
 Debt service:
   Principal                                                        624,269                      -                 624,269
   Interest                                                         165,474                      -                 165,474
          Total expenditures                                     14,683,910                741,656              15,425,566

Revenues over (under) expenditures                                  (888,413)              (301,769)            (1,190,182)

Other financing sources (uses):
 Transfers in                                                        749,296               152,359                 901,655
 Transfers out                                                      (340,485)              (73,610)               (414,095)
 Capital lease debt issued                                           585,936                     -                 585,936
    Total other financing sources (uses)                             994,747                78,749               1,073,496




The notes to the financial statements are an integral part of this statement.



                                                                 - 25 -
                                                                                                                  Exhibit 4
                                                                                                                    Page 2
                                              City of Lexington, North Carolina
                              Statement of Revenues, Expenditures and Changes in Fund Balances
                                                     Governmental Funds
                                            For the fiscal year ended June 30, 2003

                                                                                Other Governmental     Total Governmental
                                                             General Fund             Funds                   Funds
Net change in fund balances                                       106,334                  (223,020)              (116,686)

Fund balances, July 1                                           15,587,720                  719,688             16,307,408

Increase (decrease) in central purchasing inventory                     (298)                     -                   (298)

Fund balances, June 30                                       $ 15,693,756       $           496,668    $        16,190,424




The notes to the financial statements are an integral part of this statement.



                                                               - 26 -
                                                                                                                          Exhibit 5

                                                 City of Lexington, North Carolina
                     Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances
                                        of Governmental Funds to the Statement of Activities
                                               For the fiscal year ended June 30, 2003

Net change in fund balances - total governmental funds                                                               $    (116,686)
Revenues in the statement of activities that do not provide current financial resources are not reported as
  revenues in the governmental funds.                                                                                      116,439
Decrease in inventories is reported as operating expense in the statement of activities and is reported as a
  component of net assets in the governmental fund statements.                                                                (298)
Debt principal payments are not considered expenditures in the statement of activities, but rather a
  decrease in liabilities.                                                                                                 624,269
Proceeds from the issuance of debt are reported as revenues in the governmental fund statement. However,
  in the Statement of Activities it is not a revenue, rather it is an increase in liabilities.                            (585,936)
Some expenses are reported in the statement of activities that do not require the use of current financial resources
  and therefore are not reported as expenditures in governmental funds                                                     (90,832)
Landfill monitoring expenditures are reported in the governmental funds, however in the Statement of Activities
  it is not an expense, rather it is a reduction in liabilities.                                                            16,250
Interest on investments of governmental type internal service funds is reported on the statement of activities as
  a governmental activity revenue, but is not shown on the governmental fund financial statements.                          26,319
Gain (loss) on disposal of capital assets of governmental type internal service funds is reported on the statement
  of activities as a governmental activity revenue, but is not shown on the governmental fund financial statements.        (14,293)
Internal service funds are used by management to charge the cost of certain activities, such as insurance, fleet
  management, and risk management to individual funds. The net revenue (expense) of these internal service
  funds is reported with governmental activities on the Statement of Activities, but is not shown on the
  governmental fund financial statements.                                                                                  247,656
Gain (loss)on disposal of capital assets is reported in the Statement of Activities, however proceeds from the
  sale of assets is not affected by gain/(loss) in the governmental fund statements                                         (48,071)
Capital outlays are reported as expenditures in the governmental funds. However, in the statement
  of activities, capital outlay is not an expense, rather it is an increase in capital assets.                             622,492
Depreciation is recognized as an expense in the statement of activities; however it is not reported in the
  governmental funds.                                                                                                    (1,788,997)
Change in net assets of governmental activities                                                                      $     (991,688)




The notes to financial statements are an integral part of this statement.



                                                                 - 27 -
                             City of Lexington, North Carolina
                                        General Fund
   Statement of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                           For the fiscal year ended June 30, 2003

                                                                                Budget

                                                                  Original               Final
Revenues:
 Ad valorem taxes                                             $     6,436,000       $     6,436,000
 Other taxes and licenses                                             360,000               360,000
 Unrestricted intergovernmental revenues                            4,145,000             4,088,000
 Restricted intergovernmental revenues                                721,000               751,000
 Permits and fees                                                     115,000               115,000
 Sales and services                                                 1,120,636             1,125,586
 Interest                                                             227,402               227,402
 Miscellaneous revenues                                                80,628               667,235
   Total revenues                                                  13,205,666            13,770,223

Expenditures:
Current:
 General government                                                 2,629,419             2,332,320
 Public safety                                                      8,237,376             8,271,989
 Highways and streets                                               1,494,210             1,505,666
 Sanitation                                                         2,156,229             2,626,293
 Culture and recreation                                             1,194,923             1,208,826
Debt service:
 Principal                                                            632,879               632,879
 Interest                                                             165,475               165,475
   Total expenditures                                              16,510,511            16,743,448

      Revenues over (under) expenditures                           (3,304,845)           (2,973,225)

Other financing sources (uses):
 Transfers in                                                       1,800,000             1,657,641
 Transfers in related to payments in lieu of taxes                    436,971               199,296
 Transfers out                                                       (298,126)             (398,126)
 Capital lease debt issued                                            616,000               616,000
 Fund balance appropriated                                            750,000               898,414
   Total other financing sources (uses)                             3,304,845             2,973,225

Net change in fund balances                                   $                 -   $             -

Fund balances, July 1

(Increase) decrease in central purchasing inventory

Fund balances, June 30


The notes to the financial statements are an integral part of this statement.



                                               - 28 -
                                                                                                      Exhibit 6

                                         City of Lexington, North Carolina
                                                    General Fund
               Statement of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                                       For the fiscal year ended June 30, 2003


                                                                        Variance
                                                Actual                from Budget

                                           $     6,579,087        $        143,087
                                                   359,192                    (808)
                                                 4,048,725                 (39,275)
                                                   738,590                 (12,410)
                                                   176,600                  61,600
                                                 1,163,774                  38,188
                                                   141,337                 (86,065)
                                                   588,192                 (79,043)
                                                13,795,497                  25,274




                                                 1,917,736                 414,584
                                                 7,372,988                 899,001
                                                 1,215,918                 289,748
                                                 2,304,617                 321,676
                                                 1,082,908                 125,918

                                                   624,269                   8,610
                                                   165,474                       1
                                                14,683,910               2,059,538

                                                  (888,413)              2,084,812


                                                   607,641               (1,050,000)
                                                   199,296                        -
                                                  (398,126)                       -
                                                   585,936                  (30,064)
                                                         -                 (898,414)
                                                   994,747               (1,978,478)

                                                   106,334        $        106,334

                                                15,587,720

                                                         (298)

                                           $    15,693,756


The notes to the financial statements are an integral part of this statement.



                                                             - 29 -
                                        City of Lexington, North Carolina
                                             Statement of Net Assets
                                                Proprietary Funds
                                                  June 30, 2003

                                                                     Business-type Activities - Enterprise Funds
                                                                          Electric              Water and Sewer
Assets
Current assets:
 Cash and cash equivalents                                          $            4,501,836   $           687,915
  Interest receivable                                                               14,152                 2,855
  Account receivable (net) - billed                                              2,000,023               361,546
  Account receivable (net) - unbilled                                            2,802,401               346,581
  Intergovernmental                                                                258,540                42,141
  Inventory                                                                      1,087,571               145,301
  Prepaid bond interest                                                                  -                     -
    Total current assets                                                        10,664,523             1,586,339

Noncurrent assets:
 Advances to garage fund                                                          100,000                      -
 Restricted assets:
  Cash and cash equivalents                                                       875,111              6,128,140

  Capital assets:
   Land, land improvements, and construction in progress                         2,634,694            6,618,475
   Other capital assets, net of accumulated depreciation                        27,713,470           27,588,291
     Total capital assets (net of accumulated depreciation)                     30,348,164           34,206,766

    Total noncurrent assets                                                     31,323,275           40,334,906

Total assets                                                        $           41,987,798   $       41,921,245




The notes to the financial statements are an integral part of this statement.



                                                       - 30 -
                                                                                                                                  Exhibit 7
                                                                                                                                    Page 1
                                                   City of Lexington, North Carolina
                                                        Statement of Net Assets
                                                           Proprietary Funds
                                                             June 30, 2003

 Business-type Activities - Enterprise Funds               Total                Governmental Activities           Business-type Activities
   Natural Gas                   Golf                    Enterprise             Internal Service Funds            Internal Service Funds


$          2,852,459      $            102,291      $          8,144,501        $             1,518,436       $                  4,596,439
               8,132                       107                    25,246                          3,621                              2,807
             856,971                        12                 3,218,552                          6,403                            130,769
           1,203,540                         -                 4,352,522                              -                                  -
              14,244                     3,351                   318,276                         45,521                             14,356
             597,729                         -                 1,830,601                        102,462                                  -
              47,293                         -                    47,293                              -                                  -
           5,580,368                   105,761                17,936,991                      1,676,443                          4,744,371


                    -                         -                  100,000                                  -                                  -

             609,908                     4,050                 7,617,209                        280,028                             17,404


             663,092                    90,062                10,006,323                         15,000                          1,742,963
          10,625,371                   107,998                66,035,130                        248,349                            826,598
          11,288,463                   198,060                76,041,453                        263,349                          2,569,561

          11,898,371                   202,110                83,758,662                        543,377                          2,586,965

$         17,478,739      $            307,871      $       101,695,653         $             2,219,820       $                  7,331,336




The notes to the financial statements are an integral part of this statement.



                                                                  - 31 -
                                         City of Lexington, North Carolina
                                              Statement of Net Assets
                                                 Proprietary Funds
                                                   June 30, 2003

                                                                     Business-type Activities - Enterprise Funds
                                                                          Electric              Water and Sewer
Liabilities and net assets
Current liabilities:
 Accounts payable                                                   $            3,314,773   $          196,329
 General obligation bonds payable - current                                        245,000              325,000
 Revenue bonds payable - current                                                         -                    -
 Capital leases payable - current                                                   82,967              317,031
  Total current liabilities                                                      3,642,740              838,360

Current liabilities payable
 from restricted assets:
 Unpaid claims cost                                                                     -                     -
 Customer deposits                                                                380,124                33,485
 Arbitrage rebate payable                                                               -               145,261
   Total current liabilities payable from restricted assets                       380,124               178,746

Noncurrent liabilities:
 Compensated absences payable                                                       65,100               104,770
 General obligation bonds payable                                                2,975,000             5,230,000
 Revenue bonds payable                                                                   -                     -
 Capital leases payable                                                             85,240             4,599,997
 Advances from other funds:
  General fund                                                                   7,107,264                     -
  Electric fund                                                                          -                     -
   Total noncurrent liabilities                                                 10,232,604             9,934,767

     Total liabilities                                                          14,255,468           10,951,873

Net assets:
 Invested in capital assets, net of related debt                                26,959,956           23,734,738
 Unrestricted                                                                      772,374            7,234,634
     Total net assets                                                           27,732,330           30,969,372

Total liabilities and net assets                                    $           41,987,798   $       41,921,245




The notes to the financial statements are an integral part of this statement.



                                                         - 32 -
                                                                                                                              Exhibit 7
                                                                                                                                Page 2
                                                   City of Lexington, North Carolina
                                                        Statement of Net Assets
                                                           Proprietary Funds
                                                             June 30, 2003

 Business-type Activities - Enterprise Funds               Total                Governmental Activities       Business-type Activities
   Natural Gas                   Golf                    Enterprise             Internal Service Funds        Internal Service Funds


$          1,339,708      $             58,754      $          4,909,564        $                79,099   $                     68,132
                   -                         -                   570,000                              -                              -
             329,000                         -                   329,000                              -                              -
              26,775                         -                   426,773                          2,264                        165,496
           1,695,483                    58,754                 6,235,337                         81,363                        233,628




                   -                         -                         -                        280,028                              -
             121,790                     4,050                   539,449                              -                            200
                   -                         -                   145,261                              -                              -
             121,790                     4,050                   684,710                        280,028                            200


              40,639                    16,732                   227,241                         27,920                         49,842
                   -                         -                 8,205,000                              -                              -
           2,905,000                         -                 2,905,000                              -                              -
              18,862                         -                 4,704,099                              -                        262,343

                   -                    73,539                 7,180,803                              -                              -
                   -                         -                         -                        100,000                              -
           2,964,501                    90,271                23,222,143                        127,920                        312,185

           4,781,774                   153,075                30,142,190                        489,311                        546,013


           8,008,826                   198,060                58,901,580                        261,085                      2,141,721
           4,688,139                   (43,264)               12,651,883                      1,469,424                      4,643,602
          12,696,965                   154,796                71,553,463                      1,730,509                      6,785,323

$         17,478,739      $            307,871      $       101,695,653         $             2,219,820   $                  7,331,336




The notes to the financial statements are an integral part of this statement.



                                                                  - 33 -
                               City of Lexington, North Carolina
                Statement of Revenues, Expenses and Changes in Fund Net Assets
                                        Proprietary Funds
                             For the fiscal year ended June 30, 2003

                                                              Business-type Activities - Enterprise Funds
                                                                   Electric              Water and Sewer
Operating revenues:
 Charges for sales and services                           $           42,269,585     $          5,220,356
  Other operating revenues                                             1,201,564                  267,120
   Total operating revenues                                           43,471,149                5,487,476

Operating expenses:
 Cost of sales and services                                            5,624,741                  142,786
 Purchases for resale                                                 32,652,410                        -
 Water treatment                                                               -                1,115,167
 Waste collection and treatment                                                -                1,352,435
 Water and sewer construction                                                  -                  901,206
 Premiums                                                                      -                        -
 Claims                                                                        -                        -
 Claims made - not settled                                                     -                        -
 Bad debt expense                                                        262,708                   62,920
 Administration                                                        1,696,277                1,076,198
 Depreciation                                                            748,118                  608,086
 Overhead capitalized                                                   (554,999)                 (89,802)
   Total operating expenses                                           40,429,255                5,168,996

    Operating income (loss)                                            3,041,894                  318,480

Nonoperating revenues (expenses):
 Interest earned                                                         107,509                   40,998
 Gain (loss) on sale of property                                               -                  368,468
 Other nonoperating revenues                                             412,503                   51,373
 Interest expense                                                       (155,639)                (270,955)
   Total nonoperating revenues (expenses)                                364,373                  189,884

Income (loss) before transfers                                         3,406,267                  508,364

Transfers in                                                             165,000                  129,856
Transfers out                                                         (1,148,493)                (180,386)
Transfers related to payments in lieu of taxes                          (144,004)                       -

Change in net assets                                                   2,278,770                  457,834




The notes to the financial statements are an integral part of this statement.




                                                 - 34 -
                                                                                                                               Exhibit 8
                                                                                                                                 Page 1
                                                  City of Lexington, North Carolina
                                   Statement of Revenues, Expenses and Changes in Fund Net Assets
                                                           Proprietary Funds
                                                For the fiscal year ended June 30, 2003

    Business-type Activities - Enterprise Funds             Total               Governmental Activities        Business-type Activities
      Natural Gas                   Golf                  Enterprise            Internal Service Funds         Internal Service Funds

$           19,630,615     $            430,055     $         67,550,611        $             4,964,321    $                  1,573,955
               330,966                        -                1,799,650                         83,538                         483,863
            19,961,581                  430,055               69,350,261                      5,047,859                       2,057,818


             1,473,193                  516,522                7,757,242                      1,161,468                               -
            15,615,163                        -               48,267,573                              -                               -
                     -                        -                1,115,167                              -                               -
                     -                        -                1,352,435                              -                               -
                     -                        -                  901,206                              -                               -
                     -                        -                        -                        952,947                               -
                     -                        -                        -                      2,167,217                               -
                     -                        -                        -                        280,028                               -
                44,565                       83                  370,276                              -                          60,919
               987,602                   12,830                3,772,907                        159,762                       2,162,656
               428,678                   16,179                1,801,061                         29,003                          81,394
              (186,800)                       -                 (831,601)                             -                               -
            18,362,401                  545,614               64,506,266                      4,750,425                       2,304,969

             1,599,180                 (115,559)               4,843,995                        297,434                        (247,151)


                71,620                      649                  220,776                         26,319                          21,140
                  (593)                   2,753                  370,628                        (14,293)                         (2,295)
                     -                       15                  463,891                              -                           4,803
              (201,596)                       -                 (628,190)                          (231)                        (26,705)
              (130,569)                   3,417                  427,105                         11,795                          (3,057)

             1,468,611                 (112,142)               5,271,100                        309,229                        (250,208)

               540,000                  176,000                 1,010,856                        28,754                       1,933,048
            (1,142,043)                       -                (2,470,922)                            -                        (790,000)
               (55,292)                       -                  (199,296)                            -                               -

               811,276                   63,858                3,611,738                        337,983                         892,840




The notes to the financial statements are an integral part of this statement.




                                                                   - 35 -
                               City of Lexington, North Carolina
                Statement of Revenues, Expenses and Changes in Fund Net Assets
                                        Proprietary Funds
                             For the fiscal year ended June 30, 2003

                                                             Business-type Activities - Enterprise Funds
                                                                  Electric              Water and Sewer
Net assets:
 Total net assets, July 1                                            25,453,560               30,511,538

Total net assets, June 30                                $           27,732,330     $         30,969,372




The notes to the financial statements are an integral part of this statement.



                                                - 36 -
                                                                                                                              Exhibit 8
                                                                                                                                Page 2
                                                  City of Lexington, North Carolina
                                   Statement of Revenues, Expenses and Changes in Fund Net Assets
                                                           Proprietary Funds
                                                For the fiscal year ended June 30, 2003

    Business-type Activities - Enterprise Funds             Total               Governmental Activities       Business-type Activities
      Natural Gas                   Golf                  Enterprise            Internal Service Funds        Internal Service Funds

            11,885,689                   90,938               67,941,725                      1,392,526                      5,892,483

$           12,696,965     $            154,796     $         71,553,463        $             1,730,509   $                  6,785,323




The notes to the financial statements are an integral part of this statement.



                                                                   - 37 -
                                                    City of Lexington, North Carolina
                                                         Statement of Cash Flows
                                                             Proprietary Funds
                                                  For the fiscal year ended June 30, 2003

                                                                                    Business-type Activities - Enterprise Funds
                                                                                Electric         Water and Sewer           Natural Gas
Cash flows from operating activities:
 Cash received from customers                                               $     42,697,847     $      5,226,003      $     18,920,251
 Cash payments for quasi-external operating
    transactions with other funds                                                 (1,696,277)           (1,076,198)            (987,602)
 Cash paid for goods and services                                                (37,150,046)           (1,864,020)         (15,735,404)
 Cash paid to employees                                                           (1,673,323)           (1,995,004)            (787,476)
 Other operating income                                                            1,201,564               267,120              330,966
    Net cash provided (used) by operating activities                               3,379,765               557,901            1,740,735

Cash flows from noncapital financing activities:
 State grant reimbursement                                                           412,502                    -                      -
 Advances from (to) other funds                                                   (1,020,000)                   -                      -
 Proceeds from (payments on) short term loans from other funds                             -               50,000                      -
 Transfers in                                                                        165,000              129,856                540,000
 Transfers out                                                                    (1,292,497)            (180,386)            (1,197,335)
    Net cash provided (used) by noncapital financing activities                   (1,734,995)                (530)              (657,335)

Cash flows from capital and related financing activities:
 Proceeds from issuance of capital leases                                            127,698            4,898,990                37,558
 Proceeds from sale of property                                                            -               17,213                 2,941
 Construction (incl. Capitalized interest)                                          (591,234)            (816,938)              (99,002)
 Acquisition of capital assets                                                      (153,085)            (105,506)              (46,978)
 Reimbursement on acquisition of capital assets                                            -               16,350                     -
 Arbitrage recovery                                                                        -               35,023                     -
 Principal payments - bonds                                                         (240,000)            (325,000)             (310,000)
 Principal payments - capital leases                                                 (83,419)             (68,943)              (34,485)
 Interest paid                                                                      (155,639)            (270,955)             (201,596)
   Net cash provided (used) by capital and related financing activities           (1,095,679)           3,380,234              (651,562)

Cash flows from investing activities:
 Interest earned on investments                                                      107,509               40,998                71,620
    Net cash provided (used) by investing activities                                 107,509               40,998                71,620

Net increase (decrease) in cash and cash equivalents                                 656,600            3,978,603               503,458
Cash and cash equivalents, July 1                                                  4,720,347            2,837,452             2,958,909

Cash and cash equivalents, June 30                                          $      5,376,947     $      6,816,055      $      3,462,367




The notes to the financial statements are an integral part of this statement.




                                                                   - 38 -
                                                                                                                              Exhibit 9
                                                                                                                                Page 1
                                               City of Lexington, North Carolina
                                                    Statement of Cash Flows
                                                        Proprietary Funds
                                             For the fiscal year ended June 30, 2003

                                 Total Enterprise           Governmental Activities            Business-type Activities
                Golf                  Funds                 Internal Service Funds             Internal Service Funds

          $         432,082      $      67,276,183      $                             -    $                              -

                    (12,830)            (3,772,907)                        4,975,592                           1,541,756
                    (80,005)           (54,829,475)                       (4,140,699)                           (767,336)
                   (396,379)            (4,852,182)                         (493,720)                         (1,184,128)
                          -              1,799,650                            83,538                             483,863
                    (57,132)             5,621,269                           424,711                              74,155


                          -                412,502                                    -                                -
                          -             (1,020,000)                             (30,000)                               -
                          -                 50,000                                    -                                -
                    176,000              1,010,856                               28,754                        1,933,048
                          -             (2,670,218)                                   -                         (790,000)
                    176,000             (2,216,860)                              (1,246)                       1,143,048


                          -              5,064,246                                    -                                -
                      3,975                 24,129                                1,103                            1,044
                    (63,200)            (1,570,374)                                   -                                -
                          -               (305,569)                             (27,344)                         (37,759)
                          -                 16,350                                    -                            4,803
                          -                 35,023                               (4,391)                        (250,088)
                          -               (875,000)                                (231)                         (26,705)
                          -               (186,847)                                   -                                -
                          -               (628,190)                                   -                                -
                    (59,225)             1,573,768                              (30,863)                        (308,705)


                        649                220,776                              26,318                            21,140
                        649                220,776                              26,318                            21,140

                     60,292              5,198,953                           418,920                             929,638
                     46,049             10,562,757                         1,379,544                           3,684,205

          $         106,341      $      15,761,710      $                  1,798,464       $                   4,613,843




The notes to the financial statements are an integral part of this statement.




                                                               - 39 -
                                                     City of Lexington, North Carolina
                                                          Statement of Cash Flows
                                                              Proprietary Funds
                                                   For the fiscal year ended June 30, 2003

                                                                                     Business-type Activities - Enterprise Funds
                                                                                 Electric         Water and Sewer           Natural Gas
Reconciliation of Operating Income to Net Cash
  Provided (Used) by Operating Activities
Operating income (loss)                                                     $       3,041,894     $        318,480      $      1,599,180

Adjustments to reconcile operating income (loss) to cash
  provided (used) by operating activities
  Depreciation                                                                        748,118              608,086               428,678
  Overhead capitalized                                                               (554,999)             (89,802)             (186,800)
  Changes in assets and liabilities:
    (Increase) decrease in accounts receivable                                        452,556                9,227              (736,414)
    (Increase) decrease in inventory                                                   15,220               26,758                43,796
    (Increase) decrease in prepaid expenses                                                 -                    -                 4,354
    Increase (decrease) in accounts payable                                          (306,503)            (326,712)              559,554
    Increase (decrease) in customer deposits                                          (24,294)              (3,580)               26,050
    Increase (decrease) in compensated absences payable                                 7,773               15,444                 2,337
    Increase (decrease) in deferred revenues                                                -                    -                     -

       Total adjustments                                                              337,871              239,421               141,555

Net cash provided (used) by operating activities                            $       3,379,765     $        557,901      $      1,740,735

Noncash transactions affecting financial position:
In 2003, the City transferred capital assets with a book value of $2,184 from the Utility
Administration Fund to the Electric Fund, $1,422 from the General Fund to
the Natural Gas Fund, $1,288 from the Natural Gas Fund to the General Fund,
$1,155 from the Utility Administration Fund to the Golf Fund, $1,094 from the
Golf Fund to the Utility Administration Fund.




The notes to the financial statements are an integral part of this statement.




                                                                   - 40 -
                                                                                                                           Exhibit 9
                                                                                                                             Page 2
                                               City of Lexington, North Carolina
                                                    Statement of Cash Flows
                                                        Proprietary Funds
                                             For the fiscal year ended June 30, 2003

                                 Total Enterprise           Governmental Activities            Business-type Activities
                Golf                  Funds                 Internal Service Funds             Internal Service Funds



          $        (115,559)     $       4,843,995      $                       297,434    $                    (247,151)




                     16,179              1,801,061                               29,003                           81,394
                          -               (831,601)                                   -                          326,083

                      1,152               (273,479)                              15,638                          (32,199)
                          -                 85,774                                1,324                                -
                          -                  4,354                                    -                              600
                     41,623                (32,038)                              50,077                          (55,652)
                        875                   (949)                              30,903                                -
                     (1,402)                24,152                                4,699                            1,080
                          -                      -                               (4,367)                               -

                     58,427                777,274                              127,277                          321,306

          $         (57,132)     $       5,621,269      $                       424,711    $                      74,155




The notes to the financial statements are an integral part of this statement.




                                                               - 41 -
This page has been left blank intentionally.
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
I.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the City of Lexington and its discretely presented component units conform
to generally accepted accounting principals as applicable to governments. The following is a summary of
the more significant accounting policies:

     A. Reporting Entity

     The City of Lexington is a municipal corporation governed by an elected mayor and eight-member
     council. As required by generally accepted accounting principles, these financial statements
     present the City of Lexington and its component units, legally separate entities for which the City
     of Lexington is considered to be financially accountable. The two discretely presented component
     units described below are reported in separate columns in the government-wide financial
     statements to emphasize they are legally separate from the City of Lexington.

     City of Lexington Board of Alcoholic Control

     The three board members of this unit are appointed by the City of Lexington. In addition, the
     ABC Board is required by State statute to distribute its surpluses to the City of Lexington's
     General Fund. The ABC Board, which has a June 30 year-end, is presented as if it were a
     proprietary fund type. Complete financial statements for the ABC Board may be obtained from
     the entity's administrative offices at City of Lexington Board of Alcoholic Control, 419 North
     Main Street, Lexington, NC 27292.

     Lexington Tourism Authority

     The seven members of this board are appointed by the City of Lexington. The City is authorized
     by State statute to collect an occupancy tax of 6% on gross revenues from hotel/motel room
     occupancy within the corporate limits. Collections are remitted to the Lexington Tourism
     Authority, less a 3% administration charge, on a quarterly basis. Lexington Tourism Authority,
     which has a June 30 year-end, is presented as if it were a governmental fund type. Complete
     financial statements may be obtained from the entity's administrative offices at Lexington Tourism
     Authority, 28 West Center Street, Lexington, NC 27292.

     B. Government-Wide and Fund Financial Statements

     Government-wide Statements: The statement of net assets and the statement of activities display
     information about the primary government and its component units. These statements include
     the financial activities of the overall government. Eliminations have been made to minimize
     the double counting of internal activities, without distorting direct costs and program revenues



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                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


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     for the various functions. These statements distinguish between the governmental and business-type
     activities of the City. Governmental activities generally are financed through taxes,
     intergovernmental revenues, and other non-exchange transactions. Business-type activities are
     financed in whole or in part by fees charged to external parties.

     The statement of activities presents a comparison between direct expenses and program
     revenues for the different business-type activities of the City and for each function of the
     City’s governmental activities. Direct expenses are those that are specifically associated with a
     program or function and, therefore, are clearly identifiable to a particular function. Program
     revenues include (a) fees and charges paid by the recipients of goods or services offered by the
     programs and (b) grants and contributions that are restricted to meeting the operational or
     capital requirements of a particular program. Revenues that are not classified as program
     revenues, including all taxes, are presented as general revenues.

     Fund Financial Statements: The fund financial statements provide information about the City’s
     funds. Separate statements for each fund category – governmental and proprietary – are presented.
     The emphasis of fund financial statements is on major governmental and enterprise funds,
     each displayed in a separate column. All remaining governmental and enterprise funds are
     aggregated and reported as nonmajor funds.

     Proprietary fund operating revenues, such as charges for services, result from exchange
     transactions associated with the principal activity of the fund. Exchange transactions are those
     in which each party receives and gives up essentially equal values. Nonoperating revenues,
     such as subsidies and investment earnings, result from non-exchange transactions or ancillary
     activities.

     The City reports the following major governmental fund:

     General Fund - The General Fund is the general operating fund of the City. The General Fund
     accounts for all financial resources except those that are required to be accounted for in another
     fund. The primary revenue sources are ad valorem taxes, intergovernmental revenues and
     transfers from Enterprise Funds. The primary expenditures are for public safety, highways and
     streets, sanitation, culture and recreation, and general governmental services.

     The City reports the following non-major governmental funds:

     Special Revenue Funds - Special Revenue Funds account for specific revenue sources that are
     legally restricted to expenditures for specified purposes.




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                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


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         Community Development Block Grant Fund – Revenues for the Community
         Development Block Grant Fund are monies received from Federal and State sources and are
         restricted for economic and physical development.

         Controlled Substance Tax Fund – Revenues for the Controlled Substance Tax Fund are
         monies received from Federal, State of North Carolina, and County sources, and are restricted
         for public safety use.

         Public Safety Grant Fund – Revenues for the Public Safety Grant Fund are monies received
         from Federal, State of North Carolina, and County sources, and are restricted for public safety
         use.

         Special Taxing District –Revenues for the Special Taxing District are a special additional ad
         valorem property tax for the revitalization of the uptown area.

     Capital Projects Fund - The City’s General Capital Project Fund represents various aspects of
     construction or acquisition related to its five-year business plan.

     The City reports the following major enterprise funds:

     Electric Fund – The Electric Fund includes the accounts of the Electric Operation Fund, one
     capital project fund and a rate stabilization fund. Financing of the operation fund comes
     principally from charges to the users. The capital project fund is primarily financed by debt
     issuance and transfers from the Utility Administration Capital Reserve Fund.

     Natural Gas – The Natural Gas Fund includes the accounts of the Natural Gas Operation
     Fund and one capital project fund. Financing of the operation fund comes principally from
     charges to the users. The capital project fund is primarily financed by debt issuance and
     transfers from the Utility Administration Capital Reserve Fund.

     Water and Sewer Fund – The Water and Sewer Fund includes the accounts of the Water and
     Sewer Operation Fund and one capital project fund. Financing of the operation fund comes
     principally from charges to the users. The capital project fund is primarily financed by debt
     issuance.

     Golf Fund – The Golf Fund includes the accounts of the Golf Course Operation Fund and
     one capital project fund. Financing of the operation fund comes principally from charges to
     the users and General Fund transfers. The capital project fund is primarily financed by debt
     issuance.



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                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


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     The City reports the following fund type:

     Internal Service Funds:

         Garage Fund – The Garage Fund is used to account for the accumulation and allocation
         of costs associated with the City’s garage. This fund is reported in the basic financial
         statements as a governmental activity.

         Group Insurance Fund - The Group Insurance Fund, is used to account for the self-
         insurance for health and dental benefits provided to retirees of the City, employees of the City,
         and their dependents. This fund is reported in the basic financial statements as a
         governmental activity.

         Risk Management Fund - The Risk Management Fund is used to account for the City’s
         self-retention cost portion and for the premiums on the City’s reinsurance program
         pertaining to workers compensation, property, and liability exposures. This fund is
         reported in the basic financial statements as a governmental activity.

         Utility Administration Fund - The Utility Administration Fund is used to account for
         administrative overhead type costs, which are shared by all of the utility enterprise funds.
         Utility Administration also includes a Capital Reserve Fund and a Rate Stabilization Fund that
         is shared by all of the utility enterprise funds. These funds are reported in the basic financial
         statements as business-type activities.

     C. Measurement Focus, Basis of Accounting and Financial Statement Presentation

     In accordance with the North Carolina General Statutes, all funds of the City are maintained
     during the year using the modified accrual basis of accounting.

     Government-wide and Proprietary Fund Financial Statements - The government-wide and proprietary
     fund financial statements are reported using the economic resources measurement focus. The
     government-wide and proprietary fund financial statements are reported using the accrual basis
     of accounting. Revenues are recorded when earned and expenses are recorded at the time
     liabilities are incurred, regardless of when the related cash flows take place. Nonexchange
     transactions, in which the City gives (or receives) value without directly receiving (or giving)
     equal value in exchange, include property taxes, grants, and donations. On an accrual basis,
     revenue from property taxes is recognized in the fiscal year for which the taxes are levied.
     Revenue from grants and donations is recognized in the fiscal year in which all eligibility
     requirements have been satisfied.



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                                    City of Lexington, North Carolina
                                  Notes to the Basic Financial Statements
                                               June 30, 2003


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     Governmental Fund Financial Statements - Governmental funds are reported using the current
     financial resources measurement focus and the modified accrual basis of accounting. Under
     this method, revenues are recognized when measurable and available. Expenditures are
     recorded when the related fund liability is incurred, as under accrual accounting. However,
     debt service expenditures, as well as expenditures related to compensated absences and claims
     and judgments, are recorded only to the extent that they have matured. General capital asset
     acquisitions are reported as expenditures in governmental funds. Proceeds of general long-term
     debt and acquisitions under capital leases are reported as other financing sources.

     The City considers all revenues available if they are collected within 60 days after year-end,
     except for property taxes. Ad valorem taxes receivable are not accrued as revenue because the
     amount is not susceptible to accrual. At June 30, taxes receivable are materially past due and are
     not considered to be an available resource to finance the operations of the current year. Also, as of
     January 1, 1993, State law altered the procedures for the assessment and collection of property
     taxes on registered motor vehicles in North Carolina. Effective with this change in the law,
     Davidson County is responsible for billing and collecting the property taxes on registered motor
     vehicles on behalf of all municipalities and special tax districts in the County, including the City of
     Lexington. For motor vehicles registered under the staggered system, property taxes are due the
     first day of the fourth month after the vehicles are registered. The billed taxes are applicable to the
     fiscal year in which they become due. Therefore, the City's vehicle taxes for vehicles registered in
     Davidson County from March 2002 through February 2003 apply to the fiscal year ended June 30,
     2003. Uncollected taxes, which were billed during this period, are shown as a receivable in these
     financial statements and are offset by deferred revenues. For vehicles registered under the annual
     system, taxes are due on May 1 of each year. For those vehicles registered and billed under the
     annual system, uncollected taxes are reported as a receivable on the financial statements and are
     offset by deferred revenues because the due date and the date upon which interest begins to accrue
     passed prior to June 30. The taxes for vehicles registered annually that have already been collected
     as of year-end are also reflected as deferred revenues at June 30, 2003 because they are intended to
     finance the City's operations during the 2003-04 fiscal year. The City also has a contractual
     arrangement with Davidson County for the billing and collection of its other ad valorem taxes.

     Sales taxes collected and held by the State at year-end on behalf of the City are recognized as
     revenue. Intergovernmental revenues and sales and services are not susceptible to accrual because
     generally they are not measurable until received in cash. Grant revenues, which are unearned at
     year-end, are recorded as unearned/deferred revenues. Under the terms of grant agreements, the
     City funds certain programs by a combination of specific cost-reimbursement grants, categorical
     block grants, and general revenues. Thus, when program expenses are incurred, there are both
     restricted and unrestricted net assets available to finance the program. It is the City’s policy to first
     apply cost-reimbursement grant resources to such programs, followed by categorical block grants,
     and then by general revenues.



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                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


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     As permitted by generally accepted accounting principles, the City has elected to apply only
     applicable FASB Statements and Interpretations issued before November 30, 1989 that do not
     contradict GASB pronouncements in its accounting and reporting practices in both the
     government-wide and proprietary fund financial statements.

