WASHINGTON CONVENTION CENTER AUTHORITY. Basic Financial Statements, Supplementary Schedules, and Management s Discussion and Analysis

Transcription

1 Basic Financial Statements, Supplementary Schedules, and Management s Discussion and Analysis September 30, 2003 and 2002 (With Independent Auditors Reports Thereon)

2 September 30, 2003 and 2002 Table of Contents Independent Auditors Report 1 Management s Discussion and Analysis 3 Basic Financial Statements: Statements of Net Assets 11 Statements of Revenues, Expenses, and Changes in Net Assets 12 Statements of Cash Flows 13 Notes to Basic Financial Statements 15 Supplementary Schedules: Schedule of Assets, Liabilities, and Net Assets 24 Schedule of Revenues, Expenses, and Changes in Net Assets 25 Independent Auditors Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 26 Page

3 2001 M Street, NW Washington, DC Independent Auditors Report The Board of Directors Washington Convention Center Authority: We have audited the accompanying basic financial statements of the Washington Convention Center Authority (Authority), a component unit of the Government of the District of Columbia, as of and for the years ended September 30, 2003 and 2002, as listed in the table of contents. These financial statements are the responsibility of the Authority s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Washington Convention Center Authority as of September 30, 2003 and 2002, and the changes in its financial position and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in note 2(b), the Authority implemented Governmental Accounting Standards Board (GASB) Statement No. 40, Deposit and Investment Risk Disclosures (an amendment of GASB Statement No. 3), effective October 1, The Management s Discussion and Analysis on pages 3 through 10 is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information on pages 24 and 25 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is a member of KPMG International, a Swiss association.

4 In accordance with Government Auditing Standards, we have also issued our report dated December 18, 2003, on our consideration of the Authority s internal controls over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. December 18,

5 Management s Discussion and Analysis Years ended September 30, 2003 and 2002 The Washington Convention Center Authority s (the Authority or WCCA) Management s Discussion and Analysis (MD&A) is provided to focus on the results of its operations for the fiscal years ended September 30, 2003 and 2002 and its financial condition as of September 30, 2003 and It is, however, important to note that on March 31, 2003, the new convention center opened to the public. The FY2003 operating revenues and expenses, therefore, reflect an overlap of activity of nine (9) months for the old center and nine (9) months for the new center. (1) Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the Authority s basic financial statements. The annual financial report is comprised of three components: management s discussion and analysis, the basic financial statements, and the notes to the basic financial statements. The financial statements are designed to provide readers with a broad overview of the Authority s finances, in a manner similar to a private-sector business. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units on an accrual basis. Under this basis of accounting, revenues are recognized in the period they are earned, while expenses are recognized in the period they are incurred. Depreciation and amortization of capital and deferred assets are recognized in the statements of revenues, expenses and changes in net assets. The statement of net assets presents information on all of the Authority s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the Authority is improving or deteriorating. The statement of cash flows explains the sources and uses of cash during the fiscal year. (2) Basic Financial Statements The Authority s audited Statements of Net Assets; Statements of Revenues, Expenses and Changes in Net Assets; and Statements of Cash Flows are presented on pages 11 through 14. Again, it is important to note that the FY2003 statement of revenues, expenses and changes in net assets reflect the combined results of operations for the new convention center and the old convention center while the FY2002 statement of revenues, expenses and changes in net assets reflect the operating results for the old convention center only. (a) Operating Revenues For the fiscal years ended September 30, 2003 and 2002, the Authority s operating revenues were $9.4 million and $9.1 million, respectively. 3 (Continued)

6 Management s Discussion and Analysis Years ended September 30, 2003 and 2002 The breakdown of operating revenues by source for the fiscal years ended September 30, 2003 and 2002 are presented below (in thousands): % increase 2003 % of total 2002 % of total (decrease) Building rental $ 5, % $ 4, % 29 % Electrical 1, , (22) Telecommunications , (29) Audio-visual Food services 1, , (17) Miscellaneous Total operating revenues $ 9, % $ 9, % 3 % In FY2003, the primary focus of WCCA was the completion of construction and the opening of the new convention center as scheduled. The sources of WCCA s FY2003 operating revenues were: $5.1 million or 55% from building rental income; $2.2 million or 23% from electrical revenue and telecommunication service revenues for work orders done for and services rendered to WCCA customers (Show Managers and Exhibitors); $1.4 million or 15% from food services commissions (received from Centerplate, Inc.); $141,000 or 2% from audio-visual; and the remaining $476,000 or 5% from other miscellaneous sources. Miscellaneous income sources include advertising wall signage rental, telephone service commissions from telephone companies, fees earned from ATM s installed inside the Convention Center and trash hauling charges. WCCA s FY2003 operating revenues increased by 3% compared to FY2002. FY2003 total operating revenues fluctuated as follows: building rental was higher by 29%; while electrical revenue, telecommunications revenue and food services revenue were lower by 22%, 29%, and 17%, respectively. Miscellaneous revenues and audio-visual revenue increased. In FY2002, WCCA provided events with electrical services and telecommunications services primarily with the use of in-house staffing and received 100% of the revenue for these services. FY2003 revenues for electrical, telecommunications, and food services were lower than in FY2002, since WCCA outsourced these services to contractors. The current contracts provide us with a lower percentage of revenues in the form of commissions due to required cash or capital investments made by the service providers during construction. WCCA, however, is attempting to renegotiate these contracts for more favorable commission percentages. 4 (Continued)

