Internal Audit Report

Concessions International, LLC

Lease and Concession Compliance Audit

January 1, 2006 through December 31, 2008




Issue Date: February 09, 2010
Report No. 2010-05

Internal Audit 
Concession International, LLC, Agreement No. 438
Audit Period: January 1, 2006  December 31, 2008

Table of Contents
Internal Auditor's Report ................................................................................................... 3 
Executive Summary ........................................................................................................... 4 
Background ........................................................................................................................ 5 
Audit Objectives ................................................................................................................ 6 
Audit Scope ........................................................................................................................ 6 
Audit Approach .................................................................................................................. 6 
Conclusion ......................................................................................................................... 6 
Schedule of Findings and Recommendations ................................................................ 7 
1.   Late Payments of Minimum Annual Guarantee and Percentage Fee 
2.   Untimely and Incomplete Certified Annual Report of Gross Receipts 











2

Internal Audit 
Concession International, LLC, Agreement No. 438
Audit Period: January 1, 2006  December 31, 2008

Internal Auditor's Report
We have completed an audit of the Lease and Concession Agreement between the Port of Seattle and
Concessions International, LLC (CI). The purpose of the audit was to determine whether:
1) Reported concession was complete, properly calculated and remitted timely to the Port.
2) Port and the lessee complied with provisions of the Lease and Concession Agreement.
3) Lease and Concession Agreement complies with applicable state and Port requirements.
We examined information related to a 3-year period from January 1, 2006 to December 31, 2008. 
We conducted our audit using due professional care, and we planned and performed the audit to obtain
reasonable assurance as to whether the Port and the lessee had complied with significant provisions of the
agreement.
The agreement complied with applicable requirements. Other than for a minor exception, the lessee
reported to the Port all concessionable Gross Receipts in accordance with the terms of the agreement.
However, the lessee did not comply with the terms and provisions of the agreement related to timely
remittance of concession payments. The untimely payments resulted in auditor's calculated penalty and
interest of approximately $76,896 for the audit period. We also noted non-compliance with the provision
related to timely filing of the CPA Certified Annual Report of Gross Receipts.
We extend our appreciation to the management and staff of the Aviation Business Development, Lessee
staff, and Accounting & Financial Reporting (AFR) for their assistance and cooperation during the audit.


Joyce Kirangi, CPA
Director, Internal Audit





3

Internal Audit 
Concession International, LLC, Agreement No. 438
Audit Period: January 1, 2006  December 31, 2008

Executive Summary
Audit Scope and Objective The purpose of the audit was to determine whether:
1)  Reported concession was complete, properly calculated and remitted timely to the Port.
2)  Port and the lessee complied with provisions of the Lease and Concession Agreement.
3)  Lease and Concession Agreement complied with applicable state and Port requirements.
We examined the books and records of Concessions International, LLC in order to verify the accuracy and
completeness of reported gross receipts and concession fees paid to the Port from January 1, 2006 through
December 31, 2008. Aviation Business Development has the primary responsibility for administeringand 
monitoring the agreement to ensure compliance with agreed-upon terms.

Agreement Terms Concessions International, LLC (CI) is an airport concessionaire of food and
beverage operations at eight major U.S.A airports, including Sea-Tac Airport. At Sea-Tac, CI currently 
operates three Seattle's Best Coffee stores; one KOBO/Udon; two hamburger/grill fast food units; and one
restaurant (Bigfoot Food & Spirits) which is operated by an ACDBE subtenant. According to the terms of
the agreement, Concessions International, LLC shall pay to the Port for the concession rights and privileges
granted as follows: the higher of the Minimum Annual Guarantee (MAG) of 90% of the total amount paid to
the Port for the previous agreement year or a Percentage Fee by category as defined in the agreement. The
MAG amount shall be divided into equal monthly payments. All monthly payments of MAG shall be payable
in advance, on or before the first day of each month without notice from the Port and without setoff or
deduction. To the extent the Percentage Fee as defined in the agreement is higher than the monthly
payment of the MAG paid to the Port, lessee shall pay the Percentage Fee on or before the 15th of the
following month.