     D. Assets, Liabilities, and Fund Equity

         1. Deposits and Investments

         All deposits of the City are made in board-designated official depositories and are secured as
         required by State law [G. S. 159-31]. The City may designate, as an official depository, any
         bank or savings association whose principal office is located in North Carolina. Also, the City
         may establish time deposit accounts such as NOW and SuperNOW accounts, money market
         accounts, and certificates of deposit.

         State law [G. S. 159-30(c)] authorizes the City to invest in obligations of the United States or
         obligations fully guaranteed both as to principal and interest by the United States; obligations
         of the State of North Carolina; bonds and notes of any North Carolina local government or
         public authority; obligations of certain non-guaranteed federal agencies; certain high-quality
         issues of commercial paper and bankers' acceptances; and the North Carolina Capital
         Management Trust (NCCMT).

         The City’s investments with a maturity of more than one year at acquisition and non-money
         market investments are reported at fair value as determined by quoted market prices, if the
         difference is material. The securities of the NCCMT Cash Portfolio, a SEC-registered (2a-7)
         money market mutual fund, are valued at fair value, which is the NCCMT’s share price. The
         NCCMT Term Portfolio’s securities are valued at fair value. Money market investments that
         have a remaining maturity at the time of purchase of one year or less are reported at amortized
         cost. Non-participating interest earning investment contracts are reported at cost. As of June
         30, 2003, the difference between market and fair value for all investments was immaterial and
         therefore all investments are reported at cost value. There are no investments stated at
         amortized cost.

         In accordance with State law, the City may invest in securities which are callable and which
         provide for periodic interest rate increases in specific increments until maturity. These
         investments are reported at fair value as determined by quoted market prices.




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                                    City of Lexington, North Carolina
                                  Notes to the Basic Financial Statements
                                               June 30, 2003


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         2. Cash and Cash Equivalents

         The City pools money from several funds to facilitate disbursement and investment and to
         maximize investment income. Therefore, all cash and investments are essentially demand
         deposits and are considered cash and cash equivalents.

         3. Restricted Assets

         Customer deposits held by the City before any services are supplied are restricted to the service
         for which the deposit was collected.

         Assets (cash) restricted for other purposes appear in the General Fund for acquisition of
         assets; in the Electric Fund for construction in progress and acquisition of assets; in the Water
         and Sewer Fund for construction in progress, future construction and arbitrage; and in the
         Natural Gas Fund for construction in progress.

         In the internal service funds, cash is restricted in the Group Insurance Fund for unpaid claims
         and in the Risk Management Fund for unpaid claims. The Utility Administration Fund has
         cash restricted for construction in progress, rate stabilization, and utility administration capital
         reserve.

         4. Ad Valorem Taxes Receivable

         In accordance with State law [G. S. 105-347 and G. S. 159-13(a)], the City levies ad valorem
         taxes on property other than motor vehicles on July 1, the beginning of the fiscal year. The
         taxes are due on September 1 (lien date); however, interest does not accrue until the following
         January 6. These taxes are based on the assessed values as of January 1, 2002. As allowed by
         State law, the City has established a schedule of discounts that apply to taxes that are paid prior
         to the due date. In the City’s General Fund, ad valorem tax revenues are reported net of such
         discounts.

         5. Allowance for Doubtful Accounts

         In lieu of reporting allowance for doubtful accounts, the City analyzes accounts that have been
         outstanding for 180 days and writes them off on a monthly basis.

         6. Inventory and Prepaid Items

         The inventories of the City’s General Fund are valued using the weighted average cost method.
          The City’s General Fund inventory consists of expendable supplies that are recorded as
         expenditures as consumed rather than when purchased.



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                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


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         Inventories are maintained for all enterprise fund supplies. They are valued using the weighted
         average cost method, and are considered expenses when consumed.

         Certain payments to vendors reflect costs applicable to future accounting periods and are
         recorded as prepaid items in both government – wide and fund financial statements.

         7. Capital Assets

         Capital assets are defined by the government as assets with an initial, individual cost of
         more than a certain cost and an estimated useful life in excess of two years. Minimum
         capitalization costs are as follows: land, $0; Buildings, $5,000; other improvements, $5,000;
         substations, lines, and other plant and distribution systems, $0; infrastructure, $50,000;
         furniture and equipment, $5,000; and vehicles, $5,000. Purchased or constructed capital
         assets are reported at cost or estimated historical cost. Donated capital assets are recorded
         at their estimated fair value at the date of donation. The cost of normal maintenance and
         repairs that do not add to the value of the asset or materially extend assets’ lives are not
         capitalized. Also, the City has elected not to capitalize those interest costs, which are
         incurred during the construction period of general capital assets.

         Effective July 1, 2002, the City began depreciating capital assets used in government
         activities. General infrastructure assets acquired prior to July 1, 2002, consist of the road
         network that was acquired or that received substantial improvements subsequent to July 1,
         1980, and are reported at estimated historical cost using deflated replacement cost.

         Primary government capital assets are depreciated using the straight-line method over the
         following estimated useful lives:

                     Plant facilities and systems                            20 to 50 years
                     Buildings                                                     50 years
                     Furniture and office equipment                                10 years
                     Maintenance and construction equipment                         7 years
                     Motor Vehicles                                            5 to 7 years
                     Computers                                                      3 years
                     Infrastructure                                                50 years
                     Intangible Assets                                              5 years

         The City of Lexington owns a statue, which was donated by the citizens to the Lexington
         Police Department. As a policy, the City does not capitalize works of art. In addition, this
         asset is not held for financial gain and is protected and cared for by the City.




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                                     City of Lexington, North Carolina
                                   Notes to the Basic Financial Statements
                                                June 30, 2003


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         Interest is capitalized on proprietary fund assets acquired with tax-exempt debt. The amount
         of interest to be capitalized is calculated by offsetting interest expense incurred from the date
         of the borrowing until completion of the project with interest earned on invested proceeds
         over the same period. Some proprietary fund assets were constructed with resources
         externally restricted for capital acquisition and/or construction. Depreciation on these assets
         is closed to the appropriate contributed capital accounts after being recognized in operations.
         Capital assets transferred between funds are transferred at their net book value (cost less
         accumulated depreciation) as of the date of transfer.

          8. Long-Term Obligations

          In the government-wide financial statements, and proprietary fund types in the fund
          financial statements, long-term debt and other long-term obligations are reported as
          liabilities in the applicable governmental activities, business-type activities, or proprietary
          fund type statement of net assets. Bond premiums and discounts, as well as issuance
          costs, are deferred and amortized over the life of the bonds using the straight-line
          method that approximates the effective interest method. Bonds payable are reported net
          of the applicable bond premiums or discount. Bond issuance costs are reported as
          deferred charges and amortized over the term of the related debt.

          In fund financial statements, governmental fund types recognize bond premiums and
          discounts, as well as bond issuance costs, during the current period. The face amount of
          debt issued is reported as other financing sources. Premiums received on debt issuances
          are reported as other financing sources while discounts on debt issuances are reported as
          other financing uses. Issuance costs, whether or not withheld from the actual debt
          proceeds received, are reported as debt service expenditures.

          9. Compensated Absences

          The vacation policy of the City provides for the accumulation of up to twenty-four (24) days
          earned vacation leave, with up to ten years of service, up to thirty-six (36) days earned
          vacation leave with over ten years of service, and up to forty-eight (48) days earned with over
          twenty years of service. All earned vacation leave is fully vested when earned. All vacation
          pay is accrued when incurred in the government-wide and proprietary financial statements.
          A liability for these amounts is reported in governmental funds only if they have matured as
          a result of employee resignations and retirements.

          The City also has a policy of compensating retirees for 25% of unused sick leave upon
          retirement, but any unused sick leave accumulated at the time of retirement may be used in
          the determination of length of service for retirement benefit purposes. All remaining sick
          leave accumulated does not vest with the employee; therefore, no accrual has been



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                                    City of Lexington, North Carolina
                                  Notes to the Basic Financial Statements
                                               June 30, 2003


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         established for remaining unused sick leave. Sick leave does not vest, but any unused sick
         leave accumulated at the time of retirement may be used in the determination of length of
         service for retirement benefit purposes.

         10. Net Assets/Fund Balances

         Net assets in government-wide and proprietary fund financial statements are classified as
         invested in capital assets, net of related debt; restricted; and unrestricted. Restricted net
         assets represent constraints on resources that are either externally imposed by creditors,
         grantors, contributors, or laws or regulations of other governments or imposed by law
         through state statute.

         In the governmental fund financial statements, reservations of fund balance represent
         amounts that cannot be appropriated or are legally segregated for a specific purpose.
         Designations of fund balance represent tentative management plans that are subject to
         change.

         State law [G. S. 159-13(b)(16)] restricts appropriation of fund balance for the subsequent
         year's budget to an amount not to exceed the sum of cash and investments minus the sum of
         liabilities, encumbrances, and deferred revenues arising from cash receipts as those amounts
         stand at the close of the fiscal year preceding the budget year.

         RESTRICTED NET ASSETS/RESERVATIONS OF FUND BALANCE

         Restricted/Reserved for General Government – portion of net assets/fund balance that is
         available for appropriation, but is restricted for general government expenditures by external
         donors.

         Restricted for Economic and Physical Development – portion of net assets that is restricted
         for economic and physical development by contractual agreements with external parties.

         Restricted for Public Safety – portion of net assets that is restricted for public safety imposed
         by grantor agencies and regulations of other governments.

         Reserved for Encumbrances - portion of fund balance available to pay for commitments
         related to purchase orders or unperformed contracts at year-end.

         Reserved for Acquisition of Assets - portion of fund balance available for appropriation, but
         legally restricted by the terms of lease purchase agreements.




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                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


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         Reserved for Inventory - Central Purchasing - portion of fund balance that is not available
         for appropriation because it represents the year-end fund balance of ending inventories,
         which are not expendable, available resources.

         Reserved for Advances to Other Funds - portion of fund balance that is not available for
         appropriation due to the transfer of assets from the General Fund to the Golf Enterprise
         Fund. The greatest portion of the reserve for advances resulted from the City's former
         charter, which required a commitment to transfer all the Electric Fund's profits to the
         General Fund.

         Reserved by State Statute - portion of fund balance, in addition to reserves for encumbrances
         and reserves for inventories, which is not available for appropriation under State law [G.S.
         159-8(a)]. This amount is usually comprised of accounts receivable and interfund
         receivables, which have not been offset by deferred revenues.

         UNRESERVED FUND BALANCE

         Undesignated - portion of the total fund balance that is available for appropriation, which is
         uncommitted at year-end.

         Unreserved Fund Balance is subject to the following designations:

         Designated for Subsequent Year's Expenditures - portion of the total fund balance that is
         available for appropriation which has been designated for the adopted 2003-04 budget
         ordinance.

         Designated for Street Improvements - portion of the total fund balance that is available for
         appropriation, which has been designated for street improvements.

         Designated for Neighborhood Improvements – portion of the total fund balance that is
         available for appropriation, which has been designated for City Council improvements to
         their neighborhoods.

                           Designated Fund Balance as of June 30, 2003

                   Subsequent Year's Expenditures                  $ 1,507,000
                   Street Improvements                                 112,239
                   Neighborhood Improvements                             9,880
                   Total                                           $ 1,629,119




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                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


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         11. Comparative data/reclassifications

         Comparative total data for the prior year have been presented only for individual proprietary
         funds and the General Fund in order to provide an understanding of the changes in the
         financial position and operations of these funds. Also, certain amounts presented in the prior
         year data have been reclassified in order to be consistent with the current year’s presentation.

II.   Stewardship, Compliance, and Accountability

      A. Budgetary Data

      The City's budgets are adopted as required by the North Carolina General Statutes. The City
      Council adopted an annual budget for the General Fund, three Special Revenue Funds, and the
      Enterprise Funds. All annual appropriations lapse at the fiscal-year end. Project ordinances are
      adopted for the Community Development Block Grant Special Revenue Fund, the General
      Capital Project Fund, as well as the Internal Service and Enterprise Capital Project Funds, which
      are consolidated with the operating funds for reporting purposes. Project Ordinances are also
      adopted for the Utility Administration Rate Stabilization Fund, the Electric Rate Stabilization
      Fund and the Utility Administration Capital Reserve Fund. The City’s Internal Service Funds
      operate under a financial plan that was adopted by the governing board at the time the City’s
      budget ordinance was approved, as is required by the General Statutes. All budgets are prepared
      using the modified accrual basis of accounting.

      Expenditures may not legally exceed appropriations at the departmental (functional) level for all
      annually budgeted funds, and at the individual project level for the multi-year funds. The City
      Manager is authorized to transfer appropriations within a department; however, amendments are
      required for any revisions that alter the total expenditures of any fund, change capital
      appropriations by $10,000 or more, approve the use of contingency funds or alter salary. All
      amendments must be approved by the governing board. The budget ordinance must be adopted
      by July 1 of the fiscal year or the governing board must adopt an interim budget that covers that
      time until the annual ordinance can be adopted. During the year, several amendments to the
      original budget and financial plans were necessary, some of which were material. The effects of
      the material budget amendments are described below.

      An amendment to the General Fund budget was necessary due to the State of North Carolina
      eliminating several State shared revenue sources such as the intangibles tax, inventory tax,
      homestead exemption, and food stamp exemption and the County approving the new half
      cent local option sales tax that went into effect December 1, 2002. The net effect of these
      changes was a decrease to the General Fund Budget in the amount of $387,000.




                                                   -53-
                                  City of Lexington, North Carolina
                                Notes to the Basic Financial Statements
                                             June 30, 2003


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     The General Fund Budget was also amended for donations received for the City’s 175th
     Anniversary in the amount of $82,180.

     The General Fund and Proprietary Fund budgets were amended due to increased expenditures
     and Federal Emergency Management Agency (FEMA) reimbursements in relation to the
     December 5, 2002 ice storm in the total amount of $1,360,303. A budget amendment for
     $531,684 of that amount was recorded for General Fund miscellaneous revenues with the
     majority of the expenditures being incurred in the Sanitation department for debris cleanup
     efforts. A budget amendment in the amount of $791,844 was also recorded in the Electric
     Fund for the expenditures necessary to restore power to the community.

     The Electric Fund budget was also amended in the amount of $700,000 for increased
     consumption due to the extremely cold winter and to decrease expenditures in the amount of
     $575,000 in order for external funding to be provided for a capital project in lieu of internal
     funding as was originally planned. In addition, an amendment in the amount of $510,748 was
     approved which transferred funds from the Electric Rate Stabilization Fund to the Utility
     Administration Rate Stabilization Fund. The major change in the Electric CIP Fund budget
     was an amendment to establish new capital projects in the amount of $1,683,671.

     The Natural Gas Fund budget was amended for an increase in off system sales and the cost of
     gas in the amount of $5,222,463 as well as transfers to the Utility Administration Rate
     Stabilization Fund and the Utility Administration Capital Reserve Fund in the amounts of
     $300,000 and $179,700, respectively. The Natural Gas CIP Fund budget was amended with a
     transfer from the Utility Administration Capital Reserve Fund in order to establish a new
     capital project.

     An amendment was approved for the Golf CIP Fund to establish the budget for a renovations
     project in the amount of $1,900,000.

     The material change in the Internal Service Multi-Year Funds budget was the result of
     amendments discussed above which transferred funds from the Natural Gas Fund and Electric
     Rate Stabilization Fund to the Utility Administration Rate Stabilization Fund and the Utility
     Administration Capital Reserve Fund. Funds were also transferred to the Utility
     Administration Capital Reserve Fund from the Electric CIP Fund in the amount of $578,182.

     In addition, the 2002 drought and the extraordinary spring rains of 2003 adversely affected
     water and sewer consumption level. Therefore, the General Fund budget and Water and
     Sewer Fund budgets were amended to forfeit the Water and Sewer Fund transfer for a
     payment in lieu of taxes in the amount of $237,675. The Water and Sewer CIP Fund budget
     increased as a result of an amendment to establish a new capital project for state-mandated
     nutrient removal in the amount of $4,800,000.



                                                 -54-
                                    City of Lexington, North Carolina
                                  Notes to the Basic Financial Statements
                                               June 30, 2003


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     The major change to the Special Revenue Fund budgets was due to receiving Federal and State
     grants and transferring matching funds to the Community Development Block Grant Fund
     and Public Safety Grant Fund in the total amount of $241,561. Available budget funds, which
     lapsed at the end of fiscal year 2001-02, were also appropriated during the fiscal year in the
     amount of $70,016.

     B. Deficit Fund Balances or Net Assets of Individual Funds

     The Golf Fund has deficit net assets in the amount of $43,264. This is the result of incurring
     expenditures in the Golf CIP Fund (which is closed into the Golf Fund for financial statement
     presentation) for a renovations capital project. The City has adopted a resolution to be
     reimbursed for the project expenditures by installment purchase debt proceeds. The City plans to
     enter into the installment purchase agreement and receive the debt proceeds in fiscal year 2003-04,
     which will correct the deficit net assets.

III. DETAILED NOTES ON ALL FUNDS

     A. Assets

         1. Deposits

         All the deposits of the City are either insured or collateralized by using one of two methods.
         Under the Dedicated Method, all deposits that exceed the federal depository insurance
         coverage level are collateralized with securities held by the City's agents in these units' names.
         Under the Pooling Method, which is a collateral pool, all uninsured deposits are collateralized
         with securities held by the State Treasurer's agent in the name of the State Treasurer. Since the
         State Treasurer is acting in a fiduciary capacity for the City, these deposits are considered to be
         held by the City's agents in their names. The amount of the pledged collateral is based on an
         approved averaging method for non-interest bearing deposits and the actual current balance
         for interest-bearing deposits. Depositories using the Pooling Method report to the State
         Treasurer the adequacy of their pooled collateral covering uninsured deposits. The State
         Treasurer does not confirm this information with the City or the escrow agent. Because of the
         inability to measure the exact amounts of collateral pledged for the City under the Pooling
         Method, the potential exists for under-collateralization, and this risk may increase in periods of
         high cash flows. However, the State Treasurer of North Carolina enforces strict standards of
         financial stability for each depository that collateralizes public deposits under the Pooling
         Method.




                                                    -55-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
         At June 30, 2003, the City's deposits had a carrying amount of $16,279,902 and a bank
         balance of $16,693,043. Of the City's actual bank balance, $200,000 was covered by federal
         depository insurance and the balance by collateral held under the Pooling Method. At June
         30, 2003, the City’s petty cash fund totaled $2,350.

         2. Investments

         The investments of the City are categorized to give an indication of the level of custodial risk
         assumed by the entity at year-end. In the following table, Column 1 includes investments
         that are insured or registered or for which the securities are held by the City or its agents in
         the entity's name. Column 2 includes uninsured and unregistered investments for which the
         securities are held by the counter party’s trust department or agent in the City's name.
         Column 3 includes uninsured and unregistered investments for which the securities are held
         by the counter party, or by its trust department or agent but not in the City's name. The
         investments in the North Carolina Capital Management Trust are exempt from risk
         categorization because the City does not own any identifiable securities, but is a shareholder
         of a percentage of the fund.

         At June 30, 2003, the City’s investments were as follows:

                                                Categories
                                                                              REPORTED             FAIR
                                       1             2               3          VALUE             VALUE
Federal Farm Credit Bank          $ 500,000 $              - $           -    $     500,000 $         504,845
Federal Home Loan Bank             1,000,000               -             -        1,000,000         1,000,310
Fed. Natnl. Mortgage Assoc.        1,000,000               -             -        1,000,000         1,001,720
Commercial Paper                   3,994,628               -             -        3,994,628         4,003,415

Investments not subject to categorization:
North Carolina Capital Management Trust Cash Portfolio                           7,513,995    7,513,995
Total Investments                                                             $ 14,008,623 $ 14,024,285

         During 2003, the City held all investments to maturity therefore realizing $0 in net gain from
         the sale of investments. The calculation of realized gains is independent of the calculation of
         the net increase in the fair value of investments. Realized gains and losses on investments
         that had been held in more than one fiscal year and sold in the current year may have been
         recognized as an increase or decrease in the fair value of the investments reported in the
         prior year. The net increase in the fair value of the City’s investments during 2003 was
         immaterial, and therefore not reflected in investment earnings. The net increase/decrease in



                                                    -56-
                                                City of Lexington, North Carolina
                                              Notes to the Basic Financial Statements
                                                           June 30, 2003


          ********************************************************************************************
                   fair value takes into account all changes in fair value (including purchases and sales) that
                   occurred during the year. The City’s unrealized gain on investments held at year-end was
                   immaterial; therefore cash and investments are presented at cost.

                    The City invests in callable, step-up securities to hedge against a rise in interest rates. These
                    securities pay interest at a level that increases in specified increments on stated dates. As of
                    June 30, 2003, the City did not own any callable, step-up securities.

                    3. Receivables - Allowance for Doubtful Accounts

                    The amounts presented in the Balance Sheet and Statement of Net Assets are not adjusted
                    for an allowance for doubtful accounts due to the fact that the City analyzes accounts that
                    have been outstanding for 180 days and writes them off on a monthly basis.

                    4. Capital Assets

                           a. Capital asset activity for the year ended June 30, 2003, was as follows:

          Primary Government
                                                          Balance                                                    Balance
                                                        July 1, 2002      Additions   Deletions   Transfers       June 30, 2003
Governmental activities:
 Capital assets not being depreciated:
   Land                                             $      1,665,815 $             - $        - $         - $         1,665,815
   Investment in joint venture - land                        206,391               -          -           -             206,391
   Construction in progress                                5,247,552         115,772          -           -           5,363,324
    Total capital assets not being depreciated      $      7,119,758 $       115,772 $        - $         - $         7,235,530
 Capital assets being depreciated:
  Buildings                                         $     10,713,637 $             - $ (33,000) $ 14,400 $           10,695,037
  Other improvements                                       1,676,862               -          -         -             1,676,862
  Machinery & equipment                                    8,783,501         506,720   (304,047)    3,573             8,989,748
  Infrastructure                                          50,609,680               -          -         -            50,609,680
    Total capital assets being depreciated          $     71,783,680 $       506,720 $ (337,047) $ 17,973 $          71,971,327
 Less accumulated depreciation for:
  Buildings                                         $      6,172,900 $       144,042 $     (863) $       -    $       6,316,079
  Other improvements                                         516,048          87,924          -          -    $         603,972
  Machinery & equipment                                    6,019,712         646,057   (273,356)     3,216    $       6,395,629
  Infrastructure                                          21,863,382         910,974          -          -    $      22,774,356
  Total accumulated depreciation                    $     34,572,042 $     1,788,997 $ (274,219) $   3,216    $      36,090,036




                                                                   -57-
                                             City of Lexington, North Carolina
                                           Notes to the Basic Financial Statements
                                                        June 30, 2003


       ********************************************************************************************

                                                          Balance                                                          Balance
                                                        July 1, 2002     Additions     Deletions        Transfers       June 30, 2003
Internal Service Funds
 Capital assets not being depreciated:
    Land                                            $         15,000 $               - $              - $       - $            15,000
     Total capital assets not being depreciated     $         15,000 $               - $              - $       - $            15,000
 Capital assets being depreciated:
   Buildings                                        $         90,000 $            - $               - $       - $              90,000
   Other improvements                                        301,882              -                 -         -               301,882
   Machinery & equipment                                     241,588         12,944            (5,045)   (4,914)              244,573
     Total capital assets being depreciated         $        633,470 $       12,944 $          (5,045) $ (4,914) $            636,455

 Less accumulated depreciation for:
   Buildings                                        $         63,690 $        3,919 $        - $      - $                      67,609
  Other improvements                                         132,727         11,542          -        - $                     144,269
  Machinery & equipment                                      171,648         14,077     (5,076)  (4,421) $                    176,228
   Subtotal                                                  368,065         29,538     (5,076)  (4,421)                      388,106
   Accumulated depreciation                               34,940,107      1,818,535   (279,295)  (1,205)                   36,478,142
    Total capital assets being depreciated, net           37,477,043                                                       36,129,640
Governmental activity capital assets, net           $     44,611,801                                                $      43,380,170

        Reconciliation of additions:
            Capital outlay expenditures                                                    $           87,939
            Lease-purchased assets                                                                    326,288
            Grants                                                                                    105,437
            Construction in progress                                                                  115,772
                        Total                                                              $          635,436

               Depreciation expense was charged to functions/programs in the government-wide
               statement of activities as follows:
                   Governmental Activities
                   General government                                                             $       341,706
                   Public safety                                                                          284,018
                   Highways and streets                                                                   975,553
                   Sanitation                                                                             148,628
                   Cultural and recreation                                                                 39,093
                   Capital assets held by internal service funds                                           29,538
                   Total                                                                          $     1,818,536




                                                                -58-
                                                      City of Lexington, North Carolina
                                                    Notes to the Basic Financial Statements
                                                                 June 30, 2003


           ********************************************************************************************
                                                             Balance                                                          Balance
                                                           July 1, 2002      Additions         Deletions   Transfers       June 30, 2003
Business-type activities:
  Electric Fund
  Capital assets not being depreciated:
    Land                                               $        546,781 $               - $          - $           - $           546,781
    Construction in progress                                  2,841,255           591,234   (1,344,576)            -           2,087,913
    Total capital assets not being depreciated         $      3,388,036 $         591,234 $ (1,344,576) $          - $         2,634,694
  Capital assets being depreciated:
   Buildings                                           $        227,076 $                - $            - $         - $          227,076
   Plant and distribution systems                            42,366,978          1,885,039              -           -         44,252,017
   Machinery & equipment                                      2,061,318            161,881        (87,964)     21,836          2,157,071
      Total capital assets being depreciated           $     44,655,372 $        2,046,920 $      (87,964) $   21,836 $       46,636,164
  Less accumulated depreciation for:
   Buildings                                           $         86,830 $           2,821               -           -             89,651
   Plant and distribution systems                            17,033,320           672,014        (589,224)          -         17,116,110
   Machinery & equipment                                      1,703,166            73,283         (79,168)     19,652          1,716,933
   Total accumulated depreciation                      $     18,823,316 $         748,118 $      (668,392) $   19,652 $       18,922,694
      Total capital assets being depreciated, net            25,832,056                                                       27,713,470
  Electric fund capital assets, net                    $     29,220,092                                                $      30,348,164
  Water and Sewer Fund
  Capital assets not being depreciated:
    Land                                               $        849,390 $               - $             - $        - $           849,390
   Construction in progress                                   5,018,922           816,938         (66,775)         -           5,769,085
     Total capital assets not being depreciated        $      5,868,312 $         816,938 $       (66,775) $       - $         6,618,475
  Capital assets being depreciated:
   Buildings                                           $        251,000 $               - $             - $        - $           251,000
   Plant and distribution systems                            47,710,660           656,578        (180,282)    50,428          48,237,384
   Machinery & equipment                                      1,564,211           105,505         (77,726)   (50,428)          1,541,562
     Total capital assets being depreciated            $     49,525,871 $         762,083 $      (258,008) $       - $        50,029,946
  Less accumulated depreciation for:
   Buildings                                           $        225,900 $               - $             - $        - $           225,900
   Plant and distribution systems                            20,577,198           530,611         (49,785)    42,814          21,100,838
   Machinery & equipment                                      1,150,209            77,475         (69,953)   (42,814)          1,114,917
   Total accumulated depreciation                      $     21,953,307 $         608,086 $      (119,738) $       - $        22,441,655
     Total capital assets being depreciated, net             27,572,564                                                       27,588,291
  Water and Sewer fund capital assets, net             $     33,440,876                                                $      34,206,766




                                                                          -59-
                                              City of Lexington, North Carolina
                                            Notes to the Basic Financial Statements
                                                         June 30, 2003


     ********************************************************************************************
                                                        Balance                                                        Balance
                                                      July 1, 2002      Additions         Deletions     Transfers   June 30, 2003
Natural Gas Fund
Capital assets not being depreciated:
  Land                                            $        303,049 $             - $          - $               - $       303,049
 Construction in progress                                1,290,282          99,002   (1,029,241)                -         360,043
   Total capital assets not being depreciated     $      1,593,331 $        99,002 $ (1,029,241) $              - $       663,092
Capital assets being depreciated:
 Buildings                                        $        495,759 $             - $               - $          - $        495,759
 Plants and distribution systems                        15,004,636       1,176,044                 -            -       16,180,680
 Machinery & equipment                                     476,218          46,978           (36,684)       1,341          487,853
   Total capital assets being depreciated         $     15,976,613 $     1,223,022 $         (36,684) $     1,341 $     17,164,292
Less accumulated depreciation for:
 Buildings                                        $        215,651 $        10,890 $               - $          - $        226,541
 Plant and distribution systems                          5,790,547         380,032          (176,798)           -        5,993,781
 Machinery & equipment                                     312,652          37,756           (33,015)       1,206          318,599
 Total accumulated depreciation                   $      6,318,850 $       428,678 $        (209,813) $     1,206 $      6,538,921
   Total capital assets being depreciated, net           9,657,763                                                      10,625,371
Natural Gas fund capital assets, net              $     11,251,094                                                  $   11,288,463
Golf Fund
Capital assets not being depreciated:
  Land                                            $         26,863 $             - $                  - $       - $        26,863
 Construction in progress                                        -          63,199                    -         -          63,199
   Total capital assets not being depreciated     $         26,863 $        63,199 $                  - $       - $        90,062
Capital assets being depreciated:
 Buildings                                        $         61,500 $                - $            - $          - $        61,500
 Other improvements                                        106,647                  -              -            -         106,647
 Machinery & equipment                                     264,715                  -        (12,835)         963         252,843
   Total capital assets being depreciated         $        432,862 $                - $      (12,835) $       963 $       420,990
Less accumulated depreciation for:
 Buildings                                        $         28,755 $           810 $               - $          - $        29,565
 Other improvements                                         50,275          11,663                 -            -          61,938
 Machinery & equipment                                     228,432           3,706           (11,552)         903         221,489
 Total accumulated depreciation                   $        307,462 $        16,179 $         (11,552) $       903 $       312,992
   Total capital assets being depreciated, net             125,400                                                        107,998
Golf fund capital assets, net                     $        152,263                                                  $     198,060




                                                                 -60-
                                             City of Lexington, North Carolina
                                           Notes to the Basic Financial Statements
                                                        June 30, 2003


  ********************************************************************************************
                                                         Balance                                                     Balance
                                                       July 1, 2002     Additions         Deletions   Transfers   June 30, 2003
Internal Service Funds:
Capital assets not being depreciated:
   Land                                            $         68,590 $               - $            - $        - $         68,590
  Construction in progress                                2,000,456                 -       (326,083)         -        1,674,373
    Total capital assets not being depreciated     $      2,069,046 $               - $     (326,083) $       - $      1,742,963
Capital assets being depreciated:
  Buildings                                        $        899,054 $            - $               - $        - $        899,054
  Machinery & equipment                                     553,593         37,759           (10,938) (22,799)           557,615
    Total capital assets being depreciated         $      1,452,647 $       37,759 $         (10,938) $ (22,799) $     1,456,669
Less accumulated depreciation for:
  Buildings                                        $        188,802 $       34,820 $               - $        - $        223,622
  Machinery & equipment                                     390,274         46,574            (9,844) (20,555)           406,449
  Total accumulated depreciation                   $        579,076 $       81,394 $          (9,844) $ (20,555) $       630,071
    Total capital assets being depreciated, net             873,571                                                      826,598
Internal Service funds capital assets, net         $      2,942,617                                               $    2,569,561
  Business-type activities capital assets, net     $     77,006,942                                               $   78,611,014


              Depreciation expense was charged to functions/programs in the government-wide
              statement of activities as follows:

                Business-type activities
                Electric                                                                              $     748,118
                Water and sewer                                                                             608,086
                Natural Gas                                                                                 428,678
                Golf                                                                                         16,179
                Capital assets held by internal service funds                                                81,394
                Total                                                                                 $   1,882,455




                                                               -61-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
             b. Construction Commitments

Construction in progress (authorized capital projects), as of June 30, 2003, was comprised
of the following:
                                                                                   Spent        Remaining
                                                               Authorized         To Date      Commitments
Five-Year Capital Improvements Project Fund
 Underground tanks                                           $       90,000    $      82,061   $      7,939
 Industrial Park                                                  3,789,340        3,472,523        316,817
 Recreation capital improvements                                  1,923,317        1,923,311              6
 Street improvements                                                789,163          786,859          2,304
 Henry Link Bridge                                                  294,225           92,624        201,601
 South Lexington School improvements                                140,000           44,227         95,773
Total Five-Year Capital Improvements Project Fund            $ 7,026,045       $ 6,401,605     $    624,440
Community Development Block Grant Fund
 Capacity building grant                                   $      50,000     $       50,000    $          -
 Infrastructure hook-up grant                                     75,000                  -          75,000
Total Community Development Block Grant Fund               $     125,000     $       50,000    $     75,000
Enterprise Funds:
 Electric Fund
  Line relocations                                         $    1,578,981    $    1,337,661    $     241,320
  System improvements                                           3,311,833           850,252        2,461,581
 Total Electric Fund                                       $    4,890,814    $    2,187,913    $   2,702,901
 Water and Sewer Fund
  Line extensions                                          $  5,594,001      $    5,457,368    $     136,633
  Line relocations                                              118,500                 477          118,023
  Plant improvements                                          5,953,400             514,150        5,439,250
 Total Water and Sewer Fund                                $ 11,665,901      $    5,971,995    $   5,693,906
 Natural Gas Fund
  Line extensions                                          $     540,000     $       99,001    $    440,999
  Line relocations                                               261,041            261,041               -
  Total Natural Gas Fund                                   $     801,041     $      360,042    $    440,999
 Golf Fund
  Land improvements                                             1,900,000            63,200        1,836,800
  Total Golf Fund                                          $    1,900,000    $       63,200    $   1,836,800




                                                  -62-
                                            City of Lexington, North Carolina
                                          Notes to the Basic Financial Statements
                                                       June 30, 2003


********************************************************************************************
                                                                      Spent          Remaining
                                                   Authorized        To Date       Commitments
Internal Service Funds:
  Utility Administration Fund
   Building renovations                          $      184,369   $     182,821    $       1,548
   Equipment upgrades                                 2,645,749       2,645,749                -
  Total Utility Administration Fund              $ 2,830,118      $ 2,828,570      $       1,548
Total Construction in Progress -
  Proprietary Funds                                            $ 22,087,874        $ 11,411,720       $ 10,676,154

The City had no capitalized interest expense in the proprietary fund types during this fiscal year.

                c. Segment Information

                The City of Lexington maintains four enterprise funds, three of which provide water
                and sewer, electric, and natural gas utility services. Water, sewer, electric and natural
                gas services extend outside the City's corporate limits. The Golf fund provides the
                support for the operation of a golf course. Summary financial information for each
                fund is presented below for the fiscal year ended June 30, 2003.

