oversight

Financial Audit: Pennsylvania Avenue Development Corporation's 1988 Financial Statements

Published by the Government Accountability Office on 1990-01-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

    United States
    General Accounting Office
    Washington, D.C. 20648

    Comptroller   General
    of the United States

    B-199096

    January 11,199O
    To the President of the Senateand the
    Speaker of the Houseof Representatives

    This report presents our opinion on the Pennsylvania Avenue Develop-
    ment Corporation’s financial statements for the fiscal year ended Sep-
    tember 30, 1988. Reports on the Corporation’s internal accounting
    controls and on its compliance with laws and regulations are also
    provided.
    The Corporation was created by the ennsylvania Avenue Development
    Corporation Act of 1972, which pr Bvided the Corporation responsibility
    to prepare and implement a development plan for a certain area adja-
    cent to Pennsylvania Avenue between the Capitol and the White House.
    To ensure that the plan is carried out, the Congressgave the Corpora-
    tion the power of eminent domain and authority to regulate both private
    and public development, to undertake construction activities, and to
    enter into a wide variety of real estate and other commercial
    transactions.
    We are required to conduct an audit of the Corporation at least once
    every 3 years under the provisions of the overnment Corporation Con-
    trol Act (31 U.S.C.9106). To help fulfill Pur responsibility, we con-
    tracted with an independent certified public accounting firm to conduct
    a financial audit of the Corporation for the fiscal year ended Septem-
    ber 30, 1988. We determined the scopeof the audit work, monitored its
    progress at all key points, reviewed the working papers of the certified
    public accountants, Arthur Andersen & Co., and performed other proce-
    dures as we deemednecessary.Our audit was conducted in accordance
    with generally acceptedgovernment auditing standards.
    In our opinion, and consistent with the opinion of Arthur Andersen &
    Co., the Pennsylvania Avenue Development Corporation’s financial
    statements present fairly, in all material respects,its financial position
    as of September30, 1988, and the results of its operations and cash
    flows for the year then ended, in conformity with generally accepted
    accounting principles. The 1987 financial statements, which are pre-
    sented for comparative purposes, have not been audited and thus an
    opinion was not expressedon them.
Y
    The report by Arthur Andersen & Co. on internal accounting controls
    disclosedno condition believed to be a material weakness.The auditors’


    Page 1                  GAO/AFMD-90-22 Pennsylvania Avenue Development Corporation
    report on compliance with laws and regulations disclosednothing to
    indicate that the Corporation had not complied with such applicable
    laws and regulations which could have a material effect on the financial
    statements. We concur with these reports,
    During the course of the audit, Arthur Andersen & Co. also identified
    several matters which, although not material to the financial state-
    ments, were communicated for the Corporation’s consideration in a sep-
    arate managementletter.
    We are sending copies of this report to the Director of the Office of Man-
    agement and Budget, the Secretary of the Treasury, and the Chairman
    of the Board of Directors of the Pennsylvania Avenue Development
    Corporation.




    Charles A. Bowsher
    Comptroller General
    of the United States




Y




    Page 2                 GAO/AFMD-90.22 Pennsylvania Avenue Development Corporation
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    Page 9   GAO/APMD-90-22 Pennsylvania Avenue Development Corporation
 C$mtents




                                                                                                           6
.I
Auditors’ Report on                                                                                        7




                                                                                                       10
                      Balance Sheets                                                                   10
                      Statements of Revenues,Expended Appropriations and                               12
                          Expenses
                      Statements of Changesin Investment of U.S. Government                            14
                      Statements of Cash Flows                                                         16
                      Notes to Financial Statements                                                    18




                      Page 4                   GAO/APMD-90-22 Penumylvania Avenue Development Cmporatlon




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Page 5   GAO/~90-22   Pennsylvania Avenue Development Corporation
A@iitors’ Opinion
 I


                                    ARTHUR    ANDERSEN          &   Co.
                                          WASHINOTON,    D.C.