7 Management s Discussion and Analysis Years ended September 30, 2003 and 2002 (b) Operating Expenses For FY2003 and FY2002, the Authority s total operating expenses totaled $45.3 million and $20.6 million, respectively. The details of the total operating expenses for the years ended September 30, 2003 and 2002 are as follows (in thousands): % increase 2003 % of total 2002 % of total (decrease) Personal services $ 14, % $ 12, % 17 % Contractual services 10, , Occupancy 5, , Supplies Miscellaneous (60) Total operating expenses (before depreciation and amortization) 31, , Depreciation and amortization 14, ,892 Total operating expenses $ 45, % $ 20, % 120 % For a proper perspective on operating expenses, WCCA managed the old convention center for nine (9) months in FY2003 and also managed the new convention center for nine (9) months in FY2003. Personal services which are comprised of salaries, wages and other personnel related expenses accounted for $14 million or 31% of FY2003 operating expenses; contractual services such as housekeeping and security contracts accounted for $10.4 million or 23%; occupancy such as utility bills, electricity, telecommunication, water, sewer and gas expense accounted for $5.9 million or 13%; supplies accounted for $570,000 or 2%; and other miscellaneous operating expenses accounted for $152,000 or 0.3%. Depreciation and amortization expense, primarily for the new building, amounted to $14.1 million or 31% in FY2003. For FY2003, the percentages of total operating expenses for the major expense categories were significantly affected by the substantial increase in depreciation expense in the fiscal year. In FY2003, as a percentage of total operating expenses, personal services decreased by 28% and contractual services decreased by 4%. The decrease in personal services reflects a reduction of inhouse personnel and a greater emphasis placed on service contracts to augment WCCA staffing. Occupancy costs increased by 4%, reflecting the impact of the new convention center central plant and electrical utility costs. Supply costs and miscellaneous expenses were almost unchanged. In terms of absolute dollars, WCCA s FY2003 total operating expenses (before depreciation) reflected a 55% increase over FY2002. The new convention center is about three times larger than the old convention center. For a significant part of FY2003, WCCA incurred increased costs in 5 (Continued)

8 Management s Discussion and Analysis Years ended September 30, 2003 and 2002 building security, maintenance, utilities, and event related supplies. In order to control increased costs, WCCA placed emphasis on the use of contractual services. FY2003 contractual services expenses substantially increased from FY2002 and reflect WCCA s emphasis on service contracts, which were anticipated to be offset by a reduction in personal services expense. However, FY2003 actual personal services expense also increased over FY2002 as the anticipated cost savings from workforce reductions were not yet fully achieved. Depreciation expense increased by $13.7 million and reflects depreciation of the new convention center since April of With the inclusion of the $13.7 million in new building depreciation, the FY2003 total operating expenses, in absolute dollars, is 120% greater than FY2002. (c) (d) Operating Loss FY2003 s operating loss (Total Operating Revenues of $9.4 million minus Total Operating Expenses, after depreciation, of $45.3 million) for the Authority amounted to $35.9 million representing a 212% increase from FY2002 s $11.5 million. Excluding the significant depreciation expense of $14.1 million on the new building, the FY2003 operating loss of $21.8 million represented a 98% increase compared to FY2002 s $11 million. The reason for the increase in the operating loss is the increase in operating expenses discussed on the previous page. Non-operating Revenues and Expenses The composition of WCCA s non-operating revenues and expenses for the years ended September 30, 2003 and 2002 are presented below (in thousands): % increase 2003 % of total 2002 % of total (decrease) Dedicated taxes $ 58, % $ 53, % 9 % Interest income 1, Bond interest and issue costs (13,154) (33) Transfer to tourism responsibility centers (6,793) (17) (6,060) (13) 12 Net nonoperating revenues $ 39, % $ 48, % (17) % Non-operating Revenues WCCA collected approximately $59 million in dedicated taxes and earned $1 million in interest income from investments. The Office of Research and Analysis of the District of Columbia (ORA) forecasted in September 2002 that WCCA would expect to collect $54.5 million in dedicated taxes in FY2003. However, WCCA s FY2003 dedicated tax collections from the District of Columbia (DC) Office of Tax and Revenue (OTR) amounted to approximately $59 million and were 8% above ORA s forecast, due to greater than anticipated tax revenues. 6 (Continued)