CONDENSED STATEMENT OF NET ASSETS
                                                            Water and
                                          Electric           Sewer            Natural Gas      Golf             Total
Assets
 Current assets                       $    10,664,523   $     1,586,339   $      5,580,368   $ 105,761     $    17,936,991
 Noncurrent assets                            975,111         6,128,140            609,908       4,050           7,717,209
 Capital assets                            30,348,164        34,206,766         11,288,463     198,060          76,041,453
   Total assets                            41,987,798        41,921,245         17,478,739     307,871         101,695,653
Liabilities
 Current liabilities                        4,022,864         1,017,106          1,817,273      62,804           6,920,047
 Noncurrent liabilities                    10,232,604         9,934,767          2,964,501      90,271          23,222,143
   Total liabilities                       14,255,468        10,951,873          4,781,774     153,075          30,142,190
Net assets
 Invested in capital assets, net of
  related debt                             26,959,956        23,734,738          8,008,826     198,060          58,901,580
 Unrestricted                                 772,374         7,234,634          4,688,139     (43,264)         12,651,883
Total net assets                           27,732,330        30,969,372         12,696,965     154,796          71,553,463




                                                            -63-
                                         City of Lexington, North Carolina
                                       Notes to the Basic Financial Statements
                                                    June 30, 2003


********************************************************************************************
CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS
                                        Water and
                           Electric      Sewer       Natural Gas     Golf                                        Total
Operating revenues       $ 43,471,149 $   5,487,476 $ 19,961,581  $ 430,055   $                                 69,350,261
Depreciation expense          748,118       608,086       428,678     16,179                                     1,801,061
Other operating expenses   39,681,137     4,560,910    17,933,723    529,435                                    62,705,205
 Operating income (loss)    3,041,894       318,480     1,599,180   (115,559)                                    4,843,995
Nonoperating revenues (expenses):
 Investment income                         107,509             40,998              71,620            649           220,776
 Interest expense                         (155,639)          (270,955)           (201,596)             -          (628,190)
 Gain (loss) on sale of property                 -            368,468                (593)         2,753           370,628
 Other nonoperating revenues
    (expenses)                             412,503             51,373                   -             15           463,891
Transfers                               (1,127,497)           (50,530)           (657,335)       176,000        (1,659,362)
  Change in net assets                   2,278,770            457,834             811,276         63,858         3,611,738
Beginning net assets                    25,453,560         30,511,538          11,885,689       90,938          67,941,725
Ending net assets                  $    27,732,330    $    30,969,372    $     12,696,965    $ 154,796      $   71,553,463

CONDENSED STATEMENT OF CASH FLOWS
                                                          Water and
                                       Electric            Sewer             Natural Gas         Golf           Total
Net cash provided (used) by:
 Operating activities              $     3,379,765    $       557,901    $      1,740,735    $   (57,132)   $    5,621,269
 Noncapital financing activities        (1,734,995)              (530)           (657,335)       176,000        (2,216,860)
 Capital and related financing
   activities                           (1,095,679)         3,380,234            (651,562)       (59,225)        1,573,768
 Investing activities                      107,509             40,998              71,620            649           220,776
  Net increase (decrease)                  656,600          3,978,603             503,458         60,292         5,198,953
Beginning cash and cash
 equivalents                             4,720,347          2,837,452           2,958,909         46,049        10,562,757
Ending cash and cash
 equivalents                       $     5,376,947    $     6,816,055    $      3,462,367    $ 106,341      $   15,761,710




                                                          -64-
                                  City of Lexington, North Carolina
                                Notes to the Basic Financial Statements
                                             June 30, 2003


********************************************************************************************
     B. Liabilities

         1. Pension Plan Obligations

            a. Local Governmental Employees' Retirement System

            Plan Description

            The City of Lexington contributes to the statewide Local Governmental Employees'
            Retirement System (LGERS), a cost-sharing multiple-employer defined benefit
            pension plan administered by the State of North Carolina. LGERS provides
            retirement and disability benefits to plan members and beneficiaries. Article 3 of G.S.
            Chapter 128 assigns the authority to establish and amend benefit provisions to the
            North Carolina General Assembly. The Local Governmental Employees' Retirement
            System is included in the Comprehensive Annual Financial Report (CAFR) for the
            State of North Carolina. The State's CAFR includes financial statements and required
            supplementary information for LGERS. That report may be obtained by writing to
            the Office of the State Controller, 1410 Mail Service Center, Raleigh, North Carolina
            27699-1410, or by calling (919) 981-5454.

            Funding Policy

            Plan members are required to contribute six percent of their annual covered salary.
            The City is required to contribute at an actuarially determined rate. The current rate
            for employees not engaged in law enforcement and for law enforcement officers is
            4.90% and 4.78%, respectively, of annual covered payroll. The contribution
            requirements of members and of the City of Lexington are established and may be
            amended by the North Carolina General Assembly. The City's contributions to
            LGERS for the years ended June 30, 2003, 2002, and 2001 were $966,399,
            $1,099,096, and $1,056,174, respectively. The contributions made by the City equaled
            the required contributions for each year.

            b. Law Enforcement Officers Special Separation Allowance

            Plan Description

            The City of Lexington administers a public employee retirement system (the
            "Separation Allowance"), a multiple-employer defined benefit pension plan that
            provides retirement benefits to the City's qualified sworn law enforcement officers.
            The Separation Allowance is equal to .85 percent of the annual equivalent of the base
            rate of compensation most recently applicable to the officer for each year of



                                                  -65-
                                    City of Lexington, North Carolina
                                  Notes to the Basic Financial Statements
                                               June 30, 2003


********************************************************************************************
             creditable service. The retirement benefits are not subject to any increases in salary or
             retirement allowances that may be authorized by the General Assembly. Article 12D
             of G.S. Chapter 143 assigns the authority to establish and amend benefit provisions
             to the North Carolina General Assembly. The plan does not issue a separate stand-
             alone financial report. Each local government makes benefit payments required
             under this plan.

              All full-time law enforcement officers for the City of Lexington are covered by the
              Separation Allowance. At December 31, 2002, the Separation Allowance's
              membership consisted of:

               Retirees receiving benefits                                                       2
               Terminated plan members entitled to but not yet receiving benefits                0
               Active plan members                                                              63
                     Total                                                                      65


              Summary of Significant Accounting Policies

              Basis of Accounting. The City has chosen to fund the Separation Allowance on a pay-
              as-you-go basis. Pension expenditures are made from the General Fund, which is
              maintained on the modified accrual basis of accounting.

              Method Used to Value Investments. No funds are set aside to pay benefits and
              administration costs. These expenditures are paid as they come due.

              Contributions

              The City is required by Article 12D of G.S. Chapter 143 to provide these retirement
              benefits and has chosen to fund the benefit payments on a pay-as-you-go basis
              through appropriations made in the General Fund operating budget. The City's
              obligation to contribute to this plan is established and may be amended by the North
              Carolina General Assembly. There were no contributions made by employees.

              The annual required contribution for the current year was determined as part of the
              December 31, 2001 actuarial valuation using the projected unit credit actuarial cost
              method. The actuarial assumptions included (a) 7.25% investment rate of return (net
              of administrative expenses) and (b) projected salary increases ranging from 5.9% to
              9.8% per year. Item (b) included an inflation component of 3.75%. The
              assumptions did not include post-employment benefit increases.




                                                    -66-
                                 City of Lexington, North Carolina
                               Notes to the Basic Financial Statements
                                            June 30, 2003


********************************************************************************************
             Annual Pension Cost and Net Pension Obligation. The City's annual pension cost
             and net pension obligation to the Separation Allowance for the current year
             were as follows:

             Annual required contribution                                           $     86,526
             Interest on net pension obligation                                           13,306
             Adjustment to annual required contribution                                   (9,859)
             Annual pension cost                                                          89,973
             Contributions made                                                          (29,417)
             Increase (decrease) in net pension obligation                                60,556
             Net pension obligation beginning of year                                    183,530
             Net pension obligation end of year                                     $    244,086


                                        3-Year Trend Information
                   Fiscal          Annual Pension        Percentage of          Net Pension
                 Year Ended          Cost (APC)         APC Contributed          Obligation
                  6/30/01          $        63,895               35.23%         $ 128,647
                  6/30/02                   82,687               33.63%             183,530
                  6/30/03                   89,973               32.70%             244,086


            c. Supplemental Retirement Income Plan for Law Enforcement Officers

            Plan Description

            The City contributes to the Supplemental Retirement Income Plan (Plan), a defined
            contribution pension plan administered by the Department of State Treasurer and a
            Board of Trustees. The Plan provides retirement benefits to law enforcement officers
            employed by the City. Article 5 of G.S. Chapter 135 assigns the authority to establish
            and amend benefit provisions to the North Carolina General Assembly.

            Funding Policy

            Article 12E of G.S. Chapter 143 requires the City to contribute each month an amount
            equal to five percent of each officer’s salary, and all amounts contributed are vested
            immediately. Also, the law enforcement officers may make voluntary contributions to
            the plan. Contributions for the year ended June 30, 2003 were $127,084, which
            consisted of $106,220 from the City and $20,864 from the law enforcement officers.




                                                 -67-
                                 City of Lexington, North Carolina
                               Notes to the Basic Financial Statements
                                            June 30, 2003


********************************************************************************************
             d. Supplemental Retirement Income Plan for General Employees

            Plan Description

            The City contributes to the Supplemental Retire Plan (Plan), a defined contribution
            pension plan administered by the Department of State Treasurer and a Board of
            Trustees. The Plan provides retirement benefits to general employees employed by the
            City.

            Funding Policy

            The City contributes each month an amount equal to two percent of each full-time
            general employee's salary, and all amounts contributed are vested immediately. Also,
            the general employees may make voluntary contributions to the plan. Contributions
            for the year ended June 30, 2003 were $365,523, which consisted of $191,879 from the
            City and $173,644 from the general employees.

            e. Firemen's and Rescue Squad Workers' Pension Fund

            Plan Description

            The State of North Carolina contributes, on behalf of the City of Lexington, to the
            Firemen's and Rescue Squad Workers' Pension Fund (Fund), a cost-sharing multiple-
            employer defined benefit pension plan with a special funding situation administered by
            the State of North Carolina. The Fund provides pension benefits for eligible fire and
            rescue squad workers that have elected to become members of the fund. Article 86 of
            G.S. Chapter 58 assigns the authority to establish and amend benefit provisions to the
            North Carolina General Assembly. The Fund is included in the Comprehensive
            Annual Financial Report (CAFR) for the State of North Carolina. The State's CAFR
            includes financial statements and required supplementary information for the Fund.
            That report may be obtained by writing to the Office of the State Controller, 1410 Mail
            Service Center, Raleigh, North Carolina 27699-1410, or by calling (919) 981-5454.

            Funding Policy

            Plan members are required to contribute $10 per month to the Fund. The State, a
            nonemployer contributor, funds the plan through appropriations. The City does not
            contribute to the Fund. Contribution requirements of plan members and the State of
            North Carolina are established and may be amended by the North Carolina General
            Assembly.




                                                 -68-
                                  City of Lexington, North Carolina
                                Notes to the Basic Financial Statements
                                             June 30, 2003


********************************************************************************************
             f. Other Post-employment Benefits

                1. Post-employment Health Care Benefits

                The City has adopted a local policy to provide post-retirement health benefits to
                retirees of the City who participate in the North Carolina Local Governmental
                Employees' Retirement System (System) and have at least five years of creditable
                service with the City under the following conditions as adopted by the City
                Council on August 8, 1983. Any City employee hired prior to September 1, 1983,
                and who is granted early retirement by the City is covered under the group health
                insurance plan until the employee reaches age sixty-five (65). The City pays the
                majority of costs for the retirees. Retirees may purchase dependent coverage at
                the City's group rates. As of January 1, 1999, the City adopted a new health
                insurance plan. Under the new plan, retirees and active employees pay $5.00 per
                week toward the cost of health, dental, and vision insurance, plus any additional
                dependent care coverage. Currently, 60 retirees are eligible for post-retirement
                health benefits. The City is self-insured and pays 100% of health claims (after out-
                of-pocket limits are met) up to an individual stop loss of $50,000, and an
                aggregate stop loss of 125% of expected net paid claims. During the year ended
                June 30, 2003, the City paid $61,465 for the retirees' share of stop loss protection,
                and $391,020 in claims, for a total of $452,485 in post-retirement health care,
                which is funded on a pay-as-you-go basis. Group health insurance coverage is
                discontinued for those employees hired on or after September 1, 1983 when they
                are separated from employment with the City, except those retiring for disability
                reasons. Under COBRA, terminated employees are eligible to continue health
                insurance coverage for 18 months after termination at their expense, which is the
                City's cost plus 2% for administrative costs. If the terminated employee dies
                while he is still covered, the dependents may continue coverage for 36 months
                from the date of termination.

                2. Post-employment Life Insurance Benefits

                On December 14, 1981, the City Council adopted a local policy to provide the
                following post-employment life insurance coverage program to be effective
                January 1, 1982. Active employees, who were retired prior to the effective date
                and employees hired prior to the effective date and subsequently retired, would
                be provided $2,500 life insurance coverage by the City. Anyone hired after
                December 31, 1981 would be eligible for City-paid life insurance coverage only
                while actively employed. Currently, there are 119 retirees who are eligible for this
                benefit at the time of their deaths. All benefits are paid from the Life Insurance
                Plan. The City has no liability beyond payment of monthly premiums.



                                                   -69-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
                Employees not eligible for City-paid benefits may elect coverage through a City-
                selected carrier, Standard Insurance Company of Portland, Oregon. All costs are
                born by the retirees, and life insurance coverage is provided at $10,000, with a 65%
                reduction of coverage at age 65 and a 40% reduction at age 70.

                 3. Death Benefit Plan

                 The City has also elected to provide death benefits to employees through the
                 Death Benefit Plan for members of the Local Governmental Employees'
                 Retirement System (Death Benefit Plan), a multiple-employer, State-
                 administered, cost-sharing plan funded on a one-year term cost basis. The
                 beneficiaries of those employees who die in active service after one year of
                 contributing membership in the System, or who die within 180 days after
                 retirement or termination of service and have at least one year of contributing
                 membership service in the System at the time of death, are eligible for death
                 benefits. Lump sum death benefit payments to beneficiaries are equal to the
                 employee's 12 highest months salary in a row during the 24 months prior to the
                 employee's death, but the benefit may not exceed $20,000. All death benefit
                 payments are made from the Death Benefit Plan. The City has no liability
                 beyond the payment of monthly contributions. Contributions are determined
                 as a percentage of monthly payroll, based upon rates established annually by the
                 State. Separate rates are set for employees not engaged in law enforcement and
                 for law enforcement officers. Because the benefit payments are made by the
                 Death Benefit Plan and not by the City, the City does not determine the
                 number of eligible participants. For the fiscal year ended June 30, 2003, the
                 City made contributions to the State for death benefits of $11,873. The City's
                 required contributions for employees not engaged in law enforcement and for
                 law enforcement officers represented .10 % and .14% of covered payroll,
                 respectively. The contributions to the Death Benefit Plan cannot be separated
                 between the post-employment benefit amount and the other benefit amount.

         2. Deferred/Unearned Revenues

         In the fund financial statements, ad valorem taxes receivable are not accrued as a revenue
         because they are not considered to be both “measurable and available.” Ad valorem taxes
         receivable that are measurable but not available are recorded as deferred revenue in the fund
         financial statements. In addition, property taxes and other amounts collected in advance of
         the fiscal year to which they apply are also recorded as unearned revenue in the government-
         wide financial statements and deferred revenue in the fund financial statements. Certain
         receivables are also recorded as deferred revenue in the fund financial statements because they
         are not considered to be available at year-end.



                                                   -70-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
         The balance in deferred revenues in the various funds at fiscal year ended June 30, 2003 is
         composed of the following elements:
                                                                            Deferred
                                                                            Revenue
              Taxes Receivable - net (Special Revenue Fund)                     1,095
              Taxes Receivable - net (General Fund)                           463,117
              Intergovernmetal Receivables (General Fund)                     445,244
              Miscellaneous Receivables (General Fund)                         28,808
                Total                                                      $ 938,264


         3. Risk Management

         The City is exposed to various risks of loss related to torts; theft of, damage to, and
         destruction of assets; errors and omissions; injuries to employees and natural disasters.
         Effective July 1, 1992, the City Council established a risk management self-insurance fund as
         an internal service fund type. The purpose of this fund is to pay various general liability,
         property, and workers' compensation claims, and to minimize the total annual cost of
         insurance to the City. As of January 1, 1999, the City adopted a disability insurance policy.
         Under the new policy, employees are eligible to receive short-term disability benefits after 30
         days for up to 26 weeks. After 26 weeks, eligible employees may receive long-term disability
         payments.

         The self-insured retention for property is $50,000 per occurrence; for general liability,
         police professional, public officials, auto, and workers' compensation, $300,000 per
         occurrence. The coverage limits the City's out-of-pocket losses to $870,000 on all liabilities
         except crime and boiler and machinery. Boiler and machinery has a $1,000 deductible and
         a $20,000,000 limit for any one accident. Crime has a $500 deductible and a $100,000 limit.
          The insurance limit for general liability, police professionals, public officials, and auto
         liability is $300,000 per occurrence, with excess coverage of $6,700,000. The limit for
         property is $950,000 per occurrence, with excess coverage of $66,950,000, and for workers'
         compensation is $300,000 per occurrence, with excess coverage up to the statutory limit.
         All claims under $4,000 can be settled by the City Manager. Claims up to $15,000 can be
         settled by the City's Claims Committee, which includes the Safety Director. Claims $15,000
         and over are reviewed by the City's third party administrator. Workers’ Compensation
         claims up to $25,000 can be settled by the City’s Claims Committee, which includes the
         Workers’ Compensation Specialist.




                                                   -71-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
         The Risk Management Fund pays for all costs associated with claims, cost of the excess
         policies, and third party administrative charges. These expenses are funded by charges
         allocated to the General, Electric, Water and Sewer, Natural Gas, Golf, and Utility
         Administration Funds.

         The City carries commercial insurance for all other risks of loss, and some additional small
         employee fidelity bonds ranging in coverage from $5,000 to $100,000. There have been no
         other significant reductions in insurance coverage from the previous year, and settled
         claims resulting from these risks have not exceeded coverage in any of the past three fiscal
         years.

         Liabilities of the fund are reported when it is probable that a loss has occurred and the
         amount of the loss can be reasonably estimated. Liabilities include an amount for claims
         that have been incurred but not reported (IBNR's).

         Changes in the balances of claims liabilities during the past two fiscal years are as
         follows:
                                                                  2003               2002
          Unpaid claims, 7/1                                    $ 58,500          $ 31,775
          Incurred claims                                         218,680            176,536
          Claim payments                                         (210,049)          (149,811)
          Unpaid claims, 6/30                                   $ 67,131          $ 58,500


         4. Group health insurance

         The City is also self-insured for group health insurance. The Group Insurance Fund, an
         internal service fund type, pays health and dental claims for City employees and their
         covered dependents, for retirees and their covered dependents (that is, those 60 retirees
         who fall under the City's post-employment benefits), and for terminated employees and/or
         dependents who fall under the COBRA regulations. The City pays the majority of stop-
         loss coverage and administrative costs for its active employees and the retirees covered
         under the City's post-employment benefits. All dependent coverage for active employees is
         collected through payroll deduction; retirees and COBRA participants are billed by the
         City. COBRA participants are billed at 102% of the City's actual costs to cover the
         associated administrative costs. Self-insurance is in effect for $50,000 per covered
         employee/dependent. Aggregate stop-loss is 125% of expected net claims. The third party
         administrator performs such claims studies needed to determine expected net claims costs.
          Losses greater than $50,000 per covered employee and/or dependent, as well as those in
         excess of the aggregate stop-loss, are insured by a private insurance carrier.




                                                   -72-
                                    City of Lexington, North Carolina
                                  Notes to the Basic Financial Statements
                                               June 30, 2003


********************************************************************************************
         The Group Insurance Fund pays for all costs associated with claims, cost of the insurance
         coverage, and third party administrative charges. These costs are funded by charges to
         other funds, treated as quasi-external transactions. As of January 1, 1999, the City adopted
         a new health insurance plan. Under the new plan, employees and retirees pay $5.00 per
         week toward their cost of health, dental and vision insurance, plus their dependent
         coverage. The remaining costs for some retirees (post-employment benefits) are borne
         entirely by the City and are funded by the General and Utility Administration Funds, and
         are based on the number of retirees in the respective funds. The remaining funding comes
         from charges to the respective funds on a per employee, per year basis.
         Dependent/COBRA coverages are billed by the City for retirees. As of January 1, 1999,
         the new insurance administrator is billing the retirees for dependent/COBRA coverages.

          Liabilities of the fund are reported when it is probable that a loss has occurred and the
          amount of the loss can be reasonably estimated. Liabilities include an amount for claims
          that have been incurred but not reported (IBNR's).

          Changes in the balances of claims liabilities during the past two fiscal years are as
          follows:
                                                                     2003                     2002
           Unpaid claims, 7/1                                    $ 190,625               $ 158,060
           Incurred claims                                          1,979,440               2,152,168
           Claim payments                                          (1,957,168)             (2,119,603)
           Unpaid claims, 6/30                                   $ 212,897               $ 190,625

          5. Claims, Judgments and Contingent Liabilities

          At June 30, 2003 the City of Lexington was a defendant in various lawsuits. In the opinion
          of the City attorneys and management, the ultimate outcome of these legal matters will not
          have a material adverse effect on the City's financial position.

          6. Long-Term Obligations

              a. Capital Leases

              The City has entered into agreements to lease certain equipment and improvements.
              The lease agreements qualify as capital leases for accounting purposes and, therefore,
              have been recorded at the present value of the future minimum lease payments as of
              the date of their inception.




                                                     -73-
                                    City of Lexington, North Carolina
                                  Notes to the Basic Financial Statements
                                               June 30, 2003


********************************************************************************************
             The City had four master lease agreements during this fiscal year. The first master lease
             includes four lease-purchase contracts. The first lease was executed on August 25, 1997,
             and amended downward on June 15, 1999. The contract was for 3 sanitation trucks, and
             originally required 10 semi-annual payments of $49,859.10. The June 1999 amendment
             revised the final 7 semi-annual payments to $45,958.33. This contract was completed
             during this fiscal year. The second and lease-purchase contract was executed on January
             25, 1999, and amended downward on February 5, 2001. This contract funded the
             purchase of a traffic signal pre-emption system, a street sweeper, 2 rear loading packer
             bodies, a dump truck, and 2 one-ton service trucks for 10 semi-annual installments of
             $52,432.94. The February 2001 amendment revised the final 6 semi-annual payments to
             $44,847.83. The third lease purchase contract was executed on February 26, 2001, and
             amended downward on February 21, 2002. This contract included 4 vehicles and a van for
             police, as well as 9 trucks, a vehicle, a loader, a dump truck and a mounted trailer pump
             and requires 6 semi-annual payments of $77,666.18. The February 2002 amendment
             revised the final 4 semi-annual payments to $74,617.64. The fourth contract was executed
             on February 26, 2001, and amended downward on February 21, 2002 and also on
             December 20, 2002. This contract financed the purchase of a fire pumper truck and a
             utility billing customer information system for 10 semi-annual installments of $225,289.25.
              The December 2002 amendment revised the remaining 6 semi-annual payments as
             follows: 5 payments at $118,510.29 and the final payment at 118,835.16.

             The second master lease includes one contract, which was executed on February 25, 2002
             to purchase 2 sanitation loaders and an electric line truck, and requires 6 semi-annual
             payments of $79,179.51. This contract was amended downward on February 20, 2003.
             This amendment revised the final 4 semi-annual payments of $74,579.25.

             The third master lease includes two lease-purchase contracts. The contracts were executed
             on June 24, 2003. This first contract financed the purchase of a fire pumper truck and a
             sanitation side-loading truck and requires 10 semi-annual payments of $43,874.25. The
             second contract financed the purchase of various vehicles and equipment and requires 6
             semi-annual payments of 73,581.77.

             The fourth master lease contract was executed on June 12, 2003 to finance state-mandated
             nutrient removal improvements at the City’s wastewater treatment plant. The contract
             requires 30 semi-annual payments of $209,577.93.

             In all lease agreements, titles pass to the City at the end of the lease term.




                                                     -74-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
             The following is an analysis of the assets recorded under capital leases at June 30, 2003:


                                                           Governmental          Business-Type
                         Classes of Property                Activities             Activities
                    Machinery and equipment                $ 1,657,629           $     414,246
                    CIP                                                -             1,757,810
                    Less: accumulated depreciation             (380,858)              (168,422)
                    Net Book Value                         $ 1,276,771           $ 2,003,634


                   The future minimum lease obligations and the net present value of
                   these minimum lease payments as of June 30, 2003 were as follows:


                   Fiscal Year Ending                          Governmental       Business-Type
                          June 30                                Activities         Activities
                           2004                                $     419,480      $     785,080
                           2005                                      252,612            713,056
                           2006                                      143,626            555,695
                           2007                                        87,749           419,156
                           2008                                        43,874           419,156
                        2009-2013                                           -         2,095,779
                        2014-2018                                           -         2,095,779
                   Total minimum lease payments                $     947,341      $ 7,083,701
                   Less: amount representing interest                 (40,830)       (1,524,990)
                   Present value of minimum lease
                   payments                                    $     906,511      $   5,558,711


             b. Solid waste landfill post-closure care costs

             The City of Lexington closed its landfill during the fiscal year ended June 30, 1990. As of
             the current period, an administrative agreement on consent has been entered into and, an
             assessment plan is now complete. The $340,000 liability recorded in the Statement of Net
             Assets is based on the estimated annual cost to complete periodic monitoring required by
             N.C. Department of Environment, Health and Natural Resources Division of Solid Waste
             Management, Solid Waste Section, for the next 17 years. The estimates are updated
             annually based on current technology and regulatory requirements. Actual costs may be
             higher due to inflation, changes in technology, or changes in regulations.



                                                   -75-
                                  City of Lexington, North Carolina
                                Notes to the Basic Financial Statements
                                             June 30, 2003


********************************************************************************************
             c. General Obligation Indebtedness

            The City issues general obligation bonds to finance the purchase of major capital items
            and the acquisition and construction of major capital facilities. General obligation bonds
            have been issued for both general government and proprietary activities and are being
            repaid from the applicable resources. All general obligation bonds are collateralized by the
            full faith, credit, and taxing power of the City. Principal and interest requirements are
            appropriated when due.

            At June 30, 2003, the City of Lexington had no bonds authorized but unissued and a
            legal debt margin of $102,054,564.

            Bonds payable at June 30, 2003 are comprised of the following individual issues:

               General Obligation Bonds                                              Outstanding
               Serviced by the General Fund:
               12/01/98 Recreation Improvement bonds, Series
               1998, $1,700,000, due in annual payments of:
                     $ 50,000 through 06/01/10; 4.25%,
                     $200,000 through 06/01/15; 4.25%,
                     $150,000 on 06/01/16; 4.25%                                     $   1,500,000
               Serviced by the General Fund:
               12/01/95 Street Improvement bonds, Series
               1995, $2,500,000, due in annual payments of:
                     $180,000 on 06/01/04; 4.50%,
                     $190,000 on 06/01/05; 4.50%,
                     $200,000 on 06/01/06; 4.50%,
                     $210,000 on 06/01/07; 4.50%,
                     $220,000 on 06/01/08; 4.60%,
                     $235,000 on 06/01/09; 4.60%,
                     $245,000 on 06/01/10; 4.60%                                     $   1,480,000




                                                  -76-
                                 City of Lexington, North Carolina
                               Notes to the Basic Financial Statements
                                            June 30, 2003


********************************************************************************************
                General Obligation Bonds                                      Outstanding
                Serviced by the Electric Fund:
                12/01/98 Electric bonds, Series 1998,
                $2,100,000, due in annual payments of:
                      $ 75,000 through 06/01/10; 4.25%,
                      $150,000 through 06/01/17; 4.25%,
                      $150,000 through 06/01/18; 4.30%,
                      $ 75,000 through 06/01/19; 4.30%                        $ 1,800,000

               Serviced by the Electric Fund:
               12/01/95 Electric bonds, Series 1995,
               $2,400,000, due in annual payments of:
                     $170,000 on 06/01/04; 4.50%,
                     $180,000 on 06/01/05; 4.50%,
                     $190,000 on 06/01/06; 4.50%,
                     $200,000 on 06/01/07; 4.50%,
                     $215,000 on 06/01/08; 4.60%,
                     $225,000 on 06/01/09; 4.60%,
                     $240,000 on 06/01/10; 4.60%                              $   1,420,000

               Serviced by the Water and Sewer Fund:
               12/01/98 Sanitary Sewer bonds, Series 1998,
               5,930,000, due in annual payments of:
                     $225,000 through 06/01/10; 4.25%,
                     $400,000 through 06/01/17; 4.25%,
                     $400,000 on 06/01/18; 4.30%,
                     $255,000 on 06/01/19; 4.30%                              $   5,030,000

               Serviced by the Water and Sewer Fund:
               09/01/88 Sanitary Sewer bonds, Series 1988,
               $1,700,000, due in annual payments of:
                     $100,000 through 03/01/08; 7.10%,
                     $ 25,000 on 03/01/09; 7.10%                              $     525,000

                     Total general obligation bonds                           $ 11,755,000




                                                -77-
                                  City of Lexington, North Carolina
                                Notes to the Basic Financial Statements
                                             June 30, 2003


********************************************************************************************
             Debt service requirements to maturity for general obligation bonds are as follows:

       Fiscal Year Ending        Governmental Activities              Business-type Activities
             June 30            Principal      Interest              Principal       Interest
              2004             $ 230,000     $ 131,050              $ 570,000      $ 392,571
              2005                 240,000        120,825               580,000         365,070
              2006                 250,000        110,150               590,000         337,121
              2007                 260,000         99,025               600,000         308,720
              2008                 270,000         87,450               615,000         279,871
           2009-2013             1,180,000        258,600             2,740,000       1,009,656
           2014-2018               550,000         44,625             2,750,000         422,950
           2019-2023                      -              -              330,000           14,190
              Total            $ 2,980,000   $ 851,725              $ 8,775,000    $ 3,130,149


             d. Revenue Bonds

             The City issues revenue bonds to finance the purchase of major capital items and the
             acquisition and construction of major capital facilities. Revenue bonds have been issued
             for proprietary activities and are being repaid from the applicable resources.

             Debt service requirements to maturity for revenue bonds are as follows:

                      Fiscal Year Ending
                            June 30                  Principal            Interest
                             2004                $        329,000     $       182,249
                             2005                         348,000             163,335
                             2006                         368,000             143,335
                             2007                         390,000             122,123
                             2008                         412,000              99,711
                          2009-2013                     1,387,000             152,971
                             Total               $      3,234,000     $       863,723




                                                 -78-
                                City of Lexington, North Carolina
                              Notes to the Basic Financial Statements
                                           June 30, 2003


********************************************************************************************
                 Revenue Bonds                                                Outstanding
                 Serviced by the Natural Gas Fund:
                 07/22/96 Combined Enterprise System,
                 $5,066,000, due in quarterly payments of:
                       $ 79,000 through 07/01/03,
                       $ 83,000 through 10/01/03,
                       $ 82,000 through 07/01/04,
                       $ 87,000 through 10/01/04,
                       $ 86,000 through 04/01/05,
                       $ 89,000 through 07/01/05,
                       $ 92,000 through 07/01/06,
                       $ 98,000 through 10/01/06,
                       $ 97,000 through 04/01/07,
                       $ 98,000 through 07/01/07,
                       $103,000 through 07/01/08,
                       $109,000 through 07/01/09,
                       $116,000 through 10/01/09,
                       $115,000 through 04/01/10,
                       $116,000 through 07/01/10,
                       $123,000 through 10/01/10,
                       $122,000 through 07/01/11; 5.71% with
                       a 15-year amortization. (NOTE: An
                       interest and principal payment due
                       07/01/03 was prepaid in the 2002-2003
                       fiscal year in order to meet the payment
                       due date, thereby reducing the debt early
                       by $79,000.)

                             Total revenue bonds                             $   3,234,000




                                               -79-
                                                  City of Lexington, North Carolina
                                                Notes to the Basic Financial Statements
                                                             June 30, 2003


     ********************************************************************************************
              7. Changes in Long-Term Liabilities
                                                        Balance                               Balance    Current Portion
Governmental activities:                              July 1, 2002   Increases   Decreases June 30, 2003   of Balance
General obligation bonds                                  3,200,000          -     220,000     2,980,000         230,000
Capitalized leases                                          729,235      177,276       -         906,511         397,244
Compensated absences                                        576,649       34,975       -         611,624             -
Solid waste landfill                                        360,000          -      20,000       340,000          20,000
Net pension obligation                                      183,530       60,556       -         244,086             -
Rebatable arbitrage                                           26,166         -       2,196        23,970          23,970
 Governmental activity long-term liabilities         $ 5,075,580 $       272,807 $ 242,196 $ 5,106,191 $         671,214
Business-type activities:
General obligation bonds                             $  9,340,000 $             - $ 565,000 $ 8,775,000 $          570,000
Capitalized leases                                        931,400         4,627,311       -      5,558,711         592,269
Revenue bonds                                           3,544,000               -     310,000    3,234,000         329,000
Compensated absences                                      251,851            25,232       -        277,083             -
Rebatable arbitrage                                       180,283               -      35,022      145,261         145,261
 Business-type activity long-term liabilities        $ 14,247,534 $       4,652,543 $ 910,022 $ 17,990,055 $     1,636,530


                      Compensated absences typically have been liquidated in the General Fund and are
                      accounted for on a LIFO basis, assuming that employees are taking leave time as it is
                      earned.

                 8. Rebatable arbitrage

                      The City of Lexington sold general obligation debt in the amount of $9.73 million on
                      December 1, 1998 at a rate of 4.25%. $1.7 million was to fund a recreation master plan to
                      improve local parks, $2.1 million was to fund electric system reliability improvements, $4.93
                      million was to fund sewer extensions in a newly annexed area, and $1 million was for sanitary
                      sewer improvements. The City has invested these funds in securities that yield a higher rate,
                      thus resulting in revenue in excess of interest costs. Rebatable arbitrage is the liability to the
                      Federal government for any non-exempt excess earnings. The excess earnings are exempt in
                      certain circumstances when the expenditure requirements of Section 148 of the Internal
                      Revenue Code and applicable treasury regulations are met. The electric proceeds met the
                      requirements for exemption; however, the recreation and water and sewer proceeds are
                      subject to arbitrage. The amount of rebatable arbitrage is an estimate based on the earnings to
                      date, but could increase or decrease due to interest rates and the speed at which the remaining
                      bond proceeds are spent. Rebatable arbitrage in the amount of $23,970 (a $2,196 decrease




                                                                   -80-
                                     City of Lexington, North Carolina
                                   Notes to the Basic Financial Statements
                                                June 30, 2003


********************************************************************************************
             from the prior fiscal year) is recorded as a liability for Governmental Activities in the
             Statement of Net Assets for the portion of the estimated liability that applies to the
             recreation bond proceeds. A liability is recorded in the Water and Sewer Fund in the
             amount of $145,261 for the portion of the liability that is applicable to the water and sewer
             bond proceeds. An expense was recognized in the Water and Sewer Fund in fiscal year
             2000-2001 in the amount of $202,910 and recovery revenue was recognized in fiscal year
             2001-2002 in the amount of $22,627 and in fiscal year 2002-2003 in the amount of 35,022.
              The decrease in the arbitrage liability is due to a decrease in interest rates and the speed at
             which the proceeds are being spent. The arbitrage rebate due as of December 1, 2003
             must be paid to the United States Treasury no later than January 30, 2004.

          9. Interfund receivables, payables, and transfers

              The composition of interfund balances as of June 30, 2003 is as follows:

              a. Due to/from other funds:

                    Receivable fund                  Payable fund                               Amount
                   General fund                      Nonmajor governmental funds                $ 10,872
                   Business-type activities          Governmental activities                      78,301
                   Total                                                                        $ 89,173


              b. Advances to/from other funds:

                    Receivable fund                    Payable fund                             Amount
                   General fund                       Electric fund                           $ 7,107,264
                   General fund                       Golf fund                                    73,539
                   Electric fund                      Internal service funds                      100,000
                   Total                                                                      $ 7,280,803


                  The Electric Fund has a payable to the General Fund that resulted from a
                  commitment in the City’s former charter to transfer all of the Electric Fund’s
                  profits to the General Fund. A repayment plan has been established.

                  The General Fund has a receivable from the Golf Fund, which represents an
                  advance to the Golf Fund for administrative charges and the purchase of a greens
                  mower. This interfund liability will not be paid off until such time as there are
                  sufficient profits in the Golf Fund to do so.




