DENVER CONVENTION CENTER HOTEL AUTHORITY

Transcription

1 FINANCIAL AUDIT REPORT

2 CONTENTS Independent auditors report 1 Management s discussion and analysis 2-10 Financial statements: Statements of net deficiency in assets 11 Statements of revenues, expenses, and changes in net deficiency in assets 12 Statements of cash flows 13 Notes to financial statements Report on internal control over financial reporting and on compliance and other matters based on an audit of financial statements performed in accordance with Government Auditing Standards Page

3 INDEPENDENT AUDITORS REPORT GHP Horwath, P.C Broadway, Suite 3000 Denver, Colorado Fax Board of Directors Denver Convention Center Hotel Authority We have audited the accompanying statements of net deficiency in assets of the Denver Convention Center Hotel Authority (the Authority ) as of December 31, 2009 and 2008, and the related statements of revenues, expenses and changes in net deficiency in assets, and cash flows for the years then ended. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Authority s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Authority as of December 31, 2009 and 2008, and the changes in its net assets and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated April 8, 2010 on our consideration of the Authority s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits. The management s discussion and analysis included on pages 2 through 10 is not a required part of the basic financial statements, but is supplementary information required by the Governmental Accounting Standards Board. 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. April 8, 2010 A GHP Financial Group company GHP Horwath, P.C. is a member firm of Horwath International Association. Each member firm is a separate and independent legal entity. 1

4 MANAGEMENT S DISCUSSION AND ANALYSIS OVERVIEW The Denver Convention Center Hotel Authority (the Authority ), was incorporated on March 11, 2003, by the City and County of Denver, Colorado (the City ) as a separate and distinct corporate entity for the limited purpose of financing, acquiring, constructing, equipping, and operating a fullservice, convention-oriented hotel near the Colorado Convention Center (the Convention Center ). The City owns the Convention Center, which is located in downtown Denver. The Authority is organized as a Colorado non-profit corporation. Hotel construction began in June 2003 and was substantially complete in December The hotel opening occurred on December 20, 2005 (the Hotel Opening Date ) as the Hyatt Regency Denver at Colorado Convention Center. The hotel contains approximately 1.2 million gross square feet, including 1,100 hotel guest rooms, a 300 seat full-service restaurant, a lobby bar rooftop lounge, a health club, approximately 60,000 net square feet of meeting space, including ballrooms of approximately 30,000 and 15,000 net square feet, a three-level 570 car parking garage, and other supporting facilities. This section of the Authority s annual financial statements presents a narrative overview and analysis of the financial activities of the Authority for the years ended December 31, 2009 and This discussion and analysis should be read in conjunction with the Authority s financial statements and the notes to the financial statements. The discussion and analysis is designed to focus on current activities and resulting changes in financial position. FINANCIAL HIGHLIGHTS On June 20, 2003, the Authority released its official statement to issue $354,825,000 Convention Center Hotel Senior Revenue Bonds, Series 2003A (the Series 2003A Bonds ) which are secured by an Indenture of Trust dated as of June 1, 2003 (the Indenture ) by and between the Authority and JP Morgan Trust Company N.A. (successor to Bank One, N.A.). The proceeds of the Series 2003A Bonds, together with other funds, have been used to: finance the acquisition of a site (which occurred on June 25, 2003), and construct, equip and operate a full-service, first-class, upscale convention center headquarters hotel, a parking garage and supporting facilities, and furniture, fixtures, equipment and initial operation supplies (collectively, the Project or the Hotel ); pay interest during construction of the Project and for six months following its anticipated completion date; establish a reserve fund for the Series 2003A Bonds and an operating reserve fund for the Project; provide initial working capital for the Project; pay certain pre-opening fees and expenses, and pay certain costs of issuing the Series 2003A Bonds. 2