9 Management s Discussion and Analysis Years ended September 30, 2003 and 2002 Interest earned on WCCA s unspent bond proceeds in fiscal years 2003 and 2002 amounted to approximately $4.4 million and $14 million, respectively. Such amounts have been partially offset against capitalized interest expense in the accompanying audited financial statements. The FY2003 and FY2002 interest income of $1 million and $244,000, respectively, represent interest earned that was not offset against capitalized interest in the accompanying financial statements. Non-operating Expenses The Authority s non-operating expenses consisted of $12.8 million in interest expense for six (6) months (April to September 2003) on bonds payable that was not capitalized, amortization of bond issue cost of $356,000, and payments made to marketing agencies. Marketing agency payments amounted to approximately $6.8 million. This represented a 12% increase in marketing expenses from FY2002 s $6.1 million. (e) Assets WCCA s total assets at September 30, 2003 and 2002 consisted of the following (in thousands): % increase 2003 % of total 2002 % of total (decrease) Current assets $ 15,842 2 % $ 24,293 3 % (35) % Capital and other assets 820, , Restricted assets 78, , (69) Total assets $ 914, % $ 915, % % As of September 30, 2003, the Authority had total assets of approximately $914 million, approximately $1.2 million lower than the September 30, 2002 fiscal year-end figure of $915.6 million. Of the total assets as of September 30, 2003, $16 million or 2% were current, $820 million or 90% were capital and other assets; and $78 million or 8% were restricted assets. The significant change in capital and other assets and restricted assets is a result of the completion of construction of the new convention center and the use of restricted assets (bond proceeds) to fund such costs. (f) Liabilities The Authority s total liabilities at September 30, 2003 and 2002 consisted of the following (in thousands): % increase 2003 % of total 2002 % of total (decrease) Current liabilities $ 80, % $ 87, % (9) % Long-term liabilities 520, , Total liabilities $ 601, % $ 606, % (1) % 7 (Continued)

10 Management s Discussion and Analysis Years ended September 30, 2003 and 2002 Of the $601 million total liabilities of the Authority as of September 30, 2003, current liabilities amounted to $80 million or 13% and long-term liabilities (bonds payable, net of discount of $6 million and capital lease obligations) amounted to $521 million or 87%. The total liabilities of the Authority were consistent with last fiscal year and reflective of a slight reduction of $5 million or 1%. (g) Net Assets The Authority s net assets at September 30, 2003 and 2002 consisted of the following (in thousands): % increase 2003 % of total 2002 % of total (decrease) Invested in capital assets, net of related debt $ 243, % $ 115, % 110 % Restricted net assets: Debt service 25, , Construction cost 16, , (89) Operating and marketing reserve 20, ,000 7 Unrestricted net assets 8, , Total net assets $ 313, % $ 309, % 1 % As of September 30, 2003, the Authority had total net assets amounting to approximately $313 million with $243 million invested in capital assets (net of related debt), approximately $62 million in restricted net assets and unrestricted net assets of approximately $8 million. (h) Capital Assets As of September 30, 2003 and 2002, the Authority has capital assets of approximately $811 million and $625 million, respectively, net of accumulated depreciation. At September 30, 2003 and 2002, construction costs related to the new convention center amounted to $799 million and $618 million, respectively. In FY2003, $181 million in capital additions to the new convention center were made. 8 (Continued)

11 Management s Discussion and Analysis Years ended September 30, 2003 and 2002 (i) Outstanding Debt The Authority has outstanding debt, net of bond discounts, amounting to approximately $519 million and $518 million at September 30, 2003 and 2002, consisting of senior lien dedicated tax revenue serial and term bonds. Prior to the completion of building construction, only interest payments were required. Repayment of principal on the bonds begins in FY2004. The Authority signed an agreement with a vendor to finance, design, construct and operate a natural gas to electric central plant (the Central Plant) to provide hot and chilled water for the new convention center. In order to accomplish this, the vendor invested $14.3 million. In return, the Authority agreed to pay vendor various monthly fees, including a fee for capital costs associated with the design and construction of the Central Plant. To date, WCCA also spent $1.8 million to fund change orders associated with construction of the central plant. When the new convention center became operational in March 2003, WCCA recognized $16.1 million spent to construct the Central Plant as an asset and $13.5 million as a capital lease liability. WCCA makes monthly lease payments of $142,000 as stipulated in the agreement for capital costs associated with the operation of the Central Plant. The agreement provides for a buyback option that WCCA may exercise in the future. (3) Events with Future Impacts The new Washington Convention Center opened in April To date, the Authority has 115 events scheduled for the period January 2004 to January At this point in fiscal year 2003, the Authority had scheduled 92 events for the period January 2003 to January Also, to date, the Authority has booked a total of 246 events for the center from 2004 to In terms of total space area, the new convention center has approximately 2,300,000 square feet compared to 800,000 square feet in the old convention center. The new center is three (3) times bigger that the old center in terms of total space area. The new center has 725,000 square feet for exhibit space, 210,000 square feet for meeting space divisible into seventy (70) meeting rooms, and 44,000 square feet for retail space and street level restaurants. The meeting space includes 60,000 square feet for a ballroom that is currently considered the biggest in the East Coast. The new convention center is currently ranked eighth nationally in terms of size of prime exhibit space available. The new center is designed to hold multiple conventions or trade shows to occur simultaneously, something that generally cannot be done in the old center. The new convention center has significant advantageous features compared to the old center that will help the Authority in achieving greater operating revenues and much larger contribution to the DC economy in future fiscal years. Additionally, the new convention center features a full-service restaurant and several cafes. A restaurant row has developed on 7th Street, NW, due to the success of the MCI Arena. Seven new hotels located near the new center are scheduled to be completed by 2004 providing an additional 3,800 hotel rooms. The Gallery Place Entertainment Center located beside the MCI Arena and at the gateway of Chinatown is also planned to open in Plans for the redevelopment of the old Convention Center are under development, as demolition will occur late summer of (Continued)