Audit Result Summary The agreement complied with applicable state and Port requirements. 
Concessions International LLC reported all concessionable Gross Receipts to the Port except for a minor
exception. However, it did not comply with the terms and provisions of the agreement related to timely 
remittance of MAG and Percentage Fee concession payments. The untimely payments resulted in auditor's
calculated penalty and interest of approximately $76,896 for the audit period. We also noted noncompliance
with the provision related to timely filing of the CPA Certified Annual Report of Gross Receipts.




4

Internal Audit 
Concession International, LLC, Agreement No. 438
Audit Period: January 1, 2006  December 31, 2008

Background
Concessions International, LLC (CI) has been in business since 1979 and is currently headquartered in
Atlanta, Georgia. It is a family and minority owned company with operations in eight major U.S.A. cities.
Under the terms of the agreement with the Port, the lessee agreed to pay a Minimum Annual Guarantee
(MAG) or percentage fees of its gross receipts generated at the airport facility. The percentage concession
fees range from 12% on branded food and beverage to 27% on souvenirs.
For the audit period the lessee operated and managed the following stores and subtenants:
Stores: Three Seattle's Best Coffee, one Runway Deli, and one Botanical (converted to KOBO in
2007)
Subtenants: One non-ACDBE subtenant operating two Burger King Franchise Units and Dryer's Ice
Cream/See's Candy (converted to Bigfoot Food & Spirits in mid-2008).
The lease agreement requires a Minimum Annual Guarantee (MAG) of 90% of the previous year Gross
Receipts or percentage fees by category, whichever is higher as follows:
2008*
2006  2007   Non-
ACDBE
ACDBE
Non-Branded Food and Beverage (F&B)    14%   14%   13.50%    12 % 
Branded F&B                   12%   12%   11.50%    10 % 
Alcohol Beverage                  18%   18%   17.50%    16 % 
Souvenir Merchandise               27%   27%   26.50%    25 % 
Advertising and All Others               15%   15%   14.50%    13 % 
*ACDBE stands for Airport Concessions Disadvantaged Business Enterprise.
In the past two agreement years, the Port received the following concession fees.
Description                  2006      2007      2008
Concessionable Gross Receipts   $6,135,792  $6,517,726  $7,571,341 
Concession to the Port          $767,532   $812,807   $948,238 
Source: Lessee's financial records and AFR (Accounting and Financial Reporting)
Aviation Business Development with the assistance from Accounting and Financial Reporting is responsible
for administering and monitoring the agreement to ensure compliance with agreed-upon terms and
conditions.


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Internal Audit 
Concession International, LLC, Agreement No. 438
Audit Period: January 1, 2006  December 31, 2008
Audit Objectives
To determine whether:
1)  Reported concession was complete, properly calculated and remitted timely to the Port.
2)  Port and the Lessee complied with provisions of the Lease and Concession Agreement.
3)  Lease and Concession Agreement complies with applicable state and Port requirements.

Audit Scope
The scope of the audit covered the period of January 1, 2006 through December 31, 2008.

Audit Approach
To achieve our audit objectives, we performed the following procedures:
Obtained an understanding of the lease agreement.
Identified significant provisions in the agreement to establish the extent of audit procedures.
Obtained necessary financial and non-financial data from the lessee
Analyzed data (internal & external) to determine completeness & compliance:
Reconciliation of the reported gross to the lessee's accounting records to ensure completeness
and consistency.
Reconciliation of the certified Audited Schedule of Gross Receipts to lessee's accounting
records to ensure completeness.
Recalculation of concession and related fees to ensure accuracy.

Conclusion
The agreement complied with applicable state and Port requirements. Concessions International LLC
reported all concessionable Gross Receipts to the Port except for a minor exception. However, it did not
comply with the terms and provisions of the agreement related to timely remittance of MAG and Percentage
Fee concession payments. The untimely payments resulted in auditor's calculated penalty and interest of
$76,896 for the audit period. We also noted non-compliance with the provision related to timely filing of the
CPA Certified Annual Report of Gross Receipts.