5 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL HIGHLIGHTS (CONTINUED) On May 2, 2006, the Authority issued $356,155,000, in Convention Center Hotel Senior Revenue Refunding Bonds, Series 2006, which are secured by an Amended and Restated Indenture of Trust, dated as of April 1, 2006 by and between the Authority and The Bank of New York Trust Company, N.A. (successor to JP Morgan Trust Company, N.A.) as Trustee. The primary purposes of the refunding were to amend certain provisions of the Indenture, to adjust certain reserve requirements to be in line with current industry standards and to accelerate expected distributions to the City. The proceeds of the Bonds together with amounts on deposit held by the Trustee under the original Indenture are to be used to: pay interest on the Series 2006 bonds in an amount equal to accrued interest through July 1, 2006 fund a reserve fund for the Series 2006 Bonds fund a working capital reserve for the Project refund and defease all of the Series 2003A Bonds pay certain costs of issuance of the Series 2006 Bonds Associated with the refunding, the Authority and the Trustee as escrow agent, entered into an Escrow Agreement dated April 1, 2006, pursuant to which the Authority deposited $360,213,000 from the sale of the Series 2006 Bonds into a special and irrevocable escrow fund to advance refund the Series 2003A Bonds. Under federal law, the Authority may only advance refund its bonds once on a tax-exempt basis. Therefore, in the future, the Authority may only refund the Series 2006 Bonds on a tax-exempt basis as a current refunding, which means that the earliest the Authority can issue tax-exempt refunding bonds would be 90 days prior to the first optional refunding date of November 1, At December 31, 2009 and 2008, total assets, liabilities and net deficiency in assets consisted of the following: (in thousands) (in thousands) Total assets $ 344,333 $ 356,106 Total liabilities 365, ,164 Net deficiency in assets $ (21,208) $ (15,058) 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Authority s financial statements and notes thereto. The financial statements of the Authority are prepared similar to an enterprise fund, as defined by the Governmental Accounting Standards Board. Enterprise funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting. Under this method, revenues are recorded when earned, and expenses are recorded at the time liabilities are incurred. The Statements of Net Deficiency in Assets include all assets and liabilities. Over time, increases or decreases in net assets (the difference between assets and liabilities) is one indicator of the improvement or deterioration of the Authority s financial health. The Statements of Revenues, Expenses, and Changes in Net Deficiency in Assets represent the revenues earned and expenses incurred during the periods reported. Activities are reported as operating or non-operating. Capital assets are recorded at cost and are being depreciated using the straight-line method over the estimated useful lives of the assets. Depreciation began when the Hotel was placed into service. The Statements of Cash Flows represent information related to cash inflows and outflows summarized by operating, investing, capital and related financing activities, and supplemental disclosure of non-cash investing activities. FINANCIAL ANALYSIS OF THE AUTHORITY S FINANCIAL STATEMENTS Condensed financial information at December 31, 2009 and 2008: (in thousands) (in thousands) Assets: Current assets: Cash and cash equivalents $ 2,246 $ 3,124 Accounts receivable 2,101 2,052 Prepaid insurance and other 1,325 1,289 5,672 6,465 Non-current assets: Capital assets, net 249, ,765 Restricted investments 77,938 80,473 Other 10,921 11, , ,641 Total assets 344, ,106 4

7 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE AUTHORITY S FINANCIAL STATEMENTS (CONTINUED) (in thousands) (in thousands) Liabilities: Current liabilities $ 13,826 $ 16,623 Non-current liabilities 351, ,541 Total liabilities 365, ,164 Net deficiency in assets $ (21,208) $ (15,058) Summary revenues, expenses, and changes in net deficiency in assets information for the years ended December 31, 2009 and 2008: (in thousands) (in thousands) Operating revenues $ 73,229 $ 83,377 Operating expenses (62,717) (67,905) Non-operating expenses (17,109) (12,486) Unallocated receipts from the City 8,500 8,000 Unallocated payments to the City (8,053) (6,481) Change in net deficiency in assets $ (6,150) $ 4,505 Net assets may serve as a useful indicator of the Authority s financial position. Net assets represent the difference between the Authority s assets and liabilities and consist of assets invested in capital assets, net of related debt. Liabilities exceeded assets by approximately $21.2 and $15.1 million at the end of 2009 and 2008, respectively. In 2009, revenue decreased by approximately $10 million or 12% ($73 million in 2009 compared to $83 million in 2008) and operating expenses decreased by approximately $5 million or 7% ($63 million in 2009 compared to $68 million in 2008). The factors attributed to these results include: Occupancy declined over the prior year Average Daily Rate decreased Overall rooms revenues decreased Food and Beverage revenues decreased Operating expenses were down on a decrease of $10 million in revenues 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE AUTHORITY S FINANCIAL STATEMENTS (CONTINUED) In addition, the Authority received payments of $8,500,000 in 2009, of which $8,053,000 was returned to the City under the Economic Development Agreement described in Note 6 to the financial statements. During the years ended December 31, 2009 and 2008, operating expenses consisted of the following: (in thousands) (in thousands) Departmental expenses $ 28,667 $ 31,174 General and administrative 7,518 7,563 Sales and marketing 3,661 4,040 Property operation and maintenance 4,733 5,295 Depreciation expense 9,675 11,439 Management fees 4,183 3,955 Real estate and other property taxes 3,456 3,481 Operating and property insurance Amortization of prepaid bond insurance $ 62,717 $ 67,905 During the years ended December 31, 2009 and 2008, non-operating expenses consisted of the following: (in thousands) (in thousands) Interest and dividend income $ 684 $ 2,209 Interest expense (17,628) (17,642) Other income - 3,114 Amortization of bond issue costs (165) (167) $ (17,109) $ (12,486) 6