      To the Comptroller General of the United States
      and the Board of Directors of the Pennsylvania
      Avenue Development Corporation:

      We have audited the accompanying balance sheet of the PENNSYLVANIA         AVENUE
      DEVELOPMENT     CORPORATION (a wholly owned U.S. Government Corporation) as of
      September 30, 1988, and the related statements of revenues, expended
      appropriations     and expenses , changes in investment of U.S. Government and cash
      flows for the year then ended. These financial        statements are the
      responsibility     of the Corporation's management. Our responsibility      is to
      express an opinion on these financial       statements baaed on our audit.    The
      financial    statements of the Pennsylvania Avenue Development Corporation for
      the year ended September 30, 1987 were not audited by us and, accordingly, we
      do not express an opinion on them.
      We conducted our audit in accordance with generally accepted auditing
      standards and the standards for financial audits contained in the U.S. General
      Accounting Office Government Auditing Standards (1988 Revision).     Those
      standards require that we plan and perform the audit to obtain reasonable
      assurance about whether the financial   statements are free of material
      misstatement.    An audit includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements. An audit
      also includes asseesing the accounting principles used and significant
      eetimates made by management, as well as evaluating the overall financial
      statement presentation.    We believe that our audit provides a reasonable basis
      for our opinion.
      Wehave also reviewed the adjustments described in Note 19 that were applied
      to restate the 1987 unaudited financial statements.  In our opinion, such
      adjustments are appropriate and have been properly applied to the 1987
      financial  statements.
      In our opinion, the financial  statements referred to above present fairly,           in
      all material respects, the financial position of the Pennsylvania Avenue
      Development Corporation aa of September 30, 1988, and the results of its
      operations and its cash flows for the year then ended, in conformity with
      generally accepted accounting principles.


      Washington, D.C.,
      Wpril 11, 1989.




                           Page 0                 GAO/~-90-22       Pennsylvania Avenue Development Corporation
Auditors’ Report on Internal
A/ccounting
 I
           Controls



                                          ARTHUR   ANDERSEN & Co.
                                               WASHINOTON.D. C.




     To the Comptroller General of the United States
     and the Board of Directors of the Penneylvanla
     Avenue Development Corporation:
     We have audited the financial      statements of the PENNSYLVANIA  AVENUE
     DEVELOPMENT  CORPORATION   (the “Corporation”)   for the year ended September 30,
     1988, and have issued our report thereon dated April 11, 1989. Our audit wae
     made in accordance with generally accepted auditing standards and the
     standards for financial audits contained in the U.S. General Accounting Office
     Government Auditing Standards (1988 Revieion).       As part of our audit, we made
     a study and evaluation of the system of internal accounting controls to the
     extent we coneidered neceseary solely to determine the nature, timing and
     extent of our auditing proceduree. For the purpose of our report, we have
     claseified the eignificant     internal controls into the following categories.
       l   Revenue
       l   Treaaury
       l   Expenditure     - Payroll
       0 Expenditure       - Purchasing
       l   Fixed Aeeets
       l   Financial     Reporting
     Our study did not include any of the categories lieted    above because we
     determined It would be more efficient to eubetantively    test these recorda.
     The Corporation’s management ie responsible for establishing and maintaining a
     eyetem of internal accounting control.   In fulfilling  this responsibility,
     eetimates and judgments by management are required to assess the expected
     benefits and related costs of control procedures. The objectives of a system
         Y




                                 Page7              GAO/AFMD-90-22
                                                                PennsylvaniaAvenueDevelopmentCorporation
    I

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                              Auditore’   Report on Internal
                              Accounting Control                                   F’   ‘< ,




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I                                         ARTHUR     ANDERSEN       & Co.