12 Management s Discussion and Analysis Years ended September 30, 2003 and 2002 (4) Request for Information This financial report is designed to provide a general overview of the Authority s finances for all those with an interest in its finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to Ms. Tracy S. Harris, Chief Financial Officer, Washington Convention Center Authority, 801 Mount Vernon Place, NW, Washington, D.C

13 Statements of Net Assets September 30, 2003 and 2002 (In thousands) Assets Current assets: Cash $ 4,715 11,005 Investments 4,503 7,323 Due from District of Columbia 5,506 4,536 Accounts receivable, net of allowance for uncollectible accounts of $126 and $133, respectively Accrued interest receivable Total current assets 15,842 24,293 Capital and other assets: Capital assets, net of accumulated depreciation of $22,693 and $8,282, respectively 811, ,835 Unamortized bond issue costs 8,901 9,257 Total capital and other assets 820, ,092 Restricted assets: Restricted cash 1, Restricted investments 76, ,563 Total restricted assets 78, ,194 Total assets 914, ,579 Liabilities Current liabilities: Accounts payable 36,647 45,857 Compensation liabilities 1,060 1,298 Deferred revenue 11,939 11,591 Accrued interest payable 12,976 12,976 Construction retainage 6,341 16,186 Capital lease, current portion 1,050 Bonds payable, current portion 10,225 Total current liabilities 80,238 87,908 Long-term liabilities: Bonds payable, net discount of $5,831 and $6,064, respectively 508, ,396 Capital lease 12,419 Total liabilities 601, ,304 Net Assets Invested in capital assets, net of related debt 243, ,696 Restricted for: Debt service 25,211 15,769 Construction cost 16, ,535 Operating and marketing fund 20,000 20,000 Unrestricted 8,271 2,275 Total net assets $ 313, ,275 See accompanying notes to financial statements. 11

14 Statements of Revenues, Expenses, and Changes in Net Assets Years ended September 30, 2003 and 2002 (In thousands) Operating revenues: Building rental $ 5,150 4,002 Electrical 1,305 1,675 Telecommunications 862 1,209 Audio-visual 141 Food services 1,431 1,717 Miscellaneous Total operating revenues 9,365 9,071 Operating expenses: Personal services 14,139 12,077 Contractual services 10,399 5,580 Depreciation and amortization 14, Occupancy 5,887 1,775 Supplies Miscellaneous Total operating expenses 45,270 20,602 Operating loss (35,905) (11,531) Nonoperating revenues and expenses: Interest income 1, Dedicated taxes 58,905 53,874 Bond interest and issue costs (13,154) Transfer to tourism responsibility centers (6,793) (6,060) Net nonoperating revenues 39,960 48,058 Increase in net assets 4,055 36,527 Net assets, beginning of year 309, ,748 Net assets, end of year $ 313, ,275 See accompanying notes to financial statements. 12

15 Statements of Cash Flows Years ended September 30, 2003 and 2002 (In thousands) Cash flows from operating activities: Receipts from customers $ 9,659 18,343 Payments to suppliers (17,286) (6,765) Payments to employees (14,376) (12,120) Net cash used in operating activities (22,003) (542) Cash flows from capital and related financing activities: Acquisition and construction of capital assets (194,449) (179,291) Capital lease payments (1,417) Interest payments (25,952) (25,952) Net cash used in capital and related financing activities (221,818) (205,243) Cash flows from noncapital financing activities: Dedicated tax receipts 57,935 53,373 Transfers to tourism responsibility centers (6,793) (6,060) Net cash provided by noncapital financing activities 51,142 47,313 Cash flows from investing activities: Sales of investments 245, ,356 Purchases of investments (62,756) (82,210) Receipts of interest and dividends 4,924 14,447 Net cash provided by investing activities 187, ,593 Net decrease in cash and cash equivalents (5,099) (2,879) Cash and cash equivalents, beginning of year 11,636 14,515 Cash and cash equivalents, end of year $ 6,537 11, (Continued)