9 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE AUTHORITY S FINANCIAL STATEMENTS (CONTINUED) CAPITAL ASSETS AND CONSTRUCTION ACTIVITIES At December 31, 2009 and 2008, capital assets consisted of the following: (in thousands) (in thousands) Land $ 23,421 $ 23,421 Building 229, ,302 Furnishings and equipment 32,904 32,609 Computer systems 7,625 6, , ,986 Less accumulated depreciation 43,896 34,221 $ 249,802 $ 257,765 The Authority recorded approximately $9,675,000 and $11,439,000 of depreciation expense for the years ended December 31, 2009 and 2008, respectively. All-Risk Program Management Agreement The Authority entered into the All-Risk Program Management Agreement (the PMA ), as of June 26, 2003, with the Program Manager (FaulknerUSA), for construction of the hotel. Contractual commitments for hotel construction with the Program Manager consisted of the following at December 31, 2009 (in thousands): Guaranteed maximum project price $ 228,418 Less work performed and retainage (228,418) Balance remaining $ - At December 31, 2009, approximately $100,000 is being held by the Authority in retainage. Construction Monitor/Owner s Authorized Representative Agreement In September 2003, the Authority entered into a Construction Monitor/Owner s Authorized Representative Agreement (the Construction Monitor Agreement ) with a consultant team to perform certain obligations and functions under the Indenture. These obligations and functions include, but are not limited to, monitoring matters relevant to the performance of the work, providing appropriate on-site representation, recommending and overseeing independent testing and inspection of the work on behalf of the Authority, and reviewing, revising and making recommendations to the Authority and the Trustee with respect to plans and specifications, change orders and applications for payment under the construction commitment. The Construction Monitor Agreement has been extended until Final Completion, as defined, due to an extension of the period anticipated until all construction-related activities are complete. 7

10 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE AUTHORITY S FINANCIAL STATEMENTS (CONTINUED) ASSET MANAGEMENT AGREEMENT In June 2004, the Authority entered into an agreement (the Asset Management Agreement ) with Capital Hotel Management, LLC ( CHM ) to assist the Authority in overseeing the operations of the Project. The term of the Asset Management Agreement began on June 28, 2004 and ended on December 31, However, the term extends automatically for up to five additional one-year periods unless the Authority provides notice of non-renewal to CHM. The Authority has not provided a notice of non-renewal. The Asset Management Agreement requires the Authority to pay CHM monthly fees of $25,000 and $24,000 during the years ended December 31, 2009 and 2008, respectively, not including reimbursable expenses. The agreement provides for an increase in fees if the term is extended. A total of $335,000 and $294,000 was paid by the Authority to CHM during the years ended December 31, 2009 and 2008, respectively. HOTEL MANAGEMENT AGREEMENT Effective June 1, 2003, the Authority entered into an agreement with Hyatt for the operation and management of the Hotel (the Management Agreement ). The term of the Management Agreement is 15 years commencing on the Hotel Opening Date, unless terminated sooner pursuant to agreement provisions. The Management Agreement requires the Authority to pay Hyatt certain fees described in Note 7 to the financial statements. In addition, the Authority is obligated to pay Hyatt for the Hotel s pro rata share of allocable chain expenses and system costs, as well as certain reimbursable expenses, taxes and assessments, as defined. PROFESSIONAL SERVICES AGREEMENT In November 2003, the Authority entered into an agreement with Mosher Sullivan Development Partners, LLC ( Mosher Sullivan ) for professional services. Under the agreement, Mosher Sullivan is to make William E. Mosher available to act as chief executive officer of the Authority. The agreement requires the Authority to pay Mosher Sullivan certain fees described in Note 7 to the financial statements. During the years ended December 31, 2009 and 2008, the Authority paid Mosher Sullivan a total of $189,300 and $207,000, respectively. LONG-TERM DEBT ADMINISTRATION At the end of 2009 and 2008, the Authority reported $351,715,000 and $354,541,000, respectively, in outstanding non-current debt, which consists of tax-exempt revenue bonds (including unamortized premium of $7,958,000 and $8,413,000, respectively) secured by the operating revenues and income of the Hotel. At the end of 2009 and 2008, the Authority also reported $2,800,000 and $1,960,000 in outstanding current debt related to the tax-exempt revenue bonds, respectively. The Authority issued tax-exempt revenue bonds totaling $354,825,000 in 2003, which were subsequently advance refunded on May 2, 2006, with the issuance of $356,155,000 in Convention Center Hotel Senior Revenue Refunding Bonds. Additional information relating to the outstanding bonds can be found in Note 5 to the financial statements. 8