                                                     -81-
                                 City of Lexington, North Carolina
                               Notes to the Basic Financial Statements
                                            June 30, 2003


********************************************************************************************
                The Electric Fund provided an advance to the Garage Fund for operations. This
                interfund liability is being paid off by $30,000 annual installment payments.

            c. Transfers to/from other Funds at 6/30/03 consist of the following:

                     Transfers in                        Transfers out                       Amount
                 General fund                          Nonmajor governmental funds         $    57,641
                 General fund                          Natural gas fund                        605,292
                 General fund                          Electric fund                           144,004
                 Nonmajor Governmental funds           General fund                            210,000
                 Electric fund                         Internal service funds                  165,000
                 Water and sewer fund                  Nonmajor governmental funds              44,856
                 Water and sewer fund                  Internal service funds                   85,000
                 Natural gas fund                      Internal service funds                  540,000
                 Golf fund                             General fund                            176,000
                 Internal service funds                Nonmajor governmental funds              28,754
                 Internal service funds                General fund                             12,126
                 Internal service funds                Electric fund                         1,148,493
                 Internal service funds                Water and sewer fund                    180,386
                 Internal service funds                Natural gas fund                        592,043
                  Total                                                                    $ 3,989,595


                A portion of the residual balance in the Five-year Capital Improvements Fund from
                closed projects was transferred to the General Fund. The Natural Gas Fund and the
                Electric Fund made a transfer to the General Fund, which consisted of transfers
                related to payments in lieu of taxes as well as a transfer for operational expenses.

                The Nonmajor Governmental Funds received a transfer from the General Fund for
                capital projects expenditures and a transfer to the Special Taxing District for
                operational expenses.

                The Utility Administration Capital Reserve Fund made a transfer to the Electric Fund
                to fund electric capital projects.

                The Water and Sewer Fund received a transfer from the Five-year Capital
                Improvements Fund, which was a portion of the residual balance from closed capital
                projects. The Internal Service Funds made a transfer to the Water and Sewer Fund
                for funding of the nutrient removal project.




                                                -82-
                                  City of Lexington, North Carolina
                                Notes to the Basic Financial Statements
                                             June 30, 2003


********************************************************************************************
                The Internal Service Funds made a transfer to the Natural Gas Fund for funding of
                the natural gas expansion projects.

                The Golf Fund received a transfer from the General Fund for operational expenses.

                A portion of the residual balance from closed capital projects was transferred from the
                Five-year Capital Improvements Fund to the Garage Fund.

                The Utility Administration Fund received transfers from the General Fund, the
                Electric Fund, the Water and Sewer Fund, and the Natural Gas Fund to assist in the
                debt payments for the Customer Information System (CIS) project.

                The Utility Administration Capital Reserve Fund received transfers from the Electric
                Fund, the Water and Sewer Fund, and the Natural Gas Fund to provide capital
                reserve for future projects.

                Utility Administration Rate Stabilization received transfers from the Natural Gas Fund
                and the Electric Fund for the establishment of the Utility Administration Rate
                Stabilization Fund, which pools all of the utilities cash to be used for rate stabilization.

     C. Revenues, Expenditures, and Expenses

     On-Behalf Payments for Fringe Benefits and Salaries

     For the fiscal year ended June 30, 2003, the City of Lexington has recognized on-behalf payments
     for pension contributions made by the State as a revenue and an expenditure of $8,544 for the
     forty-eight employed firemen who perform firefighting duties for the City's fire department. The
     employees elected to be members of the Firemen Pension Fund, a cost sharing, multiple-
       employer public employee retirement system established and administered by the State of North
     Carolina. The Plan is funded by a $10 monthly contribution paid by each member, investment
     income, and a State appropriation.

     Also, the City has recognized as a revenue and an expenditure on-behalf payments for fringe
     benefits and salaries of $17,476 for the salary supplement and stipend benefits paid to eligible
     firemen by the local board of trustees of the Firemen's Relief Fund during the fiscal year ended
     June 30, 2003. Under State law the local board of trustees for the Fund receives an amount each
     year, which the board may use at its own discretion for eligible firemen or their dependents.




                                                   -83-
                                    City of Lexington, North Carolina
                                  Notes to the Basic Financial Statements
                                               June 30, 2003


********************************************************************************************
IV. Jointly Governed Organization

North Carolina Municipal Power Agency Number 1

The City of Lexington, in conjunction with eighteen other local governments, is a member of the North
Carolina Municipal Power Agency Number 1. The agency was formed to enable municipalities that own
electric distribution systems to finance, construct, own, operate, and maintain generation and
transmission facilities.     Each participating government appoints one Council member (or
Commissioner) to the agency's governing board. The nineteen members, who receive power from the
agency, have signed power sales agreements to purchase a specified share of the power generated by the
agency. Except for the power sales purchase requirements, no local government participant has any
obligation, entitlement, or residual interest. The City's purchases of power for the fiscal year ended June
30, 2003 were $32,652,410. These expenses are reflected in the Electric Fund's operations.

V.    Joint Ventures

Lake Thom-A-Lex Advisory Committee
The municipalities of Lexington and Thomasville, North Carolina jointly own a waterworks reservoir
system. Both cities' governing bodies have authority, under resolutions adopted individually, to acquire,
construct, improve, maintain, and jointly operate this system. Both cities have authority to issue bonds
or other means of financing as necessary to acquire, construct, and/or improve the system, as well as
having joint control over budgeting the operation. There are no bonds outstanding for the joint venture
at June 30, 2003, and there are no bonds authorized but unissued.

The City of Lexington has a 51% interest in the venture and an ongoing financial responsibility for Lake
Thom-A-Lex in that costs of operation are shared equally between the two cities. The City of
Thomasville maintains control over the financial records and bills the City of Lexington for its share of
the costs. These costs are included as a separate line item expense in the Water Plant Department level
in the City's Water and Sewer Fund. The City spent $24,119 and $16,746 for the fiscal years ended June
30, 2002 and 2003, respectively. The City of Lexington's original investment of $180,000 was recorded
in 1957, the year the joint venture began. Assets consist of 1,034 acres of land, an earthen dam
constructed in 1957, a boathouse, piers, boats, and a vehicle, which are jointly owned. The City's equity
interest as of June 30,2003 was $206,391, which is shown in the government-wide financial statements,
as the funds used for the original investment came from the General Fund. There is no distribution of
net income; retained earnings remain in the joint venture for future operational needs of the system.
The City of Thomasville has the same fiscal year-end as the City of Lexington; that is, June 30, 2003.
Complete financial statements for Lake Thom-A-Lex can be obtained from the City of Thomasville,
Finance Department, 10 Salem Street, Thomasville, North Carolina 27360.




                                                    -84-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
V. Related Organizations

     A. Lexington Housing Authority

     This unit operates under the "Housing Authorities Law" of the State of North Carolina for
     the benefit of the City's residents, and is managed by a City Council-appointed board of 5
     members. The City is therefore accountable because it appoints the governing board;
     however, the City is not financially accountable for the Housing Authority. The City does not
     approve or modify the Authority’s budget and does not select its management. The City does
     not finance any of the Authority’s deficits and is not entitled to any surpluses. The City is not
     obligated in any manner for the Authority’s debt.

     B. Lexington Board of Education

     The City of Lexington appoints 8 of the members of a 9-member board; Davidson County
     appoints the remaining 1 member. Taxing authority falls under the Davidson County
     Commissioners. The City is accountable because it appoints the majority of the governing
     board; however, the City is not financially accountable for the Board of Education. The City
     does not approve or modify the Board’s budget and does not select its management. The
     City does not finance any of the Board’s deficits and is not entitled to any surpluses. The City
     is not obligated in any manner for the Board’s debt.

VII. Operations Information

Major Customers

The City of Lexington provides water, sewer, electric and natural gas services to customers within the
City limits and in the surrounding areas in Davidson County. The following customers are major users
of the City’s various utility services:

     Pittsburgh Plate Glass Industries - PPG manufactures fiberglass, which requires large
     volumes of water and sewer and natural gas. For the fiscal year ended June 30, 2003, charges for
     all utilities were $4,738,968, which represents 7.06% of total utilities operating revenues. Natural
     gas usage charges were $4,354,637, representing 22.18% of total Natural Gas Fund operating
     revenues; water and sewer charges were $356,297, representing 6.83% of total Water and Sewer
     Fund operating revenues.

     Lexington Home Brands - The plants manufacture furniture and furniture products, which
     require large volumes of electricity. For the fiscal year ended June 30, 2003, charges for all
     utilities were $3,414,344, which represents 5.09% of total utilities operating revenues. Electric
     usage charges were $2,851,375, representing 6.75% of total Electric Fund operating revenues.
     Water and sewer usage charges were $209,205, representing 4.01% of total Water and Sewer




                                                    -85-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
     Fund operating revenues. Natural gas usage charges were $353,764 representing 1.80% of total
     Natural Gas Fund operating revenues.

     Duracell, Incorporated - Manufactures various types of batteries, which require large volumes
     of electricity. For the fiscal year ended June 30, 2003, charges for all utilities were $2,210,157,
     which represents 3.29% of total utilities operating revenues. Electric usage charges were
     $1,929,231, representing 4.56% of total Electric Fund operating revenues. Water and sewer
     usage charges were $63,158, representing 1.21% of total Water and Sewer Fund operating
     revenues. Natural gas usage charges were $217,768, representing 1.11% of total Natural Gas
     Fund operating revenues.

     Cunningham Brick – Produces bricks, which require large volumes of natural gas. For the
     fiscal year ended June 30, 2003, charges for all utilities were $1,056,450, which represents 1.57%
     of total utilities operating revenues. Natural gas usage charges were $1,045,167 representing
     5.32% of total Natural Gas Fund operating revenues.

     Lexington Memorial Hospital - Medical services require large volumes of electricity. For the
     fiscal year ended June 30, 2003, charges for all utilities were $936,025, which represents 1.39% of
     total utilities operating revenues. Electric usage charges were $603,595, representing 1.43% of
     total Electric Fund operating revenues. Water and sewer usage charges were $83,346,
     representing 1.60% of total Water and Sewer Fund operating revenues. Natural gas usage
     charges were $249,085 representing 1.27% of total Natural Gas Fund operating revenues.

     Kimberly Clark Corporation – Produces various paper products. The Lexington plant requires
     large amounts of natural gas for its production. For the fiscal year ended June 30, 2003, charges
     for all utilities were $760,111, which represents 1.13% of total utilities operating revenues. Water
     and sewer usage charges were $75,345, representing 1.44% of total Water and Sewer Fund
     operating revenues. Natural gas usage charges were $684,766, representing 3.49% of total
     Natural Gas Fund operating revenues.

     Lexington City Schools – Maintaining sufficient environments for our children to learn and
     excel in their studies requires a nominal amount of electricity. For the fiscal year ended June 30,
     2003, charges for all utilities were $732,157, which represents 1.09% of total utilities operating
     revenues. Electric usage charges were $583,573, representing 1.38% of total Electric Fund
     operating revenues. Natural Gas usage charges were $114,640, representing .58% of total
     Natural Gas Fund Operating revenues.

     Stone Container Corporation - Produces various cardboard containers; some of the products
     are related to the furniture industry. For the fiscal year ended June 30, 2003, charges for all
     utilities were $684,807, which represents 1.02% of total utilities operating revenues. Electric
     usage charges were $322,560, or .76% of total Electric Fund operating revenues. Water and
     sewer usage charges were $36,520, representing .70% of total Water and Sewer Fund operating




                                                    -86-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
     revenues. Natural gas usage charges were $325,727, representing 1.66% of total Natural Gas
     Fund operating revenues.

     TI Industries - Produces wood products such as laminate, veneers, etc., not associated with
     furniture. For fiscal year ended June 30, 2003, charges for all utilities were $557,403, which
     represents .83% of total operating revenues. Electric usage charges were $446,858, or 1.06% of
     total Electric Fund operating revenues. Water and sewer usage charges were $30,105,
     representing .58% of total Water and Sewer Fund operating revenues. Natural gas usage charges
     were $80,441, representing .41% of total Natural Gas Fund operating revenues.

     Leggett & Platt – They manufacture furniture products, which require large volumes of
     electricity and natural gas to produce. For the fiscal year ended June 30, 2003, charges for all
     utilities were $441,556, which represents .65% of total utilities operating revenue. Electric usage
     charges were $269,658, representing .64% of total electric Fund operating revenues. Water and
     sewer usage charges were $22,201, representing .43% of total Water and Sewer Fund operating
     revenues. Natural gas usage charges were $149,698 representing .76% of total Natural Gas Fund
     operating.

VIII. Related Party Transactions

     The General Fund has a receivable from the Board of Alcoholic Control (ABC Board) for law
     enforcement, as well as recreation and operational profit distributions in the total amount of
     $29,207. The ABC Board has a payable to the City of Lexington in the amount of $44,313. The
     City’s accrual is based on an estimate, as actual numbers were unavailable at the time the City’s
     financial statements were prepared; thus resulting in a difference of $15,106.

IX. Summary Disclosure of Significant Contingencies

     A. Federal and State Assisted Programs

     The City has received proceeds from several Federal and State grants. Periodic audits of these
     grants are required and certain costs may be questioned as not being appropriate expenditures
     under the grant agreements. Such audits could result in the refund of grant moneys to the
     grantor agencies. Management believes that any required refunds will be immaterial; therefore,
     no provision has been made in the City's financial statements for the refund of grant moneys.

     B. Electric Deregulation

     In 1997, the General Assembly appointed the Study Commission on the Future of Electric
     Service in North Carolina (“Study Commission”) to examine the cost, adequacy, availability and
     pricing of electric rates in North Carolina, in order to determine whether legislation is necessary




                                                   -87-
                                   City of Lexington, North Carolina
                                 Notes to the Basic Financial Statements
                                              June 30, 2003


********************************************************************************************
     to assure an adequate and reliable source of electricity and economical, fair and equitable rates
     for all consumers in North Carolina.

     The Study Commission submitted its report to the 2000 General Assembly on May 16, 2000.
     That report recommended retail choice for all customers by January 1, 2006. Specific
     recommendations on Municipal Power Agency debt and stranded costs were deferred. The
     report did state that nothing in the recommendation was intended to preclude municipalities
     from being able to sell or retain their distribution systems by making a payment against the
     municipal agency debt equal to the appraised value of the electric system. In February 2002, the
     Study Commission revealed that for the foreseeable future at least, any plans to deregulate the
     state’s power industry would remain on hold pending further study.
     The City and the Electric Agency are unable to predict the results of the study or the
     recommendations made by the Study Commission, or whether any recommendations to the
     General Assembly will be enacted into law.

     Although the impact of retail electric competition cannot be measured at this time, if such
     competition becomes applicable to the City, it may cause significant changes in (i) the
     number of customers, (ii) the costs to the customers, (iii) revenues, (iv) financing costs,
     and (v) debt ratings.




                                                   -88-
This page has been left blank intentionally.
         REQUIRED
SUPPLEMENTAL FINANCIAL DATA
                                                                                                Exhibit A-1

                                  City of Lexington, North Carolina
                        Law Enforcement Officers' Special Separation Allowance
                                Required Supplementary Information
                                    Schedule of Funding Progress
                                        Last Ten Fiscal Years


                        Actuarial Accrued
            Actuarial    Liability (AAL)      Unfunded                                         UAAL as a
Actuarial   Value of     Projected Unit         AAL           Funded           Covered        Percentage of
Valuation    Assets          Credit            (UAAL)          Ratio           Payroll       Covered Payroll
  Date         (a)              (b)              (b-a)         (a/b)             (c)            ((b-a)/c)

12/31/02        -        $       816,379     $   816,379         -         $     2,109,467      38.70%
12/31/01        -        $       754,714     $   754,714         -         $     2,061,494      36.61%
12/31/00        -        $       681,616     $   681,616         -         $     2,006,619      33.97%
12/31/99        -        $       437,892     $   437,892         -         $     1,918,962      22.82%
12/31/98        -        $       466,997     $   466,997         -         $     1,918,260      24.34%
12/31/97        -        $       427,133     $   427,133         -         $     1,623,351      26.31%
12/31/96        -        $       419,823     $   419,823         -         $     1,547,859      27.12%
12/31/95        -        $       349,470     $   349,470         -         $     1,727,702      20.23%
12/31/94        -        $       290,225     $   290,225         -         $     1,630,934      17.80%
12/31/93        -        $       318,775     $   318,775         -         $     1,645,915      19.37%




                                                 - 89 -
                                                                                              Exhibit A-2

                           City of Lexington, North Carolina
                 Law Enforcement Officers' Special Separation Allowance
                         Required Supplementary Information
                         Schedule of Employer Contributions
                                 Last Ten Fiscal Years




    Year Ended                      Annual Required                         Percentage
     June 30                         Contribution                           Contributed

       2003                         $          86,526                           32.70%
       2002                         $          80,134                           33.63%
       2001                         $          65,686                           35.23%
       2000                         $          66,053                           42.30%
       1999                         $          57,552                           64.19%
       1998                         $          55,417                           66.10%
       1997                         $          52,004                           92.94%
       1996                         $          42,731                           59.29%
       1995                         $          44,110                           72.14%
       1994                         $          40,196                          118.94%

Notes to the Required Schedules:

The information presented in the required supplementary schedules was determined as part
of the actuarial valuations at the dates indicated. Additional information as of the latest
actuarial valuation follows.

      Valuation date                                                12/31/2002

      Actuarial cost method                                         Projected unit credit

      Amortization method                                           Level percent of pay closed

      Remaining amortization period                                 28 years

      Asset valuation method                                        Market value

      Actuarial assumptions:

       Investment rate of return                                    7.25%

       Projected salary increases                                   5.9% to 9.8%

       Includes inflation at                                        3.75%

       Cost-of-living adjustments                                   None




                                             - 90 -
NONMAJOR GOVERNMENTAL FUNDS
       Combining Schedules
                                                                                                       Exhibit B-1

                                           City of Lexington, North Carolina
                                               Combining Balance Sheet
                                            Nonmajor Governmental Funds
                                                     June 30, 2003


                                                                                                  Total
                                                      Special              Capital              Nonmajor
                                                     Revenue               Projects         Governmental Funds
Assets
 Cash and cash equivalents                       $          28,193     $       422,618      $           450,811
 Taxes receivable                                            1,095                   -                    1,095
 Accounts receivable - intergovernmental                    12,757              47,006                   59,763
 Interest receivable                                            30                 815                      845
       Total assets                                         42,075             470,439                  512,514

Liabilities and fund balances
Liabilities:
  Accounts payable                                           3,531                    348                 3,879
  Due to other funds:
    General fund                                            10,872                      -                10,872
  Deferred revenues                                          1,095                      -                 1,095
       Total liabilities                                    15,498                    348                15,846

Fund balances:
 Reserved for encumbrances                                       -               29,660                  29,660
 Designated for subsequent
   year's expenditures                                       7,000                   -                    7,000
 Unreserved, undesignated                                   19,577             440,431                  460,008

     Total fund balances                                    26,577             470,091                  496,668

Total liabilities and fund balances              $          42,075     $       470,439      $           512,514




                                                        - 91 -
                                                                                              Exhibit B-2

                                     City of Lexington, North Carolina
                Combining Statement of Revenues, Expenditures and Changes in Fund Balances
                                      Nonmajor Governmental Funds
                                  For the fiscal year ended June 30, 2003

                                                                                         Total
                                                   Special           Capital           Nonmajor
                                                  Revenue            Projects      Governmental Funds
Revenues:
 Special ad valorem tax                       $       79,111     $            -    $            79,111
 Intergovernmental                                   209,360                  -                209,360
 Sales and services                                   17,577             83,320                100,897
 Interest                                              1,133              6,998                  8,131
 Miscellaneous revenues                               28,888             13,500                 42,388
   Total revenues                                    336,069            103,818                439,887

Expenditures:
 Public safety                                       238,977                  -                238,977
 Highways and streets                                      -            282,208                282,208
 Culture and recreation                                    -              6,900                  6,900
 Economic and physical development                   194,446             19,125                213,571
    Total expenditures                               433,423            308,233                741,656

Revenues over (under) expenditures                    (97,354)         (204,415)              (301,769)

Other financing sources (uses):
  Transfers from (to):
   From general fund                                  40,000            170,000                210,000
   To general fund                                       (18)           (57,623)               (57,641)
   To water and sewer fund                                 -            (44,856)               (44,856)
   To garage fund                                          -            (28,754)               (28,754)
       Total other financing sources (uses)           39,982             38,767                 78,749

Net change in fund balances                           (57,372)         (165,648)              (223,020)

Fund balances, July 1                                 83,949            635,739                719,688

Fund balances, June 30                        $       26,577     $      470,091    $           496,668




                                                     - 92 -
   GENERAL FUND
Individual Fund Schedule
                                                   GENERAL FUND

The General Fund is the principal fund of the City from which the major portion of the City's operations are
financed. This fund finances the regular operation of all departments and accounts for all activities that are not
legally or by sound financial management to be accounted for in other funds.

A summary of revenues and expenditures for the last two fiscal years is presented below:

                                                     June 30, 2003                             June 30, 2002
                                                                  Percent                                   Percent
REVENUES BY SOURCE                              Amount           of Total                 Amount           of Total

Ad valorem taxes                        $        6,579,087            43%             $    6,304,353            42%
Other taxes and licenses                           359,192             2%                    388,409             2%
Unrestricted intergovernmental revenues          4,048,725            27%                  3,630,213            24%
Restricted intergovernmental revenues              738,590             5%                    795,963             5%
Permits and fees                                   176,600             1%                    126,976             1%
Sales and services                               1,163,774             8%                  1,274,814             8%
Interest                                           141,337             1%                    240,917             2%
Miscellaneous revenues                             588,192             4%                     46,520             1%
Other financing sources                          1,392,873             9%                  2,325,375            15%

             Total revenues                 $   15,188,370            100%            $   15,133,540           100%



EXPENDITURES BY FUNCTION

General government                          $    1,917,736            13%             $    1,614,060            11%
Public safety                                    7,372,988            49%                  7,392,957            49%
Highway and streets                              1,215,918             8%                  1,442,059            10%
Sanitation                                       2,304,617            15%                  2,222,740            15%
Culture and recreation                           1,082,908             7%                  1,023,631             6%
Debt service                                       789,743             5%                    499,103             3%
Other financing uses                               398,126             3%                    953,476             6%

           Total expenditures               $   15,082,036            100%            $   15,148,026           100%




                                                          - 93 -
                            City of Lexington, North Carolina
                                       General Fund
   Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                          For the fiscal year ended June 30, 2003
         (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                         2003

                                                            Budget              Actual
Revenues:
Ad valorem taxes:
    Current year                                                            $   6,447,369
    Prior year                                                                    137,278
    Penalties and interest                                                         57,267
    Discounts and refunds                                                         (62,827)
          Total                                         $    6,436,000          6,579,087

Other taxes and licenses:
    Cable TV franchise tax                                                        143,761
    Motel occupancy tax                                                           215,431
          Total                                               360,000             359,192

Unrestricted intergovernmental revenues:
    Local option sales tax                                                      2,730,859
    Payments in lieu of taxes                                                       6,645
    Intangible tax reimbursement                                                        -
    Utility franchise tax                                                         916,306
    Piped natural gas tax                                                          68,636
    Telecommunications tax                                                        128,399
    Beer and wine tax                                                              85,180
    Food stamp tax reimbursement                                                        -
    Inventories tax reimbursement                                                       -
    ABC revenues                                                                  112,700
           Total                                             4,088,000          4,048,725

Restricted intergovernmental revenues:
     Powell Bill allocation                                                       682,963
     On-behalf of payments - fire                                                  26,020
     ABC recreation                                                                24,150
     ABC law enforcement                                                            5,457
           Total                                              751,000             738,590

Permits and fees:
    Inspection fees and licenses                                                  176,600
          Total                                               115,000             176,600




                                           - 94 -
                                                                               Exhibit C-1
                                                                                   Page 1
                         City of Lexington, North Carolina
                                    General Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                       For the fiscal year ended June 30, 2003
      (With comparative actual amounts for the fiscal year ended June 30, 2002)

                             2003                2002
                            Variance
                          from Budget            Actual


                                             $   6,146,848
                                                   162,599
                                                    44,540
                                                   (49,634)
                         $     143,087           6,304,353


                                                   238,595
                                                   149,814
                                  (808)            388,409


                                                 2,539,563
                                                     5,928
                                                   174,302
                                                   567,651
                                                    28,388
                                                    32,915
                                                         -
                                                     7,394
                                                   108,172
                                                   165,900
                                (39,275)         3,630,213


                                                   719,037
                                                    29,099
                                                    35,550
                                                    12,277
                                (12,410)           795,963


                                                   126,976
                                61,600             126,976




                                        - 95 -
                            City of Lexington, North Carolina
                                       General Fund
   Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                          For the fiscal year ended June 30, 2003
         (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                         2003

                                                            Budget              Actual
Sales and services:
      Court cost and parking fees                                                   27,341
      Street fees                                                                   16,204
      Cemetery fees                                                                 88,486
      Mowing and towing fees                                                         3,260
      Sale of property                                                              31,705
      Sanitation fees                                                              883,796
      Recreation fees                                                               14,129
      Cost reimbursement                                                            97,966
      Other sales and services                                                         887
            Total                                            1,125,586           1,163,774

Interest                                                      227,402             141,337

Miscellaneous:
     FEMA reimbursement                                                           416,460
     Donations                                                                    166,177
     Other revenues                                                                 5,555
          Total                                               667,235             588,192

           Total revenues                                   13,770,223          13,795,497




                                         - 96 -
                                                                               Exhibit C-1
                                                                                   Page 2
                         City of Lexington, North Carolina
                                    General Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                       For the fiscal year ended June 30, 2003
      (With comparative actual amounts for the fiscal year ended June 30, 2002)

                             2003                 2002
                            Variance
                          from Budget            Actual

                                                     28,078
                                                     18,906
                                                     76,276
                                                      2,665
                                                     23,153
                                                  1,021,400
                                                     21,901
                                                     82,136
                                                        299
                                38,188            1,274,814

                                (86,065)           240,917


                                                         -
                                                    26,946
                                                    19,574
                                (79,043)            46,520

                                25,274           12,808,165




                                        - 97 -
                            City of Lexington, North Carolina
                                       General Fund
   Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                          For the fiscal year ended June 30, 2003
         (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                         2003

                                                            Budget              Actual
Expenditures:
General government:
    Governing board:
          Salaries and employee benefits                                          104,978
          Operating expenses                                                        3,902
          Cost redistribution                                                    (105,521)
                Total governing board                          15,756               3,359

     Administrative - city manager:
         Salaries and employee benefits                                           281,969
         Operating expenses                                                        33,817
         Capital outlay                                                                 -
         Cost redistribution                                                     (206,239)
               Total administrative - city manager            208,080             109,547

     Administrative - other:
         Salaries and employee benefits                                           195,400
         Operating expenses                                                       826,459
         Grants to other agencies                                                 223,190
         Payment to LTA - occupancy tax                                           208,969
         175th Anniversary festival                                                74,262
         Cost redistribution                                                      (47,248)
               Total administrative - other                  1,505,118          1,481,032

     Finance:
          Salaries and employee benefits                                          666,319
          Operating expenses                                                       61,724
          Capital outlay                                                                -
          Cost redistribution                                                    (712,897)
                Total finance                                  96,748              15,146




                                              - 98 -
                                                                               Exhibit C-1
                                                                                   Page 3
                         City of Lexington, North Carolina
                                    General Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                       For the fiscal year ended June 30, 2003
      (With comparative actual amounts for the fiscal year ended June 30, 2002)

                             2003                2002
                            Variance
                          from Budget            Actual




                                                    98,074
                                                     6,991
                                                   (92,019)
                                12,397              13,046


                                                   352,788
                                                    59,288
                                                    18,060
                                                  (194,217)
                                98,533             235,919


                                                   174,408
                                                   679,021
                                                   200,317
                                                   143,612
                                                         -
                                                  (253,609)
                                24,086             943,749


                                                   682,597
                                                    62,288
                                                     4,807
                                                  (680,911)
                                81,602              68,781




                                        - 99 -
                         City of Lexington, North Carolina
                                    General Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                       For the fiscal year ended June 30, 2003
      (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                      2003

                                                         Budget              Actual
 Legal:
      Employee benefits                                                         15,530
      Professional services                                                     33,335
      Cost redistribution                                                       (1,195)
           Total legal                                      57,035              47,670

 Human resources:
    Salaries and employee benefits                                             144,464
    Operating expenses                                                          51,647
    Capital outlay                                                                   -
    Cost redistribution                                                       (143,754)
          Total human resources                            111,450              52,357

 Information technologies:
      Salaries and employee benefits                                           173,947
      Operating expenses                                                       229,598
      Capital outlay                                                            39,086
      Cost redistribution                                                     (440,246)
            Total information technologies                  99,864               2,385

 Public buildings:
      Salaries and employee benefits                                           162,209
      Operating expenses                                                       110,051
      Capital outlay                                                            10,712
      Cost redistribution                                                      (76,732)
            Total public buildings                         238,269             206,240

           Total general government                       2,332,320          1,917,736




                                       - 100 -
                                                                               Exhibit C-1
                                                                                   Page 4
                         City of Lexington, North Carolina
                                    General Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                       For the fiscal year ended June 30, 2003
      (With comparative actual amounts for the fiscal year ended June 30, 2002)

                             2003               2002
                            Variance
                          from Budget           Actual

                                                   11,110
                                                   37,301
                                                   (1,217)
                                 9,365             47,194


                                                  163,150
                                                   58,126
                                                    1,413
                                                 (141,454)
                                59,093             81,235


                                                  168,658
                                                  181,679
                                                   42,032
                                                 (350,337)
                                97,479             42,032


                                                  165,989
                                                   66,716
                                                   23,337
                                                  (73,938)
                                32,029            182,104

                               414,584          1,614,060




                                      - 101 -
                            City of Lexington, North Carolina
                                       General Fund
   Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                          For the fiscal year ended June 30, 2003
         (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                         2003

                                                            Budget              Actual
Public safety:
     Police:
           Salaries and employee benefits                                       3,627,794
           Operating expenses                                                     492,393
           Capital outlay                                                         106,902
                 Total police                                4,653,269          4,227,089

     Fire:
             Salaries and employee benefits                                     2,359,765
             Operating expenses                                                   340,905
             Capital outlay                                                             -
                   Total fire                                3,135,566          2,700,670

     Community development:
        Salaries and employee benefits                                            354,447
        Operating expenses                                                         90,578
        Bad debt expense                                                              204
        Capital outlay                                                                  -
              Total community development                     483,154             445,229

                    Total public safety                      8,271,989          7,372,988

Highways and streets:
    Engineering:
         Salaries and employee benefits                                           304,153
         Operating expenses                                                        38,628
         Cost redistribution                                                     (125,845)
               Total engineering                              232,422             216,936

     Street:
           Salaries and employee benefits                                         560,168
           Operating expenses                                                     492,943
           Capital outlay                                                          34,037
           Cost redistribution                                                    (88,166)
                 Total street                                1,273,244            998,982

                    Total highways and streets               1,505,666          1,215,918




                                              - 102 -
                                                                               Exhibit C-1
                                                                                   Page 5
                         City of Lexington, North Carolina
                                    General Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                       For the fiscal year ended June 30, 2003
      (With comparative actual amounts for the fiscal year ended June 30, 2002)

                             2003               2002
                            Variance
                          from Budget           Actual


                                                3,636,134
                                                  429,275
                                                  130,242
                               426,180          4,195,651


                                                2,424,605
                                                  327,792
                                                   33,228
                               434,896          2,785,625


                                                  333,064
                                                   70,033
                                                       25
                                                    8,559
                                37,925            411,681

                               899,001          7,392,957




                                                  291,497
                                                   31,821
                                                 (114,703)
                                15,486            208,615


                                                  579,044
                                                  341,738
                                                  312,662
                                                        -
                               274,262          1,233,444

                               289,748          1,442,059




                                      - 103 -
                            City of Lexington, North Carolina
                                       General Fund
   Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                          For the fiscal year ended June 30, 2003
         (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                         2003

                                                            Budget              Actual
Sanitation:
     Sanitation:
            Salaries and employee benefits                                         794,557
            Operating expenses                                                     941,588
            Tipping fees - landfill                                                386,798
            Bad debt expense                                                        15,216
            Capital outlay                                                         166,458
                     Total sanitation                        2,626,293           2,304,617

Culture and recreation:
     Recreation:
          Salaries and employee benefits                                          349,165
          Operating expenses                                                      144,457
          Capital outlay                                                           20,303
                Total recreation                              577,649             513,925

     Public grounds:
          Salaries and employee benefits                                          441,744
          Operating expenses                                                      103,454
          Capital outlay                                                           23,785
                Total public grounds                          631,177             568,983

                   Total culture and recreation              1,208,826           1,082,908

Debt service:
    Principal retirement                                                          624,269
    Interest fees                                                                 165,474
                   Total debt service                         798,354             789,743

                Total expenditures                          16,743,448          14,683,910




                                             - 104 -
                                                                               Exhibit C-1
                                                                                   Page 6
                         City of Lexington, North Carolina
                                    General Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                       For the fiscal year ended June 30, 2003
      (With comparative actual amounts for the fiscal year ended June 30, 2002)

                             2003                2002
                            Variance
                          from Budget           Actual


                                                   783,499
                                                   565,788
                                                   526,628
                                                     2,215
                                                   344,610
                               321,676           2,222,740




                                                  332,058
                                                  126,860
                                                   12,550
                                63,724            471,468


                                                  415,934
                                                  113,429
                                                   22,800
                                62,194            552,163

                               125,918           1,023,631


                                                  466,111
                                                   32,992
                                 8,611            499,103

                             2,059,538          14,194,550




                                      - 105 -
                            City of Lexington, North Carolina
                                       General Fund
   Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                          For the fiscal year ended June 30, 2003
         (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                         2003

                                                            Budget              Actual

Revenue over (under) expenditures                           (2,973,225)           (888,413)

Other financing sources (uses):
Transfers from (to):
     From public safety grant                                       18                  18
     From five-year capital improvements                        57,623              57,623
     From electric fund                                      1,050,000                   -
     From natural gas fund                                     550,000             550,000
     From garage fund                                                -                   -
     Transfers related to payment in lieu of taxes             199,296             199,296
     To public safety grant                                          -                   -
     To special taxing district                                (40,000)            (40,000)
     To general obligation debt service fund                         -                   -
     To five-year capital improvements                        (170,000)           (170,000)
     To water and sewer fund                                         -                   -
     To golf fund                                             (176,000)           (176,000)
     To utility administration fund                            (12,126)            (12,126)
Proceeds from capital leases                                   616,000             585,936
Fund balance appropriated                                      898,414                   -
           Total other financing sources (uses)              2,973,225             994,747

Excess revenues and other financing sources
    over (under) expenditures and other uses            $            -            106,334

Fund balance, July 1                                                            15,587,720

Increase (decrease) in central purchasing inventory                                   (298)

Fund balance, June 30                                                       $ 15,693,756




                                             - 106 -
                                                                               Exhibit C-1
                                                                                   Page 7
                         City of Lexington, North Carolina
                                    General Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual
                       For the fiscal year ended June 30, 2003
      (With comparative actual amounts for the fiscal year ended June 30, 2002)

                             2003                2002
                            Variance
                          from Budget           Actual

                             2,084,812          (1,386,385)




                                      -                  -
                                      -             18,854
                             (1,050,000)         1,050,000
                                      -            550,000
                                      -              2,684
                                      -            398,286
                                      -            (19,200)
                                      -            (40,000)
                                      -           (360,150)
                                      -           (322,000)
                                      -           (200,000)
                                      -                  -
                                      -            (12,126)
                                (30,064)           305,551
                               (898,414)                 -
                             (1,978,478)         1,371,899


                         $     106,334             (14,486)

                                                15,602,947

                                                        (741)

                                            $ 15,587,720




                                      - 107 -
This page has been left blank intentionally.
SPECIAL REVENUE FUNDS
    Combining Schedules
             and
  Individual Fund Schedules
                                          SPECIAL REVENUE FUNDS

Special Revenue Funds are used to account for specific revenues that are legally restricted to expenditures for
particular purposes.

                              COMMUNITY DEVELOPMENT BLOCK GRANT

This fund is used to account for the community development block grants. Proceeds from these grants are
restricted for economic development expenditures.

                             CONTROLLED SUBSTANCE TAX DISTRIBUTION

This fund is used to account for the collected controlled substance tax revenues received from Federal, State,
and County sources, which are restricted for public safety use.

                                            PUBLIC SAFETY GRANT

This fund is used to account for grants received from various agencies. Proceeds from these grants are
restricted for public safety related expenditures.

                                         SPECIAL TAXING DISTRICT

This fund is used to account for the special additional ad valorem property tax for the revitalization of the
uptown area.