16 Statements of Cash Flows Years ended September 30, 2003 and 2002 (In thousands) Reconciliation of operating loss to net cash used in operating activities: Operating loss $ (35,905) (11,531) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation 14, Changes in assets and liabilities: Increase in accounts receivable (54) (554) (Decrease) increase in accounts payable (277) 1,288 Decrease in compensation liabilities (238) (43) Increase in deferred revenue 348 9,826 Net cash used in operating activities $ (22,003) (542) See accompanying notes to financial statements. 14

17 Notes to Basic Financial Statements September 30, 2003 and 2002 (1) Organization The Washington Convention Center Authority (the Authority or WCCA), a corporate body and an independent authority of the District of Columbia government was created pursuant to the Washington Convention Center Authority Act of 1994, D.C. Law (the WCCA Act), effective September 28, The WCCA was established for the purpose of acquiring, constructing, equipping, maintaining, and operating a new convention center in the District of Columbia. The WCCA engages in activities deemed appropriate to promote trade shows, conventions, and other events closely related to activities of the existing convention center and the new convention center. The WCCA also maintained and operated the old convention center until the new convention center opened in March The WCCA is governed by a nine-member board of directors (the Board). Two members serve as ex-officio voting members of the Board. One of the ex-officio members must be the chief financial officer of the District of Columbia and the mayor designates the other. The remaining seven public members are appointed by the mayor with the consent of the Council of the District of Columbia (the Council) and represent certain sectors of the community. The terms of the public members are four years. No board member is permitted to serve more than two consecutive four-year terms. The mayor appoints one public member as chairperson with the advice and consent of the Council. The WCCA receives its funding by generating operating revenue, collecting dedicated taxes, and earning interest income on invested funds. The dedicated taxes were established pursuant to the WCCA Act. Effective October 1, 1998, the dedicated taxes consist of a separate sales and use tax of 4.45% (of the District s 14.5%) on hotel room charges and a sales and use tax of 1.0% (of the District s 10.0%) on restaurant meals, alcohol beverages consumed on the premises, and rental vehicle charges. The dedicated taxes are collected on behalf of the WCCA in accordance with the September 1998 Lockbox and Collection Agreements executed by the WCCA, the District and the financial institution. The WCCA was authorized to issue bonds to finance the costs of the new convention center pursuant to the WCCA Act, as amended. On September 28, 1998, the WCCA issued $524,460,000 in senior lien dedicated tax revenue bonds to finance the construction of the new Washington Convention Center. The United States Congress is also required to approve certain actions of the Council and WCCA relating to the issuance of the bonds and the development of the new convention center. The WCCA is a component unit of the District of Columbia. (2) Summary of Significant Accounting Policies (a) Basis of Accounting The accompanying financial statements were prepared on the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred. The Authority accounts for its activities in four separate accounts: the Operating Account; the Building Account; the Marketing Account, and the New Center Account. However, for financial reporting purposes, it reports its activities as one enterprise fund. 15 (Continued)

18 Notes to Basic Financial Statements September 30, 2003 and 2002 In accordance with Governmental Accounting Standards Board (GASB) Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that use Proprietary Fund Accounting, the Authority applies all applicable GASB pronouncements. The Authority has elected to apply only those Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board (APB) Opinions, and Accounting Research Bulletins, issued on or before November 30, 1989, that do not conflict with or contradict GASB pronouncements. (b) (c) (d) (e) Accounting Change The Authority has adopted GASB Statement No. 40, Deposit and Investment Risk Disclosures (an amendment of GASB Statement No. 3), effective October 1, The primary impact of the implementation of this standard on the Authority is to require certain new and/or modified disclosures regarding the Authority s exposure to deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk, if any. Cash and Cash Equivalents The Authority considers all highly liquid instruments purchased with an original maturity of less than three months to be cash equivalents. Investments Investments are stated at amortized cost which approximates fair value. Capital Assets and Depreciation Capital assets are carried at cost less accumulated depreciation. Donated capital assets are recorded at fair market value at the date donated. Depreciation expense is calculated using the straight-line method over the following estimated useful lives: Equipment and financial systems Furniture and fixtures Central plant Building 5 years 10 years 20 years 30 years Construction costs incurred in connection with the construction of the new convention center were capitalized as construction-in-progress (CIP) until the new convention center was opened in March The Authority capitalizes interest incurred during the construction period. Additionally, the Authority offsets interest capitalized with interest earned on unspent bond funds during the construction period. Expenditures for repairs and maintenance that do not increase the economic useful lives of related assets are charged to operations during the fiscal year in which the costs are incurred. 16 (Continued)