11 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE AUTHORITY S FINANCIAL STATEMENTS (CONTINUED) CREDIT RATINGS AND BOND INSURANCE In connection with the sale of the Series 2006 Bonds, the Authority purchased an insurance policy from XL Capital Assurance Inc. ( XL Capital ) to guarantee the payment of principal and interest when due. Separate from the insurance policy, XL Capital and the Authority entered into certain investment contracts, which required XL Capital to maintain certain financial ratings as a condition of serving as an investment provider under such agreement. XL Capital maintained financial strength ratings of AAA through February 1, Effective February 2, 2008, this rating was downgraded by Moody s, Inc. to A3. As a result, in March 2008, The Trustee withdrew funds XL Capital held under such investment contract and XL Capital paid a breakage fee of $3,114,000 to the Authority. This amount is recorded as other non-operating income in the Authority s 2008 financial statements. In October 2009, the City agreed to transfer the funds received from the breakage fee to the Hotel s Subordinate FF&E CapEx Reserve Fund. RISK MANAGEMENT Risks of loss related to torts; theft of, damage to and destruction of assets; and other events or effects that cannot be reasonably anticipated or controlled during construction were contractually allocated to the program manager responsible for construction of the Hotel. The Authority carries a directors and officers liability policy. The Authority also is covered under commercial insurance policies purchased and maintained for the benefit of the Project. In addition, the Program Manager has provided performance and payment bonds ( Surety Bonds ) naming the Authority and the Trustee as obliges under the PMA. The Authority is required to carry adequate amounts and types of insurance against these risks, including property, business, interruption, boiler, commercial general liability, and directors and officers insurance. Fidelity bonds or other insurance is also required for officers and employees of any entity with access to revenues, receipts or income of the Authority or funds used for payment of the bonds. RISKS AND UNCERTAINTIES Current economic conditions may adversely affect our industry, business and results of operations. The United States economy is currently in the midst of a recession and the future economic environment is likely to be less favorable than that of recent years. This recession had and could further lead to reduced consumer and commercial spending in the foreseeable future. The performance of the lodging industry has historically been closely linked with the performance of the general economy and, specifically, growth in the United States gross domestic product, business investment and employment growth. As a result, the lodging industry may experience significant downturns in connection with, or in anticipation of, declines in general economic conditions. A continued weakening of the economy may adversely and materially affect our industry, business and results of operations and we can not accurately predict how severe and prolonged any downturn might be. Moreover, reduced revenues as a result of the weakening economy may also reduce our working capital and impact our long-term business strategy. 9

12 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE AUTHORITY S FINANCIAL STATEMENTS (CONTINUED) REQUESTS FOR ADDITIONAL INFORMATION This financial report is designed to provide investors, creditors, and customers with a general overview of the Authority s finances and to demonstrate the Authority s accountability for the money it receives. If you have questions about this report or need additional financial information, contact Mr. William E. Mosher, CEO, Denver Convention Center Hotel Authority, th Street, Suite 3050, Denver, CO 80202, or (303)

13 STATEMENTS OF NET DEFICIENCY IN ASSETS DECEMBER 31, 2009 AND 2008 (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 2,246 $ 3,124 Accounts receivable, net 2,101 2,052 Prepaid insurance and other 1,325 1,289 Total current assets 5,672 6,465 Non-current assets: Capital assets, net (Note 4) Restricted investments (Note 3) Other assets (Note 5): Prepaid bond insurance Bond issue costs, net 249, ,765 77,938 80,473 8,022 8,339 2,899 3,064 Total non-current assets 338, ,641 $ 344,333 $ 356,106 LIABILITIES AND NET DEFICIENCY IN ASSETS Current liabilities: Accounts payable $ 2,627 $ 5,539 Accrued interest (Note 5) 1,472 1,472 Accrued liabilities 5,914 5,968 Advance deposits 1,013 1,684 Bonds payable (Note 5) 2,800 1,960 Total current liabilities 13,826 16,623 Non-current liabilities: Bonds payable, net (Note 5) 351, ,541 Total liabilities 365, ,164 Net deficiency in assets (Notes 2 and 3): Invested in capital assets, net of related debt Restricted for: Debt service Capital project Unrestricted (106,185) (100,209) 39,496 36,831 48,662 52,154 (3,181) (3,834) Total net deficiency in assets (21,208) (15,058) $ 344,333 $ 356,106 See notes to financial statements. 11

14 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET DEFICIENCY IN ASSETS (IN THOUSANDS) Operating revenues: Charges for sales and services: Rooms $ 42,562 $ 50,218 Food and beverage 25,362 27,899 Other operated departments 3,344 3,258 Rentals and other income 1,961 2,002 Total operating revenues 73,229 83,377 Operating expenses: Departmental expenses: Rooms 11,844 12,696 Food and beverage 15,172 16,751 Other operated departments 1,651 1,727 General and administrative 7,518 7,563 Sales and marketing 3,661 4,040 Property operation and maintenance 4,733 5,295 Depreciation expense 9,675 11,439 Management fees (Note 7) 4,183 3,955 Real estate and other property taxes (Note 6) 3,456 3,481 Operating and property insurance Amortization of prepaid bond insurance Total operating expenses 62,717 67,905 Operating income 10,512 15,472 Non-operating income (expenses): Interest and dividend income 684 2,209 Interest expense (17,628) (17,642) Other income (Note 3) - 3,114 Amortization of bond issue costs (165) (167) Total non-operating expenses (17,109) (12,486) (Loss) income before unallocated receipts and payments (6,597) 2,986 Unallocated receipts from the City (Note 6) 8,500 8,000 Unallocated payments to the City (Note 6) (8,053) (6,481) 447 1,519 (Increase) decrease in net deficiency in assets $ (6,150) $ 4,505 See notes to financial statements. 12

