OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION VANGUARD CAR RENTAL USA, INC. REVENUE AND CONTRACT COMPLIANCE AUDIT DECEMBER 2006 Dennis J. Gallagher Auditor
City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000, FAX 720-913-5247 www.denvergov.org/auditor Dennis J. Gallagher Auditor December 1, 2006 Mr. Turner West, Manager Department of Aviation City and County of Denver Dear Mr. Turner West and Mr. Mark Ezell: Mr. Mark Ezell Vanguard Car Rental USA, Inc. PO Box 22202 Tulsa, Oklahoma 74121-2202 Attached is the Auditor s Office Internal Audit Division s report of their revenue and contract compliance audit of the Vanguard Car Rental USA, Inc. operations at Denver International Airport. The audit period was for the years ended December 31, 2004 and 2005. The purpose of the audit was to determine whether Vanguard and the City and County of Denver complied with the terms and conditions of the contracts and whether internal controls were adequate under the circumstances. Internal Audit found that Vanguard s Usage Fee Statements for 2004 and 2005 were not prepared in accordance with the contract and the 2004 statement was not submitted timely as disclosed herein. If you have any questions, please call Michael Clark, Director of Internal Audit, at 720-913- 5029. Sincerely, DJG/kh cc: Dennis J. Gallagher Auditor Honorable John Hickenlooper, Mayor Honorable Members of City Council Members of the Audit Committee Kelly Brough, Chief of Staff Chris Henderson, Chief Operating Officer Chris Mootz, Acting City Attorney Lauri Dannemiller, Executive Staff Director, City Council Beth Machann, Controller Cheryl Cohen-Vader, Chief Deputy Manager of Aviation Stan Koniz, Deputy Manager of Aviation for Business and Technologies Pete Gingras, Assistant Deputy Manager of Aviation/Properties Laura Trujillo, Co-Assistant Deputy Manager of Aviation/Finance Amy Weston, Co-Assistant Deputy Manager of Aviation/Finance Sharon Shannon, Internal Audit Supervisor, Aviation/Finance The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 1
TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 2 Internal Auditor s Report 3 Executive Summary 4 Background, Scope, Objective, and Methodology 5 Finding, Recommendation, and Responses 7 Schedule of Amounts Due and Paid and Related Notes 8 2
Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000, FAX 720-913-5247 www.denvergov.org/auditor INTERNAL AUDITOR S REPORT We have completed a revenue and contract compliance audit of the Concession Agreement and Terminal Building Premises Lease dated October 1, 1993 and first, second, and third amendments dated January 28, 1997, September 1, 1999, and February 7, 2003, respectively; the Special Facilities and Ground Lease dated September 1, 1999 and first, second, and third amendments dated August 6, 2001, February 7, 2003 and April 20, 2004, respectively; and the Lease Termination Agreement dated February 7, 2003 (Contracts) between the City and County of Denver and Alamo Rent-A-Car, LLC and assigned to Vanguard Car Rental USA, Inc. (Vanguard) at Denver International Airport for the years ended December 31, 2004 and 2005. The purpose of the audit was to determine whether Vanguard and the City complied with the terms and conditions of the contracts and whether internal controls were adequate under the circumstances. We also determined whether rules and regulations as required under the circumstances were complied with and the internal controls in place were adequate. This audit was included in the Auditor s Office Internal Audit Division s 2005 Annual Audit Plan and is authorized pursuant to the City and County of Denver Charter, Article V, Section 1, General Powers and Duties of Auditor. We conducted our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Schedule of Amounts Due and Paid is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the revenue amounts. As a result of our audit, we noted two compliance issues related to Vanguard s usage fee statement. We extend our appreciation to Airport personnel who assisted and cooperated with us during the course of our examination. Date: December 1, 2006 Staff: Dick Wibbens, CPA, Audit Manager Marcus Richardson, Audit Supervisor Internal Audit Division Michael Clark, CPA Director of Internal Audit The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 3
VANGUARD CAR RENTAL USA, INC. EXECUTIVE SUMMARY FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2005 This summary highlights the finding of this revenue and contract compliance audit, which is more fully described in the Finding, Recommendation, and Responses section beginning on page 7. The Finding, Recommendation, and Response section includes responses from the Department of Aviation and Vanguard Car Rental USA, Inc. Usage Fee Statements The 2004 usage fee statement submitted to the City was over one year late. Also, the usage fee statements for 2004 and 2005 did not include a breakdown of Rental Car Transaction Days nor did they include usage fees collected as required. The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 4
