Internal Audit Report 

Lease and Concession Audit 
Airport Management Services, LLC 


May 1, 2008 April 30, 2010 




Issue Date: June 12, 2012 
Report No. 2012-08

Internal Audit Report 
Airport Management Services 
May 1, 2008  April 30, 2010 

Table of Contents 
Transmittal Letter ................................................................................................................................................................... 3 
Executive Summary ............................................................................................................................................................... 4 
Background.............................................................................................................................................................................. 5 
Audit Scope and Methodology ............................................................................................................................................ 6 
Conclusion ............................................................................................................................................................................... 6 
Schedule of Findings and Recommendations ................................................................................................................ 7 















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Internal Audit Report 
Airport Management Services 
May 1, 2008  April 30, 2010 

Transmittal Letter 

Audit Committee 
Port of Seattle 
Seattle, Washington 

We have completed an audit of the Lease and Concession Agreement, as amended, between the
Port of Seattle and Airport Management Services, LLC. 
We examined information related to a two-year period from May, 1 2008 to April 30, 2010.
We conducted this performance audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives. 
We extend our appreciation to the Aviation Business Development staff for their assistance and
cooperation during the audit. 


Joyce Kirangi, CPA 
Director, Internal Audit 







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Internal Audit Report 
Airport Management Services 
May 1, 2008  April 30, 2010 
Executive Summary 
Audit Scope and Objective The audit objective was to determine whether             Airport Management
Services complied with the following gross receipts reporting      requirements  of the  Lease and
Concession Agreement: 
1. Complete reporting of sales subject to gross receipts 
2. Complete reporting of "Retail Display Allowances" in the report of gross receipts 
3. Compliance with significant provisions of the agreement including the certified CPA reports 
We examined the books and records of Airport Management Services, LLC for a two-year period from
May 1, 2008 through April 30, 2010. Aviation Business Development in conjunction with Accounting
and Financial Reporting (AFR) has the primary responsibility for administering and monitoring the
agreement to ensure compliance with agreed-upon terms. 
Background  The Port of Seattle entered into a lease and concession agreement with Hudson News
Company, d/b/a Hudson News Group, for operation of Retail Concessions at Seattle-Tacoma
International Airport. In July of 2004, with consent from the Port of Seattle, Hudson News Group
assigned all its lease rights to Airport Management Services, LLC. 
Hudson operates 20+ different concession locations under the lease, including 4 specialty locations.
The lease provides four different categories of retail merchandise with a different concession rate
ranging from 11.5% to 26.5%. The agreement generates annually approximately $7 million in nonutility
revenues to the Port: 
2009      2010      2011 
Revenue      $7,054,411  $6,973,595  $7,559,343 
Source: PeopleSoft 
The concession fee is payable to the Port to the extent that the concession fee is greater than the
monthly Minimum Annual Guarantee. Concession fee, if applicable, is due by the 15th of the following
month and is paid in accordance to an established schedule. 
For untimely payments, the agreement provides for a one-time late fee of 5% of the overdue amount
and interest to be accrued at the rate of 18% per annum from the due date until paid. 
Audit Result Summary  We concluded that Airport Management Services did not properly report
concession related to Retail Display Allowances (RDAs) and promotional & marketing efforts in the
amount of $297,679 and $74,916, respectively. Additionally, we noted that certain merchandise types
were misclassified for the purpose of concession calculations which resulted in a concession
overpayment of $116,336 to the Port. See Schedule of Findings and Recommendations on Page 7. 
We noted no other instances of noncompliance with significant provisions of the agreement. 