15 STATEMENTS OF CASH FLOWS (IN THOUSANDS) Cash flows from operating activities: Receipts from guests $ 73,180 $ 88,112 Interest and dividends received 684 2,209 Interest paid (17,628) (17,642) Payments for goods or services (53,082) (55,168) Net cash provided by operating activities 3,154 17,511 Cash flows from noncapital financing activities: Receipts from the City 8,500 8,000 Payments to the City (8,053) (6,481) Net cash provided by noncapital financing activities 447 1,519 Cash flows from capital and related financing activities: Payment of bonds payable (1,960) (265) Purchases of capital assets (1,402) (968) Payments to contractors (3,146) (179) Payments for prepaid insurance, other (59) (59) Net cash used in capital and related financing activities (6,567) (1,471) Cash flows from investing activities: Investment purchases (12,048) (41,501) Investment sales 14,136 23,418 Net cash provided by (used in) investing activities 2,088 (18,083) Net decrease in cash and cash equivalents (878) (524) Cash and cash equivalents, beginning of year 3,124 3,648 Cash and cash equivalents, end of year $ 2,246 $ 3,124 Supplemental disclosure of non-cash investing activities: Capital assets increased through accounts payable $ 310 $ 129 Reconciliation of (increase) decrease in net deficiency in assets to net cash provided by operating activities: (Increase) decrease in net deficiency in assets $ (6,150) $ 4,405 Adjustments to reconcile (increase) decrease in net deficiency in assets to net cash provided by operating activities: Amortization of bond premium, recorded as interest expense (455) (458) Amortization of deferred amount on refunding, recorded as interest expense Amortization of prepaid bond insurance Amortization of bond issue cost Depreciation expense 9,675 11,439 (Increase) decrease in accounts receivable (49) 631 Decrease (increase) in prepaid insurance and other 23 (362) (Decrease) in accounts payable (76) (216) (Decrease) increase in accrued liabilities (54) 7 (Decrease) increase in advance deposits (671) 1,150 Net cash provided by operating activities $ 3,154 $ 17,511 See notes to financial statements. 13

16 1. Organization and basis of presentation: Organization: NOTES TO FINANCIAL STATEMENTS The Denver Convention Center Hotel Authority (the Authority ) was incorporated on March 11, 2003, by the City and County of Denver, Colorado (the City ) as a separate and distinct corporate entity for the limited purpose of owning, financing, acquiring, constructing, equipping, and operating a full-service, convention-oriented hotel near the Colorado Convention Center (the Convention Center ). The Authority is organized as a Colorado non-profit corporation. The Authority is governed by a seven member board of directors appointed by the Mayor of the City and confirmed by the City Council. The City owns the Convention Center, which is located in downtown Denver. The Convention Center was completed in April 1990 and underwent an expansion project that was completed by January On June 20, 2003, the Authority released its official statement to issue $354,825,000 Convention Center Hotel Senior Revenue Bonds, Series 2003A (the Series 2003A Bonds ), which were secured by an Indenture of Trust dated June 1, 2003 (the Indenture ) by and between the Authority and The Bank of New York Trust Company, N.A. as trustee (the Trustee ). The proceeds from the Series 2003A Bond issuance, together with other funds, were used to: a. finance the acquisition of a site (which occurred on June 25, 2003), and construct, equip and operate a full-service, first-class, upscale convention center headquarters hotel, a parking garage and supporting facilities, and furniture, fixtures and equipment and initial operating supplies (collectively, the Project or the Hotel ); b. pay capitalized interest during construction of the Project and for six months following its anticipated completion date; c. establish a reserve fund for the Series 2003A Bonds and an operating reserve fund for the Project; d. provide initial working capital for the Project; e. pay certain pre-opening fees and expenses, and pay certain costs of issuing the Series 2003A Bonds. On December 20, 2005, the Authority opened the Hotel with 1,100 guest rooms, a full-service restaurant, a lobby bar and lounge, a health club, 60,000 net square feet of meeting space, including ballrooms of 30,000 and 15,000 net square feet, a three-level 570 car parking garage and other supporting facilities. On May 2, 2006, the Authority issued $356,155,000 Denver Convention Center Hotel Authority Convention Center Hotel Senior Revenue Refunding Bonds, Series 2006 (the Series 2006 Bonds ), which are secured by an Amended and Restated Indenture of Trust (the Amended Indenture ), dated April 1, 2006 by and between the Authority and the Trustee. The proceeds from the Series 2006 Bonds together with amounts on deposit held by the Trustee under the original Indenture have been used to: a. refund and defease all of the Series 2003A Bonds (Note 5); b. fund a reserve for the Series 2006 Bonds; c. fund a working capital reserve for the Project; 14

17 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. Organization and basis of presentation (continued): Organization (continued): d. fund interest on the Series 2006 Bonds in an amount equal to accrued interest through July 1, 2006; e. pay certain costs of issuing the Series 2006 Bonds. The Authority and the Trustee, as escrow agent, entered into an Escrow Agreement dated April 1, 2006 (the Escrow Agreement ) pursuant to which the Authority deposited $360,213,000 from the sale of the Series 2006 Bonds into a special and irrevocable escrow fund (the Escrow Fund ) to advance refund the Series 2003A Bonds (Note 5). Basis of presentation: The Authority s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The Authority is a single-enterprise proprietary fund engaged solely in business-type activities, and utilizes the accrual basis of accounting. Proprietary funds are used to account for operations that are financed in a manner similar to a private business enterprise in that a periodic determination of revenues earned, expenses incurred and/or changes in net assets is appropriate for capital maintenance, public policy, management control, accountability or other purposes. Under this method, revenues are recorded when earned, and expenses are recognized as soon as they result in liabilities or use of assets for the benefits provided. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund s principal ongoing operations. Per the criteria set forth in generally accepted accounting principles, the Authority s financial statements are included in the City s comprehensive annual financial report (CAFR) as a component unit of the City for its fiscal years 2009 and Summary of significant accounting policies: Cash and cash equivalents: The Authority considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. 15