19 Notes to Basic Financial Statements September 30, 2003 and 2002 (f) (g) (h) Amortization of Bond Discount and Issuance Costs The bond discount is recorded as a reduction of the carrying cost of the bonds. Bond discount and issuance costs are amortized based upon the weighted average of bonds outstanding over the term of the bonds. Deferred Revenue Deferred revenue consists of unearned revenues for future events. Revenue Recognition Rental revenues are recorded as rentals become due. Rental payments received in advance are deferred until earned. (3) Cash Dedicated taxes are recorded in the period when the exchange transaction on which the tax is imposed occurs. The Authority distinguishes between operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services in connection with the Authority s ongoing operation. The principal operating revenues of the Authority consist of building rental, electrical, telecommunications, food services, and miscellaneous revenues. Operating expenses include personal services, contractual services, depreciation, occupancy, supplies, and miscellaneous expenses. All revenue and expenses not meeting this definition are reported as nonoperating revenues and expenses. The Authority s cash at September 30, 2003 and 2002 consisted of the following (in thousands): Carrying Bank Carrying Bank value balance value balance Cash in bank and on hand $ 4,715 5,940 11,005 12,260 Restricted cash 1,822 2, Total $ 6,537 8,245 11,636 12,891 Custodial Credit Risk Deposits. Custodial credit risk is the risk that in the event of a bank failure, the Authority s deposits may not be returned to it. The Authority s policy to address custodial risk requires all cash deposits held by banks and bond trustees to be insured either by federal deposit insurance or by collateral held by the Authority s custodian bank in the Authority s name. In conformity with such policy, all cash deposits of the Authority were either entirely covered by federal depository insurance or by collateral held by the Authority s custodial bank in the Authority s name as of and for the years ended September 30, 2003 and Restricted cash represents funds held at a Bank for the purpose of funding construction related costs on September 30, 2003 and (Continued)

20 Notes to Basic Financial Statements September 30, 2003 and 2002 (4) Investments As of September 30, 2003 and 2002, the Authority had the following investments: As of September 30, 2003 (in thousands) Maturities Interest rates Fair value Guaranteed investment contracts 5/31/ %-5.71% $ 44,935 Commercial paper 12/31/ % 20,000 Money market mutual funds 1.00% 16,295 Totals $ 81,230 As of September 30, 2002 (in thousands) Maturities Interest rates Fair value Guaranteed investment contracts 5/31/ %-5.71% $ 144,474 Commercial paper 12/31/ % 20,000 Money market mutual funds 1.00%-2.00% 99,412 Totals $ 263,886 Interest Rate Risk. The Authority s formal investment policy addresses safety of principal, diversification, liquidity, and rate of return. The policy, however, does not formally address exposure to interest rate risk. In order to limit its exposure to fair value losses arising from increasing interest rates, the Authority invests in short-term assets and long-term guaranteed investment contracts that it plans to hold until maturity. Credit Risk. The Authority s investment policy limits investments in commercial paper to certain highly rated short-term obligations of U.S. corporations. The Authority s investment policy limits investments in guaranteed investment contracts to those that are very highly rated and insured or guaranteed by insurance or assurance companies that are required to maintain at minimum an AA-Standard and Poor s rating or an Aa3 Moody s rating. The Authority s investments in money market mutual funds are in funds which invest in direct obligations of the U.S. Treasury and repurchase agreements secured by such obligations. The Authority was in compliance with such policies as of and for the years ended September 30, 2003 and Concentration of Credit Risk. The Authority places no limit on the amount the Authority may invest in any one issuer. More than 5 percent of the Authority s investments are in Orchid Funding Corp. commercial paper, AIM-guaranteed investment contracts, and AIG money market mutual funds as of September 30, These investments are 25%, 55%, and 20%, respectively, of the Authority s total investments as of September 30, Additionally, as of September 30, 2002, more than 5 percent of the Authority s investments were in Orchid Funding Corp. commercial paper, AIM-guaranteed investment contracts, AIG money market mutual funds, AMBC money market mutual funds, and MBIA money market mutual funds. These investments were 8%, 29%, 21%, 24%, and 6% respectively, of the Authority s total investments as of September 30, (Continued)

21 Notes to Basic Financial Statements September 30, 2003 and 2002 (5) Capital Assets Capital asset balances at September 30, 2003 and 2002, are summarized as follows (in thousands): Year ended September 30, 2003 Beginning Ending balance Additions Deletions balance Land $ 4, ,763 Total land 4, ,763 Artwork 2,653 2,653 Total artwork 2,653 2,653 Central plant 16,172 16,172 Accumulated depreciation (404) (404) Total central plant 15,768 15,768 Financial systems Total financial systems Building 791, ,908 Accumulated depreciation (12,909) (12,909) Total building, net 778, ,999 Furniture and fixtures 6,577 4,109 10,686 Accumulated depreciation (5,045) (433) (5,478) Total furniture and fixtures, net 1,532 3,676 5,208 Equipment 4,259 2,547 6,806 Accumulated depreciation (3,237) (377) (3,614) Total equipment 1,022 2,170 3,192 Construction-in-progress 617, ,795 (798,476) Net capital assets $ 624, ,740 (798,476) 811, (Continued)