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Internal Audit Report 
Airport Management Services 
May 1, 2008  April 30, 2010 
Background 
On January 28, 2003, the Port of Seattle entered into a lease and concession agreement with 
Hudson News Company, d/b/a Hudson News Group, for operation of Retail Concessions at Seattle- 
Tacoma International Airport. In July of 2004, with consent from the Port of Seattle, Hudson News 
Group assigned all its lease rights to Airport Management Services, LLC. 
There are 20+ different concession locations under this lease. This includes 4 specialty locations: 
Discover Puget Sound, Made in Washington, Life is Good, and Kid's Works. There are 2 bookstores, 
and 2 "stores within a store" at the north and south satellite locations. The lessee is allowed to sell
specialty items at these stores within a store location. The rest of the concession locations are basic
newsstands. 
The lease provides the following four different categories of retail merchandise; each category has a
different concession rate: 
Newspapers, magazines, books, retail display allowance (RDAs),
14.5% 
Category A           promotional income, HBA, sundries, candy, snacks, beverage, travel
Concession 
accessories, tobacco products, and other news related products 
Souvenirs, gifts, and apparel, with the exception of items which are
26.5% 
Category B           offered for sale in distinct "boutiqued" areas of News/Gift stores and
Concession 
approved by the Port as Category C items 
11.5%    Specialty Retail merchandise that is sold in distinct "boutiqued" areas of
Category C 
Concession  News/Gift stores and approved by the Port as Category C item 
11.5%    Souvenirs, books, gifts crafts and apparel sold from Specialty Retail and
Category D 
Concession  Book Stores 

The concession fee is payable to the Port to the extent that the concession fee is greater than the
monthly Minimum Annual Guarantee. Concession fee, if applicable, is due to the Port by the 15th of
the following month and is paid in accordance to an established schedule. 
For untimely payments, the agreement provides for a one-time late fee of 5% of the overdue amount
and interest to be accrued at the rate of 18% per annum from the due date until paid. 
Below is the highlight of revenues (non-utility) to the Port from Airport Management Services, LLC: 
2009      2010      2011 
Space Rental General           $106,900   $105,819   $155,108 
License to Use                  3,360     3,360     3,360 
Tenant Marketing Assessment       206,292    207,880    218,356 
Retail Display Allowance            3,433     1,980     54,790 
Retail - L/H Taxable             2,908,491   3,050,164   3,213,556 
Retail                        3,569,791   3,695,904   3,822,364 
Retail MAG                 256,145   (91,513)     91,809 
$7,054,411  $6,973,595  $7,559,343 
Source: PeopleSoft 
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Internal Audit Report 
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Audit Scope and Methodology 
We reviewed information for a two-year period from May 1, 2008 to April 30, 2010. We utilized a riskbased
audit approach from the planning phase to testing. We  gathered information through 
observations and detailed analytical reviews in order to obtain a complete understanding of the lessee 
operations and financial records. 
We applied additional detailed audit procedures to areas with the highest likelihood of significant 
negative impact as follows: 
a.  Concession Revenue 
Obtained and analyzed detailed accounting information including sales reports by category and
store location to ensure that the recorded sales were reasonable and complete. 
Agreed a profit and loss statement to the receipts reported and concession paid to the Port. 
Verified that the reported receipts were consistent with the lessee's sales records. 
Verified the reported sales to an independent sales data source. 
Reviewed and verified that deductions to gross receipts were proper and reasonable. 
Recalculated the reported concession to ensure accuracy. 
b.  Retail Display Allowance 
Conducted a survey among the members of Association of Airport Internal Auditors (AAIA) to
establish a RDA baseline expected of similarly sized retail operations at an airport. 
Analyzed accounting information includingbillings and cost of goods records to determine that 
all so-called RDA accounts were reported in accordance with the agreement. 
Conducted on-site visits at the airport to ensure consistency and reasonable completeness. 
Judgmentally tested a sampled of ten RDA billings and reviewed associated agreements to
verify that they were proper, complete, and accurate. 
c.  Certified Annual Report 
Reviewed the annual certifications for the audit period to determine timely submission and the
accuracy of information in the certification. 

Conclusion 
We concluded that Airport Management Services did not properly report concession related to Retail
Display Allowances (RDAs) and promotional & marketing efforts in the amount of $297,679 and
$74,916, respectively. Additionally, we noted that certain merchandise types were misclassified for
the purpose of concession calculations which resulted in a concession overpayment of $116,336 to
the Port. 
We noted no other instances of noncompliance with significant provisions of the agreement. 