                                                     -2-


        are to provide management with reasonable, but not absolute, assurance that
        aeeete are safeguarded against loss from unauthorized use or disposition,    and
        that traneactione are executed In accordance with management’s authorization
        and recorded properly to permit the preparation of financial statementa in
        accordance with generally accepted accounting principles.
        Because of inherent IImitations   in any internal control structure, error8 or
        lrregularitiea   may neverthelese occur and not be detected.   Also, projection
        of any evaluation of the system to future periods ie subject to the risk that
        procedures may become inadequate because of changes in conditione or that the
        degree of compliance with the procedures may deteriorate.
        Our etudy and evaluation made for the limited purpose described in the first
        paragraph would not necessarily disclose all material weaknesses in the
        eystem. Accordingly, we do not express an opinion on the system taken a8 a
        whole. However, during our audit we did not become aware of any conditions
        that we believe to be a material weakness.
        During the course of our audit, we identified  a number of other weakneseee in
        internal accounting controls which will be reported in a separate Management
        better dated April 11, 1989. Although we did not consider these weaknesses to
        be material to the financial  statements, they nonetheless merit management’s
        at tent ion.
        This report ia Intended solely for the use of the U.S. General Accounting
        Office and the Pennsylvanla Avenue Development Corporation.  This restriction
        is not Intended to limit the distribution of this report, which, upon
        acceptance by the addresses, is a matter of public record.


        Washington, D. C. ,
        April 11, 1989.




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                              Page 8                           GAO/AFMD-90-22   PennsylvaniaAvenue Development Corporation
ditors’ Report on Compliance
 Regulations


                                   ARTHUR      ANDERSEN&          Co.
                                            WASHINGTON. D. C.




   To the Comptroller General of the United States
   and the Board of Directors of the Pennsylvania
   Avenue Development Corporation:
   We have audited the financial   statements of the PENNSYLVANIA AVENUE
   DEVELOPMENT  CORPORATION (the “Corporation”)  for the year ended September 30,
   1988, and have issued our report thereon dated April 11, 1989. Our audit was
   made in accordance with generally accepted auditing standards and the
   standards for financial  audits contained in the U.S. General Accounting Office
   Government Auditing Standards (1988 Revision), and, accordingly, included such
   tests of the accounting records and such other auditing procedures as we
   considered necessary in the circumstances.
   The Corporation’s management is responsible for compliance with laws and
   regulations.    In connection with our audit referred to above, we selected and
   tested transactions and records to determine the Corporation’s compliance with
   laws and regulations,    noncompliance with which could have a material effect on
   the financial   statements of the Corporation.
   The results of our tests indicate that, for the items tested, the Corporation
   complied with those provisions of lawa and regulations,    noncompliance with
   which could have a material effect on the financial   statements. Nothi.ng came
   to our attention that caused us to believe that, for the items not tested, the
   Corporation was not in compliance with laws or regulations,    noncompliance with
   which could have a material effect on the Corporation’s financial     statements.
   This report is intended solely for the use of the U.S. General Accounting
   Office and the Pennsylvania Avenue Development Corporation.  This restriction
   is not intended to limit the distribution of this report, which, upon
   acceptance by the addressees, is a matter of public record.


   Washlngton, D.C.,
   April 11, 1989.




                        Page 9                 GAO/APMD-90-22 Pennsylvania Avenue Development Corporation
Flhancial Statements