18 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Summary of significant accounting policies (continued): Credit and interest risk: Custodial credit risk is the risk that in the event of a bank failure, the Authority s deposits may not be returned to it. At December 31, 2009 and 2008, the Authority had unrestricted cash deposits in bank accounts in excess of federally insured limits aggregating to approximately $1,996,000 and $2,874,000 respectively. The Authority s restricted investments 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 December 31, 2009 and Capital assets: Capital assets are defined by the Authority as assets with an initial, individual cost of at least $1,000. The building cost consists of the construction cost, capitalized interest and additional costs incurred during the construction period. Interest was capitalized as incurred during the construction period; interest earned on unexpended bond funds was offset against interest capitalized. Purchased capital assets are recorded at historical cost. The cost of normal maintenance and repairs, which neither materially add to the value of an asset nor prolong its life, are expensed during the period incurred. Capital assets are depreciated using the straight-line method over the following estimated useful lives: Building Furnishings and equipment Computer systems 40 years 7 15 years 3 years Management assesses the carrying values of its long-lived assets for impairment when circumstances indicate such amounts may not be recoverable from future operations. Based on its review, management does not believe any impairment has occurred as of December 31, Receivables: Receivables are presented in the financial statements net of any allowance for doubtful accounts. Allowances for doubtful accounts are recorded when it is probable that the account receivable balance will not be collected and are based upon historical trends and the periodic aging of receivables. Increases in the allowance for doubtful accounts are recorded as changes to bad debt expense and are reflected in general and administrative expense in the statements of revenues, expenses and changes in the net deficiency in assets. The Authority recorded an allowance of $139,750 and $132,700 as of December 31, 2009 and 2008, respectively. Amortization of bond premium and issue costs: The bond premium is recorded as an increase in the carrying value of the bonds. Bond issue costs were capitalized when incurred. Bond issue costs and the bond premium are amortized based upon the weighted average amount of bonds outstanding over the life of the bonds (the bonds outstanding method). 16

19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Summary of significant accounting policies (continued): Equity classifications: Equity is classified as net assets (liabilities) and is displayed in three components: Invested in capital assets, net of related debt Consists of capital assets, which are reduced by the outstanding balance of bonds and accrued interest that are attributable to the acquisition and construction of these assets. Restricted net assets Consists of net assets with constraints placed on their use either by (1) external groups such as creditors, grantors, contributors, or laws or regulations of other governments; or (2) law through constitutional provisions or enabling legislation. Net assets restricted for debt service represent restricted investments held in a Senior Debt Service Reserve Fund, Senior Debt Service Account, Senior Special Debt Service Reserve Fund and Redemption Fund, as defined (Note 3). Net assets restricted for capital project represent restricted investments of $38,441,000 and $43,642,000 respectively, plus other assets of $11,297,000 and $11,719,000 respectively, less accounts payable related to the construction of $1,076,000 and $3,207,000 at December 31, 2009 and 2008, respectively. Unrestricted net assets Consists of all other net assets that do not meet the definition of restricted or invested in capital assets, net of related debt. Operating revenues and expenses: Operating revenues and expenses result from providing services in connection with the operations of the Hotel. Revenues are recognized when services are rendered. Operating revenues are net of sales, use, occupancy and similar taxes (excluded from revenues) on the Statements of Revenues, Expenses and Changes in Net Deficiency in Assets. Operating expenses include the cost of sales and services, general and administrative expenses, amortization of prepaid bond insurance and depreciation of capital assets. All revenues and expenses not meeting this definition are reported as non-operating income and expenses. Income taxes: The Authority is organized as a non-profit corporation and as such, its income generated in the exercise of its essential government functions is excluded from income tax. Accordingly, no provision for federal or state income taxes has been provided in the accompanying financial statements. 17

20 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Summary of significant accounting policies (continued): Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America for governmental units requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Advertising: Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2009 and 2008, were approximately $1,182,000 and $1,337,000, respectively, and are included in general and administrative expenses in the accompanying statements of revenues, expenses, and changes in net deficiency in assets. Reclassifications: Certain 2008 balances have been reclassified to conform to the 2009 financial statement presentation. 3. Restricted investments: Restricted investments are segregated in the following funds at December 31, 2009 and 2008: (in thousands) (in thousands) Construction Fund: Additional Expenses Account $ 416 $ 5,191 Insurance Proceeds Account 8 5 Senior Debt Service Reserve Fund 22,541 22,546 Cash Trap Fund 14,420 12,500 Operating Reserve Fund 5,000 5,000 Taxes and Insurance Fund 3,632 2,423 Debt Service Fund, Senior Debt Service Account 1,697 1,636 Subordinate FF&E CapEx Fund 3,156 - Senior FF&E Reserve Fund 6,396 5,015 Administrative Expenses Fund 1, Excess Revenue Fund ,119 Senior Special Debt Service Reserve Fund 9,932 7,350 Subordinate Management Fee Fund - 56 Supersubordinate Management Fee Fund - 56 Redemption Fund 5,326 5,299 Authority Fund 1, Senior CapEx Reserve Fund 2,927 1,828 $ 77,938 $ 80,473 18