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Internal Audit 
Concession International, LLC, Agreement No. 438
Audit Period: January 1, 2006  December 31, 2008

Schedule of Findings and Recommendations
1. Late Payments of Minimum Annual Guarantee and Percentage Fee
The agreement under Section 4 stipulates specific payment terms for concession fee and Minimum
Annual Guarantee (MAG) payments as follows:
MAG  payable in advance, on or by the first day of each and every month, without notice from the
Port and without setoff or deduction.
Percentage Fees  payable on or before the fifteen (15) day of each month.
For late payments, the agreement provides under Section 9 a penalty of 5% and interest to be accrued
at 18% per annum or the maximum allowed by the law, whichever is less.
We reviewed payment history for the audit period and noted twenty (20) and ten (10) instances of late
MAG and concession fee payments, respectively, as follows.
# of
Type of   Instances  Range of Days  Late Charge    Interest
Year
Payment   of Late     Late       (5%)     (18%/yr)    Grand
Payments                                Total
MAG    5     1 to 11     $14,519     $516   $15,034 
2006
Concession   3       22 to 36        $1,163       $337     $1,501 
MAG    6     1 to 51     $17,463    $1,981   $19,443 
2007
Concession   2        2 to 6         $1,706       $53     $1,759 
MAG    9     1 to 19     $27,668    $1,607   $29,275 
2008
Concession   5        3 to 62        $8,630     $1,254     $9,884 
$71,149      $5,747     $76,896 
Based on the 5% one-time penalty for overdue payments plus interest of 18% until paid, our calculation 
resulted in penalty and interest charges of approximately $76,896 for the period January 1, 2006
through December 31, 2008.
Recommendation 
We recommend management bill Concessions International, LLC approximately $76,896 in penalty and
interest.
Management Response 
The audit documented instances when Concessions International submitted Minimum Annual
Guarantee (MAG) and Percentage Fee payments late. The lease agreement stipulates a 5% penalty
and interest accrued at 18% per annum. AFR bills the predetermined monthly MAG amount for
payment. Concessionaires pay percentage fee payments when gross sales are reported, up to 15-20

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Internal Audit 
Concession International, LLC, Agreement No. 438
Audit Period: January 1, 2006  December 31, 2008
days after the conclusion of a sales month. These percentage fee amounts are variable depending upon
sales.
The Port's central financial system does not provide an automated mechanism to bill tenants the 5%
penalty for late payment. In June 2009, the Port put in place a manual solution using a desktop
application to compute penalty fees. With this tool in place, all tenants were notified that moving forward
they would be billed penalty for late payments. All tenants are now being billed for any applicable late
penalties according to the terms of their lease.
Management is working toward resolution of the issue of retroactive late penalties and interest for
revenue prior to mid-2009, in consultation with Port Legal counsel.

2. Untimely and Incomplete Certified Annual Report of Gross Receipts
Under Section 7 of the agreement, the lessee is required to provide the Port with a certified Schedule of
Gross Receipts for each calendar year within sixty (60) days after the close of each agreement year.
The schedule is required to be certified by the Chief Financial Officer (CFO) and accompanied by a
signed certificate of an independent Certified Public Accountant (CPA). The CPA certification is required
to include, among many, reasonable assurance that the reported gross receipts are complete and
conform to the definition of gross receipts in the agreement.
We noted the schedule for the audit period was untimely and incomplete as follows.
Year   Report Received   # of Days Late          Other Noncompliance
2006     September 2009     912         The CPA certification did not include
2007     September 2009     577      concessionable gross receipts of the lessee's
2008        May 2009      80           subtenants for all three years.
Timely and independently certified gross receipts are a significant part of a complete lease management
system. It is a mechanism designed to compensate, to a degree, an inherent risk of self-interest in a
self-reporting system.
Recommendation
We recommend management strengthen the existing monitoring system to ensure complete and timely
filing of the Certified Annual Report of Gross Receipts in compliance with the terms of the agreement. 
Management Response
The audit documented that Concessions International did not provide the Port with a certified Schedule 
of Gross Receipts within 60 days after the end of the agreement year, for all three years of the audit 
period. The CPA certification also failed to include the gross receipts of the Burger King franchisee 
subtenant, which is without question a consequence of the relationship with this subtenant. The issues
with the subtenant may have also had bearing on CI's timely reporting of annual audited sales,
nonetheless a requirement of the lease.
A new provision has been added to the Port's lease management system (PropWorks) to track the
timely submittal of the audited report. This will provide an increased quality control mechanism for the
AFR staff that receive the audited reports from all tenants.
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