22 Notes to Basic Financial Statements September 30, 2003 and 2002 Year ended September 30, 2002 Beginning Ending balance Additions Deletions balance Land $ 4, ,600 Total land 4, ,600 Furniture and fixtures 6, ,577 Accumulated depreciation (4,742) (319) 16 (5,045) Total furniture and fixtures, net 1,638 (122) 16 1,532 Equipment 3, (18) 4,259 Accumulated depreciation (3,100) (137) (3,237) Total equipment (18) 1,022 Construction-in-progress 387, , ,681 Net capital assets $ 394, ,484 (2) 624,835 In fiscal years 2003 and 2002, capitalized interest net of interest earned on unspent bond proceeds amounted to $9,877,000 and $11,748,000, respectively. (6) Construction Commitments During the first half of the fiscal year the Authority substantially completed construction of the new convention center, which became operational in March The Authority is currently working to close-out construction contracts, the costs of which are financed by the remaining proceeds of the serial lien dedicated tax revenue bonds and dedicated tax revenues. (7) Capital Lease The Authority signed an agreement with a vendor to finance, design, construct and operate a natural gas to electric central plant (the Central Plant) to provide hot and chilled water for the new convention center. In order to accomplish this, the vendor invested $14.3 million. In return, the Authority agreed to pay vendor various monthly fees, including a fee for capital costs associated with the design and construction of the Central Plant. To date, WCCA also spent $1.8 million to fund change orders associated with construction of the central plant. When the new convention center became operational in March 2003, WCCA recognized $16.1 million spent to construct the Central Plant as an asset and $13.5 million as a capital lease liability. WCCA makes monthly lease payments of $142,000 as stipulated in the agreement for capital costs associated with the operation of the Central Plant. The agreement provides for a buyback option that WCCA may exercise in the future. 20 (Continued)

23 Notes to Basic Financial Statements September 30, 2003 and 2002 The following reflects the received annual lease payments through maturity (in thousands): 2004 $ 1, , , , , , ,861 24,861 Less interest (11,392) Capital lease obligation 13,469 Less current portion (1,050) Long-term portion of capital lease obligation $ 12,419 (8) Bonds Payable At September 30, 2003 and 2002, long-term debt consisted of (in thousands): Par value 1998 Bonds payable 4.5% 5.25% due $ 524,460 The bond proceeds are used to construct and equip the new convention center. The 1998 Bonds are special obligations of WCCA. The 1998 Bonds are payable solely from dedicated tax receipts and pledged funds established under the Trust Agreement. The WCCA Act authorized the pledge of the dedicated taxes to secure the repayment of the 1998 Bonds. Pursuant to the WCCA Act, the District has also pledged not to limit or alter any rights vested in the WCCA to fulfill agreements made with holders of the 1998 Bonds, or in any way impair rights and remedies of bondholders until the 1998 Bonds and the interest thereon are paid in full. In connection with the issuance of the bonds, the District and the WCCA entered into lockbox and collection agreements with a local bank into which the dedicated taxes are deposited and transferred to the bond trustee on the following day. Dedicated taxes are collected one month in arrears. The WCCA Act provides that on or before July 15 of each year, the District s Auditor shall deliver a certification relating to the sufficiency of the projected dedicated tax revenues, WCCA operating revenues, and any amounts in excess of the minimum reserve account deposits to meet the sum of the projected operating and debt service expenditures and reserve requirements. If the projected revenues are insufficient, the WCCA Act requires the mayor to impose a surtax in an amount sufficient to meet the projected deficiency. The District s Auditor determined that the projected dedicated taxes for fiscal year 21 (Continued)

24 Notes to Basic Financial Statements September 30, 2003 and are expected to be sufficient to meet the projected expenditures and reserve requirements. Therefore, no surtax was imposed by the mayor. A summary of annual maturities of the bonds payable is as follows at September 30, 2003 (in thousands): Principal Interest 2004 $ 10,225 25, ,685 25, ,190 24, ,720 24, ,310 23, , , ,640 88, ,830 62, ,555 30, ,535 1,640 $ 524, ,073 At September 30, 2003 and 2002, the unamortized bond discount was $5,831,000 and $6,064,000, respectively. Bond issuance costs to be amortized over the bond maturity were $8,901,000 and $9,257,000 at September 30, 2003 and 2002, respectively. As of September 30, 2003 and 2002, pledged investments of $78,549,000 and $257,194,000, respectively, were held by the bond trustee for the debt service and reserve account requirements. (9) Retirement Plan Effective April 1998, all WCCA full-time employees are covered by a defined contribution plan. The plan, which is managed by ICMA Retirement Corporation requires no employee contributions. All employees are vested after four years of service. The contribution is 7% of total gross salary ($10,935,000 and $8,826,000 in 2003 and 2002, respectively) including bonuses and overtime. The total employer s contribution for 2003 and 2002 was $697,000 and $555,000, respectively. (10) Related-Party Transactions As of September 30, 2003 and 2002, the dedicated taxes receivable due from the District government was $5,506,000 and $4,536,000, respectively. These receivable amounts substantially represent September tax payments collected by the District in October. In accordance with the provisions of Section 208(c) of the Washington Convention Center Act of 1994 (as amended in 1998), the WCCA is required to fund a marketing account in an amount equal to the greater of 17.4% of the hotel sales tax received, or the amount necessary to provide payment from the marketing account to pay the marketing services contracts. During fiscal years 2003 and 2002, the Authority transferred $6,962,000 and $6,068,000, respectively, which represented 17.4% of the hotel sales tax to the marketing account. 22 (Continued)

