Audit Report on the Compliance of Staten Island Hockey, Inc., With its License Agreement

EXECUTIVE SUMMARY

On April 26, 1999, the Department of Parks and Recreation (Parks) entered into an eight-year license agreement with Staten Island Hockey, Inc. (Staten Island Hockey), to renovate, operate, and maintain an outdoor recreation facility consisting of a regulation-size hockey rink, a miniature golf course, a food concession, a go-cart track, and batting cages at Schmidts Lane and Manor Road, in Staten Island.

Staten Island Hockey is required to pay the City the greater of either: a minimum annual fee of $85,000 for the first and second years of the license, or 15 percent of gross receipts; a minimum annual fee of $100,000 for the third and fourth years, or 16 percent of gross receipts; a minimum annual fee of $110,000 for the fifth and sixth years, or 17 percent of gross receipts; and a minimum annual fee of $120,000 for the seventh and eighth year, or 15 percent of gross receipts. For its second operating year, May 1, 2001, to April 30, 2002, Staten Island Hockey reported gross receipts of $191,000 and paid the City the minimum annual fee of $85,000.

In addition, Staten Island Hockey was required by the license agreement to expend a minimum of $438,119 on capital improvements. The agreement required that Staten Island Hockey construct a regulation-size hockey rink, upgrade and repair the miniature golf course, purchase and install new equipment for the batting cages, pave the hockey parking area, expand and renovate the food concession stand, make general repairs to the facility, and construct a state-of-the-art two-lane go-cart track.

The license agreement also requires that Staten Island Hockey maintain the required amount of insurance coverage; submit monthly gross receipt reports and an annual income and expense report to Parks; remit a $30,000 security deposit to the City; and pay all utility costs, including charges for water and sewer use.

The audit’s objectives were to determine whether Staten Island Hockey properly reported its total gross receipts, accurately calculated license fees due the City, and paid these fees on a timely basis; and complied with certain other provisions and requirements of its license agreement.

To conduct our audit, we requested specific data and detailed documentation to verify whether Staten Island Hockey reported all revenue and paid the City the appropriate fees. These requests included, but were not limited to, the underlying documentation to support the amounts recorded on the Gross Receipts Statements submitted to Parks for 2001. Staten Island Hockey failed to provide all the following critical documents for the entire operating year, from May 2001 to April 2002: Hockey league contracts, schedules, rosters, invoices, daily sales and receipts records, daily dated cash register receipts, sales books, and bank deposit receipts to support the revenue recorded on its monthly bank statements.

Our audit found that Staten Island Hockey paid its minimum license fees and its design review fee, remitted the required security deposit to the City, and paid its utility bills in accordance with its license agreement. As part of the improvements completed, Staten Island Hockey built a regulation-size hockey rink, constructed a rain shelter over the rink, upgraded the batting cages and miniature golf course area, and renovated the concession stand.

However, Staten Island Hockey breached the license agreement because it does not keep complete and accurate books of account and other records. Without such records, we were unable to track the actual amount of revenues collected or to verify whether Staten Island Hockey reported all of its gross revenues to Parks. Because of the lack of records, we observed the operation of the facility for a seven-day period in April and May 2002. During the seven-day observation period, Staten Island Hockey collected $8,379 from the batting cages, miniature golf course, the concession stand, and Snapple vending sales. Even though it rained steadily on three of our observation days, this amount far exceeded the $4,672 in gross receipts reported by Staten Island Hockey for the entire month of April 2001.

Based on our review of available records, our observations, and records obtained from vendors, we conservatively calculated that Staten Island Hockey should have reported gross receipts of at least $424,754—55 percent more than was actually reported. However, Staten Island Hockey generates revenue from other sources—hockey rink rentals, private parties, special events, the soda fountain, as well as additional revenues from sublicensees (T&C Sports World and The Sports Section)—which were not included in our estimate because no documentation of these amounts was available.

We could not determine whether Staten Island Hockey would have exceeded the minimum that required it to pay percentage-based fees to the City, since it failed to maintain the required documentation and had no records indicating the amounts collected from other sources. However, since our estimate of underreported gross receipts did not exceed the threshold at which percentage fees would be due the City, we do not include a percentage fee assessment in this report.

In addition, Staten Island Hockey did not use a point of sale cash register system, did not deposit cash receipts in a timely manner, and co-mingled funds with the Staten Island Hockey President’s other business.

Moreover, Staten Island Hockey, despite receiving a "Certificate of Completion" for its required capital improvements from Parks, did not construct a two-lane go-cart track or pave the hockey parking lot, as specified in the license agreement. Also, Staten Island Hockey did not maintain the proper amounts of insurance required by the license agreement.

Consequently, we recommend that Parks terminate its agreement with Staten Island Hockey because Staten Island Hockey seriously breached its license agreement. Should Parks decide not to terminate its agreement with Staten Island Hockey, it should require that Staten Island Hockey:

• Install a point-of-sale system and ensure that all sales and hockey fees are processed through this system and are properly recorded on its books and records;
• Report all revenues generated at the facility on its monthly Gross Receipts Statements to Parks, including all revenue from the hockey leagues, miniature golf, batting cages, and the snack bar; and pay all required fees due the City.
• Maintain for six years all documents supporting the reported gross receipts. This documentation should include, but not be limited to: pre-numbered batting cage and hockey rink rental receipts; daily dated cash register receipts; and bank deposit slips;
• Comply with the capital improvements specified in the license agreement, which include constructing a two-lane go-cart track and paving the parking lot adjacent to the hockey rink.
• Maintain the proper amounts and types of insurance coverage.

Also, Parks should:

• In the future, before issuing a Certificate of Completion of Capital Commitment, more carefully verify that all the required work was, in fact, completed. If capital improvement modifications are necessary, then the agreement should be modified to reflect such changes.

The matters covered in this report were discussed with officials of Staten Island Hockey and Parks during and at the conclusion of this audit. A preliminary draft report was sent to representatives of Staten Island Hockey and Parks officials and discussed at an exit conference held on June 5, 2002. On June 6, 2002, we submitted a draft report to Staten Island Hockey and Parks with a request for comments. Written responses were received from Staten Island Hockey on June 18, 2002, and from Parks on June 19, 2002.

Staten Island Hockey’s accountant, who responded on behalf of Staten Island Hockey Inc., disagreed with the audit’s estimate of underreported gross receipts, but generally agreed with the audit’s findings and recommendations. To address the deficiencies noted in the report, Staten Island Hockey stated that it would count and record golf and batting tokens on a daily basis, will maintain documents relating to gross receipts throughout the license period, will adhere to the capital improvement requirements in the license, and has updated its insurance policies in compliance with the requirements of the license.

In its response, Parks stated that it has issued a Notice To Cure on June 18, 2002, to Staten Island Hockey’s President requiring that Staten Island Hockey correct the deficiencies cited in the audit report and comply with the audit’s recommendations. Parks also agreed with the audit’s position that Staten Island Hockey did not complete all the capital improvements required by the license agreement.