Bala!jce Sheet6




                                                                                        As of September 30,
                                                                                  ---------------------------
                                                                                                              1987
                                                                                        1988               (Unaudited)
                  CURRENT  ASSETS:
                   Cash, including restricted   cash of $1,692,430
                      and $1,367,712 in 1988 and 1987,
                      respectively  (Notes 3 and 13)                              $ 22,128,838         $ 16,447,245
                    Investments - Federal securities                                 20,567,723
                   Accounts receivable (Note 4)                                           159,347             979,256
                   Accrued interest receivable                                                9,757
                                                                                  ------------         ------------
                            Total current     assets                                 42,865,665           17,426,501
                                                                                  ------------
                  PROPERTY  ANDEQUIPMENT:
                    Land, at cost (Notes 2, 5, 10 and 13)                                 62,305,921     100,873,477
                    Construction in progress (Note 6)                                     93,812,004      86,165,OOO
                    Equipment, furniture  and fixtures, net
                      (Notes 2 and 7)                                                        118,492           115,086
                    Leasehold improvements, net (Note 8)                                                          1,965
                                                                                  ------------         ------------
                            Total property     and equipment                        156,236,417          187,155,528
                                                                                                       ------------
                  OTHERASSETS(Notes 2 and 15):
                   Deferred rent receivable                                                2,553,613       2,973,217
                   Deferred interest receivable                                            1,643,514       1,860,798
                            Total other assets                                            4.197.127        4,834,015
                                                                                                       _*----------
                  TOTALASSETS                                                                          $209,416,044
                                                                                                       ===========I




                                      The accompanying notes are an integral
                                             part of these statements.




                                    Page 10                    GAO/AFMD-90-22 Pennsylvania Avenue Development Corporation




                                                                             fl     ,‘:
                                                                                   1,
    LIABILITIES AND INVESTHENTOF THE U.S. GOVERNMENT
                                                                    As of September 30,
                                                                __-_-----------------------
                                                                                            1987
                                                                    1988               (Unaudited)
    CURRENT LIABILITIES:
     Accounts payable and accrued liabilities
       (Note 9)                                                 $ 1,809,267         s       782,452
     Accrued interest payable (Note 10)                          18,662,472            42,407,508
     Deposits held for developers                                 1,692,430              1,367,712
     Accrued annual leave                                            96,220                   94,578
     Other liabilities   (Note 13)                                  568,080                   60,449
                                                                                    ------------
              Total current       liabilities                     22,828,469           44,712,699
                                                                _-__--_--_--        ------------
      Notes payable to U.S. Treasury (Note 10)                    49,903,282           49,903,282
              Total liabilities                                     72,731,751         94,615,981
                                                                ------------        -_----------

    INVESTMENT  OF THE U.S. GOVERNMENT:
      Invested capital (Note 11)                        113,462,012                   107,135,018
      Unexpended appropriation  (Note 12)                13,815,219                    15,659,660
      Donations and other items                            4,033,792                     2,825,435
      Cumulative results of operations                       (743,565)                (10,820,050)
                                                      _-----------                  ------------
              Total investment of the U.S. Government 130,567,458                     114,800,063
                                                      ------------                  ---a--------

    TOTALLIABILITIES AND INVESTMENT
                                  OF
      THE U.S. GOVERNMENT                                       $203,299,209        $209,416,044
                                                                az====s=IP===       t=OI==PI==3=




                             The accompanying notes are an integral
                                    part of these statements.

Y




                      Page   11                 GAO/AFMJMO-22   PennsylvaniaAvenue DevelopmentCorporation
Statbments of Revenues, Expended Appropriations and Expenses
                                            ,‘_   :.           ,,    .   . ..I           ,’          .‘,   :

                                                                                     For the Years Ended
                                                                                        September 30,
                                                                                                    1987
                                                                                      1988       (Unaudited)
                REVENUES  :
                  Sale of land (Note 13)                                          $58,414,253    $       -
                 Rental income (Notes 14 and 19)                                     2,817,095      2,941,838
                  Interest income (Note 15)                                          1,108,395      2,152,751
                 Miscellaneous                                                       1,451,338      1,144,301
                                                                                  -----------    -----------
                           Total revenue                                            63.791.081      6,238,890
                EXPENDED
                       APPROPRIATIONS                                                2,647,652       2,471,988
                                                                                  -----------    -----------
                           Total revenues and expended
                             appropriations                                         66,438,733     8,710,878
                                                                                  -----------    -w-s i ------
                EXPENSES  :
                  Cost of land sold (Note 13)                                      41,108,860
                  Interest expense (Note 10)                                       11,104,258      10,397,457
                  Personnel compensation and benefits (Note 16)                     1,483,535       19420,704
                  Property management expense (Note 17)                               755,192           273,758
                  Administrative expenses                                             780,488          811,443
                  Depreciation and amortization expense                                37,321            38,222
                  Operating expense - Lansburgh’s                                     118,981           223,528
                  Bad debt expense                                                                       18,398
                 Miscellaneous expenses                                                14,521              4,776
                                                                                                 -----------
                           Total expenses                                           55,403,156     13,188,286
                                                                                  --------e-w    ---se------
               NET INCOME(LOSS)                                                   $11,035,577    $(4,477,408)
                                                                                  =3s======E=    =zlt3C=t===