                                                       - 108 -
                                City of Lexington, North Carolina
                                Nonmajor Special Revenue Funds
                                    Combining Balance Sheet
                                          June 30, 2003


                                                            Controlled             Public
                                                           Substance Tax           Safety
                                                            Distribution           Grant
Assets
 Cash and cash equivalents                             $            15,554     $            -
 Taxes receivable                                                        -                  -
 Accounts receivable - intergovernmental                                 -             11,933
 Interest receivable                                                    30                  -
     Total assets                                                   15,584             11,933

Liabilities and fund balances
Liabilities:
  Accounts payable                                                         -                81
  Due to other funds:
    General fund                                                           -           10,872
  Deferred revenues                                                        -                -
      Total liabilities                                                    -           10,953

Fund balances:
 Designated for subsequent
   year's expenditures                                                   -                    -
 Unreserved, undesignated                                           15,584                  980
    Total fund balances                                             15,584                  980

Total liabilities and fund balances                    $            15,584     $       11,933




                                             - 109 -
                                            Exhibit D-1

    City of Lexington, North Carolina
    Nonmajor Special Revenue Funds
        Combining Balance Sheet
              June 30, 2003


     Special
     Taxing
     District               Total

$          12,639      $         28,193
            1,095                 1,095
              824                12,757
                -                    30
           14,558                42,075




            3,450                   3,531

                -                10,872
            1,095                 1,095
            4,545                15,498




            7,000                 7,000
            3,013                19,577
           10,013                26,577

$          14,558      $         42,075




                 - 110 -
                                  City of Lexington, North Carolina
                                  Nonmajor Special Revenue Funds
             Combining Statement of Revenues, Expenditures and Changes in Fund Balances
                               For the fiscal year ended June 30, 2003

                                                Community              Controlled           Public
                                                Development           Substance Tax         Safety
                                                Block Grant            Distribution         Grant
Revenues:
 Special ad valorem tax                     $                -    $                -    $            -
 Intergovernmental                                      14,875                23,024           171,461
 Sales and services                                          -                     -                 -
 Interest                                                    -                   432               479
 Miscellaneous revenues                                      -                     -                 -
    Total revenues                                      14,875                23,456           171,940

Expenditures:
 Operations                                                  -                 3,288           130,252
 Contracted services                                    14,875                     -                 -
 Capital outlay - equipment                                  -                     -           105,437
    Total expenditures                                  14,875                 3,288           235,689

Revenues over (under) expenditures                            -               20,168            (63,749)

Other financing sources (uses):
 Transfers from (to):
   From general fund                                          -                    -                 -
   To general fund                                            -                    -               (18)
   Intrafund transfers                                        -              (21,211)           21,211
     Total other financing sources (uses)                     -              (21,211)           21,193

Net change in fund balances                                   -               (1,043)           (42,556)

Fund balances, July 1                                         -               16,627            43,536

Fund balances, June 30                      $                 -   $           15,584    $            980




                                                   - 111 -
                                                                             Exhibit D-2

                     City of Lexington, North Carolina
                     Nonmajor Special Revenue Funds
Combining Statement of Revenues, Expenditures and Changes in Fund Balances
                  For the fiscal year ended June 30, 2003

                       Special
                       Taxing
                       District             Total

                  $         79,111      $       79,111
                                 -             209,360
                            17,577              17,577
                               222               1,133
                            28,888              28,888
                           125,798             336,069


                            98,912             232,452
                            80,659              95,534
                                 -             105,437
                           179,571             433,423

                            (53,773)            (97,354)




                            40,000              40,000
                                 -                 (18)
                                 -                   -
                            40,000              39,982

                            (13,773)            (57,372)

                            23,786              83,949

                  $         10,013      $       26,577




                                  - 112 -
                                  City of Lexington, North Carolina
                     Community Development Block Grant Special Revenue Fund
                  Statement of Revenues, Expenditures and Changes in Fund Balances
                                        Authorized and Actual
                       From inception and for the fiscal year ended June 30, 2003

                                                                    Project                  Actual
                                                                 Authorization*            Prior Years
Revenues:
 Intergovernmental grant                                                               $             35,125
   Total revenues                                            $            125,000                    35,125

Expenditures:
Capacity building grant
 Contracted services                                                                                 35,125
Infrastructure hook-up grant
  Contracted services                                                                                     -
    Total expenditures                                                    125,000                    35,125

Revenues over (under) expenditures                                                -                       -

Other financing sources (uses):
 None                                                                                                     -
   Total other financing sources (uses)                                           -                       -

Net change in fund balance                                   $                    -    $                  -

Fund balances, July 1

Fund balances, June 30

*Annual budgets are not adopted for capital projects, but a financial plan is adopted for the life
 of the project.




                                                   - 113 -
                                                                   Exhibit D-3

                City of Lexington, North Carolina
   Community Development Block Grant Special Revenue Fund
Statement of Revenues, Expenditures and Changes in Fund Balances
                      Authorized and Actual
     From inception and for the fiscal year ended June 30, 2003

                             Actual
              Current Year             Total to Date

          $            14,875     $             50,000
                       14,875                   50,000




                       14,875                   50,000


                            -                        -
                       14,875                   50,000

                             -                         -


                             -                         -
                             -                         -

                             -    $                    -

                             -

          $                  -




                             - 114 -
                                  City of Lexington, North Carolina
                     Controlled Substance Tax Distribution Special Revenue Fund
                 Statement of Revenues, Expenditures and Changes in Fund Balances
                                           Budget and Actual
                                For the fiscal year ended June 30, 2003
               (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                  2003

                                                                Budget                     Actual
Revenues:
 Intergovernmental                                                                   $              23,024
 Interest                                                                                              432
   Total revenues                                        $               7,873                      23,456

Expenditures:
 Operations                                                                                          3,288
   Total expenditures                                                    3,288                       3,288

Revenues over (under) expenditures                                       4,585                      20,168

Other financing sources (uses):
  Transfers from (to):
   To public safety grant                                                                       (21,211)
  Appropriated fund balance                                                                           -
   Total other financing sources (uses)                                  (4,585)                (21,211)

Net change in fund balance                               $                    -                     (1,043)

Fund balance, July 1                                                                                16,627

Fund balance, June 30                                                                $              15,584




                                               - 115 -
                                                                     Exhibit D-4

                   City of Lexington, North Carolina
      Controlled Substance Tax Distribution Special Revenue Fund
  Statement of Revenues, Expenditures and Changes in Fund Balances
                            Budget and Actual
                 For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                    2003                      2002
                   Variance
                 from Budget                 Actual

                                      $               30,959
                                                         415
             $             15,583                     31,374


                                                           -
                                -                          -

                           15,583                     31,374




                                                     (28,894)
                                                           -
                          (16,626)                   (28,894)

             $             (1,043)                     2,480

                                                      14,147

                                      $               16,627




                                - 116 -
                                 City of Lexington, North Carolina
                              Public Safety Grant Special Revenue Fund
                 Statement of Revenues, Expenditures and Changes in Fund Balances
                                          Budget and Actual
                               For the fiscal year ended June 30, 2003
               (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                2003

                                                                Budget                     Actual
Revenues:
 Intergovernmental                                                                     $        171,461
 Interest                                                                                           479
   Total revenues                                        $           171,830                    171,940

Expenditures:
 Operations                                                                                     130,252
 Capital outlay - equipment                                                                     105,437
   Total expenditures                                                236,559                    235,689

Revenues over (under) expenditures                                    (64,729)                  (63,749)

Other financing sources (uses):
  Transfers from (to):
   To general fund                                                                                     (18)
   From controlled substance tax                                                                    21,211
  Appropriated fund balance                                                                              -
     Total other financing sources (uses)                              64,729                       21,193

Net change in fund balance                               $                  -                   (42,556)

Fund balance, July 1                                                                                43,536

Fund balance, June 30                                                              $                  980




                                               - 117 -
                                                                     Exhibit D-5

                  City of Lexington, North Carolina
               Public Safety Grant Special Revenue Fund
  Statement of Revenues, Expenditures and Changes in Fund Balances
                           Budget and Actual
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                    2003                      2002
                   Variance
                 from Budget                 Actual

                                       $          160,757
                                                    1,309
             $                 110                162,066


                                                  117,224
                                                   50,289
                               870                167,513

                               980                    (5,447)




                                                      19,200
                                                      28,894
                                                           -
                          (43,536)                    48,094

             $            (42,556)                    42,647

                                                        889

                                       $              43,536




                                 - 118 -
                                  City of Lexington, North Carolina
                             Special Taxing District Special Revenue Fund
                  Statement of Revenues, Expenditures and Changes in Fund Balances
                                           Budget and Actual
                                For the fiscal year ended June 30, 2003
                (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                 2003

                                                                 Budget                     Actual
Revenues:
 Special ad valorem tax                                                             $             79,111
 Sales and services                                                                               17,577
 Interest                                                                                            222
 Miscellaneous revenues                                                                           28,888
   Total revenues                                         $           140,275                    125,798

Expenditures:
 Operations                                                                                       98,912
 Contracted services                                                                              80,659
   Total expenditures                                                 183,908                    179,571

Revenues over (under) expenditures                                     (43,633)                  (53,773)

Other financing sources (uses):
  Transfers from (to):
   From general fund                                                                                 40,000
  Appropriated fund balance                                                                               -
      Total other financing sources (uses)                              43,633                       40,000

Net change in fund balance                                $                  -                   (13,773)

Fund balance, July 1                                                                                 23,786

Fund balance, June 30                                                               $                10,013




                                                - 119 -
                                                                     Exhibit D-6

                  City of Lexington, North Carolina
             Special Taxing District Special Revenue Fund
  Statement of Revenues, Expenditures and Changes in Fund Balances
                           Budget and Actual
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                    2003                      2002
                   Variance
                 from Budget                 Actual

                                      $               70,377
                                                           -
                                                         336
                                                      26,715
             $            (14,477)                    97,428


                                                   53,830
                                                   73,155
                            4,337                 126,985

                          (10,140)                   (29,557)




                                                      40,000
                                                           -
                           (3,633)                    40,000

             $            (13,773)                    10,443

                                                      13,343

                                      $               23,786




                                - 120 -
This page has been left blank intentionally.
DEBT SERVICE FUND
Individual Fund Schedule
                      GENERAL OBLIGATION DEBT SERVICE FUND

This fund is presented for comparative purposes only. Debt service expenditures previously
accounted for in this fund are now accounted for in the General Fund.




                                              - 121 -
                                  City of Lexington, North Carolina
                                General Obligation Debt Service Fund
                  Statement of Revenues, Expenditures and Changes in Fund Balances
                                           Budget and Actual
                                For the fiscal year ended June 30, 2003
                (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                 2003

                                                                 Budget                     Actual
Revenues:
 None                                                                               $                -
   Total revenues                                                            -                       -

Expenditures:
 Interest expense                                                                                    -
 Bond principal                                                                                      -
   Total expenditures                                                        -                       -

Revenues over (under) expenditures                                           -                       -

Other financing sources (uses):
  Transfers from (to):
   From general fund                                                                                 -
      Total other financing sources (uses)                                   -                       -

Net change in fund balance                                $                  -                       -

Fund balance, July 1                                                                                 -

Fund balance, June 30                                                               $                -




                                                - 122 -
                                                                      Exhibit E-1

                  City of Lexington, North Carolina
                General Obligation Debt Service Fund
  Statement of Revenues, Expenditures and Changes in Fund Balances
                           Budget and Actual
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                    2003                      2002
                   Variance
                 from Budget                 Actual

                                      $                  -
                                -                        -


                                                  150,150
                                                  210,000
                                -                 360,150

                                -                 (360,150)




                                                  360,150
                                -                 360,150

             $                  -                        -

                                                         -

                                      $                  -




                                - 123 -
This page has been left blank intentionally.
CAPITAL PROJECT FUND
 Individual Fund Schedule
                                   CAPITAL PROJECT FUND

                  FIVE-YEAR CAPITAL IMPROVEMENTS PROJECT FUND

This fund is used to account for the capital additions and improvements to the City's infrastructure in
conformity to the City's five-year business and capital improvement plan. Additions and improvements
associated with proprietary operations are reported in the proprietary funds section.




                                                     - 124 -
                                                                                         Exhibit F-1

                                 City of Lexington, North Carolina
                        Nonmajor Five-Year Capital Improvements Project Fund
                                           Balance Sheet
                                           June 30, 2003

                                                                         2003
Assets
 Cash and cash equivalents                                       $             422,618
 Accounts receivable - intergovernmental                                        47,006
 Interest receivable                                                               815
     Total assets                                                              470,439

Liabilities and fund balances
  Liabilities:
    Accounts payable                                                              348
      Total liabilities                                                           348

 Fund balances:
  Reserved for encumbrances                                                     29,660
  Unreserved, undesignated                                                     440,431
    Total fund balances                                                        470,091

 Total liabilities and fund balances                             $             470,439




                                               - 125 -
This page has been left blank intentionally.
                                         City of Lexington, North Carolina
                             Nonmajor Five-Year Capital Improvements Project Fund
                         Schedule of Revenues, Expenditures and Changes in Fund Balances
                                               Authorized and Actual
                             From inception and for the fiscal year ended June 30, 2003

                                                                         Project                      Actual
                                                                      Authorization*                Prior Years
Revenues:
 Sale of land                                                                                  $            1,613,872
 Interest                                                                                                     306,402
 Reimbursements of costs                                                                                      970,663
 Miscellaneous revenues                                                                                       158,628
   Total revenues                                                              3,307,732                    3,049,565

Expenditures:
Underground tanks:
 Professional services - monitoring                                                                            82,061

Industrial Park:
  Land                                                                                                      1,875,153
  Gas line construction                                                                                        29,799
  Water line construction                                                                                     235,060
  Sewer line construction                                                                                     518,476
  Road construction                                                                                           728,877
  Other                                                                                                        66,033

Recreation capital improvements:
 Capital outlay - land improvements                                                                         1,454,691
 Capital outlay - equipment                                                                                   299,260
 Professional services                                                                                        162,460

Street improvements:
  Contracted services                                                                                         601,298

Henry Link bridge:
 Professional services                                                                                         40,204

South Lexington School improvements:
  Professional services                                                                                             -
    Total expenditures                                                         7,026,045                    6,093,372




*Annual budgets are not adopted for capital projects, but a financial plan is adopted for the life of the project.



                                                       - 126 -
                                                                  Exhibit F-2
                                                                      Page 1
                City of Lexington, North Carolina
    Nonmajor Five-Year Capital Improvements Project Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances
                      Authorized and Actual
    From inception and for the fiscal year ended June 30, 2003

                            Actual
            Current Year              Total to Date

        $                  -     $           1,613,872
                       6,998                   313,400
                      83,320                 1,053,983
                      13,500                   172,128
                     103,818                 3,153,383



                            -                   82,061


                      17,907                 1,893,060
                           -                    29,799
                           -                   235,060
                           -                   518,476
                           -                   728,877
                       1,218                    67,251


                            -                1,454,691
                            -                  299,260
                        6,900                  169,360


                     185,561                   786,859


                      52,420                    92,624


                      44,227                    44,227
                     308,233                 6,401,605




                            - 127 -
                                         City of Lexington, North Carolina
                             Nonmajor Five-Year Capital Improvements Project Fund
                         Schedule of Revenues, Expenditures and Changes in Fund Balances
                                               Authorized and Actual
                             From inception and for the fiscal year ended June 30, 2003

                                                                         Project                      Actual
                                                                      Authorization*                Prior Years

Revenues over (under) expenditures                                             (3,718,313)                 (3,043,807)

Other financing sources (uses):
 Transfers from (to):
  From general fund                                                                                         1,842,145
  From water and sewer fund                                                                                    35,000
  From natural gas fund                                                                                        79,700
  From garage fund                                                                                             22,701
  To general fund                                                                                                   -
  To water and sewer fund                                                                                           -
  To garage fund                                                                                                    -
 Proceeds from bond issue                                                                                   1,700,000
   Total other financing sources (uses)                                        3,718,313                    3,679,546

Net change in fund balance                                        $                     -      $              635,739

Fund balances, July 1

Fund balances, June 30




*Annual budgets are not adopted for capital projects, but a financial plan is adopted for the life of the project.




                                                       - 128 -
                                                                  Exhibit F-2
                                                                      Page 2
                City of Lexington, North Carolina
    Nonmajor Five-Year Capital Improvements Project Fund
Schedule of Revenues, Expenditures and Changes in Fund Balances
                      Authorized and Actual
    From inception and for the fiscal year ended June 30, 2003

                            Actual
            Current Year              Total to Date

                     (204,415)               (3,248,222)




                     170,000                 2,012,145
                           -                    35,000
                           -                    79,700
                           -                    22,701
                     (57,623)                  (57,623)
                     (44,856)                  (44,856)
                     (28,754)                  (28,754)
                           -                 1,700,000
                      38,767                 3,718,313

                     (165,648)   $             470,091

                     635,739

        $            470,091




                            - 129 -
This page has been left blank intentionally.
ENTERPRISE FUNDS
                                          ENTERPRISE FUNDS

Enterprise funds are used to account for operations that are financed and operated in a manner similar to
private business enterprises.

                                            ELECTRIC FUND

This fund provides electric distribution service to residential, commercial and industrial customers, both
inside and outside the city limits. This self-supporting fund has revenues sufficient to meet the operating
expenses and provide funds for electric line construction. These revenues are also used to provide for
principal and interest on Electric Fund debt. The Electric Rate Stabilization Fund was closed during
FY 2002-03 and funds were transferred to the Utility Administration Rate Stabilization Fund.

                                      WATER AND SEWER FUND

This fund accounts for water treatment and distribution as well as sewer treatment and collection for users
primarily within the city limits. This self-supporting fund has revenues sufficient to meet the operating
expenses and provide funds for water and sewer line construction. These revenues are also used to provide
for principal and interest on Water and Sewer Fund debt.

                                          NATURAL GAS FUND

This fund provides natural gas distribution services to residential, commercial and industrial customers
inside and outside the city limits. This self-supporting fund has revenues sufficient to meet the operating
expenses and provide funds for natural gas line construction. These revenues are also used to provide for
principal and interest on Natural Gas Fund debt.

                                               GOLF FUND

This fund accounts for the activities at the Lexington Municipal Golf Course.




                                                   - 130 -
                               City of Lexington, North Carolina
                                          Electric Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                             2003

                                                               Budget                Actual
Revenues:
 Operating revenues:
   Charges for sales and services:
     Residential                                                                $        18,927,774
     Commercial                                                                          15,305,557
     Industrial                                                                           5,914,703
     Area lights                                                                            512,608
     Street lighting                                                                        238,629
     Traffic lights                                                                          32,982
     Cable amplifiers                                                                       114,023
     Sales tax                                                                            1,223,309
     FEMA reimbursement                                                                     791,845
     Other operating revenues                                                               407,536
       Total operating revenues                                 44,010,724               43,468,966

Nonoperating revenues:
 Interest earned                                                                           105,596
 Sale of property                                                                                -
 Other nonoperating revenues                                                                 5,225
   Total nonoperating revenues                                     193,000                 110,821

   Total revenues                                               44,203,724               43,579,787

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 131 -
                                                                       Exhibit G-1
                                                                            Page 1
                  City of Lexington, North Carolina
                             Electric Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                     2003                   2002
                    Variance
                  from Budget              Actual




                                     $      18,139,096
                                            14,164,486
                                             5,846,911
                                               474,646
                                               236,604
                                                38,450
                                               108,780
                                             1,153,876
                                                     -
                                               325,146
                        (541,758)           40,487,995


                                               210,668
                                                 4,580
                                                 6,375
                         (82,179)              221,623

                        (623,937)           40,709,618




                                - 132 -
                               City of Lexington, North Carolina
                                          Electric Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                              2003

                                                               Budget                Actual
Expenditures:
 Operating expenses:
  Salaries and employee benefits                                                          1,673,323
  Cost of sales and services                                                              3,928,424
  Purchases for resale                                                                   32,652,410
  Administrative charges general fund                                                       755,726
  Administrative charges risk management fund                                               113,798
  Administrative charges utility administration fund                                        826,753
   Total operating expenses                                     41,786,272               39,950,434

 Budgetary appropriations:
  Interest expense                                                                         155,639
  Bond principal                                                                           240,000
  Capital lease principal                                                                   83,419
  Capital outlay                                                                           153,085
  Capital outlay construction in progress                                                  350,000
   Total budgetary appropriations                                 1,149,356                982,143

   Total expenditures                                           42,935,628               40,932,577

Revenues over (under) expenditures                                1,268,096               2,647,210

Other financing sources (uses):
 Capital lease debt issued                                         145,000                 127,698
 Transfers from (to):
  From electric fund construction in progress                             -                       -
  From utility administration capital reserve                       165,000                 165,000
  To general fund                                                (1,050,000)                      -
  To utility administration fund                                    (73,857)                (59,566)
  To utility administration capital reserve fund                   (492,500)               (492,500)
  Transfers related to payment in lieu of taxes                    (144,004)               (144,004)
 Appropriated retained earnings                                     182,265                       -
   Total other financing sources (uses)                          (1,268,096)               (403,372)

Change in net assets - budgetary basis                    $               -      $        2,243,838

NOTE: Prepared on the budgetary basis which is modified accrual.




                                               - 133 -
                                                                       Exhibit G-1
                                                                            Page 2
                  City of Lexington, North Carolina
                             Electric Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                      2003                  2002
                     Variance
                   from Budget             Actual


                                             1,579,148
                                             3,616,690
                                            31,516,627
                                               743,995
                                                64,637
                                             1,134,782
                       1,835,838            38,655,879


                                               161,967
                                               230,000
                                                26,072
                                                43,699
                                               518,000
                         167,213               979,738

                       2,003,051            39,635,617

                       1,379,114             1,074,001


                         (17,302)              150,000

                               -                     6
                               -                     -
                       1,050,000            (1,050,000)
                          14,291              (213,909)
                               -              (220,049)
                               -              (134,288)
                        (182,265)                    -
                         864,724            (1,468,240)

               $       2,243,838      $       (394,239)




                                 - 134 -
                                                                                           Exhibit G-1
                                                                                                Page 3
                                 City of Lexington, North Carolina
                                            Electric Fund
                     Schedule of Revenues, Expenses and Changes in Net Assets
                                  Budget and Actual (Non-GAAP)
                               For the fiscal year ended June 30, 2003
               (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                  2003                     2002
Reconciliation of modified accrual basis
 to full accrual basis:

Total revenues                                              $     43,579,787       $       40,709,618
Total expenditures                                                40,932,577               39,635,617

Revenues over (under) expenditures                                  2,647,210               1,074,001

Budgetary appropriations                                             982,143                  979,738

Depreciation                                                         (748,118)             (1,618,331)

Wages and overhead charged to construction                           208,320                  228,760

Materials charged to construction                                    226,375                  425,363

Overhead capitalized                                                 120,304                  248,804

Reimbursement for construction of capital assets                     407,277                  115,972

Reimbursement of city property                                           2,184                 80,723

Increase (decrease) in inventory                                      (15,220)                 66,425

Interest earned                                                          1,913                      -

Interest expense                                                     (155,639)               (161,967)

Bad debt expense                                                     (262,708)                (82,446)

(Increase) decrease in compensated absences payable                      (7,774)               (6,513)

Income (loss) before transfers                              $       3,406,267      $        1,350,529




                                               - 135 -
This page has been left blank intentionally.
                                 City of Lexington, North Carolina
                                  Electric Rate Stabilization Fund
                                Schedule of Revenues and Expenses
                               Authorized and Actual (Non-GAAP)
                      From inception and for the fiscal year ended June 30, 2003


                                                               Project              Prior
                                                            Authorization           Years
Revenues:
 Interest earned                                       $              1,914     $             -
   Total revenues                                                     1,914                   -

Other financing sources (uses):
 Transfers from (to):
   From electric fund                                               508,834             508,834
   To utility administration rate stabilization                    (510,748)                  -
     Total other financing sources (uses)                            (1,914)            508,834

Change in net assets                                   $                    -   $       508,834

Net assets, July 1

Net assets, June 30




                                                  - 136 -
                                                                      Exhibit G-2

               City of Lexington, North Carolina
                Electric Rate Stabilization Fund
              Schedule of Revenues and Expenses
             Authorized and Actual (Non-GAAP)
    From inception and for the fiscal year ended June 30, 2003

       Actual                     Total
       Current                     to                     Variance
        Year                      Date                  from Budget

$                1,913    $                1,913    $                  (1)
                 1,913                     1,913                       (1)




                    -                    508,834                       -
             (510,747)                  (510,747)                      1
             (510,747)                    (1,913)                      1

             (508,834)    $                    -    $                   -

             508,834

$                    -




                              - 137 -
                                  City of Lexington, North Carolina
                               Construction in Progress - Electric Fund
                                 Schedule of Revenues and Expenses
                                Authorized and Actual (Non-GAAP)
                       From inception and for the fiscal year ended June 30, 2003


                                                              Project                   Prior
                                                           Authorization                Years
Revenues:
 NCDOT reimbursement                                                                $       863,662
   Total revenues                                                  1,514,834                863,662

Expenditures:
Electric scada system
 Capital outlay - equipment                                                                 142,365

NC 8 widening
 Contracted services                                                                        927,809

Feeder cables
 Contracted services                                                                            64,510

Hickory Street breakers
 Capital outlay - equipment                                                                     99,636

Tyro substation
 Capital outlay - land                                                                          25,648

High side protection
 Capital outlay - equipment                                                                 152,174

URD subdivision replacement
 Contracted services                                                                        100,000

Reconductor Park Street - 2nd Avenue
 Contracted services                                                                            51,470

NC 8 widening - phase II
 Contracted services                                                                            33,068

Cotton Grove circuit
 Contracted services                                                                                 -

3-Phase Royal Park & Cotton Grove
  Professional services                                                                              -

   Total expenditures for construction in progress                 4,890,814              1,596,680




                                                - 138 -
                                                             Exhibit G-3
                                                                  Page 1
           City of Lexington, North Carolina
        Construction in Progress - Electric Fund
          Schedule of Revenues and Expenses
         Authorized and Actual (Non-GAAP)
From inception and for the fiscal year ended June 30, 2003

                Actual                    Total
                Current                    to
                 Year                     Date

          $           407,277      $          1,270,939
                      407,277                 1,270,939




                             -                 142,365


                             -                 927,809


                             -                    64,510


                        20,364                 120,000


                        15,206                    40,854


                        42,395                 194,569


                             -                 100,000


                             -                    51,470


                      376,783                  409,851


                      112,801                  112,801


                        23,684                    23,684

                      591,233                 2,187,913




                             - 139 -
                                City of Lexington, North Carolina
                             Construction in Progress - Electric Fund
                               Schedule of Revenues and Expenses
                              Authorized and Actual (Non-GAAP)
                     From inception and for the fiscal year ended June 30, 2003


                                                               Project                Prior
                                                            Authorization             Years

Revenues over (under) expenditures                                (3,375,980)            (733,018)

Other financing sources (uses):
 Contribution from operating fund                                                         965,735
 Contribution from utility administration
     capital reserve fund                                                                     45,927
 Contribution to operating fund                                                                   (6)
 Contribution to utility administration
     capital reserve fund                                                                       -
   Total other financing sources (uses)                           3,375,980             1,011,656

Unexpended revenues and receipts                        $                   -     $       278,638




                                              - 140 -
                                                             Exhibit G-3
                                                                  Page 2
           City of Lexington, North Carolina
        Construction in Progress - Electric Fund
          Schedule of Revenues and Expenses
         Authorized and Actual (Non-GAAP)
From inception and for the fiscal year ended June 30, 2003

                Actual                    Total
                Current                    to
                 Year                     Date

                      (183,956)                (916,974)


                      350,000                 1,315,735

                             -                    45,927
                             -                        (6)

                      (85,680)                  (85,680)
                      264,320                 1,275,976

          $             80,364     $           359,002




                             - 141 -
                               City of Lexington, North Carolina
                                     Water and Sewer Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                              2003

                                                               Budget                Actual
Revenues:
 Operating revenues:
   Water charges for sales and service:
     Residential                                                                 $       1,018,779
     Commercial and industrial                                                           1,303,765
     Other water charges                                                                    22,795
   Sewer charges for sales and service:
     Residential                                                                         1,346,065
     Commercial and industrial                                                           1,411,262
     Other sewer charges                                                                   117,690
   Other operating revenues:
     FEMA reimbursements                                                                    16,094
     Other operating revenues                                                              267,376
       Total operating revenues                                   5,635,131              5,503,826

Nonoperating revenues:
 Interest earned                                                                           22,338
 Sale of property                                                                          17,213
   Total nonoperating revenues                                       43,000                39,551

   Total revenues                                                 5,678,131              5,543,377

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 142 -
                                                                        Exhibit G-4
                                                                             Page 1
                  City of Lexington, North Carolina
                        Water and Sewer Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                     2003                   2002
                    Variance
                  from Budget               Actual




                                      $       1,007,501
                                              1,239,690
                                                 34,745

                                              1,261,867
                                              1,305,094
                                                134,340

                                                      -
                                                196,536
                         (131,305)            5,179,773


                                                 47,309
                                                  9,373
                           (3,449)               56,682

                         (134,754)            5,236,455




                                - 143 -
                               City of Lexington, North Carolina
                                     Water and Sewer Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                              2003

                                                               Budget                Actual
Expenditures:
 Operating expenses:
  Water and sewer administration:
   Salaries and employee benefits                                                          125,644
   Cost of sales and services                                                               13,913
   Administrative charges general fund                                                     796,019
   Administrative charges risk management fund                                              71,784
   Administrative charges utility administration fund                                      208,395
     Total water and sewer administration                         1,294,366              1,215,755

  Water plant:
   Salaries and employee benefits                                                          523,928
   Cost of sales and services                                                              398,208
   Chemicals and supplies                                                                  185,291
      Total water plant                                           1,193,884              1,107,427

  Waste treatment plant:
   Salaries and employee benefits                                                          756,774
   Cost of sales and services                                                              594,043
     Total waste treatment plant                                  1,381,703              1,350,817

  Public works, maintenance, and construction:
   Salaries and employee benefits                                                         604,102
   Cost of sales and services                                                             267,488
     Total public works, maintenance, and construction             940,625                871,590

     Total operating expenses                                     4,810,578              4,545,589
NOTE: Prepared on the budgetary basis which is modified accrual.




                                              - 144 -
                                                                        Exhibit G-4
                                                                             Page 2
                  City of Lexington, North Carolina
                        Water and Sewer Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                     2003                   2002
                    Variance
                  from Budget               Actual




                                                119,173
                                                 63,455
                                                779,654
                                                 45,369
                                                275,155
                           78,611             1,282,806


                                                484,337
                                                338,521
                                                168,575
                           86,457               991,433


                                                753,240
                                                490,834
                           30,886             1,244,074


                                                617,871
                                                254,785
                           69,035               872,656

                          264,989             4,390,969




                                - 145 -
                               City of Lexington, North Carolina
                                     Water and Sewer Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                              2003

                                                               Budget                Actual
Budgetary appropriations:
 Interest expense                                                                         270,955
 Bond principal                                                                           325,000
 Capital lease principal                                                                   68,943
 Capital outlay:
  Water and sewer administration                                                                -
  Water plant                                                                              28,836
  Waste treatment plant                                                                    11,156
  Public works                                                                             65,513
 Capital outlay construction in progress                                                  150,000
   Total budgetary appropriations                                  956,523                920,403

   Total expenditures                                             5,767,101              5,465,992

Revenue over (under) expenditures                                   (88,970)               77,385

Other financing sources (uses):
 Capital lease debt issued                                         110,000                 98,990
 Transfers from (to) :
  From general fund                                                       -                      -
  From water and sewer fund construction in progress                      -                      -
  To utility administration fund                                    (12,620)               (12,620)
  To utility administration capital reserve fund                    (19,223)               (19,223)
  Transfers relating to payment in lieu of taxes                          -                      -
 Appropriated retained earnings                                      10,813                      -
   Total other financing sources (uses)                              88,970                 67,147

Change in net assets - budgetary basis                    $               -      $        144,532

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 146 -
                                                                        Exhibit G-4
                                                                             Page 3
                  City of Lexington, North Carolina
                        Water and Sewer Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                       2003                 2002
                      Variance
                    from Budget             Actual

                                                286,349
                                                325,000
                                                 22,230

                                                  1,364
                                                 89,124
                                                  3,767
                                                  9,444
                                                 90,000
                           36,120               827,278

                          301,109             5,218,247

                          166,355                18,208


                          (11,010)                    -

                                -               200,000
                                -                     1
                                -              (124,557)
                                -               (39,276)
                                -              (213,918)
                          (10,813)                    -
                          (21,823)             (177,750)

                $         144,532       $      (159,542)




                                  - 147 -
                                                                                           Exhibit G-4
                                                                                                Page 4
                                 City of Lexington, North Carolina
                                       Water and Sewer Fund
                     Schedule of Revenues, Expenses and Changes in Net Assets
                                  Budget and Actual (Non-GAAP)
                               For the fiscal year ended June 30, 2003
               (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                  2003                     2002
Reconciliation of modified accrual basis
 to full accrual basis:

Total revenues                                              $       5,543,377     $         5,236,455
Total expenditures                                                  5,465,992               5,218,247

Revenues over (under) expenditures                                     77,385                  18,208

Budgetary appropriations                                             920,403                  827,278

Depreciation                                                         (608,086)             (1,144,478)

Wages charged to construction                                          52,429                  47,970

Material charged to construction                                       18,797                  22,023

Overhead capitalized                                                   18,576                  17,524

Arbitrage recovery                                                     35,023                  22,627

Capital outlay not capitalized                                              -                     (1,162)

Gain (loss) on sale of property                                      351,255                  141,310

Increase (decrease) in inventory                                      (26,759)                 14,904

Interest earned                                                        18,660                  75,738

Interest expense                                                     (270,955)               (286,349)

Bad debt expense                                                      (62,920)                (11,353)

(Increase) decrease in compensated absences payable                   (15,444)                    (5,571)

Income (loss) before transfers                              $        508,364      $          (261,331)




                                               - 148 -
This page has been left blank intentionally.
                                City of Lexington, North Carolina
                        Construction in Progress - Water and Sewer Fund
                               Schedule of Revenues and Expenses
                              Authorized and Actual (Non-GAAP)
                     From inception and for the fiscal year ended June 30, 2003


                                                                Project               Prior
                                                             Authorization            Years
Revenues:
 Interest                                                                         $      878,284
   Total revenues                                                    883,950             878,284

Expenditures:
Annexation Sewer
 Arbitrage rebate                                                                        202,910
Sapona Business Center
  Contracted services                                                                    341,051
Brown Street
 Professional services                                                                 1,611,878
Woodland Hills, Peace Haven , Quail Ridge
 Contracted services                                                                   1,293,342
Linwood Farms
  Contracted services                                                                    658,387
Green Needles
 Contracted services                                                                     911,138
US Highway 64 West
 Capital outlay - equipment                                                               71,635
Wal-Mart Slip Line
 Contracted services                                                                           -
Wennonah Mill Drain
 Contracted services                                                                           -
Glenwood
 Contracted services                                                                           -
Childer's Park Outfall
 Contracted services                                                                           -




                                              - 149 -
                                                             Exhibit G-5
                                                                  Page 1
           City of Lexington, North Carolina
   Construction in Progress - Water and Sewer Fund
          Schedule of Revenues and Expenses
         Authorized and Actual (Non-GAAP)
From inception and for the fiscal year ended June 30, 2003

              Actual                 Total
              Current                 to
               Year                  Date

         $          18,660     $        896,944
                    18,660              896,944




                         -              202,910


                     1,090              342,141


                  200,141              1,812,019


                  113,727              1,407,069


                    10,675              669,062


                    32,957              944,095


                         -                71,635


                  216,069               216,069


                     5,053                   5,053


                     8,437                   8,437


                     1,475                   1,475




                         - 150 -
                                City of Lexington, North Carolina
                        Construction in Progress - Water and Sewer Fund
                               Schedule of Revenues and Expenses
                              Authorized and Actual (Non-GAAP)
                     From inception and for the fiscal year ended June 30, 2003


                                                                      Project              Prior
                                                                   Authorization           Years
Young Drive Outfall
 Contracted services                                                                                -
Package Plant at Golf Course
 Contracted services                                                                                -
Nutrient removal
 Professional services                                                                         64,240
NC Highway 8 Widening
 Professional services                                                                            477
   Total expenditures for construction in progress                     11,665,901           5,155,058

Revenues over (under) expenditures                                    (10,781,951)         (4,276,774)

Other financing sources (uses):
 Contribution from operating fund                                                             192,187
 Contribution from utility administration
     capital reserve fund                                                                     118,500
 Contribution to utility administration capital reserve fund                                        -
 Contribution from general capital improvement project                                              -
 Arbitrage recovery                                                                            22,627
 Proceeds from bond issue                                                                   5,510,951
 Capital lease debt issued                                                                          -
   Total other financing sources (uses)                                10,781,951           5,844,265

Unexpended revenues and receipts                               $                   -   $    1,567,491




                                                - 151 -
                                                             Exhibit G-5
                                                                  Page 2
           City of Lexington, North Carolina
   Construction in Progress - Water and Sewer Fund
          Schedule of Revenues and Expenses
         Authorized and Actual (Non-GAAP)
From inception and for the fiscal year ended June 30, 2003

              Actual                 Total
              Current                 to
               Year                  Date

                     1,425                   1,425


                    23,870                23,870


                  202,018               266,258


                        -                    477
                  816,937              5,971,995

                  (798,277)           (5,075,051)


                  150,000               342,187

                    85,000              203,500
                  (148,543)            (148,543)
                    44,856               44,856
                    35,022               57,649
                         -            5,510,951
                 4,800,000            4,800,000
                 4,966,335           10,810,600

         $       4,168,058     $       5,735,549




                         - 152 -
                               City of Lexington, North Carolina
                                        Natural Gas Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                             2003

                                                               Budget                Actual
Operating revenues:
 Charges for sales and services:
   Residential                                                                  $         4,676,524
   Commercial                                                                             4,419,023
   Industrial                                                                            10,535,068
   FEMA reimbursement                                                                         3,670
   Other operating income                                                                   327,296
     Total operating revenues                                   19,547,476               19,961,581

Nonoperating revenues:
 Interest earned                                                                            71,620
 Sale of property                                                                            2,941
 Other nonoperating revenues                                                                     -
      Total nonoperating revenues                                  126,000                  74,561

      Total revenues                                            19,673,476               20,036,142

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 153 -
                                                                        Exhibit G-6
                                                                             Page 1
                  City of Lexington, North Carolina
                           Natural Gas Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                     2003                   2002
                    Variance
                  from Budget               Actual


                                      $       4,547,393
                                              4,007,003
                                              6,599,776
                                                      -
                                                 89,523
                          414,105            15,243,695


                                                134,687
                                                  4,138
                                                    557
                          (51,439)              139,382

                          362,666            15,383,077




                                - 154 -
                               City of Lexington, North Carolina
                                        Natural Gas Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                              2003

                                                               Budget                Actual
Expenditures:
 Operating expenses:
  Salaries and employee benefits                                                            787,475
  Cost of sales and services                                                                667,071
  Purchases for resale                                                                   15,587,676
  Administrative charges general fund                                                       396,098
  Administrative charges risk management fund                                                52,697
  Administrative charges utility administration fund                                        538,807
   Total operating expenses                                     18,500,161               18,029,824

 Budgetary appropriations:
  Interest expense                                                                         201,596
  Bond principal                                                                           310,000
  Capital lease principal                                                                   34,485
  Capital outlay                                                                            46,978
  Capital outlay construction in progress                                                        -
   Total budgetary appropriations                                  617,692                 593,059

   Total expenditures                                           19,117,853               18,622,883

Revenues over (under) expenditures                                 555,623                1,413,259

Other financing sources (uses):
 Transfers from (to):
  Capital lease debt issued                                          46,900                  37,558
  From natural gas construction in progress fund                     25,959                  25,959
  To general fund                                                  (550,000)               (550,000)
  To rate stabilization                                            (300,000)               (300,000)
  To utility administration fund                                   (112,343)               (112,343)
  To utility administration fund capital reserve                   (179,700)               (179,700)
  Transfers related to payment in lieu of taxes                     (55,292)                (55,292)
 Appropriated retained earnings                                     568,853                       -
   Total other financing sources (uses)                            (555,623)             (1,133,818)

Change in net assets - budgetary basis                    $               -      $         279,441

NOTE: Prepared on the budgetary basis which is modified accrual.