21 3. Restricted investments (continued): DENVER CONVENTION CENTER HOTEL AUTHORITY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Construction Fund - includes the following accounts: Additional Expenses Account - used to pay construction and other administrative costs, including construction monitoring, legal fees, insurance and other costs. Commencing with the issuance of the Series 2006 Bonds this account is to be used to pay any Hotel pre-opening expenses, and to satisfy any remaining accrued and unpaid costs of the Project; any funds remaining are to be transferred to the Senior Debt Service Account. Capitalized Interest Account used to pay interest accruing on the Series 2006 Bonds. Insurance Proceeds Account used to hold funds collected from insurance companies and used to pay out claims. The Senior Debt Service Reserve Fund - is to be used to cure any deficiency in the Senior Debt Service Account; interest and profits are transferred to the Senior Debt Service Account. The Cash Trap Fund - is used to pay any unpaid expenses or obligations incurred with respect to the Project, to pay any administrative expenses in excess of the amounts available to pay such expenses in the Administrative Expenses Fund and other expenditures, including but not limited to unbudgeted capital emergency expenses, expenditures required to protect life, health or property from imminent danger or to comply with legal requirements and costs of insurance, or any other expenses and items requested by the Hotel manager with prior notice. The Operating Reserve Fund - represents a required operating reserve ($5 million cash and a $5 million letter of credit, (Note 7); interest and profits are transferred into the Senior Debt Service Account. The Taxes and Insurance Fund - is used to pay taxes and insurance premiums with respect to the ownership and operation of the Project and to pay any costs incurred by the Authority in challenging the imposition of any taxes. The Debt Service Fund and within such fund, the Senior Debt Service Account - is used to pay debt service on the Series 2006 Bonds; interest and profits from investing these funds are transferred to the Administrative Expenses Fund. The Available Revenue Fund - represents a fund in which proceeds from the depository account from the Hotel are deposited and are allocated to the other funds in the order of priority and as directed by the Amended Indenture. The Senior FF&E Reserve Fund - represents investments required to be on deposit for replacement and additions to Hotel furnishings and equipment. Deposits equal 2% of gross receipts in the third year of operations (2008) and 2.5% of gross receipts in the fourth year of operations (2009) and thereafter. The Administrative Expenses Fund - is used to pay the administrative expenses related to the administration of the Series 2006 Bonds and the Project including fees and expenses of any consultants after the opening of the Hotel and the expenses of the Authority. 19

22 3. Restricted investments (continued): DENVER CONVENTION CENTER HOTEL AUTHORITY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Excess Revenue Fund - is to be used for the sole benefit of the Authority and may be disbursed to the Authority. The Senior Special Debt Service Reserve Fund - is to be used to apply amounts to any deficiency in the Senior Debt Service Account with certain limitations; interest and profits are transferred to the Excess Revenue Fund provided certain conditions are met. The Subordinate Management Fee Fund - is to be used to apply amounts to any deficiency in the Senior Debt Service Account with certain limitations; after paying the amounts, if any, all amounts remaining on deposit in this fund shall be paid to Hyatt to pay the Subordinate Management Fee, as defined in the Management Agreement (Note 7). The Supersubordinate Management Fee Fund - is to be used to apply amounts to any deficiency in the Senior Debt Service Account with certain limitations; after paying the amounts, if any, all amounts remaining on deposit in this fund shall be paid to Hyatt to pay the Supersubordinate Management Fee, as defined in the Management Agreement (Note 7). The Redemption Fund - is to be used to apply amounts to any deficiency in the Senior Debt Service Account with certain limitations; amounts in this fund may be applied to pay the principal and Redemption Price, as defined, and interest on outstanding bonds. The Authority Fund - is to be used for any purpose related to the Bonds or the Project and may be disbursed at the direction of the Authority. The Senior CapEx Reserve Fund - represents investments required to be on deposit for replacement and additions to Hotel furnishings and equipment to the extent sufficient funds are not available in the Senior FF&E Reserve Fund. Deposits equal 1% of gross receipts, as defined, of the Hotel for the third year of operations (2008) and 1.5% of gross receipts in the fourth year of operations (2009) and thereafter. The Subordinate FF&E/CapEx Reserve Fund - represents investments required to be on deposit for replacement and additions to Hotel furnishings and equipment to the extent sufficient funds are not available in the Senior CapEx Reserve Fund. Deposits equal 1% of gross receipts, as defined, of the Hotel for the fifth year of operations (2010) and 2% of gross receipts in the sixth year of operations (2011) and thereafter. In addition to the funds described above, the Authority is required to establish other funds and accounts with the Trustee and is required to maintain certain funds in accordance with requirements in the Amended Indenture. These funds had zero balances at December 31, 2009 and/or will be established in future years as required by the Amended Indenture. All funds held by the Trustee under the provisions of the Amended Indenture are deposited with the Trustee. All funds held by the Trustee are placed in demand or time deposits or, if and as directed by the Authority, invested in certain investment securities. Amounts in the Senior Debt Service Reserve Fund may be invested solely in direct obligations of the United States or obligations which are unconditionally guaranteed by the United States maturing in two years or less, and/or in certain investment agreements, including guaranteed investment contracts ( GIC s ), forward purchase agreements and reserve fund put agreements, and certain repurchase agreements. If the Trustee fails to receive such direction by the Authority, the Trustee is to invest such amounts in registered money market funds. 20