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Internal Audit Report 
Airport Management Services 
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Schedule of Findings and Recommendations 
1.  Unreported Gross Receipts from the Retail Display Allowances (RDAs) 
The agreement under Section 1.11 defines concession gross receipts as: 
" aggregate gross amount of revenue derived from all sales of goods and merchandise of 
any type or kind transacted or made and all charges for services performed by Lessee or any 
persons, firms or corporations in or upon the concession premises 
...including the amount of all consideration other than money received for any of the
foregoing 
Gross Receipts shall also include 
any so-called "retail display allowances" or other promotional or advertising income received
by or credited to Lessee on account of displays, promotions, advertising or other activities at
the Premises" 
The above programs (retail display allowances, promotions, advertising, and other agreed-upon retail
activities) generate revenue to Airport Management Services. The receipts and consideration
received from vendors, publishers, and or suppliers are directly attributable to the concession
arrangement with the Port on airport premises and therefore subject to concession. 
For the audit period, we noted that Airport Management Services did not report approximately $2
million in RDA receipts related to product promotion and displays. After reviewing its accounting
records, Airport Management Services acknowledged the underreporting.  The effect of the
underreporting is additional concession owed to the Port as calculated below: 
Unreported     RDA
Concessionaire Reported RDA 
Audited RDA Receipts       RDA Receipts   Concession    Total
Receipts 
Rate      Under
Reported
to the
Port 
Point    Product             Point of    Product    Additional   (e)=(b+c+d)-(a)      (f) 
Agreement    of   Awareness   Additional   Sales    Awareness   Promotion                        (e x f) 
Year     Sales     (a)      Promotion     (b)        (c)        (d) 
2009     0     $70,747        0   $960,953     $70,747   $114,962     $1,075,915             $156,007 
14.50% 
2010     0      58,184        0   860,715      58,184    116,332       977,047              141,672 
Underpaid Concession to the Port   $297,679 

Recommendation 
We recommend Port management: 
1.  Seek and recover approximately $297,679 from Airport Management Services. 
2.  Ensure that Airport Management Services complies with the lease agreement definition of gross
receipts. 
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Internal Audit Report 
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3.  Review prior agreement years including 2011 and 2012 for the correct reporting of gross receipts 
and recover underpaid fees, if applicable. 

Management Response 
Aviation Business Development agrees with the recommendations of the audit. Airport Management
Services has agreed with the auditors regarding the payment on Retail Display Allowances (RDA) and 
immediately changed its reporting procedure for correct reporting during all of 2011 and moving 
forward. It is worth noting that within the airport concessions industry, the subject of accurate
reporting of percentage rent on RDAs is seen as very difficult to calculate for each individual airport
due to the complexity of the national promotional agreements. At the outset of the audit,
approximately three and one half years ago, staff specifically called attention to the RDA as being an
item requiring a complete audit review of amounts and means of calculating. 

2.  Concession Overpayment Due to Specialty Merchandise Misclassification 
Airport Management Services operates  20+ concession locations including four  specialty
merchandise locations at Sea-Tac Airport. At non-specialty locations, the agreement allows the sale 
of specialty items in "stores within a store" areas which is commonly referred to as boutiqued areas. 
The agreement provides the following four concession categories of retail merchandise, and each of
the four categories has a different concession rate: 
a.  Category A  (concession rate 14.5%)  Newspapers, magazines, books, retail display
allowance (RDAs), promotional income 
b.  Category B  (concession rate 26.5%)  Souvenirs, gifts, and apparel 
c.  Category C  (concession rate 11.5%)  Specialty Retail merchandise that is sold in distinct
"boutiqued" areas 
d.  Category D  (concession rate 11.5%)  Souvenirs, books, gifts crafts and apparel at Specialty
Retail and Book Stores 
We noted Airport Management Services reported to the Port certain specialty goods under
Category C and reported them as Category A and B. Category A, and B, have a higher
concession rate  than Category C  and therefore this action resulted  in concession fee
overpayment to the Port. The overpayment is calculated as follows: 




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Internal Audit Report 
Airport Management Services 
May 1, 2008  April 30, 2010 
Concessionaire
Over Reported
Reported           Audited 
Concession on
Specialty Goods 
Receipts    Rates   Concession   Rates   Concession 
Agreement   Merchandise
(c  e) 
Year       Type       (a)      (b)     (c) = a x b     (d)     (e) = a x d 
Food       $786,213   14.50%    $ 114,001           $90,415         $ 23,586 
Gift             109,755   26.50%       29,085                 12,622            16,463 
2009 
Candy       446,111   14.50%     64,686           51,303         13,383 
Electronics      78,027   14.50%      11,314               8,973           2,341 
11.50% 
Food        814,683      14.50%     118,129            93,689         24,441 
Gift            119,258    26.50%       31,603                13,715             17,889 
2010 
Candy       488,874   14.50%     70,887            56,221         14,666 
Electronics     118,888   14.50%      17,239              13,672           3,567 
Overpaid Concession to the Port        $116,336 

