Audit Report - NBC With Mgmt Comments - May 2013

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To: Robert Layton, City Manager

From: Laurie Wolf, Internal Auditor

Subject: Special Audit National Baseball Congress (NBC) Operations2012 and 2011 Tournaments including Ancillary Activities

Date: May 3, 2013

Background InformationWB, LLC was selected as the preferred operator for professional baseball at Lawrence DumontStadium (Stadium) in August 2007. The associated, fifteen year lease agreement, effectiveMarch 18, 2008, provided that revenues received from the operation of the stadium forprofessional baseball be divided to fund an annual stadium operations budget and otherprofessional baseball related expenses of the team.

In addition, under the terms of the lease agreement, WB, LLC was given the right to manageand operate the NBC and its Midwest Regional and World Series tournaments in exchange forannual lease payments of $27,500. The City purchased the NBC and related activities from theRich family in 2007 subsequent to their decision to move the Wranglers to a different city. TheNBC has always been held in Wichita and the purchase was made to ensure that thetournaments would continue to be played here. Revenues of the NBC in excess of operational

expenses were to be retained by WB, LLC.

The lease agreement obligated the City to provide and maintain certain equipment required toproperly operate the stadium for baseball operations and other events. WB, LLC was toprovide concession equipment, office equipment, ticketing equipment, scoreboards, videoequipment and all necessary sporting goods and equipment for operation of the stadium andthe baseball team.

In January 2009, WB, LLC requested forgiveness of the first NBC lease payment due tosignificant financial losses incurred during its inaugural season resulting from start-upexpenses. City Council agreed to defer the payment and spread it over the next five years.

Lease payments would increase to $33,000 during the second through sixth year of theagreement and revert back to $27,500 for the remaining years of the lease.

The Wichita Wingnuts professional baseball team (Wingnuts) experienced a change inownership after the 2009 season. WIB, LLC d/b/a Wichita Wingnuts became the new owner ofthe team and thus operator of the NBC. WIB, LLC inherited all existing contracts andagreements of the former ownership group.


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Audit ObjectivesInterviews were conducted with City of Wichita staff from Public Works & Utilities and Law aswell as staff of WIB, LLC (Operator) to gain information about NBC tournament operations.The Operators financial information for 2012 and 2011, along with related supportingdocumentation, was reviewed to extract revenues and expenses of the NBC and its ancillary

activities. Information obtained during the interview and review processes was also used toreach conclusions about whether payments had been made timely to employees, vendors andcontractors of the NBC.

Audit ResultsCombined Financial Reporting and Bank Account ActivityIt was noted during the audit that the Operator has one bank account that is used for bothWingnuts and NBC transactions. Cash flow is managed overall rather than by actual receiptsand expenditures of each operation.

Some transactions are recorded separately in the financial statements but many are combined

and at least initially reported as Wingnuts activity. Year-end adjustments are made for certainrevenue/expense categories to split activity between the Wingnuts and NBC.

Operator Response:Financial transactions and related reporting for NBC operations are in the process ofbeing separated. The separation will require use and management of intra-companyaccounts. In addition, a separate bank account will be established for the NBC so thatmonies are not co-mingled with Wingnuts operations.

Reconciliation of Ticket RevenueThe Operator utilizes ticketing equipment and software provided by a third party vendor forticket sales initiated at the Stadium. Tickets are also sold directly by that vendor via telephone,internet and from various vendor authorized outlets. Ticket revenue collected by the vendor isoffset with ticket printing and other fees assessed to the Operator for use of the system.

System reporting is available detailing the volume of sales by ticket type and the associatedrevenue by ticketing method/location. It was noted during the audit that 2012 NBC ticketrevenue recorded in the financial statements ($81,345) did not reconcile with ticket systemreporting ($142,276) for the event.

Operator Response:Ticketing revenue could not easily be reconciled with ticket system reporting primarilybecause of how season tickets were set-up in the system and the fact that not all ticket

options were set-up and available in the system. If a certain ticket option was notproperly set-up in the system, it would be necessary to print a higher value ticket optionupon sale even though revenue collected was less. All available ticket options will beset-up in the system going forward and a process will be developed to ensure ticketssales and revenue can be reconciled daily.


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Cash Handling ProcessInternal controls of the cash handling process are not adequate to ensure revenues are recordedcompletely and accurately. The Operator does not use ticket system reporting to reconcile ticketsales by ticket seller or by event. In addition, certain souvenir shop transactions are notrecorded in the POS system provided by a different third party vendor.

Operator Response:A nightly revenue reconciliation sheet has been developed and will be utilized to ensurerevenue is reconciled with actual ticket sales on a daily basis and to provide a snapshotof activity for future reference. In addition, internal controls will be enhanced related tomain office, box office and souvenir shop sales and cash handling.