                                              - 155 -
                                                                        Exhibit G-6
                                                                             Page 2
                  City of Lexington, North Carolina
                           Natural Gas Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                       2003                 2002
                      Variance
                    from Budget             Actual


                                                798,122
                                                482,260
                                             12,436,111
                                                378,756
                                                 31,408
                                                503,609
                          470,337            14,630,266


                                                217,309
                                                293,000
                                                 11,772
                                                 35,730
                                                385,000
                           24,633               942,811

                          494,970            15,573,077

                          857,636              (190,000)




                           (9,342)                    -
                                -                     7
                                -              (550,000)
                                -                     -
                                -              (173,674)
                                -                     -
                                -               (50,080)
                         (568,853)                    -
                         (578,195)             (773,747)

                $         279,441       $      (963,747)




                                  - 156 -
                                                                                           Exhibit G-6
                                                                                                Page 3
                                 City of Lexington, North Carolina
                                          Natural Gas Fund
                     Schedule of Revenues, Expenses and Changes in Net Assets
                                  Budget and Actual (Non-GAAP)
                               For the fiscal year ended June 30, 2003
               (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                  2003                     2002
Reconciliation of modified accrual basis
 to full accrual basis:

Total revenues                                                   $20,036,142           $15,383,077
Total expenditures                                                18,622,883            15,573,077

Revenues over (under) expenditures                                  1,413,259                (190,000)

Budgetary appropriations                                             593,059                  942,811

Depreciation                                                         (428,678)               (352,010)

Wages charged to construction                                          77,400                  86,357

Materials charged to construction                                      80,035                  77,048

Overhead capitalized                                                   29,365                  60,535

Gain (loss) on sale of property                                          (3,534)               41,110

Increase (decrease) in inventory                                      (43,797)                418,371

Interest expense                                                     (201,596)               (217,309)

Bad debt expense                                                      (44,565)                (23,536)

Decrease (increase) in compensated absences payable                      (2,337)                  (1,462)

Income (loss) before transfers                                    $1,468,611                 $841,915




                                               - 157 -
This page has been left blank intentionally.
                               City of Lexington, North Carolina
                          Construction in Progress - Natural Gas Fund
                              Schedule of Revenues and Expenses
                             Authorized and Actual (Non-GAAP)
                    From inception and for the fiscal year ended June 30, 2003


                                                                  Project              Prior
                                                               Authorization           Years
Revenues:
 None
   Total revenues                                          $                   -   $            -
Expenditures:
Highway 8 relocation
 Contracted services                                                                      261,041
Upper Lake Road
 Contracted services                                                                            -
   Total expenditures for construction in progress                    801,041             261,041

Revenues over (under) expenditures                                   (801,041)           (261,041)

Other financing sources (uses):
 Contribution from operating fund                                                         287,000
 Contribution from utility administration capital reserve fund                                  -
 Contribution to operating fund                                                                 -
 Contribution to utility administration capital reserve fund                                    -
   Total other financing sources (uses)                               801,041             287,000

Unexpended revenues and receipts                           $                   -   $       25,959




                                              - 158 -
                                                             Exhibit G-7

           City of Lexington, North Carolina
      Construction in Progress - Natural Gas Fund
          Schedule of Revenues and Expenses
         Authorized and Actual (Non-GAAP)
From inception and for the fiscal year ended June 30, 2003

              Actual                 Total
              Current                 to
               Year                  Date


         $               -     $               -



                         -              261,041


                    99,001                99,001
                    99,001              360,042

                   (99,001)             (360,042)


                        -               287,000
                  540,000               540,000
                  (25,959)              (25,959)
                        -                     -
                  514,041               801,041

         $        415,040      $        440,999




                         - 159 -
                               City of Lexington, North Carolina
                                            Golf Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                              2003

                                                               Budget                Actual
Operating revenues:
 Charges for sales and services:
   Golf course revenues                                                          $       252,891
   Golf cart rentals                                                                     177,164
     Total operating revenues                                      501,492               430,055

Nonoperating revenues:
 Interest earned                                                                             649
 Sale of property                                                                          3,975
 Other nonoperating revenues                                                                  15
    Total nonoperating revenues                                       3,278                4,639

     Total revenues                                                504,770               434,694

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 160 -
                                                                        Exhibit G-8
                                                                             Page 1
                  City of Lexington, North Carolina
                               Golf Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                     2003                   2002
                    Variance
                  from Budget               Actual


                                      $         313,848
                                                214,025
                          (71,437)              527,873


                                                   2,095
                                                   4,858
                                                      29
                            1,361                  6,982

                          (70,076)              534,855




                                - 161 -
                               City of Lexington, North Carolina
                                            Golf Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                                Budget and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                              2003

                                                               Budget                Actual
Expenditures:
 Operating expenses:
  Salaries and employee benefits                                                         396,379
  Cost of sales and services                                                             121,545
  Administrative charges risk management fund                                             12,830
   Total operating expenses                                        668,970               530,754

 Budgetary appropriations:
  Capital outlay                                                                               -
   Total budgetary appropriations                                    11,800                    -

   Total expenditures                                              680,770               530,754

Revenue over (under) expenditures                                  (176,000)             (96,060)

Other financing sources (uses):
 Transfers from (to):
  From general fund                                                176,000               176,000
   Total other financing sources (uses)                            176,000               176,000

Change in net assets - budgetary basis                    $               -      $        79,940

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 162 -
                                                                        Exhibit G-8
                                                                             Page 2
                  City of Lexington, North Carolina
                               Golf Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
                   Budget and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                       2003                 2002
                      Variance
                    from Budget             Actual


                                                393,545
                                                148,579
                                                  8,632
                          138,216               550,756


                                                 18,418
                           11,800                18,418

                          150,016               569,174

                           79,940               (34,319)




                                  -                   -
                                  -                   -

                $          79,940       $       (34,319)




                                  - 163 -
                                                                                           Exhibit G-8
                                                                                                Page 3
                                 City of Lexington, North Carolina
                                              Golf Fund
                     Schedule of Revenues, Expenses and Changes in Net Assets
                                  Budget and Actual (Non-GAAP)
                               For the fiscal year ended June 30, 2003
               (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                  2003                     2002
Reconciliation of modified accrual basis
 to full accrual basis:

Total revenues                                              $        434,694       $          534,855
Total expenditures                                                   530,754                  569,174

Revenues over (under) expenditures                                    (96,060)                (34,319)

Budgetary appropriations                                                      -                18,418

Depreciation                                                          (16,179)                (39,450)

Gain (loss) on sale of property                                          (1,222)              (37,504)

Bad debt expense                                                            (83)                     (91)

(Increase) decrease in compensated absences payable                      1,402                    (2,199)

Income (loss) before transfers                              $        (112,142)     $          (95,145)




                                               - 164 -
This page has been left blank intentionally.
                               City of Lexington, North Carolina
                             Construction in Progress - Golf Fund
                              Schedule of Revenues and Expenses
                             Authorized and Actual (Non-GAAP)
                    From inception and for the fiscal year ended June 30, 2003


                                                                 Project              Prior
                                                              Authorization           Years
Revenues:
 None
   Total revenues                                         $                   -   $           -
Expenditures:
Golf course renovations
 Contracted services                                                                          -
   Total expenditures for construction in progress                 1,900,000                  -

Revenues over (under) expenditures                                (1,900,000)                 -

Other financing sources (uses):
 None                                                                                         -
   Total other financing sources (uses)                            1,900,000                  -

Unexpended revenues and receipts                          $                   -   $           -




                                             - 165 -
                                                             Exhibit G-9

           City of Lexington, North Carolina
         Construction in Progress - Golf Fund
          Schedule of Revenues and Expenses
         Authorized and Actual (Non-GAAP)
From inception and for the fiscal year ended June 30, 2003

              Actual                 Total
              Current                 to
               Year                  Date


         $               -     $               -



                    63,199                63,199
                    63,199                63,199

                   (63,199)              (63,199)


                         -                     -
                         -                     -

         $         (63,199)    $         (63,199)




                         - 166 -
This page has been left blank intentionally.
INTERNAL SERVICE FUNDS
    Combining Schedules
             and
  Individual Fund Schedules
                                          INTERNAL SERVICE FUNDS

Internal service funds are used to account for the financing of goods or services provided by one department
to other departments on a cost reimbursement basis.

                                                  GARAGE FUND

This fund accounts for the costs of required fuel and maintenance to the City's on-road and off-road vehicles
and equipment. The costs of providing this service are billed to the user departments. Vehicles and equipment
are acquired by the individual departments.

                                           GROUP INSURANCE FUND

This fund was established as a self-insurance fund for employee health and dental coverage. The City pays the
majority of premium costs for its active employees. This fund accounts for City and employee premium
contributions as well as payments to a third-party administrator for total claims, stop-loss premiums, and
administrative charges.

                                               TELEPHONE FUND

This fund is presented for comparative purposes only. The telephone fund was closed in FY 2001-02.
Telephone expenditures are now reported in the Utility Administration Fund.

                                          RISK MANAGEMENT FUND

This fund accounts for the City's self-insured workers' compensation program and property liability
insurance. Claims review and handling is provided by a third-party administrator to whom premiums are
paid for coverage after self-insured retentions are met as well as administrative charges. Costs of this fund are
shared directly or indirectly by all participating funds that have employees, property, and various liability risks.

                                      UTILITY ADMINISTRATION FUND

This fund provides management, marketing, and meter reading services to the Electric, Water and Sewer, and
Natural Gas utilities. The three aforementioned funds are charged as user departments to recover the total cost
of this fund. Charges to the user departments are prorated based on their operational budgets and number of
customers. The Utility Administration Capital Reserve Fund provides for the accumulation of resources for
future capital project needs in the Electric, Water and Sewer, and Natural Gas utilities. The Utility
Administration Rate Stabilization Fund provides for the accumulation of resources for rate stabilization for the
Electric, Water and Sewer and Natural Gas utilities.




                                                        - 167 -
                                                     City of Lexington, North Carolina
                                                           Internal Service Funds
                                                    Combining Statement of Net Assets
                                                               June 30, 2003


                                                                                         Group             Risk          Utility
                                                                   Garage               Insurance       Management    Administration
Assets
Current assets:
 Cash and cash equivalents                                     $       40,945       $      797,514      $   679,977   $      621,821
 Interest receivable                                                      137                1,949            1,535            1,226
 Accounts receivable                                                        -                6,398                5          130,769
 Intergovernmental                                                     44,633                    -              888           14,356
 Inventory                                                            102,462                    -                -                -
   Total current assets                                               188,177              805,861          682,405          768,172

Noncurrent assets:
 Restricted assets:
  Cash and cash equivalents                                                     -          212,897           67,131           17,404

  Capital assets:
   Land, land improvements, and construction in progress               15,000                       -             -        1,742,963
   Other capital assets, net of depreciation                          248,349                       -             -          826,598
     Total capital assets (net of accumulated depreciation)           263,349                       -             -        2,569,561

    Total noncurrent assets                                           263,349              212,897           67,131        2,586,965

Total assets                                                   $      451,526       $    1,018,758      $   749,536   $    3,355,137




The notes to the financial statements are an integral part of this statement.



                                                                    - 168 -
                                                                                                     Exhibit H-1
                                                                                                          Page 1
                                                     City of Lexington, North Carolina
                                                           Internal Service Funds
                                                    Combining Statement of Net Assets
                                                               June 30, 2003

                                           Utility                 Utility
                                       Administration          Administration
                                       Capital Reserve        Rate Stabilization         Total


                                      $       3,154,973      $           819,645    $ 6,114,875
                                                      -                    1,581          6,428
                                                      -                        -        137,172
                                                      -                        -         59,877
                                                      -                        -        102,462
                                              3,154,973                  821,226      6,420,814




                                                         -                      -         297,432


                                                         -                      -        1,757,963
                                                         -                      -        1,074,947
                                                         -                      -        2,832,910

                                                         -                      -        3,130,342

                                      $       3,154,973      $           821,226    $ 9,551,156




The notes to the financial statements are an integral part of this statement.



                                                                   - 169 -
                                                     City of Lexington, North Carolina
                                                           Internal Service Funds
                                                    Combining Statement of Net Assets
                                                               June 30, 2003


                                                                                         Group             Risk          Utility
                                                                   Garage               Insurance       Management    Administration
Liabilities and net assets
Current liabilities:
 Accounts payable                                              $        17,631      $       35,451      $    26,017   $       68,132
 Capital leases payable - current                                        2,264                   -                -          165,496
  Total current liabilities                                             19,895              35,451           26,017          233,628

Current liabilities payable
from restricted assets:
  Unpaid claims costs                                                           -          212,897           67,131               -
  Customer deposits                                                             -                -                -             200
   Total payable from restricted assets                                         -          212,897           67,131             200

Noncurrent liabilities:
 Compensated absences payable                                           22,304                      -         5,616           49,842
 Advances from other funds:
  Electric fund                                                       100,000                       -             -                -
 Capital leases payable                                                     -                       -             -          262,343
  Total noncurrent liabilities                                        122,304                       -         5,616          312,185

    Total liabilities                                                 142,199              248,348           98,764          546,013

Net assets:
Invested in capital assets, net of related debt                       261,085                    -                -        2,141,721
Unrestricted                                                           48,242              770,410          650,772          667,403
Total net assets                                                      309,327              770,410          650,772        2,809,124

Total liabilities and net assets                               $      451,526       $    1,018,758      $   749,536   $    3,355,137




The notes to the financial statements are an integral part of this statement.



                                                                    - 170 -
                                                                                                     Exhibit H-1
                                                                                                          Page 2
                                                     City of Lexington, North Carolina
                                                           Internal Service Funds
                                                    Combining Statement of Net Assets
                                                               June 30, 2003

                                           Utility                 Utility
                                       Administration          Administration
                                       Capital Reserve        Rate Stabilization         Total


                                      $                  -   $                  -   $     147,231
                                                         -                      -         167,760
                                                         -                      -         314,991




                                                         -                      -         280,028
                                                         -                      -             200
                                                         -                      -         280,228


                                                         -                      -          77,762

                                                         -                      -         100,000
                                                         -                      -         262,343
                                                         -                      -         440,105

                                                         -                      -        1,035,324


                                                      -                        -         2,402,806
                                              3,154,973                  821,226         6,113,026
                                              3,154,973                  821,226         8,515,832

                                      $       3,154,973      $           821,226    $ 9,551,156




The notes to the financial statements are an integral part of this statement.



                                                                   - 171 -
                                                  City of Lexington, North Carolina
                                                        Internal Service Funds
                              Combining Statement of Revenues, Expenses and Changes in Fund Net Assets
                                               For the fiscal year ended June 30, 2003


                                                                                     Group                Risk                 Utility
                                                           Garage                   Insurance          Management           Administration
  Operating revenues:
   Charges for services                               $         951,721         $      3,138,087   $        874,513     $        1,573,955
   Other operating revenues                                      54,189                   13,353             15,996                483,863
     Total operating revenues                                 1,005,910                3,151,440            890,509              2,057,818

  Operating expenses:
   Cost of sales and services                                   995,711                        -             165,757                     -
   Premiums                                                           -                  350,051             602,896                     -
   Claims                                                             -                1,957,168             210,049                     -
   Claims made - not settled                                          -                  212,897              67,131                     -
   Bad debt expense                                                   -                        -                   -                60,919
   Administration                                                     -                  154,874               4,888             2,162,656
   Depreciation                                                  29,003                        -                   -                81,394
     Total operating expenses                                 1,024,714                2,674,990           1,050,721             2,304,969

      Operating income (loss)                                   (18,804)                 476,450           (160,212)              (247,151)

  Nonoperating revenues (expenses):
   Interest earned                                                1,431                   12,754              12,134                 10,661
   Gain (loss) on sale of property                                  107                        -             (14,400)                (2,295)
   Other nonoperating revenues                                        -                        -                   -                  4,803
   Interest expense                                                (231)                       -                   -                (26,705)
    Total nonoperating revenues (expenses)                        1,307                   12,754              (2,266)               (13,536)

  Income (loss) before transfers                                (17,497)                 489,204           (162,478)              (260,687)




The notes to the financial statements are an integral part of this statement.




                                                                    - 172 -
                                                                                              Exhibit H-2
                                                                                                   Page 1
                                  City of Lexington, North Carolina
                                        Internal Service Funds
              Combining Statement of Revenues, Expenses and Changes in Fund Net Assets
                               For the fiscal year ended June 30, 2003

                            Utility                    Utility
                        Administration             Administration
                        Capital Reserve           Rate Stabilization            Total

                    $                     -   $                        -   $     6,538,276
                                          -                            -           567,401
                                          -                            -         7,105,677


                                          -                            -         1,161,468
                                          -                            -           952,947
                                          -                            -         2,167,217
                                          -                            -           280,028
                                          -                            -            60,919
                                          -                            -         2,322,418
                                          -                            -           110,397
                                          -                            -         7,055,394

                                          -                            -            50,283


                                          -                     10,479              47,459
                                          -                          -             (16,588)
                                          -                          -               4,803
                                          -                          -             (26,936)
                                          -                     10,479               8,738

                                          -                     10,479              59,021




The notes to the financial statements are an integral part of this statement.




                                                      - 173 -
                                                  City of Lexington, North Carolina
                                                        Internal Service Funds
                              Combining Statement of Revenues, Expenses and Changes in Fund Net Assets
                                               For the fiscal year ended June 30, 2003


                                                                                     Group                 Risk                 Utility
                                                           Garage                   Insurance           Management           Administration
  Transfers from (to):
   From general fund                                                  -                         -                    -               12,126
   From general capital projects fund                            28,754                         -                    -                    -
   From electric fund                                                 -                         -                    -               59,566
   From electric fund - construction in progress                      -                         -                    -                    -
   From electric fund - rate stabilization                            -                         -                    -                    -
   From water and sewer fund                                          -                         -                    -               12,620
   From water and sewer fund - construction
     in progress                                                       -                        -                    -                    -
   From natural gas fund                                               -                        -                    -              112,343
   To electric fund                                                    -                        -                    -                    -
   To water and sewer fund - construction in
     progress                                                         -                         -                    -                    -
   To natural gas fund - construction in progress                     -                         -                    -                    -
     Total transfers from (to)                                   28,754                         -                    -              196,655

  Change in net assets                                           11,257                  489,204            (162,478)                (64,032)
  Net assets:
   Net assets, July 1                                           298,070                  281,206             813,250              2,873,156

  Net assets, June 30                                 $         309,327         $        770,410    $        650,772     $        2,809,124




The notes to the financial statements are an integral part of this statement.




                                                                    - 174 -
                                                                                              Exhibit H-2
                                                                                                   Page 2
                                  City of Lexington, North Carolina
                                        Internal Service Funds
              Combining Statement of Revenues, Expenses and Changes in Fund Net Assets
                               For the fiscal year ended June 30, 2003

                            Utility                   Utility
                        Administration            Administration
                        Capital Reserve          Rate Stabilization             Total

                                      -                           -                 12,126
                                      -                           -                 28,754
                                492,500                           -                552,066
                                 85,680                           -                 85,680
                                      -                     510,747                510,747
                                 19,223                           -                 31,843

                                 148,543                          -                148,543
                                 179,700                    300,000                592,043
                                (165,000)                         -               (165,000)

                                 (85,000)                         -                (85,000)
                                (540,000)                         -               (540,000)
                                 135,646                    810,747              1,171,802

                                135,646                     821,226              1,230,823


                               3,019,327                              -          7,285,009

                    $          3,154,973     $              821,226       $      8,515,832




The notes to the financial statements are an integral part of this statement.




                                                     - 175 -
                                       City of Lexington, North Carolina
                                             Internal Service Funds
                                      Combining Statement of Cash Flows
                                     For the fiscal year ended June 30, 2003




                                                                                                    Group
                                                                                Garage             Insurance
Cash flows from operating activities:
 Cash received from quasi-external operating
    transactions with other funds                                        $          963,114    $      3,132,966
 Cash paid for goods and services                                                  (609,488)         (2,617,484)
 Cash paid to employees                                                            (378,506)                  -
 Other operating income                                                              54,189              13,353
    Net cash provided (used) by operating activities                                 29,309             528,835

Cash flows from noncapital financing activities:
 Advances from (to) other funds                                                     (30,000)                   -
 Transfers in                                                                        28,754                    -
 Transfers out                                                                            -                    -
    Net cash provided (used) by noncapital financing activities                      (1,246)                   -

Cash flows from capital and related financing activities:
 Proceeds from sale of property                                                       1,103                    -
 Acquisition of capital assets                                                      (12,944)                   -
 Reimbursement on acquisition of capital asset                                            -                    -
 Principal payments - capital leases                                                 (4,391)                   -
 Interest paid                                                                         (231)                   -
   Net cash provided (used) by capital and related financing
    activities                                                                      (16,463)                   -

Cash flows from investing activities:
 Interest earned on investments                                                       1,431              12,754
    Net cash provided (used) by investing activities                                  1,431              12,754

Net increase (decrease) in cash and cash equivalents                                13,031              541,589
Cash and cash equivalents, July 1                                                   27,914              468,822

Cash and cash equivalents, June 30                                       $          40,945     $      1,010,411



The notes to the financial statements are an integral part of this statement.




                                                       - 176 -
                                                                                            Exhibit H-3
                                                                                                 Page 1
                                    City of Lexington, North Carolina
                                          Internal Service Funds
                                   Combining Statement of Cash Flows
                                  For the fiscal year ended June 30, 2003


                                                 Utility                Utility
       Risk                 Utility          Administration         Administration
    Management           Administration      Capital Reserve       Rate Stabilization       Total


$         879,512    $         1,543,337    $                -     $          (1,581)   $     6,517,348
         (913,727)              (767,336)                    -                     -         (4,908,035)
         (115,214)            (1,184,128)                    -                     -         (1,677,848)
           15,996                483,863                     -                     -            567,401
         (133,433)                75,736                     -                (1,581)           498,866


                 -                    -                     -                     -             (30,000)
                 -              196,655               925,646               810,747           1,961,802
                 -                    -              (790,000)                    -            (790,000)
                 -              196,655               135,646               810,747           1,141,802


                -                  1,044                     -                      -             2,147
          (14,400)               (37,759)                    -                      -           (65,103)
                -                  4,803                     -                      -             4,803
                -               (250,088)                    -                      -          (254,479)
                -                (26,705)                    -                      -           (26,936)

          (14,400)              (308,705)                    -                      -          (339,568)


          12,133                 10,661                      -                10,479            47,458
          12,133                 10,661                      -                10,479            47,458

         (135,700)              (25,653)              135,646               819,645           1,348,558
          882,808               664,878             3,019,327                     -           5,063,749

$        747,108     $          639,225     $       3,154,973      $        819,645     $     6,412,307




                                                  - 177 -
                                       City of Lexington, North Carolina
                                             Internal Service Funds
                                      Combining Statement of Cash Flows
                                     For the fiscal year ended June 30, 2003


                                                                                                    Group
                                                                                Garage             Insurance
Reconciliation of Operating Income to Net Cash
  Provided (Used) by Operating Activities

Operating income                                                         $          (18,804)   $        476,450

Adjustments to reconcile operating income to net
  cash provided (used) by operating activities:
  Depreciation                                                                      29,003                    -
  Construction in progress not capitalized                                               -                    -
  (Increase) decrease in accounts receivable                                        11,393                 (759)
  (Increase) decrease in inventory                                                   1,324                    -
  (Increase) decrease in prepaid expenses                                                -                    -
  Increase (decrease) in accounts payable                                            2,324               35,234
  Increase (decrease) in unpaid claims cost                                              -               22,272
  Increase (decrease) in compensated absences payable                                4,069                    -
  Increase (decrease) in deferred revenues                                               -               (4,362)
      Total adjustments                                                             48,113               52,385

Net cash provided (used) by operating activities                         $          29,309     $        528,835



Noncash transactions affecting financial position:
In 2003, the City transferred capital assets with a book value of $2,184 from the Utility
Administration Fund to the Electric Fund, $1,155 from the Utility Administration Fund
to the Golf Fund, $1,094 from the Golf Fund to the Utility Administration Fund;
$1,650 from the General Fund to the Garage Fund, $2,142 from the Garage Fund
to the General Fund, $14,400 from the Risk Management Fund to the General Fund.




The notes to the financial statements are an integral part of this statement.




                                                     - 178 -
                                                                                            Exhibit H-3
                                                                                                 Page 2
                                    City of Lexington, North Carolina
                                          Internal Service Funds
                                   Combining Statement of Cash Flows
                                  For the fiscal year ended June 30, 2003

                                                 Utility                Utility
       Risk                 Utility          Administration         Administration
    Management           Administration      Capital Reserve       Rate Stabilization       Total




$        (160,212)   $          (247,151)   $                  -   $                -   $       50,283




               -                 81,394                      -                     -           110,397
               -                326,083                      -                     -           326,083
           5,004                (30,618)                     -                (1,581)          (16,561)
               -                      -                      -                     -             1,324
               -                    600                      -                     -               600
          12,519                (55,652)                     -                     -            (5,575)
           8,631                      -                      -                     -            30,903
             630                  1,080                      -                     -             5,779
              (5)                     -                      -                     -            (4,367)
          26,779                322,887                      -                (1,581)          448,583

$        (133,433)   $           75,736     $                -     $          (1,581)   $      498,866




                                                  - 179 -
                               City of Lexington, North Carolina
                                          Garage Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                            Financial Plan and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
            (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                             2003

                                                           Financial Plan               Actual
Revenues:
 Operating revenues:
   Charges for sales and services                                               $           951,721
   FEMA reimbursements                                                                        4,818
   Other operating revenues                                                                  49,371
     Total operating revenues                                    1,143,991                1,005,910

 Nonoperating revenues:
  Interest income                                                                            1,431
  Sale of property                                                                           1,103
    Total nonoperating revenues                                      1,700                   2,534

     Total revenues                                              1,145,691                1,008,444

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 180 -
                                                                        Exhibit H-4
                                                                             Page 1
                   City of Lexington, North Carolina
                              Garage Fund
       Schedule of Revenues, Expenses and Changes in Net Assets
                Financial Plan and Actual (Non-GAAP)
                 For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                      2003                   2002
                     Variance
                   from Budget              Actual


                                       $        955,116

                                                 77,735
                         (138,081)            1,032,851


                                                    1,626
                                                      716
                              834                   2,342

                         (137,247)            1,035,193




                                 - 181 -
                               City of Lexington, North Carolina
                                          Garage Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                            Financial Plan and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
            (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                  2003

                                                             Financial Plan              Actual
Expenditures:
 Operating expenses:
   Salaries and employee benefits                                                           378,507
   Cost of sales and services                                                                69,951
   Purchases for resale                                                                     541,861
     Total operating expenses                                      1,158,314                990,319

 Budgetary appropriations:
  Interest expense                                                                              231
  Capital lease principal                                                                     4,391
  Capital outlay                                                                             12,944
    Total budgetary appropriations                                    23,323                 17,566

     Total expenditures                                            1,181,637               1,007,885

 Revenues over (under) expenditures                                  (35,946)                     559

 Other financing sources (uses):
  Transfers from (to):
    From general capital projects                                     28,754                 28,754
    To general fund                                                        -                      -
 Appropriated retained earnings                                        7,192                      -
      Total other financing sources (uses)                            35,946                 28,754

Change in net assets -budgetary basis                    $                    -      $       29,313

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 182 -
                                                                        Exhibit H-4
                                                                             Page 2
                   City of Lexington, North Carolina
                              Garage Fund
       Schedule of Revenues, Expenses and Changes in Net Assets
                Financial Plan and Actual (Non-GAAP)
                 For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                       2003                  2002
                      Variance
                    from Budget             Actual


                                                358,984
                                                 68,077
                                                538,032
                          167,995               965,093


                                                    524
                                                  4,890
                                                 29,521
                            5,757                34,935

                          173,752             1,000,028

                           36,505                35,165




                                -                        -
                                -                   (2,684)
                           (7,192)                       -
                           (7,192)                  (2,684)

                $          29,313       $        32,481




                                  - 183 -
                                                                                         Exhibit H-4
                                                                                              Page 3
                                City of Lexington, North Carolina
                                           Garage Fund
                    Schedule of Revenues, Expenses and Changes in Net Assets
                             Financial Plan and Actual (Non-GAAP)
                              For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                 2003                    2002
Reconciliation of modified accrual basis
 to full accrual basis:

Total revenues                                            $       1,008,444       $       1,035,193
Total expenditures                                                1,007,885               1,000,028

Revenues over (under) expenditures                                        559                35,165

Budgetary appropriations                                             17,566                  34,935

Depreciation                                                        (29,003)                (32,763)

Gain (loss) on sale of property                                          (996)              (26,620)

Increase (decrease) in inventory                                        (1,323)                 3,733

Interest expense                                                         (231)                   (524)

(Increase) decrease in compensated absences payable                     (4,069)                 (2,715)

Income (loss) before transfers                            $         (17,497)      $          11,211




                                              - 184 -
This page has been left blank intentionally.
                                City of Lexington, North Carolina
                                      Group Insurance Fund
                    Schedule of Revenues, Expenses and Changes in Net Assets
                             Financial Plan and Actual (Non-GAAP)
                              For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                   2003

                                                              Financial Plan              Actual
Revenues:
 Operating revenues:
   Premium charges to employees                                                       $       504,536
   Premium charges for COBRA                                                                   14,262
   Premium charges to departments                                                           2,619,289
   Other operating revenues                                                                    13,353
     Total operating revenues                                       3,375,855               3,151,440

 Nonoperating revenues:
  Interest                                                                                    12,754
    Total nonoperating revenues                                         9,145                 12,754

     Total revenues                                                 3,385,000               3,164,194

Expenditures:
 Operating expenses:
   Health insurance premiums                                                                  350,051
   Health claims paid                                                                       1,957,168
   Health claims - not settled                                                                212,897
   Administration                                                                             154,874
    Total operating expenses                                        3,385,000               2,674,990

Revenues over (under) expenditures                                             -             489,204

Other financing sources (uses):
    None                                                                       -                    -
  Total other financing sources (uses)                                         -                    -

Change in net assets - budgetary basis                    $                    -      $      489,204

NOTE: Prepared on the budgetary basis which is modified accrual.




                                              - 185 -
                                                                        Exhibit H-5

                   City of Lexington, North Carolina
                         Group Insurance Fund
       Schedule of Revenues, Expenses and Changes in Net Assets
                Financial Plan and Actual (Non-GAAP)
                 For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                       2003                  2002
                      Variance
                    from Budget             Actual


                                        $       442,013
                                                 12,011
                                              2,394,160
                                                  2,576
                         (224,415)            2,850,760


                                                    6,850
                            3,609                   6,850

                         (220,806)            2,857,610




                                                330,748
                                              2,119,603
                                                190,625
                                                126,793
                          710,010             2,767,769

                          489,204                89,841


                                  -                     -
                                  -                     -

                $         489,204       $        89,841




                                  - 186 -
                                City of Lexington, North Carolina
                                         Telephone Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                            Financial Plan and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                   2003

                                                              Financial Plan              Actual
Revenues:
 Operating revenues:
   Charges for sales and services                                                     $            -
     Total operating revenues                             $                    -                   -

 Nonoperating revenues:
  Interest                                                                                         -
     Total nonoperating revenues                                               -                   -

     Total revenues                                                            -                   -

Expenditures:
 Operating expenses:
   Salaries and employee benefits                                                                  -
   Telephone expense                                                                               -
     Total operating expenses                                                  -                   -

     Total expenditures                                                        -                   -

Revenues over (under) expenditures                                             -                   -

Other financing sources (uses):
 Transfers from (to):
  To utility administration fund                                               -                   -
     Total other financing sources (uses)                                      -                   -

Revenues and other sources over (under)
 expenditures and other uses                              $                    -      $            -

NOTE: Prepared on the budgetary basis which is modified accrual.