23 3. Restricted investments (continued): DENVER CONVENTION CENTER HOTEL AUTHORITY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Authority s restricted investments as of December 31, 2009 and 2008, consist of the following: (in thousands) (in thousands) Money market funds $ 77,938 $ 58,170 Treasury securities - 22,303 $ 77,938 $ 80,473 The Authority s money market fund investments and treasury securities are rated AAAm by Standard & Poor s and Aaa by Moody s Investors Service. In March 2008, the Authority received a contractual $3,114,000 breakage fee from a former financial service provider that had guaranteed certain of the Authority s previous investments. This fee was recorded as other non-operating income, and in accordance with the Indenture, was deposited in the Excess Revenue Fund. In October 2009, the City agreed to transfer the funds received from the breakage fee into the Hotel s Subordinate FF&E CapEx Reserve Fund. For an investment, custodial risk is the risk that, in the event of the failure of the counterparty, the Authority will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. Money market funds represent investments not evidenced by securities and are in the Authority s name. 4. Capital assets, net: At December 31, 2009 and 2008, capital assets consist of the following: (in thousands) (in thousands) Land $ 23,421 $ 23,421 Building 229, ,302 Furnishings and equipment 32,904 32,609 Computer systems 7,625 6, , ,986 Less accumulated depreciation 43,896 34,221 $ 249,802 $ 257,765 21

24 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. Bonds payable: On April 11, 2006, the Authority released its official statement to issue $356,155,000 of Series 2006 Bonds; which were issued on the closing date, May 2, 2006, at a premium of $9,634,610. The stated interest rates on the Series 2006 Bonds range from 4.125% to 5.25%. The Series 2006 Bonds were issued to advance refund $354,825,000 of outstanding Series 2003A Bonds with stated interest rates that ranged from 2% to 5%. The net proceeds of $363,402,703 (after payment of $2,315,007 in underwriting discount and $72,000 in underwriting fees) were deposited (a) $2,188,374 into the Capitalized Interest Account to be applied to the payment of interest accruing on the Series 2006 Bonds, (b) $360,213,000 in an irrevocable escrow fund with an escrow agent to provide for all future debt service payments on the Series 2003A Bonds and (c) the remainder was applied to costs of issuance for the Series 2006 Bonds. As a result, the Series 2003A Bonds are considered to be defeased and the liability for those bonds has been removed from the Statement of Net Deficiency in Assets. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the Series 2003A Bonds of $8,951,091. This difference, reported in the accompanying financial statements as a reduction to bonds payable, is being charged to operations through the year 2035 using the bonds outstanding method. During each of the years ended December 31, 2009 and 2008, $428,000 and $431,000 was charged to interest expense, respectively. The Authority completed the advance refunding to reduce the balance required in the Senior Special Debt Service Reserve Fund from $40 million to $12 million. The total debt service payments over the next 29 years increased by approximately $33,378,000. This increase is attributed to an increase in the interest rates and an extension in the term of the bonds. However, the Authority obtained an economic gain (net difference between the present value of the old and new debt service payments) of approximately $4,143,000. Under federal tax law, the Authority may only advance refund once. Therefore, in the future, the Authority may only refund the Series 2006 Bonds on a tax-exempt basis as a current refunding, meaning that the earliest it can issue tax-exempt refunding bonds would be ninety days prior to the first optional refunding date of November 1, Interest of $17,655,000 and $17,668,000 was paid in each of the years 2009 and 2008, on the Series 2006 Bonds. Interest payments are due each December 1. Interest is payable by the Trustee, as paying agent. Accrued interest at December 31, 2009 and 2008, was approximately $1,472,000. The Series 2006 Bonds are special limited obligations of the Authority, payable as to principal and interest solely from and secured by a first lien upon the Trust Estate established under the Amended Indenture which may be subject to certain encumbrances allowed under the Amended Indenture. The Trust Estate is comprised of certain revenues and property pledged by the Authority to the Trustee and certain funds and accounts held by the Trustee under the Amended Indenture. Revenues pledged by the Authority to the Trustee include the revenues expected to be derived from the operations of the Hotel, subject only to the payment of certain operating and maintenance expenses, and certain economic development payments by the City, which are subject to annual appropriation (Note 6). 22