Employee/Vendor/Contractor/Team PaymentsThe Operator ensures employee payroll is given priority and paid timely.Vendor/Contractor/Team payments are managed according to cash flow dynamics of theentire organization. The majority of vendor/contractor/team payments associated with the2012 Midwest Regional and World Series tournaments were paid within two months of eventend. Payments associated with the 2011 tournaments however were significantly delayed withmany not being paid until first quarter of the following year.

Operator Response:NBC revenue will be deposited into a separate bank account and utilized to payobligations associated with the NBC tournaments and other activities timely and inaccordance with performance standards established and agreed upon with the City.

NBC Lease FeesIt was noted during the audit that 2012 and 2011 NBC lease fees totaling $66,000 have not beenpaid to the City in accordance with the lease agreement and amendment. Lease fees are due in

December of each lease year.

Operator Response:Past due NBC lease fees will be paid on a six-month payment arrangement beginning

June 1, 2013 with final payment on or before November 1, 2013. Future lease fees will bepaid timely and in accordance with the Lease Agreement for Lawrence-DumontStadium and related amendments.

Water/Sewer FeesWater and sewer fees totaling $82,706, which includes amounts from both 2012 and 2011, havenot been paid to the City. Collection action has not been taken on the past due balance because

City staff and the Operator have been working together to assess if there were leaks at thestadium which resulted in higher water usage. Ice machine leaks were identified in theClubhouse and Pavilion and thus usage adjustments will be made as soon as repairdocumentation is received. The adjustment may not however significantly reduce theoutstanding balance.


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Operator Response:A repair invoice for ice machine repair in the Clubhouse and the All American Grilllocated in the Pavilion were provided for allowable usage adjustments. Water/Sewerfees remaining after the adjustments will be paid on a six-month payment arrangementwith final payment on or before November 1, 2013. Future water/sewer fees will be

paid timely.

Line of CreditA line of credit was used by the Operator in 2009 to pay operational expenses of both theWingnuts and NBC. The Operator attributed $147,519 of the $197,585 total debt to the NBC.Only interest is paid annually.

Operator Response:An interest only payment is made annually on the line of credit along with a smallprincipal reduction. A plan will be developed to ensure the line of credit attributed tothe NBC is paid down with future year tournament net income.

Ancillary ActivitiesIt was noted during the audit that there are several ancillary activities managed by the Operatorwhich are associated with the NBC. One of the activities, the Hap Dumont Youth League(League), is a youth extension of the adult program. The fee based League currently only has apresence in Kansas. Pocket-sized Major League Baseball rulebooks are updated, produced andsold by the Operator each year as well. The NBC is the only source for these small rulebooks.Baseballs, for use during NBC affiliated events, have also historically been purchased and soldhowever sales in 2012 were limited to stock on hand.

Operator Response:The Hap Dumont Youth League and the production/distribution of pocket-sized Major

League Baseball rulebooks will be continued in 2013.

Audit Recommendations The lease agreement between the City and the Operator does not contain performance

parameters or expectations for operation of the NBC and its ancillary activities.Performance standards should be developed and the lease agreement amended to includeexpectations for operation of the events/activities. At a minimum, expectations should beestablished for financial reporting, cash handling, employee/vendor/contractor payments,subsidiary system reconciliations and line of credit pay down.

Application of water rate tiers is based upon winter water consumption. Waterconsumption during the baseball season is primarily being billed at tier two and tier threerates since water demand at the Stadium during the winter months is nearly non-existent.Application of tier two rates is appropriate based upon the Operators consumption cycle,however, tier three is a penalty tier meant to deter excessive consumption. City staff shoulddetermine if water utility guidelines allow and the Operators industry warrants billing atonly tier two rates. A change in water rate tier application would significantly reducestadium water expenses.


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Revenues, expenses and operations of the NBCs ancillary activities should be reviewed todetermine if the activities should be continued in future seasons as part of the NBC.

City staff should work with the Operator to determine a reasonable payment plan for pastdue NBC lease and water/sewer fees.

ConclusionThe Operator has leased the right to manage the NBC and NBC revenues above operatingexpenses belong to the Operator, however, the City is the owner of the NBC and therefore has avested interest in how it is operated and its financial performance. The City should monitorboth, without dictating operational decisions, to ensure the NBC is able to retain and growupon its reputation as premier event.

cc: Cathy Holdeman, Assistant City ManagerAlan King, Public Works & Water Utilities Director

Joe Pajor, Public Works & Water Utilities Deputy Director

Documents

Audit Report - NBC With Mgmt Comments - May 2013