                                             - 187 -
                                                                            Exhibit H-6
                                                                                 Page 1
                   City of Lexington, North Carolina
                            Telephone Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
               Financial Plan and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                       2003                 2002
                      Variance
                    from Budget             Actual


                                        $        54,058
                $                 -              54,058


                                                   1,198
                                  -                1,198

                                  -              55,256




                                                 30,444
                                                 20,546
                                  -              50,990

                                  -              50,990

                                  -                4,266




                                  -             (41,723)
                                  -             (41,723)


                $                 -     $       (37,457)




                                  - 188 -
                                                                                           Exhibit H-6
                                                                                                Page 2
                                  City of Lexington, North Carolina
                                           Telephone Fund
                     Schedule of Revenues, Expenses and Changes in Net Assets
                              Financial Plan and Actual (Non-GAAP)
                               For the fiscal year ended June 30, 2003
               (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                  2003                     2002
Reconciliation of modified basis to full accrual basis

Total revenues                                              $               -     $            55,256
Total expenditures                                                          -                  50,990

Excess revenues over (under) expenditures                                   -                     4,266

Depreciation                                                                -                     (935)

Gain (loss) on disposal of capital assets                                   -                 (16,892)

Income (loss) before transfers                              $               -     $           (13,561)




                                                - 189 -
This page has been left blank intentionally.
                                City of Lexington, North Carolina
                                     Risk Management Fund
                   Schedule of Revenues, Expenses and Changes in Net Assets
                            Financial Plan and Actual (Non-GAAP)
                             For the fiscal year ended June 30, 2003
             (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                   2003

                                                              Financial Plan              Actual
Revenues:
 Operating revenues:
   Charges for sales and services                                                     $      874,513
   Other operating revenues                                                                   15,996
     Total operating revenues                                        922,864                 890,509

 Nonoperating revenues:
  Interest                                                                                    12,134
  Sale of property                                                                                 -
    Total nonoperating revenues                                       31,230                  12,134

     Total revenues                                                  954,094                 902,643

Expenditures:
 Operating expenses:
   Salaries and employee benefits                                                             115,214
   Other operating                                                                             49,913
   Premiums                                                                                   602,896
   Claims                                                                                     210,049
   Claims made - not settled                                                                   67,131
   Administration                                                                               4,888
     Total operating expenses                                       1,207,733               1,050,091

 Budgetary appropriations:
  Capital outlay                                                                              14,400
    Total budgetary appropriations                                    15,000                  14,400

     Total expenditures                                             1,222,733               1,064,491

Revenues over (under) expenditures                                   (268,639)               (161,848)

Other financing sources (uses):
 Appropriated retained earnings                                      268,639                        -
     Total other financing sources (uses)                            268,639                        -

Change in net assets - budgetary basis                    $                    -      $      (161,848)

NOTE: Prepared on the budgetary basis which is modified accrual.




                                              - 190 -
                                                                            Exhibit H-7
                                                                                 Page 1
                   City of Lexington, North Carolina
                        Risk Management Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
               Financial Plan and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                       2003                  2002
                      Variance
                    from Budget             Actual


                                        $       626,766
                                                 37,120
                          (32,355)              663,886


                                                 25,718
                                                    476
                          (19,096)               26,194

                          (51,451)              690,080




                                                110,242
                                                 55,327
                                                499,208
                                                162,311
                                                 58,500
                                                 17,504
                          157,642               903,092


                                                       -
                              600                      -

                          158,242               903,092

                          106,791              (213,012)


                         (268,639)                     -
                         (268,639)                     -

                $        (161,848)      $      (213,012)




                                  - 191 -
                                                                                           Exhibit H-7
                                                                                                Page 2
                                  City of Lexington, North Carolina
                                       Risk Management Fund
                     Schedule of Revenues, Expenses and Changes in Net Assets
                              Financial Plan and Actual (Non-GAAP)
                               For the fiscal year ended June 30, 2003
               (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                  2003                     2002
Reconciliation of modified accrual basis
 to full accrual basis

Total revenues                                              $         902,643     $           690,080
Total expenditures                                                  1,064,491                 903,092

Revenues over (under) expenditures                                   (161,848)               (213,012)

Budgetary appropriations                                               14,400                          -

Depreciation                                                                 -                    (2,764)

Gain (loss) on sale of property                                       (14,400)                    (8,748)

(Increase) decrease in compensated absences payable                      (630)                    1,261

Income (loss) before transfers                              $        (162,478)    $          (223,263)




                                                - 192 -
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                                   City of Lexington, North Carolina
                                      Utility Administration Fund
                       Schedule of Revenues, Expenses and Changes in Net Assets
                                Financial Plan and Actual (Non-GAAP)
                                 For the fiscal year ended June 30, 2003
                 (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                      2003

                                                                    Financial Plan           Actual
Revenues:
 Operating revenues:
   Charges for sales and services                                                        $     1,573,955
   FEMA reimbursements                                                                            12,193
   Other operating revenues                                                                      474,084
     Total operating revenues                                             1,738,149            2,060,232

 Nonoperating revenues:
  Interest                                                                                        9,711
  Sale of property                                                                                1,044
    Total nonoperating revenues                                              15,000              10,755

     Total revenues                                                       1,753,149            2,070,987

NOTE: Prepared on the budgetary basis which is modified accrual.




                                                 - 193 -
                                                                        Exhibit H-8
                                                                             Page 1
                  City of Lexington, North Carolina
                     Utility Administration Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
               Financial Plan and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                     2003                   2002
                    Variance
                  from Budget               Actual


                                      $       1,913,546
                                                      -
                                                269,939
                          322,083             2,183,485


                                                  8,453
                                                  4,956
                           (4,245)               13,409

                          317,838             2,196,894




                                - 194 -
                                  City of Lexington, North Carolina
                                     Utility Administration Fund
                      Schedule of Revenues, Expenses and Changes in Net Assets
                               Financial Plan and Actual (Non-GAAP)
                                For the fiscal year ended June 30, 2003
                (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                        2003

                                                                   Financial Plan              Actual
Expenditures:
 Utility administrative overhead:
  Salaries and employee benefits                                                                  102,843
  Cost of sales and services                                                                      217,206
  Administrative charges risk management fund                                                      43,134
   Total utility administrative overhead                                   378,648                363,183

 Public utilities:
  Salaries and employee benefits                                                                        -
  Cost of sales and services                                                                            -
   Total public utilities                                                           -                   -

 Marketing - customer service:
  Salaries and employee benefits                                                                  567,359
  Cost of sales and services                                                                      248,876
   Total marketing - customer service                                    1,018,076                816,235

 Warehousing:
  Salaries and employee benefits                                                                  143,105
  Cost of sales and services                                                                       21,106
   Total warehousing                                                       180,133                164,211




NOTE: Prepared on the budgetary basis which is modified accrual.




                                                - 195 -
                                                                        Exhibit H-8
                                                                             Page 2
                  City of Lexington, North Carolina
                     Utility Administration Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
               Financial Plan and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                     2003                   2002
                    Variance
                  from Budget               Actual


                                                 89,947
                                                174,504
                                                      -
                           15,465               264,451


                                                 86,448
                                                  5,294
                                -                91,742


                                                512,713
                                                338,626
                          201,841               851,339


                                                 94,918
                                                 44,321
                           15,922               139,239




                                - 196 -
                                   City of Lexington, North Carolina
                                      Utility Administration Fund
                       Schedule of Revenues, Expenses and Changes in Net Assets
                                Financial Plan and Actual (Non-GAAP)
                                 For the fiscal year ended June 30, 2003
                 (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                                           2003

                                                                      Financial Plan              Actual
 Meter reading:
  Salaries and employee benefits                                                                     371,901
  Cost of sales and services                                                                          56,487
   Total meter reading                                                       438,381                 428,388

   Total operating expenses                                                 2,015,238               1,772,017

Budgetary appropriations:
 Interest expense                                                                                     26,705
 Capital lease principal                                                                             250,088
 Capital outlay                                                                                       37,759
   Total budgetary appropriations                                            334,565                 314,552

   Total expenditures                                                       2,349,803               2,086,569

Revenues over (under) expenditures                                           (596,654)                (15,582)

Other financing sources (uses):
Transfers from (to):
  From general fund                                                           12,126                  12,126
  From electric fund                                                          73,857                  59,566
  From water and sewer fund                                                   12,620                  12,620
  From natural gas fund                                                      112,343                 112,343
  From telephone fund                                                              -                       -
  From utility administration construction in progress fund                   80,141                  80,141
  To utility administration construction in progress fund                          -                       -
 Appropriated retained earnings                                              305,567                       -
   Total other financing sources (uses)                                      596,654                 276,796

Change in net assets - budgetary basis                            $                    -      $      261,214

NOTE: Prepared on the budgetary basis which is modified accrual.




                                                  - 197 -
                                                                        Exhibit H-8
                                                                             Page 3
                  City of Lexington, North Carolina
                     Utility Administration Fund
      Schedule of Revenues, Expenses and Changes in Net Assets
               Financial Plan and Actual (Non-GAAP)
                For the fiscal year ended June 30, 2003
(With comparative actual amounts for the fiscal year ended June 30, 2002)

                       2003                 2002
                      Variance
                    from Budget             Actual

                                                381,305
                                                 47,221
                            9,993               428,526

                          243,221             1,775,297


                                                 74,540
                                              1,087,333
                                                171,366
                           20,013             1,333,239

                          263,234             3,108,536

                          581,072              (911,642)




                                -                12,126
                          (14,291)              213,909
                                -               124,557
                                -               173,674
                                -                41,723
                                -               684,496
                                -               (25,000)
                         (305,567)                    -
                         (319,858)            1,225,485

                $         261,214       $       313,843




                                  - 198 -
                                                                                               Exhibit H-8
                                                                                                    Page 4
                                     City of Lexington, North Carolina
                                        Utility Administration Fund
                         Schedule of Revenues, Expenses and Changes in Net Assets
                                  Financial Plan and Actual (Non-GAAP)
                                   For the fiscal year ended June 30, 2003
                   (With comparative actual amounts for the fiscal year ended June 30, 2002)

                                                                          2003                 2002
Reconciliation of modified accrual basis
 to full accrual basis

Total revenues                                                      $       2,070,987      $    2,196,894
Total expenditures                                                          2,086,569           3,108,536

Revenues over (under) expenditures                                            (15,582)           (911,642)

Budgetary appropriations                                                      314,552           1,333,239

Depreciation                                                                  (81,394)           (194,681)

CIP wages and overhead not capitalized                                       (389,560)                     -

Reimbursement for purchase of capital assets                                     2,389            813,127

Interest earned                                                                    950             11,924

Interest expense                                                              (26,705)            (74,540)

Gain (loss) on sale of property                                                  (3,339)         (512,805)

Bad debt expense                                                              (60,919)                (9,084)

(Increase) decrease in compensated absences payable                              (1,079)              9,421

Income (loss) before transfers                                      $        (260,687)     $      464,959




                                                   - 199 -
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                                    City of Lexington, North Carolina
                              Utility Administration Capital Reserve Fund
                     Schedule of Revenues, Expenditures and Changes in Net Assets
                                  Authorized and Actual (Non-GAAP)
                       From inception and for the fiscal year ended June 30, 2003


                                                                Project              Prior
                                                             Authorization           Years
Revenues:
 None
   Total revenues                                        $                   -   $             -

Expenditures:
 Electric reserve                                                  2,116,187                   -
 Water and sewer reserve                                             248,722                   -
 Natural gas reserve                                                 790,066                   -
   Total expenditures                                              3,154,975                   -

Revenues over (under) expenditures                                 (3,154,975)                 -

Other financing sources (uses):
 Transfers from (to):
   From electric fund                                              1,495,037           1,002,537
   From electric fund construction in progress                       982,077             896,395
   From water and sewer fund                                          58,499              39,276
   From water and sewer fund construction in progre                  393,723             245,180
   From natural gas fund                                             179,700                   -
   From natural gas fund construction in progress                  1,315,366           1,315,366
   To electric fund                                                 (165,000)                  -
   To electric fund construction in progress                        (195,927)           (195,927)
   To water and sewer fund construction in progress                 (203,500)           (118,500)
   To natural gas fund construction in progress                     (705,000)           (165,000)
      Total other financing sources (uses)                         3,154,975           3,019,327

Change in net assets                                     $                   -   $     3,019,327

Net assets, July 1

Net assets, June 30




                                               - 200 -
                                                                    Exhibit H-9

               City of Lexington, North Carolina
         Utility Administration Capital Reserve Fund
Schedule of Revenues, Expenditures and Changes in Net Assets
             Authorized and Actual (Non-GAAP)
  From inception and for the fiscal year ended June 30, 2003

      Actual                   Total
      Current                   to                      Variance
       Year                    Date                   from Budget


$                 -    $                     -    $                   -


                  -                          -             2,116,187
                  -                          -               248,722
                  -                          -               790,066
                  -                          -             3,154,975

                  -                          -             3,154,975




            492,500                  1,495,037                       -
             85,680                    982,075                      (2)
             19,223                     58,499                       -
            148,543                    393,723                       -
            179,700                    179,700                       -
                  -                  1,315,366                       -
           (165,000)                  (165,000)                      -
                  -                   (195,927)                      -
            (85,000)                  (203,500)                      -
           (540,000)                  (705,000)                      -
            135,646                  3,154,973                      (2)

           135,646     $             3,154,973    $        3,154,973

          3,019,327

$         3,154,973




                           - 201 -
                                  City of Lexington, North Carolina
                           Utility Administration Rate Stabilization Fund
                     Schedule of Revenues, Expenses and Changes in Net Assets
                                Authorized and Actual (Non-GAAP)
                      From inception and for the fiscal year ended June 30, 2003


                                                            Project                Prior
                                                         Authorization             Years
Revenues:
 Interest earned                                    $                    -   $             -
   Total revenues                                                        -                 -

Other financing sources (uses):
 Transfers from (to):
   From electric rate stabilization                              510,748                   -
   From natural gas                                              300,000                   -
   To electric fund                                             (510,748)                  -
   To natural gas fund                                          (300,000)                  -
     Total other financing sources (uses)                              -                   -

Change in net assets                                $                    -   $             -

Net assets, July 1

Net assets, June 30




                                               - 202 -
                                                                     Exhibit H-10

                 City of Lexington, North Carolina
          Utility Administration Rate Stabilization Fund
    Schedule of Revenues, Expenses and Changes in Net Assets
               Authorized and Actual (Non-GAAP)
     From inception and for the fiscal year ended June 30, 2003

        Actual                    Total
        Current                    to                    Variance
         Year                     Date                 from Budget

$              10,479     $               10,479   $               10,479
               10,479                     10,479                   10,479




              510,747                   510,747                        (1)
              300,000                   300,000                         -
                    -                         -                   510,748
                    -                         -                   300,000
              810,747                   810,747                   810,747

              821,226     $             821,226    $              821,226

                     -

$             821,226




                              - 203 -
                               City of Lexington, North Carolina
                     Construction in Progress - Utility Administration Fund
                              Schedule of Revenues and Expenses
                             Authorized and Actual (Non-GAAP)
                    From inception and for the fiscal year ended June 30, 2003


                                                                 Project              Prior
                                                              Authorization           Years
Revenues:
 Reimbursement of costs                                                           $      813,127
 Interest                                                                                 29,283
   Total revenues                                                    845,749             842,410

Expenditures:
Utilities warehouse
 Capital outlay - construction                                                           147,019
Customer Information System
 Professional services                                                                   375,768
 Capital outlay - intangibles                                                          1,331,372
 Capital outlay - equipment                                                              146,297
   Total expenditures for construction in progress                 2,065,481           2,000,456

Revenues over (under) expenditures
 for construction in progress                                     (1,219,732)         (1,158,046)

Other financing sources (uses):
 Contribution from operating fund                                                         26,563
 Contribution to operating fund                                                         (684,496)
 Capital lease debt issued                                                             1,957,806
   Total other financing sources (uses)                            1,219,732           1,299,873

Unexpended revenues and receipts                          $                   -   $      141,827




                                             - 204 -
                                                             Exhibit H-11

            City of Lexington, North Carolina
  Construction in Progress - Utility Administration Fund
          Schedule of Revenues and Expenses
          Authorized and Actual (Non-GAAP)
From inception and for the fiscal year ended June 30, 2003

              Actual                 Total
              Current                 to
               Year                  Date

         $           2,389     $        815,516
                       950               30,233
                     3,339              845,749




                    35,802              182,821


                    13,792               389,560
                     3,413             1,334,785
                    10,470               156,767
                    63,477             2,063,933


                   (60,138)           (1,218,184)


                         -                26,563
                   (80,141)             (764,637)
                         -             1,957,806
                   (80,141)            1,219,732

         $        (140,279)    $             1,548




                         - 205 -
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SUPPLEMENTAL FINANCIAL DATA
                                                                                            Schedule I-1

                                     City of Lexington, North Carolina
                                  Schedule of Ad Valorem Taxes Receivable
                                               June 30, 2003

                               Uncollected                                               Uncollected
                                 Balance              Current           Collections        Balance
          Fiscal Year         June 30, 2002           Net Levy          and Credits     June 30, 2003

            2002-03           $             -     $    6,738,660    $      6,551,065    $      187,595
            2001-02                   185,447                                110,870            74,577
            2000-01                    78,987                                 19,781            59,206
            1999-00                    35,876                                  3,556            32,320
            1998-99                    36,113                                  3,901            32,212
            1997-98                    24,345                                  1,751            22,594
            1996-97                    18,328                                  1,381            16,947
            1995-96                    15,138                                    433            14,705
            1994-95                     9,151                                    291             8,860
             Prior                     18,640                                  3,444            15,196
                              $       422,025     $    6,738,660    $      6,696,473    $      464,212


Reconciliation to revenues:

        Taxes - ad valorem - general and special                    $      6,658,198
         revenue fund
        Discounts allowed                                                     44,561
        Amount refunded                                                       18,825
        Prior years penalties collected                                           10
        Abatements and releases - prior years                                  7,168
               Subtotal                                                    6,728,762

        Less interest collected                                              (32,289)

        Total collections and credits                               $      6,696,473




                                                  - 206 -
                                                                                                           Schedule I-2

                                           City of Lexington, North Carolina
                                              Analysis of Current Tax Levy
                                         For the fiscal year ended June 30, 2003


                                                                                                 Total Levy
                                                                                         Property
                                                                                        excluding
                                                     City - Wide                        Registered       Registered
                                     Property                              Total          Motor             Motor
                                     Valuation             Rate            Levy          Vehicles         Vehicles
Original levy:
 Property taxed at current
  year's rate                   $ 1,182,453,550       $       0.515    $ 6,089,636     $ 5,919,251     $      170,384
 Registered motor vehicles taxed
  at prior year's rate               66,079,559               0.495         327,094               -           327,094
 Property taxed for special
  uptown district*                   34,126,605               0.200          68,253         68,253                  -
Penalties                                     -                              45,497         45,497                  -
     Total                        1,282,659,714                           6,530,480      6,033,002            497,478

Discoveries:
 Current year taxes - city             67,527,548             0.515         347,767        347,767                    -
 Current year taxes - uptown
  district                              1,941,410             0.200           3,882          3,882                    -
     Total                             69,468,958                           351,649        351,649                    -

Abatements - city                     (27,835,534)            0.515        (143,353)      (115,349)            (28,004)
Abatements - uptown district              (58,000)            0.200            (116)          (116)                  -
    Total                             (27,893,534)                         (143,469)      (115,465)            (28,004)

Total property valuation         $ 1,324,235,138

Net levy                                                                  6,738,660      6,269,185            469,474

Uncollected taxes at June 30                                               (187,595)      (132,387)            (55,208)

Current year's taxes collected                                         $ 6,551,065     $ 6,136,798     $      414,266

Current levy collection percentage                                           97.22%         97.89%             88.24%

*Valuation included in city-wide tax value.




                                                          - 207 -
                                                                                              Schedule I-3

                                     City of Lexington, North Carolina
                                        Analysis of Current Tax Levy
                                   For the fiscal year ended June 30, 2003


Secondary Market Disclosures:

Assessed Valuation:
      Assessment Ratio (1)                                                                            100%
      Real Property                                                                        $ 940,539,529
      Personal Property                                                                        342,919,457
      Public Service Companies (2)                                                              40,776,152
Total Assessed Valuation                                                                     1,324,235,138
City-wide Tax Rate                                                                                 0.00515
Special Tax Rate                                                                                   0.00200
Levy (includes discoveries, releases, and abatements) (3)                                  $     6,738,660

(1) Percentage of appraised value has been established by statute.
(2) Valuation of railroads, telephone companies and other utilities as determined by the
    North Carolina Property Tax Commission.
(3) The levy includes interest and penalties.




                                                    - 208 -
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                         STATISTICAL SECTION



The statistical section reflects financial trends, demographic and economic
data, and the fiscal capacity of the City.




                                    - 209 -
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                                                        Table 1
       City of Lexington, North Carolina
Graph of General Fund Expenditures by Category
     For the fiscal year ended June 30, 2003




                                           GENERAL
                    DEBT SERVICE         GOVERNMENT
                         5%                  13%


       SANITATION                                  CULTURE &
           16%                                    RECREATION
                                                      7%



    HIGHWAYS &
     STREETS
        8%




                                       PUBLIC SAFETY
                                            51%




                             - 210 -
                        City of Lexington, North Carolina
          General Governmental Expenditures by Function and Department (1)                   Table 2
                        Last Ten Year Period 1994-2003

                                                Fiscal          Fiscal         Fiscal         Fiscal
                                                Year            Year           Year           Year
               Departments                      1994            1995           1996           1997
General government:
  Governing board                                $66,913          $66,116        $58,412        $59,663
  Administrative - city manager                   82,774           89,401         73,521         79,829
  Administrative - other (3) (4)                 946,566          769,333        742,026        641,403
  Election costs (3)                               8,766                -         10,149              -
  Finance                                         87,641          151,249        122,022        103,824
  Tax listing (3)                                 36,162           34,612         41,583         39,296
  Legal                                           18,838           23,780         17,393         10,597
  Human resources                                139,919          146,473        131,399        123,163
  Information technologies                             -           40,464         15,769         26,258
  Public buildings                               154,826          137,930        193,507        158,767
  Total general government                     1,542,405        1,459,358      1,405,781      1,242,800

Public safety:
  Police                                       3,267,988        3,530,728      3,175,322      3,151,722
  Fire                                         2,115,578        2,272,093      2,114,948      2,155,968
  Community development                          332,306          379,484        410,526        359,913
  Total public safety                          5,715,872        6,182,305      5,700,796      5,667,603

Highways and streets:
   Engineering                                   173,967         146,084        110,047         114,363
   Street and street aid                         776,762         575,404        775,678         908,279
   Total highways and streets                    950,729         721,488        885,725       1,022,642

Sanitation:
   Sanitation                                  1,892,387        1,926,324      2,049,376      2,318,577

Culture and recreation:
   Recreation - general                          412,788         416,114        333,296        383,424
   Public grounds                                387,950         369,496        481,179        435,374
   Total culture and recreation                  800,738         785,610        814,475        818,798

Economic development
   Economic development                                  -               -              -              -

Debt service:
   Debt service (2)                              386,059         562,916        545,603        828,957

Total general governmental expenditures      $11,288,190      $11,638,001    $11,401,756    $11,899,377



Note: (1) Includes debt service fund and general fund only.
      (2) The debt service expenditure for 1999 was reported incorrectly and has been restated.
      (3) Beginning in fiscal year 1999 and 2000, respectively, Election costs and Tax listing
          are reported within the Administrative - other line item.
      (4) Prior to fiscal year 2003, the Administrative-other line item LTA was treated as a transfer and not shown.


                                                    - 211 -
               City of Lexington, North Carolina
General Governmental Expenditures by Function and Department (1)          Table 2 cont.
               Last Ten Year Period 1994-2003

  Fiscal         Fiscal         Fiscal        Fiscal         Fiscal          Fiscal
  Year           Year           Year          Year           Year            Year
  1998           1999           2000          2001           2002            2003

    $58,901        $70,964        $23,524        $5,904        $13,046          $3,359
     62,570         72,390        201,074       183,366        235,919         109,547
    600,456        679,329      1,187,209       923,093        800,137       1,481,032
      8,264              -              -             -              -               -
     82,748        121,753         86,808        40,970         68,781          15,146
     40,233         45,423              -             -              -               -
     10,815         13,469         43,815        39,421         47,194          47,670
    146,148        126,084         99,166        68,294         81,235          52,357
     36,968         43,463         32,149        35,381         42,032           2,385
    142,977        158,515        302,249       198,037        182,104         206,240
  1,190,080      1,331,390      1,975,994     1,494,466      1,470,448       1,917,736


  3,431,449      3,789,306      3,869,655     3,951,021      4,195,651       4,227,089
  2,227,654      2,334,539      2,597,287     2,910,145      2,785,625       2,700,670
    365,018        378,837        391,087       371,884        411,681         445,229
  6,024,121      6,502,682      6,858,029     7,233,050      7,392,957       7,372,988


   119,961         145,081        168,083       173,494        208,615         216,936
   810,707       1,115,554      1,077,542       916,878      1,233,444         998,982
   930,668       1,260,635      1,245,625     1,090,372      1,442,059       1,215,918


  2,009,216      2,252,447      2,071,330     1,946,341      2,222,740       2,304,617


   364,302        366,147        422,561       476,837         471,468         513,925
   451,351        460,920        421,477       489,976         552,163         568,983
   815,653        827,067        844,038       966,813       1,023,631       1,082,908


           -              -       50,000               -              -               -


   806,623       2,920,221      1,014,296     1,026,075       859,253          789,743

$11,776,361    $15,094,442    $14,059,312   $13,757,117    $14,411,088     $14,683,910




                                 - 212 -
                          City of Lexington, North Carolina
                     General Governmental Revenues by Source (1)                               Table 3
                           Last Ten Year Period 1994-2003

                                           Ad Valorem               Unrestricted
                                               for       Other         Inter-
   Fiscal         Total         Ad Valorem    Debt     Taxes and Governmental
   Year        Revenues (2)       Taxes      Service  Licenses (3) Revenues (3) (4)

   1994            $6,780,521    $2,586,876               -   $1,608,723       $1,212,968
   1995             7,432,129     2,825,318      $129,678      1,754,337        1,243,100
   1996             7,735,203     2,841,918       141,242      1,936,453        1,289,057
   1997             8,643,830     3,404,043       125,529      1,993,712        1,326,987
   1998             9,303,143     3,577,711             -      2,113,788        1,510,786
   1999            11,378,008     4,666,210             -      2,917,521        1,552,936
   2000            11,602,812     4,745,334             -      3,036,762        1,592,007
   2001            12,683,889     5,495,682             -        310,394        4,606,252
   2002            12,992,724     6,304,353             -        388,409        3,862,599 *
   2003            13,795,497     6,579,087             -        359,192        4,048,725

                   GENERAL GOVERNMENTAL REVENUES BY
                                     SOURCE
                      For The Fiscal Year Ended June 30, 2003




                                Interest Earned on
                                    Investments
                                                   Misc Revenues
                                        2%
                                                        4%
                         Sales and Services
                                8%


                 Restricted
             Intergovernmental
                  Revenues
                                                                             Ad Valorem Taxes
                    5%
                                                                                   48%

                 Unrestricted
              Intergovernmental
                   Revenues
                     29%


                                                          Other Taxes &
                                        Permits & Fees      Licenses
                                             1%                3%
Note: (1) Includes general fund and debt service fund only.
      (2) Total revenues and total sales and services for 1994, 1995, 1996, 1998,
       and 1999 have been restated due to reclassifying the disposal of fixed assets in the general fund
       from an other financing source to a revenue.
      (3) For 2001, other taxes and licenses, unrestricted intergovernmental, restricted
       intergovernmental and sales and service revenues have been restated to reflect revenue
       reclassifications made in 2002 in preparation for GASB 34. The most significant change,
       was the reclassification of local option sales tax from other taxes and licenses to unrestricted
       intergovernmental revenues. Fiscal years 1994 to 2000 have not been restated to reflect
       the changes. Prior to 2003, PILOTS were shown as unrestricted intergovernmental revenues.
       PILOTS are now shown as transfers.
       *Decrease is due to $693,743 being withheld by the State of NC.
                                              - 213 -
                                                   City of Lexington, North Carolina
                                              General Governmental Revenues by Source (1)                 Table 3 cont.
                                                     Last Ten Year Period 1994-2003

        Restricted
          Inter-                                     Permits               Sales             Interest
Fiscal Governmental                                    and                 and              Earned on     Miscellaneous
Year Revenues (3) (4)                                 Fees            Services (2) (3)     Investments     Revenues

1994                               $604,339              $33,528            $485,269          $196,006             $49,127
1995                                637,239               47,028             340,869           365,829              50,581
1996                                646,392               59,621             507,682           276,933              35,405
1997                                742,111               94,431             645,098           258,796              53,123
1998                                689,936              105,841             700,300           490,932              38,604
1999                                783,587              134,770             723,634           452,192              91,648
2000                                785,753              129,850             675,163           507,899             130,044
2001                                743,566               95,883             854,340           479,298              87,763
2002                                748,136              126,976           1,274,814           240,917              46,520
2003                                738,590              176,600           1,163,774           141,337             588,192



                                  GENERAL GOVERNMENTAL REVENUES
                                                For the Last Ten Year Period 1994-2003


                             16


                             14
 TOTAL REVENUES (MILLIONS)




                             12


                             10


                             8


                             6


                             4


                             2


                             0
                                  1994   1995     1996    1997      1998    1999    2000    2001   2002     2003
                                                          TEN YEAR PERIOD 1994-2003
                (3) Total revenues for 1992 and 1993 were stated incorrectly.
                       (4) Prior to 2003, ABC revenues were treated as transfers and not shown.




                                                                 - 214 -
                                                    City of Lexington, North Carolina
                                              General Governmental Tax Revenues by Source
                                                     Last Ten Year Period 1994-2003                              Table 4


Fiscal                 Ad Valorem                 Local Option      Utility           Other         Total
Year                      Tax                      Sales Tax   Franchise Tax (1)     Taxes (1)      Taxes

1994                                 $2,586,876      $1,384,890         $817,573       $149,831     $4,939,170
1995                                 2,825,318       1,486,495           873,086       189,483      5,374,382
1996                                 2,841,918       1,592,783           901,176       261,250      5,597,127
1997                                 3,404,043       1,631,817           951,142       280,217      6,267,219
1998                                 3,577,711       1,720,964           966,603       295,678      6,560,956
1999                                 4,666,210       2,511,402         1,007,582       338,058      8,523,252
2000                                 4,745,334       2,563,703         1,061,381       370,540      8,740,958
2001                                 5,495,682       2,599,595         1,046,441       458,981      9,600,699
2002                                 6,304,353       2,539,563           567,651 *     449,712 *    9,861,279
2003                                 6,579,087       2,730,859           916,306       614,407     10,840,659



                                             COMPARISON OF TAX REVENUE BY
                                                       SOURCE
                                                    TOTAL TAX REVENUES 1994-2003


                                      7
                                     6.5
                                      6
         TOTAL REVENUES (MILLIONS)




                                     5.5
                                      5
                                     4.5
                                      4
                                     3.5
                                      3
                                     2.5
                                      2
                                     1.5
                                      1
                                     0.5
                                      0

                                           1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
                                                                  TEN YEAR PERIOD 1994-2003


          (1) For years 2001 and 2002, piped natural gas tax, and beer & wine tax
          is reported as other taxes. In prior years, these revenues were reported as utility
          franchise tax. Year 2001 was restated to reflect the change.
          *State of NC withheld $452,115 in Utility Franchise Taxes; as well as, $117,240 in
          piped natural gas tax, and beer & wine tax, which are reported as part of other taxes.

                                                                        - 215 -
                                 City of Lexington, North Carolina
                                        Property Tax Rates                                     Table 5
                             Direct and Overlapping Governments and
                         Assessed Valuation, and Tax Levies and Collections
                                  Last Ten Year Period 1994-2003

                             City of Lexington
                                          Special
Fiscal Year                Debt           Taxing            Total                Lexington     Total
  Ending Operating        Service         District          City        Davidson School        Tax
 June 30, Milliage        Milliage        Milliage         Milliage      County   District     Levy

  1994          $0.38                -         $0.20            $0.58      $0.54      $0.19       $1.31
  1995           0.40            $0.02          0.20             0.62       0.54       0.19        1.35
  1996           0.40             0.02          0.20             0.62       0.54       0.19        1.35
  1997           0.47             0.02          0.20             0.69       0.54       0.19        1.42
  1998           0.41                -          0.20             0.61       0.48       0.13        1.22
  1999           0.46                -          0.20             0.66       0.48       0.13        1.27
  2000           0.46                -          0.20             0.66       0.53       0.13        1.32
  2001          0.495                -          0.20            0.695       0.53       0.13       1.355
  2002          0.495                -          0.20            0.695       0.53       0.13       1.355
  2003          0.515                -          0.20            0.715       0.53       0.13       1.375

    Note: All taxes are calculated on per $100 of assessed valuation.




                          Assessed Valuation and Collections                                  Table 5A
             and Percentage of Collections For Ten Year Period 1994-2003

          Fiscal Year                                   Current    Percent
            Ending       Assessed        Lexington       Year's     of Levy    Taxes
           June 30,      Valuation       Tax Levy      Collections Collected Receivable

             1994         $688,316,052    $2,615,601       $2,548,385     97.4      $67,216
             1995          716,584,813     3,049,447        2,971,500     97.4       77,947
             1996          744,037,333     3,064,009        2,982,573     97.3       81,436
             1997          756,398,623     3,625,874        3,529,069     97.3       96,805
             1998          900,784,037     3,660,505        3,561,791     97.3       98,714
             1999        1,068,323,589     4,806,067        4,686,746     97.5      119,321
             2000        1,109,298,717     5,026,451        4,884,868     97.2      141,583
             2001        1,157,191,530     5,658,666        5,460,575     96.5      198,091
             2002        1,315,657,257     6,415,965        6,230,518     97.1      185,447
             2003        1,324,235,138     6,738,660        6,551,065     97.2      187,595


                                                 - 216 -
                          City of Lexington, North Carolina
                    Schedule of Assessed Value of Taxable Property                  Table 6
                           Last Ten Year Period 1994-2003




                                 Personal       Public Service
           Real Property         Property        Companies             Total
Fiscal       Assessed            Assessed         Assessed            Assessed
Year          Value               Value            Value               Value

1994         $509,986,461       $155,478,771        $22,850,820      $688,316,052
1995          486,646,181        207,639,230         22,299,402       716,584,813
1996          510,554,318        211,146,267         22,336,748       744,037,333
1997          525,632,044        207,279,418         23,487,161       756,398,623
1998          647,289,040        221,397,746         32,097,251       900,784,037
1999          751,439,127        283,000,101         33,884,361     1,068,323,589
2000          773,202,513        298,213,715         37,882,489     1,109,298,717
2001          788,896,943        328,235,045         40,059,542     1,157,191,530
2002          934,151,974        340,692,126         40,813,157     1,315,657,257
2003          940,539,529        342,919,457         40,776,152     1,324,235,138

   Note: (1) Information was provided by Davidson County Tax Assessor.

         (2) Assessed value of taxable property for 2003 is based on the actual value
             of the property as of January 1, 2002, as provided by state law.

         (3) N.C. General Statutes require that an octennial reappraisal of real property
             be conducted. The last reappraisal of all taxable property took place in 1998.
             A partial revaluation took place in 2002.

         (4) The assessed value of taxable property does not include property owned by
             the U.S. Government, the State of North Carolina, educational institutions, etc.
             that are not subject to taxation.

         (5) Public service companies' property includes real and personal property
             of utilities, railroads, telephone and pipeline, etc. These assessments are made
             by the North Carolina Department of Revenue, with no distinction between
             real and personal property.

         (6) Special District's value is included as of fiscal year 1995.