VANGUARD CAR RENTAL USA, INC. BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2005 Background Vanguard Car Rental USA, Inc. is the owner of Alamo Rent A Car and National Car Rental. The company s assets are under the Vanguard name through Vanguard s purchase of Alamo and National from ANC Rental Corporation in October 2003. Alamo and National now share space and a brand name at Denver International Airport (DIA). Vanguard has the following contracts with the City for its DIA operation: 1) the Concession Agreement and Terminal Building Premises Lease, 2) the Special Facilities and Ground Lease, and 3) the Lease Termination Agreement. Scope The contract provisions we focused on for this audit are Sections 4.1, 6.1(a), 6.1(d), 6.2(a), 6.2(b), 6.2(c)(i), 6.2(d), 6.2(g), 6.2(h), 6.2(j), 7.8, 9.1, 9.2(a), 9.5, and 10.2 of the Concession Agreement and Terminal Building Premises Lease; Sections 4.01, 5.01, 5.02(a), 5.08, 8.02.01, 8.02.02, 8.02.03, 8.02.04, and 8.03 of the Special Facilities and Ground Lease; and paragraph number 2 of the Lease Termination Agreement. We did not review or audit fingerprinting revenue, ID badge revenue, or any other revenue not specifically covered in the aforementioned contract sections. Additionally, we reviewed Vanguard s independent auditor s Statement of Usage Fees Charged and Paid for the years ended December 31, 2004 and 2005 to determine if the usage fees were properly calculated and reported. Our audit of Vanguard covers a two year period from January 1, 2004 through December 31, 2005 for Vanguard s operations at DIA. The gross revenue amount audited for the years ended December 31, 2004 and 2005 was $98,577,789. Objective This audit of Vanguard was included in the Auditor s Office Internal Audit Division s 2005 Annual Audit Plan and is authorized pursuant to the City Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor. The objective of this audit was to determine whether Vanguard properly reported gross revenue and paid the proper amounts to the City in accordance with their contracts. A secondary objective was to determine if the City and Vanguard complied with other provisions of the contracts and applicable City rules and regulations. 5
BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY VANGUARD CAR RENTAL USA, INC. Methodology Evidence gathering and analysis techniques used to meet the objectives of the audit included, but were not limited to, the following: Interviews and discussions were conducted with management and staff of Vanguard and DIA Review of internal controls Performed a walk-through of the operation and the accounting system Reviewed contracts and City rules and regulations Performed an analytical review of gross revenues Performed various tests of gross revenue Confirmed cash receipts Verified and recalculated rentals, fees, and charges Verified evidence of insurance and performance bonds The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 6
VANGUARD CAR RENTAL USA, INC. FINDING, RECOMMENDATION, AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2005 Usage Fee Statements The usage fee statement for 2004 submitted to the City was over one year late. Also, the usage fee statements for 2004 and 2005 did not include a breakdown of Rental Car Transaction Days nor did Vanguard include the usage fees collected as required by Section 5.08 of the Ground Lease. Recommendation We recommend that the Department of Aviation request Vanguard to send the annual statement of usage fees by March 31, of each year as required by their contract. We also recommend that the Department of Aviation require Vanguard to include in the usage fee statement a breakdown of Rental Car Transaction Days and usage fees collected on a month-by-month basis. Department of Aviation Response DIA Property Office issues an annual reminder to the RAC business representatives citing relevant paragraphs in each Agreement regarding reporting requirements. In 2006 that reminder was an email sent in February (copy of email will be sent separately to the City Auditor s Office). In this email we attached a sample format for the CAS but did not (and have not in the past) send any sample format for the Usage Fee Statement, as that is a report to the Trustee rather than a direct report to the City. We could certainly devise such a sample and send same with the annual reminder for the 2006 reports, to be sent in February 2007, if DIA Finance and the Trustee determine there would be value in doing this. The Department of Aviation will review the benefit of the sample and take action as required. Vanguard Response This finding states that the 2004 usage fee statement to the City was over one year late. Also, the 2004 and 2005 usage fee statement did not include a breakdown of Rental Car Transaction Days nor did Vanguard include the usage fees collected as required by Section 5.08 of the Ground Lease. We partially agree with this finding. We anticipate timely issuance of future reports and will include in the usage fee statement a breakdown of Rental Car Transaction Days. However, we did include the usage fees collected as required by Section 5.08 of the Ground Lease, it was labeled as Usage Fees Charged rather than Usage Fees Collected. The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 7
VANGUARD CAR RENTAL USA, INC. SCHEDULE OF AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2005 2004 2005 Total Gross Revenue (Note 1) $ 46,931,743 $ 51,646,046 $ 98,577,789 Amounts Due (Note 2) Concession Fees $ 4,814,793 $ 5,164,605 $ 9,979,398 Terminal Building Premises' Rent 13,517 7,770 21,287 Ground Rentals 816,751 875,557 1,692,308 Additional Rental 463,533 472,864 936,397 Termination Payment 196,020 228,690 424,710 Usage Fees 2,218,644 2,155,464 4,374,108 Interest Charges 325-325 Total 8,523,583 8,904,950 17,428,533 Amounts Paid (Note 3) Concession Fees 4,814,793 5,164,605 9,979,398 Terminal Building Premises' Rent 13,517 7,770 21,287 Ground Rentals 816,751 875,557 1,692,308 Additional Rental 463,533 472,864 936,397 Termination Payment 196,020 228,690 424,710 Usage Fees 2,218,644 2,155,464 4,374,108 Interest Charges 325-325 Total 8,523,583 8,904,950 17,428,533 Balance Due $ - $ - $ - The accompanying notes are an integral part of this schedule. 8
NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID VANGUARD CAR RENTAL USA, INC. 1. Gross Revenue Gross Revenue as reported in the accompanying schedule includes all charges for time and mileage and other authorized charges or services for rentals of motor vehicles from customers at DIA. Other authorized charges or services include: GPS Equipment Ski Racks Child Seats Government Surcharge Insurance Under Age Fee Additional Driver Fee Drop off Charges Airport Fees Frequent Traveler Plan Fees Reductions to gross revenues are made for the following: Discounts and Coupons Loss Damage Waiver Gasoline Usage Fees Non-airport Users 2. Amounts Due Concession Fees Section 6.2 (a) of the Concession Agreement states that Vanguard agreed to pay as Concession Fees to the City an amount equal to 10% of their annual gross revenues (Percentage Compensation Fee) derived from its operations or a minimum annual guaranteed amount, whichever is greater. Vanguard s minimum annual guarantee of $4,814,793 was greater than the Percentage Compensation Fee of $4,693,174 for 2004. Vanguard s Percentage Compensation Fee of $5,164,605 was greater than the minimum annual guarantee of $4,814,793 for 2005. Terminal Building Premises Rent Section 6.1 (a) of the Terminal Building Premises Lease states that Vanguard agreed to pay as Terminal Building Premises Rentals to the City an amount equal to $60 per square foot per year. The square feet of the Terminal Building Premises are as follows: 257.2 square feet from January 1, 2004 to September 30, 2004 129.5 square feet from October 1, 2004 to December 31, 2005 9
NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID VANGUARD CAR RENTAL USA, INC. Ground Rentals Section 5.02 (a) in conjunction with Section 5.02 (g) of the Special Facilities and Ground Lease and the Department of Aviation billing invoices and a Memo dated November 8, 2000, Vanguard agreed to pay as Ground Rentals to the City the following ground rentals: Area Description Square Feet Annual Rate Per Square Foot Period Alamo Lease Area 653,399 $.075 January 1, 2004 to September 30, 2004 Alamo Lease Area 653,399 $.0875 October 1, 2004 to September 30, 2005 Alamo Lease Area 653,399 $.0725 October 1, 2005 to December 31, 2005 Alamo Option Lease Area 217,802 $.075 January 1, 2004 to September 30, 2004 Alamo Option Lease Area 217,802 $.0875 October 1, 2004 to September 30, 2005 Alamo Option Lease Area 217,802 $.0725 October 1, 2005 to December 31, 2005 Additional Rental Section 5.02 (d) of the Special Facilities and Ground Lease in conjunction with the Special Facilities and Ground Lease Payment Schedule dated September 1, 2000 and the Department of Aviation billing invoices, Vanguard agreed to pay as Additional Rentals an amount of $38,627.74 per month for the period January 1, 2004 to September 30, 2005 and $41,738.26 per month for the period October 1, 2005 to December 31, 2005. Termination Payment According to paragraph number 2 of the Lease Termination Agreement, for the early termination of the National Car Rental Lease, Vanguard agreed to pay to the City a total amount equal to $619,822.50 payable monthly in the following periods and amounts: a) June 2003 to December 2003 = $13,612.50 b) January 2004 to December 2004 = $16,335.00 c) January 2005 to December 2005 = $19,057.50 d) January 2006 to May 2006 = $19,965.00 Annual Payments: 2003 = $95,287.50 2004 = $196,020.00 2005 = $228,690.00 2006 = $99,825.00 Total $619,822.50 10
NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID VANGUARD CAR RENTAL USA, INC. Usage Fees According to Section 5.01 of the Special Facilities and Ground Lease, Vanguard agreed to charge and collect usage fees for each rental car transaction day from all airport customers entering into car rental agreements. Such fees are intended to cover the costs of the bonds issued to construct the rental car facilities at DIA and are paid to the trustee of the car rental revenue fund on a monthly basis. The rental car transaction daily usage fee was $2.20 for the period January 1, 2004 to March 31, 2004; $2.00 for the period April 1, 2004 to November 30, 2004; and for the month of December 2004 and all of 2005, the usage fee was $1.80. We obtained the usage fee amounts due as noted in the accompanying schedules from Vanguard s 2004/2005 independent auditor s reports dated May 17, 2006. 3. Amounts Paid The amounts paid as noted in the accompanying schedule for Concession Fees, Ground Rentals, Additional Rentals and Termination Payments were compiled from the Department of Aviation s cash receipt records and reports provided to us. The amounts paid also include the credits from prior years overpayments and Additional Rental Surplus. According to a letter from Zion Bank dated January 3, 2005, Vanguard was issued a credit of $579,263.59 for the 1999 C Surplus. Also, according to another letter from Zion Bank dated February 12, 2004, Vanguard was issued another credit of $185,614.74 for the 1999 A-B Surplus. Usage Fees paid as noted in the accompanying schedule were obtained from Vanguard s 2004/2005 independent auditor s reports dated May 17, 2006. 11