25 Notes to Basic Financial Statements September 30, 2003 and 2002 The WCCA paid the following marketing services contracts in fiscal years 2003 and 2002 (in thousands): DC Chamber of Commerce $ Greater Washington IBERO Washington Convention & Tourism Committee 6,068 5,335 Total $ 6,793 6,060 As of September 30, 2003 and 2002, the marketing account has a dedicated taxes receivable of $633,000 and $508,000, respectively. As of September 30, 2003 and 2002, the Marketing Fund has a balance of $341,369 and $294,

26 Schedule of Assets, Liabilities, and of Net Assets September 30, 2003 (In thousands) Operating Building Marketing New Center account account account account Total Assets Current assets: $ Cash 4, ,715 Investments 4, ,503 Due from District of Columbia 5, ,506 Accounts receivable, net of allowance for uncollectible accounts Accrued interest receivable Inter-account receivable (payable) 3,105 (5,238) 915 1,218 Total current assets 8,624 4,466 1,507 1,245 15,842 Capital and other assets: Capital assets, net of accumulated depreciation 1, ,490 1, ,099 Unamortized bond issue costs 8,901 8,901 Total capital and other assets 1, ,391 1, ,000 Restricted assets: Restricted cash 1,822 1,822 Restricted investments 76,727 76,727 Total restricted assets 78,549 78,549 Total assets 10, ,406 1,507 2, ,391 Liabilities Current liabilities: Accounts payable 3,619 31,777 (3) 1,254 36,647 Compensation liabilities 539 (18) 539 1,060 Deferred revenue 1,939 10,000 11,939 Accrued interest payable 12,976 12,976 Construction retainage 6,341 6,341 Capital lease, current portion 1,050 1,050 Bonds payable, current portion 10,225 10,225 Total current liabilities 6,097 72,369 (21) 1,793 80,238 Long-term liabilities: Bonds payable, net of discount 508, ,404 Capital lease 12,419 12,419 Total liabilities 6, ,192 (21) 1, ,061 Net Assets Invested in capital assets, net of related debt 1, ,417 1, ,026 Restricted for: Debt service 25,211 25,211 Construction cost 16,822 16,822 Operating and marketing fund 20,000 20,000 Unrestricted 2,527 4,764 1,528 (548) 8,271 Total net assets $ 3, ,214 1, ,330 See accompanying independent auditors report. 24

27 Schedule of Revenues, Expenses, and Changes in Net Assets Year ended September 30, 2003 (In thousands) Operating Building Marketing New Center account account account account Total Operating revenues: Building rental $ 5,150 5,150 Electrical 1,305 1,305 Telecommunications Audio-visual Food services 1,431 1,431 Miscellaneous Total operating revenues 9,365 9,365 Operating expenses: Personal services 13, ,139 Contractual services 7,592 2,807 10,399 Depreciation and amortization 14,123 14,123 Occupancy 5,887 5,887 Supplies Miscellaneous 740 (588) 152 Total operating expenses 42,636 2,634 45,270 Operating (loss) (33,271) (2,634) (35,905) Nonoperating revenues and expenses: Interest income ,002 Dedicated taxes 51,943 6,962 58,905 Bond interest and issue costs (13,154) (13,154) Transfer to tourism responsibility centers (6,793) (6,793) Inter-account transfers to/(from) 33,069 (38,613) 801 4,743 Net nonoperating revenues 33,225 1, ,743 39,960 Increase (decrease) in net assets (46) 1, ,109 4,055 Net assets (deficit), beginning of year 4, , (1,482) 309,275 Net assets, end of year $ 3, ,214 1, ,330 See accompanying independent auditors report. 25

28 2001 M Street, NW Washington, DC Independent Auditors Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards The Board of Directors Washington Convention Center Authority: We have audited the financial statements of the Washington Convention Center Authority (the Authority), a component unit of the government of the District of Columbia, as of and for the year ended September 30, 2003 and have issued our report thereon dated December 18, 2003 which referred to a change in accounting principle. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Compliance As part of obtaining reasonable assurance about whether the Authority s financial statements are free of material misstatements, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. Internal Control over Financial Reporting In planning and performing our audit, we considered the Authority s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. This report is intended solely for the information and use of the audit committee, management, and the Inspector General of the District of Columbia, and is not intended to be and should not be used by anyone other than those specified parties. December 18, 2003 KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is a member of KPMG International, a Swiss association. 26