         (7) Real Property and Personal Property assessed values have been restated for
             1994 - 1997 and 2000 - 2002. Public Service assessed values have been
             been restated for 1994. These amounts were reported incorrectly in prior years

                                          - 217 -
                             City of Lexington, North Carolina
                              Schedule of Principal Taxpayers                           Table 7
                              Fiscal Year Ended June 30, 2003




                             Assessed Valuation as of June 30, 2003

                                                                                       Percent of
                                                                                         Total
                                      Type of               Assessed                   Assessed
          Taxpayer                    Business              Valuation     Tax Levy     Valuation

Kimberly Clark Corp.         Tissue Products                $71,647,727    $368,986     5.41%
Lexington Home Brands        Furniture                       61,748,572     318,005     4.66%
Duracell USA                 Batteries                       52,291,503     269,301     3.95%
Parkdale America             Textiles                        17,485,795      90,052     1.32%
Stanley Furniture Co. Inc.   Furniture                       15,158,710      78,067     1.14%
Green Printing Co. Inc.      Printing                        13,404,441      69,033     1.01%
JELD-WEN                     Building Products               11,831,454      60,932     0.89%
Lexington State Bank         Banking                          9,997,749      51,488     0.75%
RCR Air                      Auto Racing/Airways              8,498,077      43,765     0.64%
Diebold Security Mfg. Inc.   Security Delivery Systems        6,495,090      33,450     0.49%

           Total                                           $268,559,118   $1,383,079    20.26%




                                                 - 218 -
                      City of Lexington, North Carolina
                      Computation of Legal Debt Margin                              Table 8
                                June 30, 2003




Assessed valuation                                              $   1,324,235,138

Debt limit 8 percent of total assessed value                    $    105,938,811

Debt applicable to limitation (gross debt):
   Authorized and outstanding bonded debt                             14,989,000
   Outstanding debt not evidenced by bonds                             6,465,222

Statutory deductions:
        Electric bonds                               $ 3,220,000
        Natural Gas revenue bonds                      3,234,000
        Sanitary Sewer bonds                           5,555,000
        Other debt not evidenced by bonds
           applicable to proprietary funds              5,560,975

    Total deductions allowed                                          17,569,975

    Total debt applicable to limitation (net debt)                     3,884,247

Legal debt margin available to the City under
North Carolina General Statute 159-55(c).                       $    102,054,564




                                         - 219 -
                                  City of Lexington, North Carolina
                            Ratio of Net General Obligation Bonded Debt                                 Table 9
                To Assessed Value and Net General Obligation Bonded Debt Per Capita
                                   Last Ten Year Period 1994-2003


                                                    Less        Debt                     Ratio of Net    Net
                                      Gross         Debt     Payable from     Net        Bonded Debt Bonded
Fiscal Population    Assessed        Bonded        Service    Enterprise     Bonded       to Assessed   Debt
Year      (1)        Value (2)       Debt (3)     Fund (4)   Revenues (5)     Debt           Value    Per Capita

1994      16,892     $688,316,052    $3,800,000          -     $3,800,000         -               -         -
1995      17,510      716,584,813     3,175,000          -      3,175,000         -               -         -
1996      17,061      744,037,333     7,465,000   $388,062      4,965,000   $2,111,938           0.28       124
1997      17,373      756,398,623     6,620,000    388,062      4,245,000    1,986,938           0.26       114
1998      19,475      900,784,037     5,775,000    287,182      3,530,000    1,957,818           0.22       101
1999      19,254    1,068,323,589    14,790,000    160,457     10,980,000    3,649,543           0.34       190
2000      19,342    1,109,298,717    14,055,000          -     10,440,000    3,615,000           0.33       187
2001      20,030    1,157,191,530    13,305,000          -      9,895,000    3,410,000           0.29       170
2002      20,121    1,315,657,257    12,540,000          -      9,340,000    3,200,000           0.24       159
2003      20,327    1,324,235,138    11,755,000          -      8,775,000    2,980,000           0.23       147

Note: (1) Population information was provided by the North Carolina Office of State
          Budget and Management.

       (2) Assessed value was provided by Davidson County Tax Assessor.

       (3) Amount does not include natural gas revenue bonds.

       (4) Amount available for repayment of street general obligation bonds.

       (5) Bonded debt is general obligation debt payable in its entirety from the
           revenue of the various enterprise funds, and the bond indentures require
           that the City set rates sufficient to pay the debt service.




                                                   - 220 -
                              City of Lexington, North Carolina
                       Ratio of Annual Debt Service Expenditures                          Table 10
                          For General Obligation Bonded Debt (1)
                        to Total General Governmental Expenditures
                               Last Ten Year Period 1994-2003


                                                         Total                 Ratio of
                                         Total          General             Debt Service to
Fiscal                                   Debt        Governmental        General Governmental
Year       Principal    Interest (2)    Service      Expenditures(3)         Expenditures

1996              -         $56,539      $56,539           $11,401,756            0.50%
1997       $125,000         113,075      238,075            11,899,377             2.00
1998        130,000         107,575      237,575            11,776,361             2.02
1999        135,000         137,850      272,850            15,042,140             1.81
2000        195,000         167,900      362,900            14,059,312             2.58
2001        205,000         159,250      364,250            13,757,117             2.65
2002        210,000         150,150      360,150            14,411,088             2.50
2003        220,000         140,825      360,825            14,683,910             2.46

Note: (1) General obligation bonds reported in the enterprise funds have been
          excluded.

         (2) Excludes bond issuance and other costs.

         (3) Includes general and debt service funds, excludes other financing uses.

         (4) There was no general obligation debt other than shown in Enterprise Funds
             prior to fiscal year 1996.




                                           - 221 -
                      City of Lexington, North Carolina
             Computation of Direct and Overlapping Bonded Debt                         Table 11
                          General Obligation Bonds
                                 June 30, 2003


                                                              Percentage               Amount
                                          Net                Applicable to           Applicable to
                                      Bonded Debt               City of                City of
   Government Agency                  Outstanding             Lexington               Lexington

City of Lexington                 $       2,980,000 (1)           100.00%        $     2,980,000

Davidson County                          18,305,000                14.10% (2)          2,581,005

    Total direct and
    overlapping debt              $      21,285,000                              $     5,561,005


(1) Excluding general obligation bonds reported in the enterprise funds.

(2) The percentage applicable to City of Lexington is a ratio of the City's assessed
    valuation of $1,324,235,138 divided by the County's assessed valuation
    of $9,394,199,200.




                                         - 222 -
                                                      Table 12


             City of Lexington, North Carolina
            Graph of Enterprise Funds Revenue
           For the fiscal year ended June 30, 2003




                              GOLF
                               1%



   NATURAL GAS
       29%




                                                     ELECTRIC
                                                       62%


WATER & SEWER
     8%




                         - 223 -
                         City of Lexington, North Carolina
          Electric Fund KWHRS Sold, Number of Customers, and Revenues                                       Table 13
                         Last Ten Year Period 1994-2003


                                                     Percent
                                                     Increase                     Percent
                                                    (Decrease)                    Increase
 Fiscal                                            in KWHRS Number of            (Decrease)
 Year      KWHRS Sold                                  Sold    Customers         Customers    Revenues

  1994       439,047,459                                 5.64         16,957        0.96      $35,025,025
  1995       432,623,371                                (1.46)        17,010*       0.31       35,540,282
  1996       445,706,702                                 3.02         17,151        0.83       37,676,087
  1997       435,055,190                                (2.39)        17,297        0.85       36,830,161
  1998       452,654,070                                 4.05         17,433        0.79       39,470,814
  1999       452,567,321                                (0.02)        17,762        1.89**     39,896,407
  2000       458,138,559                                 1.23         17,980       1.23        40,056,193
  2001       467,913,374                                 2.13         18,194       1.19        40,557,384
  2002       450,328,321                                (3.76)        18,130       (0.35)      39,540,973
  2003       453,001,042                                 0.59         18,214       0.46        42,269,585

Note: The statistical information as to KWHRS sold and number of customers was
      provided by the Electric Fund's management. *Due to utility billing computer
      problems, the number of customers in 1995 and 2002 had to be adjusted downward.
      **Percent increase in customers incorrectly reported as 1.85 for 1999.




                                            ELECTRIC REVENUES 1994-2003

                                            50
                TOTAL REVENUES (MILLIONS)




                                            40


                                            30


                                            20


                                            10


                                            0
                                                 1994    1995 1996 1997         1998 1999 2000 2001 2002 2003
                                                                    TEN YEAR PERIOD 1994-2003




                                                                 - 224 -
                          City of Lexington, North Carolina
                    Electric Statement of Revenues and Expenses                         Table 14
                           Last Ten Year Period 1994-2003


                                            Fiscal         Fiscal         Fiscal         Fiscal
                                             Year           Year          Year           Year
              Description                    1994           1995          1996           1997

Operating revenues:
   Charges for service                   $35,121,153     $35,540,282    $37,676,087    $36,830,161
   Other operating revenues                  288,949         339,127        737,004      1,020,383

    Total operating revenues              35,410,102      35,879,409     38,413,091     37,850,544

Operating expenses:
    Salaries and benefits                  1,499,186         890,623        957,660        843,804
    Operating expenses                     1,859,369       3,281,187      3,792,234      3,784,808
    Purchases of power                    26,820,844      26,534,770     29,123,157     28,535,566
    Depreciation                             763,954         767,397        803,832        987,088

     Total operating expenses             30,943,353      31,473,977     34,676,883     34,151,266

Operating income (loss)                     4,466,749      4,405,432      3,736,208      3,699,278

Non-operating revenues (expenses):
    Interest earned on investments             39,208         88,807        136,626        157,241
    Interest on long-term debt                (14,640)       (41,037)       (88,505)      (136,499)
    Other                                       3,876          6,692       (118,325)        13,579

     Total                                     28,444         54,462        (70,204)       34,321

Net income before transfers                 4,495,193      4,459,894      3,666,004      3,733,599
      Operating transfers in (out)         (2,460,000)    (4,260,000)    (3,041,491)    (2,095,200)

      Net income                          $2,035,193       $199,894       $624,513      $1,638,399




                                         - 225 -
                                  City of Lexington, North Carolina
                               Electric Statement of Revenues and Expenses                  Table 14 cont.
                                   Last Ten Year Period 1994-2003


  Fiscal         Fiscal         Fiscal           Fiscal         Fiscal         Fiscal
  Year           Year           Year             Year           Year           Year
  1998           1999           2000             2001           2002           2003


$39,470,814    $39,896,407    $40,056,193      $40,557,384    $39,540,973    $42,269,585
    955,337        888,994        945,363          900,779        923,947      1,201,564

 40,426,151     40,785,401     41,001,556       41,458,163     40,464,920     43,471,149


    544,295        802,862        910,531          843,160      1,108,097      1,352,473
  4,260,764      3,859,384      4,199,143        5,262,697      5,285,050      5,676,254
 30,782,903     31,324,485     31,289,430       31,373,339     31,516,627     32,652,410
  1,069,229      1,155,692      1,868,833        1,598,845      1,618,331        748,118

 36,657,191     37,142,423     38,267,937       39,078,041     39,528,105     40,429,255

  3,768,960      3,642,978      2,733,619        2,380,122       936,815       3,041,894


    140,939        244,908        344,248          435,894        210,668        107,509
   (126,805)      (160,554)      (193,462)        (177,179)      (161,967)      (155,639)
     17,429         26,179       (154,677)         768,778        230,725        412,503

    31,563        110,533          (3,891)       1,027,493       279,426        364,373

  3,800,523      3,753,511      2,729,728        3,407,615      1,216,241      3,406,267
 (1,542,269)    (1,053,052)    (2,487,174)      (2,063,477)    (1,374,206)    (1,127,497)

 $2,258,254     $2,700,459      $242,554        $1,344,138      ($157,965)    $2,278,770




                                     - 226 -
                      City of Lexington, North Carolina                   Table 15
Revenue Bond and General Obligation Bond (Payable from Utility Revenue) Coverage
                               Electric Fund
                       Last Ten Year Period 1994-2003


           Net Revenues
  Fiscal   Available for
   Year    Debt Service    Principal       Interest   Total      Coverage

   1994       $5,177,659   $120,000         $14,640   $134,640    38.46
   1995        5,268,328    120,000          41,037    161,037    32.72
   1996        4,558,341     90,000          88,505    178,505    25.54
   1997        4,857,186    120,000         136,499    256,499    18.94
   1998        4,996,557    125,000         126,805    251,805    19.84
   1999        5,069,757    130,000         160,554    290,554    17.45
   2000        4,792,023    215,000         193,462    408,462    11.73
   2001        5,177,396    220,000         177,179    397,179    13.04
   2002        2,996,539    230,000         161,967    391,967    7.64
   2003        4,310,024    240,000         151,805    391,805    11.00




                                       - 227 -
                                              City of Lexington, North Carolina
                               Water & Sewer Fund CCF's Sold, Number of Customers, and Revenues                                     Table 16
                                              Last Ten Year Period 1994-2003


                                     Water in         Number of          Sewer in         Number of            Water &
Fiscal                               Millons of          Water          Millons of           Sewer              Sewer
Year                                CCF's (1) (5)   Customers (2) (6)   CCF's (3) (5)   Customers (2) (4)      Revenues

 1994                                       1,700              8,459           1,058                7,102       $4,492,621
 1995                                       1,717              8,400             818                7,211        4,446,974
 1996                                       1,469              8,463             896                7,274        4,294,020
 1997                                       1,542              8,521             902                7,353        4,250,669
 1998                                       1,585              8,543             907                7,383        4,451,025
 1999                                       1,584              8,623           1,074                7,468        4,440,655
 2000                                       1,612              8,698           1,097                7,584        4,367,449
 2001                                       1,650              8,756           1,191                7,700        4,806,128
 2002                                       1,426              8,542           1,037                7,708        4,983,237
 2003                                       1,351              8,496           1,015                7,780        5,220,356

Note: The statistical information was provided by the Management of the
      Water and Sewer Utility. (1) CCF's of water sold incorrectly reported in fiscal
      years 1996, 1997,1998, 1999. (2) Due to utility billing computer problems, the
      number of customers in 1995 had to be adjusted downward. (3) CCF's of sewer
      incorrectly reported in fiscal years 1995, 1996, 1997, 1998, and 1999.
      (4) Number of sewer customers incorrectly reported as 7,218 in 1999.
      (5) For years 1994 - 2001 - Column headings incorrectly stated as gallons
      instead of CCF's. (6) Reported # of 2002 water customers incorrectly,
      had to be adjusted downward.


                                                            WATER AND SEWER REVENUES
                                                                     1994-2003

                                    5.5
                                     5
        TOTAL REVENUES (MILLIONS)




                                    4.5
                                     4
                                    3.5
                                     3
                                    2.5
                                     2
                                    1.5
                                     1
                                    0.5
                                     0
                                           1994      1995      1996     1997        1998     1999       2000      2001       2002      2003
                                                                         TEN YEAR PERIOD 1994-2003



                                                                          - 228 -
                                     City of Lexington, North Carolina
                            Water and Sewer Statement of Revenues and Expenses      Table 17
                                       Last Ten Year Period 1994-2003


                                            Fiscal       Fiscal        Fiscal        Fiscal
                                             Year         Year         Year          Year
              Description                   1994         1995          1996          1997

Operating revenues:
   Water charges for service              $2,206,112    $2,113,770    $2,137,640    $2,103,587
   Sewer charges for service               2,282,412     2,333,204     2,156,380     2,147,082
   Other operating revenues                   66,735        34,795       253,471       305,688

    Total operating revenues               4,555,259     4,481,769     4,547,491     4,556,357

Operating expenses:
    Water plant                              819,737       842,321       838,259       854,133
    Waste treatment plant                  1,145,217     1,174,639     1,106,945     1,069,448
    Water and sewer                        1,367,609     1,464,208     1,481,799     1,505,518
    Depreciation                           1,006,050     1,052,469     1,094,483     1,267,229

     Total operating expenses              4,338,613     4,533,637     4,521,486     4,696,328

Operating income (loss)                      216,646       (51,868)      26,005       (139,971)

Non-operating revenues (expenses):
    Interest earned on investments            24,778        37,793        27,493        47,767
    Interest on long-term debt              (226,341)     (203,033)     (179,332)     (155,515)
    Other                                    300,591       329,981       361,796       367,481

     Total                                    99,028      164,741       209,957       259,733

Net income before transfers                  315,674       112,873       235,962       119,762
      Operating transfers in (out)          (250,000)     (200,000)     (200,000)     (200,000)

      Net income                             $65,674      ($87,127)     $35,962       ($80,238)




                                            - 229 -
                         City of Lexington, North Carolina
              Water and Sewer Statement of Revenues and Expenses        Table 17 cont.
                           Last Ten Year Period 1994-2003


 Fiscal           Fiscal       Fiscal        Fiscal        Fiscal           Fiscal
 Year             Year         Year          Year          Year             Year
 1998             1999         2000          2001          2002             2003


$2,130,303      $2,111,104    $2,074,355    $2,265,064    $2,281,936      $2,345,339
 2,320,722       2,329,551     2,293,094     2,541,064     2,701,301       2,875,017
   222,902         197,590       198,229       193,159       196,536         267,120

 4,673,927       4,638,245     4,565,678     4,999,287     5,179,773       5,487,476


   863,822         907,666     1,007,661       932,681       991,351       1,115,167
 1,055,246       1,142,436     1,141,480     1,154,298     1,251,014       1,352,435
 1,511,482       1,388,165     1,759,141     2,093,987     2,278,187       2,093,308
 1,190,300       1,061,941     1,689,905     1,219,818     1,144,478         608,086

 4,620,850       4,500,208     5,598,187     5,400,784     5,665,030       5,168,996

   53,077          138,037    (1,032,509)     (401,497)     (485,257)        318,480


    82,586         233,445       379,579       383,476       123,047          40,998
  (128,525)       (222,957)     (325,004)     (305,533)     (286,349)       (270,955)
   371,505             557      (289,518)       (7,381)      173,310         419,841

  325,566           11,045      (234,943)      70,562        10,008          189,884

   378,643         149,082    (1,267,452)     (330,935)     (475,249)        508,364
  (200,000)        259,081     1,247,120       498,709        36,167         (50,530)

 $178,643         $408,163      ($20,332)    $167,774     ($439,082)        $457,834




                                - 230 -
                      City of Lexington, North Carolina                   Table 18
Revenue Bond and General Obligation Bond (Payable from Utility Revenue) Coverage
                         Water and Sewer Fund
                      Last Ten Year Period 1994-2003


           Net Revenues
  Fiscal   Available for
   Year    Debt Service    Principal   Interest     Total     Coverage

   1994       $1,473,042   $480,000    $224,390    $704,390     2.09
   1995        1,368,375    475,000     203,033     678,033     2.02
   1996        1,509,777    510,000     179,332     689,332     2.19
   1997        1,542,506    600,000     155,515     755,515     2.04
   1998        1,697,468    590,000     128,525     718,525     2.36
   1999        1,433,980    450,000     222,957     672,957     2.13
   2000          747,457    325,000     325,004     650,004     1.15
   2001        1,193,149    325,000     305,533     630,533     1.89
   2002          955,578    325,000     286,349     611,349     1.56
   2003        1,387,405    325,000     267,940     592,940     2.34




                                   - 231 -
                            City of Lexington, North Carolina
                Natural Gas MCF/DT Sold, Number of Customers, and Revenues                                   Table 19
                             Last Ten Year Period 1994-2003

                                                                        Percent
                                                                        Increase
    Fiscal                                          Number of          (Decrease)
     Year           MCF/DT Sold*                    Customers        in Customers              Revenues

    1994                          3,010,105           6,069                  9.39              $12,549,994
    1995                          3,413,652           6,398**                5.42               11,646,074
    1996                          2,881,503***        6,662                  4.13               14,196,341
    1997                          3,223,199           6,963                  4.52               15,508,116
    1998                          2,891,760           7,128                  2.37               14,084,925
    1999                          2,637,915           7,346                  3.06****           12,281,833
    2000                          2,640,017           7,668                  4.38               14,330,136
    2001                          2,663,583           7,892                  2.92               24,697,824
    2002                          2,349,043           7,936                  0.56               15,154,172
    2003                          2,906,965           8,026                  1.13               19,630,615

Note: The statistical information as to MCF sold and the number of customers was
      provided by the Natural Gas Department's management. *Numbers for 1993-
      1999 are shown in MCF's . 2000 - 2003 is shown in DT's. **Due to utility billing
      computer problems, the number of customers in 1995 had to be adjusted downward.
      ***MCF sold in 1996 was incorrectly reported in prior fiscal years and has been
      adjusted. ****Percent increase in customers incorrectly reported in 1999.




                                         NATURAL GAS CONSUMPTION
                                                   1994 - 2003
                                          Thousand Cubic Feet of Gas Sold

                                  4
              TOTAL MCF/DT SOLD




                                  3



                                  2



                                  1



                                  0
                                      1994   1995   1996    1997     1998      1999     2000   2001   2002   2003
                                                           TEN YEAR PERIOD 1994-2003




                                                                   - 232 -
                                City of Lexington, North Carolina
                          Natural Gas Statement of Revenues and Expenses                  Table 20
                                  Last Ten Year Period 1994-2003


                                             Fiscal         Fiscal          Fiscal         Fiscal
                                              Year           Year           Year           Year
              Description                     1994           1995           1996           1997

Operating revenues:
   Charges for service                     $12,540,159    $11,646,074    $14,196,341     $15,508,116
   Other operating revenues                    266,162        193,109        671,291         240,319

    Total operating revenues                12,806,321     11,839,183      14,867,632     15,748,435

Operating expenses:
    Salaries and benefits                      733,903        536,532         563,354        517,275
    Operating expenses                         726,207        924,042         998,860      1,049,944
    Purchases of natural gas                10,348,828      9,390,021      11,841,008     11,762,255
    Depreciation                               261,661        287,307         357,177        432,485

     Total operating expenses               12,070,599     11,137,902      13,760,399     13,761,959

Operating income (loss)                        735,722       701,281        1,107,233      1,986,476

Non-operating revenues (expenses):
    Interest earned on investments              38,385         50,451          37,755        146,652
    Interest on long-term debt                (174,876)      (166,126)       (155,259)      (280,297)
    Other                                         (585)           823             566         60,242

     Total nonoperating revenues
     (expenses)                               (137,076)      (114,852)       (116,938)       (73,403)

Net income before transfers                    598,646        586,429         990,295      1,913,073
      Operating transfers in (out)            (494,450)      (590,000)       (590,000)      (619,700)

      Net income                              $104,196        ($3,571)      $400,295      $1,293,373




                                            - 233 -
                       City of Lexington, North Carolina
               Natural Gas Statement of Revenues and Expenses                Table 20 cont.
                        Last Ten Year Period 1994-2003


  Fiscal           Fiscal         Fiscal         Fiscal         Fiscal           Fiscal
  Year             Year           Year           Year           Year             Year
  1998             1999           2000           2001           2002             2003


$14,084,925     $12,281,833     $14,330,136    $24,697,824    $15,154,172     $19,630,615
     59,242         507,243          56,136        289,638         89,523         330,966

 14,144,167      12,789,076      14,386,272     24,987,462     15,243,695      19,961,581


    525,449          543,149        435,886        483,432        652,692         683,047
  1,161,716          894,944        940,126      1,265,646      1,373,486       1,635,513
 10,706,398        8,749,813     11,035,391     20,803,180     12,036,855      15,615,163
    307,947          369,375        486,588        609,028        352,010         428,678

 12,701,510      10,557,281      12,897,991     23,161,286     14,415,043      18,362,401

  1,442,657        2,231,795      1,488,281      1,826,176       828,652        1,599,180


    143,399          157,257        191,863        232,872        134,687          71,620
   (277,456)        (264,153)      (249,766)      (233,817)      (217,309)       (201,596)
     (2,179)          (5,499)       (98,987)        19,726         45,805            (593)


   (136,236)        (112,395)      (156,890)       18,781         (36,817)       (130,569)

  1,306,421        2,119,400      1,331,391      1,844,957        791,835       1,468,611
   (652,273)        (652,555)      (727,181)      (466,380)    (1,861,859)       (657,335)

  $654,148        $1,466,845      $604,210      $1,378,577    ($1,070,024)       $811,276




                                  - 234 -
                      City of Lexington, North Carolina                   Table 21
Revenue Bond and General Obligation Bond (Payable from Utility Revenue) Coverage
                             Natural Gas Fund
                       Last Ten Year Period 1994-2003


           Net Revenues
  Fiscal   Available for
   Year    Debt Service    Principal       Interest    Total     Coverage

   1994       $1,045,018   $135,000        $174,876   $309,876       3.37
   1995        1,039,862    150,000         166,126    316,126       3.29
   1996        1,502,731    130,000         155,259    285,259       5.27
   1997        2,625,855    209,000         280,297    489,297       5.37
   1998        1,891,824    234,000         277,456    511,456       3.70
   1999        2,752,928    247,000         264,153    511,153       5.39
   2000        2,067,745    262,000         249,766    511,766       4.04
   2001        2,686,758    277,000         233,817    510,817       5.26
   2002        1,361,154    293,000         217,309    510,309       2.67
   2003        1,697,168    310,000         200,121    510,121       3.33




                                       - 235 -
                                                   City of Lexington, North Carolina
                                       Golf Fund Rounds Played, Number of Customers, and Revenues              Table 22
                                                    Last Ten Year Period 1994-2003




                                                                            Number
 Fiscal                                             Rounds                    of
  Year                                             Played (1)               Members                Revenues

  1994                                              39,055                       345                $444,713
  1995                                              34,406                       234                 367,419
  1996                                              40,412                       244                 495,146
  1997                                              41,247                       201                 577,591
  1998                                              39,099                       193                 570,013
  1999                                              32,847                       141                 458,198
  2000                                              32,852                       145                 508,059
  2001                                              30,777                       126                 486,953
  2002                                              32,286                       130                 527,873
  2003                                              25,841                       102                 430,055




                                                      GOLF FUND REVENUES
                                                FOR THE TEN YEAR PERIOD 1994-2003

                                 600
                                 550
    TOTAL REVENUES (THOUSANDS)




                                 500
                                 450
                                 400
                                 350
                                 300
                                 250
                                 200
                                 150
                                 100
                                  50
                                   0
                                         1994    1995    1996     1997    1998     1999   2000   2001   2002   2003
                                                                 TEN YEAR PERIOD 1994-2003




(1) Rounds played have been restated for 1997 - 2002. Rounds played were reported
    incorrectly in prior years.




                                                                - 236 -
                              City of Lexington, North Carolina
                             Golf Statement of Revenues and Expenses               Table 23
                               Last Ten Year Period 1994-2003


                                           Fiscal       Fiscal         Fiscal       Fiscal
                                            Year         Year          Year         Year
              Description                  1994         1995           1996         1997

Operating revenues:
   Charges for service                     $444,713     $367,419       $495,146    $577,591
   Other operating revenues                       -            -              -           -

    Total operating revenues                444,713      367,419       495,146      577,591

Operating expenses:
    Salaries and benefits                   285,184      318,553       296,335      303,119
    Operating expenses                      158,250       96,497        90,173      100,420
    Depreciation                             32,097       28,910        28,807       31,759

     Total operating expenses(loss)         475,531      443,960       415,315      435,298

Operating income (loss)                     (30,818)     (76,541)        79,831     142,293

Non-operating revenues (expenses):
    Interest earned on investments             3,907           -          4,292       10,148
    Interest on long-term debt                (1,759)       (987)          (180)        (338)
    Other                                          -       2,180           (540)           -

     Total nonoperating revenues
     (expenses)                                2,148       1,193          3,572        9,810

Net income before transfers                 (28,670)     (75,348)        83,403     152,103
      Operating transfers in (out)           45,200       87,766              -     (50,000)

      Net income                            $16,530      $12,418        $83,403    $102,103




                                         - 237 -
                City of Lexington, North Carolina
             Golf Statement of Revenues and Expenses          Table 23 cont
                Last Ten Year Period 1994-2003


Fiscal      Fiscal      Fiscal        Fiscal      Fiscal         Fiscal
Year        Year        Year          Year        Year           Year
1998        1999        2000          2001        2002           2003


$570,013    $458,198    $508,059     $486,953     $527,873       $430,055
       -           -           -            -            -              -

570,013     458,198      508,059      486,953      527,873        430,055


317,764     322,738      346,620      359,875      372,255        394,977
115,011     103,005      154,240      219,414      180,791        134,458
 40,719      40,834       41,952       42,410       39,450         16,179

473,494     466,577      542,812      621,699      592,496        545,614

  96,519      (8,379)     (34,753)    (134,746)    (64,623)      (115,559)


   9,089       7,946        4,947        5,929       2,095            649
  (2,382)     (3,175)      (1,699)        (346)          -              -
     534       3,733        3,483          301     (32,617)         2,768


   7,241       8,504        6,731        5,884     (30,522)         3,417

 103,760         125      (28,022)    (128,862)    (95,145)      (112,142)
(120,000)    (50,000)           -            -           -        176,000

($16,240)   ($49,875)   ($28,022)    ($128,862)   ($95,145)       $63,858




                        - 238 -
                        City of Lexington, North Carolina
                               Demographic Statistics                                                        Table 24
                         Last Ten Year Period 1994-2003

                                                 Per
  Fiscal           Population                   Capita                        Property    Construction
   Year               (1)                      Income                          Value          (2)

   1994              16,892                    17,886                     $688,316,052       $9,513,638
   1995              17,510                    19,467                      716,584,813        7,665,542
   1996              17,061                    20,016                      744,037,333       15,775,649
   1997              17,373                    20,605                      756,398,623       12,922,102
   1998              19,475                    23,034               *      900,784,037       12,537,483
   1999              19,254                    24,365                    1,068,323,589       19,749,091
   2000              19,342                    25,327                    1,109,298,717       14,841,533
   2001              20,030                    25,909                    1,157,191,530        7,122,107
   2002              20,121                     NA                **     1,315,657,257        7,168,635
   2003              20,327                     NA                       1,324,235,138       13,252,370

                                              State of
                  County's                 North Carolina's
  Fiscal        Unemployment               Unemployment                    Bank
  Year             Rate (3)                   Rate (3)                   Deposits (4)

   1994               3.10%                     4.20%                    $1,118,408,000
   1995                 3.5                       4.5                     1,164,285,000
   1996                 2.9                       4.5                     1,195,242,000
   1997                 2.8                      4.0                      1,247,298,000
   1998                 2.4                      3.5                      1,310,878,000
   1999                 2.2                      3.0                      1,394,469,000
   2000                 2.5                      3.4                      1,454,000,000
   2001                 6.0                      4.9                      1,506,748,000
   2002                 5.7                      6.7                      1,495,712,000
   2003                 8.4                      6.6                         NA

(1) Population information was provided by the North Carolina Office of State Budget and Management,
    1990 and 2000 U.S. Census, and the North Carolina Office of State Planning.


(2) New construction information was provided by the City of Lexington's Community Development Department.


(3) 1994 - 2002 Unemployment information was provided by the Employment Security Commission of North Carolina.
    2003 Unemployment information was provided by the U.S. Department of Labor.


(4) 1993-1996 bank deposits were provided by Sheshunoff Branches of North Carolina and
    includes all financial institutions.
    1997-2001 bank deposits were provided by Lexington State Bank and includes all financial institutions.
    2002 bank deposits were provided by the FDIC.


(*) Assessed valuation increased due to the county-wide revaluation which is done every eight years.


(**) Assessed valuation increased due to a county-wide partial revaluation.




                                                        - 239 -
                             City of Lexington, North Carolina
                                    Miscellaneous Statistics                Table 25
                               Fiscal Year Ended June 30, 2003


Date incorporated                                          1828

Form of government                                     Council/Manager

Area                                                    17.5 square miles

Number of full time employees                               350

Law Enforcement Protection:
   Number of employees:
   Officers                                                  65
   Other                                                     16

Fire Protection:
    Number of stations                                        3
    Number of firemen                                        47

General Information:

Miles of streets                                            123

Number of water treatment plants                                 2

Miles of electrical lines:
     Within City limits                                     240
     Outside City limits                                    160

Population                                               20,327

Number of electric customers                             18,214

Number of water customers                                 8,496

Number of sewer customers                                 7,780

Number of natural gas customers                           8,026




                                    - 240 -
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                CITY OF LEXINGTON, NORTH CAROLINA

        SCHEDULE OF FINDINGS AND QUESTIOND COSTS
             FOR THE YEAR ENDED JUNE 30, 2003

1. Summary of Auditor’s Results
   A. An unqualified opinion was issued on the financial statements of the City of Lexington,
      North Carolina.

   B. Our audit of the basic financial statements disclosed no reportable conditions in internal
      control.

   C. Our audit of the basic financial statements disclosed no instances of noncompliance with
      laws, regulations and the provisions of contracts and grant agreements that is material to
      the basic financial statements.

   D. Our audit of compliance with the types of compliance requirements applicable to the
      City’s major programs disclosed no reportable conditions in internal controls over major
      programs.

   E. Our audit disclosed no audit findings which related to Federal and State awards.

   F. An unqualified opinion was issued on the City of Lexington’s compliance with the types
      of compliance requirements applicable to its major State program.

   G. The major federal program for the City of Lexington, North Carolina for the fiscal year
      ended June 30, 2003 is:

   Program Name                                    CFDA#
   Emergency Assistance Funding                    83.544

   H. The major State program for the City of Lexington for the year ended June 30, 2003 was:

   Power Bill

   I. The threshold for determining Type A programs for the City of Lexington was $300,000.

   J. City of Lexington did not qualify as a low risk auditee under Section 530 of Circular
      No.A-133.




                                           -247-
               CITY OF LEXINGTON, NORTH CAROLINA

        SCHEDULE OF FINDINGS AND QUESTIOND COSTS
             FOR THE YEAR ENDED JUNE 30, 2003
                                        (Continued)


2. Findings Related to the Audit of the Basic Financial Statements

   The audit did not detect any findings as it relates to the general purpose financial statements.

3. Findings and Questioned Costs Related to the Audit of Federal And State Awards

   The audit did not detect any findings or questioned costs as it relates to federal or State
   awards.




                                             -248-
                                            City of Lexington, North Carolina
                                  Schedule of Expenditures of Federal and State Awards
                                           For the Year Ended June 30, 2003

                                                                                             Federal
                                                                                           (Direct and
Federal Grantor/Passed                                                       Federal         Passed
Through Grantor/Program                                                      CFDA           Through)            State
Title                                                                        Number       Expenditures       Expenditures
Federal Grant
Federal Emergency Management Agency
 Division of Emergency Management
    Emergency Assistance Funding                                              83.544     $    1,037,927 $                   -
US Department of Justice
 Office of Community Oriented Policing Services
    Field Reporting Software Grant                                           16.710              47,488                     -
Department of Commerce
 Division of Community Assistance
   Community Development Block Grant - Capacity Building Grant                14.228             14,875                     -
Federal Emergency Management Agency
  Financial and Acquisition Management Division
    Fire Wellness and Fitness Grant                                           83.554             10,314                     -
U.S. Department of Justice
 Office of Justice Programs
     Communications Equipment Grant                                           16.592             40,759                     -
North Carolina Department of Crime Control and Public Safety
 Division of the Governor's Crime Commission
    Mobile Data Laptop Grant                                                  16.579             42,000                     -
North Carolina Department of Transportation
 North Carolina Governor's Highway Safety Program
    Vehicles Grant                                                            20.605             62,591                     -


State Grants
NC Department of Transportation
   Powell Bill                                                                N/A                        -        682,963
   Henry-Link Bridge Replacement Grant                                        N/A                        -         52,420

Total Federal grants                                                                     $    1,255,954
    Total State grants                                                                                       $    735,383

Notes to the Schedule of Expenditures of Federal and State Awards:
1.   Basis of Presentation
     The accompanying schedule of expenditures of federal and state awards includes the federal and state grant
     activity of City of Lexington and is presented on the modified accrual basis of accounting. The information
     in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local
     Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from
     amounts presented in, or used in the preparation of the general purpose financial statements.



                                                         - 249 -
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