Recommendation 
We recommend Port management: 
1.  Reimburse approximately $116,336 to Airport Management Services. 
2.  Ensure that Airport Management Services reports specialty goods in accordance with the terms of
the lease agreement. 
3.  Review prior agreement years including 2011 and 2012 for the correct reporting of gross receipts 
and reimburse overpaid fees, if applicable. 

Management Response 
Aviation Business Development agrees with the recommendations of the audit. The North and South
Satellite Hudson stores include what is referred to as "a store within a store." This concept works well
for the satellites due to limited space for specialty retail.  During the earlier years of the lease
agreement, Hudson's point of sale system was not capable of tracking the different merchandise
sales that were listed as specialty items in the lease agreement and as a result paid at a higher
percentage rent than required by the lease agreement. Their systems have been updated and are
now capable of pulling these sales as specialty retail and paying the appropriate percentage as per
the lease agreement. They were aware of the overpayment but were unable to make the adjustment
until the new system was administered. 

3.  Exclusion of Certain Promotional and Advertising Income from Reported Concession
Gross Receipts 
The agreement under Section 1.11 defines concession gross receipts as: 
" the aggregate gross amount of revenue derived from all sales of goods and merchandise of any
type or kind transacted or made and all charges for services performed by Lessee or any persons,
firms or corporations in or upon the concession premises 
...including the amount of all consideration other than money received for any of the foregoing 
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Internal Audit Report 
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Gross Receipts shall also include any so-called "retail display allowances" or other promotional or 
advertising income received by or credited to Lessee on account of displays, promotions, advertising 
or other activities at the Premises" 
We reviewed the monthly profit and loss (P&L) statements for the two-year audit period.                                We noted a
number of accounts recorded as a reduction to the cost of goods (COG) for a cumulative total of 
approximately $3.8 million. We evaluated the nature of the transactions and noted that some of the 
transactions represented income from vendors for Retail Display Allowance (RDA) at Sea-Tac Airport. 
Airport Management Services did not recognize the receipts as part of concession, but recorded the
receipts as reductions to the cost of goods. Following the discovery, Airport Management Services
acknowledged that approximately $2 million in such receipts (Finding #1) had not been properly
reported to the Port. 
At the same time, Airport Management Services maintained that the remaining reduction of $1.6
million ($3.8 million less $2.2 million) to the cost of goods would not be subject to concession. We
were, pursuant to the terms of a confidentiality agreement, able to further test Lessee's practices
related to promotional and advertising income and have concluded that Lessee failed to properly
account for certain items in its calculation of Gross Receipts. In addition  to the amounts
acknowledged as owing in Finding #1 ($297,679), we specifically conclude that Lessee owes the Port
approximately an additional $74,916 related to these items. 

Recommendation 
We recommend Port management: 
1.  Seek and recover approximately $74,916. 
2.  Revise the Gross Receipts definition to clarify its applicability to the lessee operations. 
3.  Ensure that Airport Management Services complies with the lease agreement definition of gross
receipts. 
4.  Review prior agreement years including 2011 and 2012 for the correct reporting of gross receipts 
and recover underpaid fees, if applicable. 
Management Response 
In general, Aviation Business Development agrees with the recommendations of the audit. However,
recommendation #2 is difficult to implement immediately, and would require an amendment to the
Lease and Concession Agreement. The definition of gross receipts is identical in all concession lease
agreements, which makes revision of such a definition in one tenant agreement very problematic.
Instead, concessions management would recommend working with Legal counsel and an outside
concessions consultant with development of a revised definition of gross receipts for the next
generation of concessions leases. Hudson has demonstrated a willingness to evaluate its payment
practices despite the uncertainty of the gross receipts definition for determining concessionable
amounts. Management supports the audit recommendation to conduct a review of 2011 and 2012
gross receipts to evaluate correct reporting. 

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