                                      The accompanying notes are an integral
                                             part of these statements.
                Y




                                       Page 12                 GAO/APMLMO-22 Pennsylvania Avenue Development Corporation



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         Page 13   GAO/AFMD-90-22 Pennsylvania Avenue Development Corporation
                                                                                                          .                     ‘W       ,’
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Statements of Changer In Investment of U.S. Qovemment
1     I
     ,I
      I                                                                  FORTHE YEAI(SRNDEDSEPTEMBER
                                                                                                   30, 1987 AND
                                                                                 SEPTEMBER 30.     1988 (AUDITED)




                                                                                            Invested            Unexpended
                                                                                            Capital           Appropriation

                                  BALANCEAT SEPTEMBER
                                                    30, 1986 (UNAUDITED)                  $101,421,954         $16,567,199

                                    Appropriation       from U.S. government                                      6.321.000

                                    Expended appropriation                                                       (2,471,988)

                                    Increase (decrease) in invested capital                  5,713,064           (5,544,638)
                                    Net income (loss)                                                             1,003,521
                                    Appropriation       returned to U.S. government                                 (215,434)
                                                                                          ------------         -----------
                                  BALANCE      AT SEPTEMBER
                                                          30, 1987 (UNAUDITED)              107,135,018          15,659,660
                                    Appropriation       from U.S. government                                      8,616,OOO
                                    Expended appropriation                                                      (2,647,652)
                                    Increase (decrease) in invested capital                  6,326,994          (8,572,396)
                                    Net income                                                                       923,482
                                    Appropriation       returned to U.S. government                                 (163,875)
                                                                                         ------------          -----------
                                  BALANCEAT SEPTEMBER
                                                    30, 1988                             $113,462,012          $13,815,219
                                                                                         PsI====~~~=I          Sc3=P==SP311




                                                The accompanying notes are an integral     part of these statements.
I


                                        Page 14                    GAO/AFMD-90-22 Pennsylvauia Avenue Development Corporation
                                                    Flmndsl    Statements




-




    Di ration8              Cumulative
    at I Other              Results of
             'terns
             -              Operations          Total
    $:       tO73.419      $ (5.339.161)    $114,723,411
                                                6,321,OOO
                                              (2,471,988)
             752,056                              920,482
                    (40)      (5,480,889)     (4,477,408)
                                                   (215,434)
    -m
           i-.-------      ------------     ------------
         i !, 825,435        (10,820,050)     114,800,063
                -                              8,616,OOO
         ’      I
                                              (2,647,652)
         Z,172,747                            (1,072,655)
              35,610          10,076,485      11,035,577
                                                   (163,875)
                                            ------------
    $4,033,792             $ (743,565)      $130,567,458
    liD*IIIII-3            11=1.-m*.**=     .1.*.13r5c==PP




                              Y




                                                   Page 15                  GAO/AFMD-90-22 Pennsylvania Avenue Development Corporation
                                        Financial Statements




    ents of Cash Flows



                                                                                 For the Years Ended
                                                                                      September 30,
                                                                          ---------------------------
                                                                                                      1987
                                                                                1988               (Unaudited)
,
/            CASH FLOWSFROMOPERATING ACTIVITIES:
               Net income (loss)                                            $ 11,035,577        $ (4,477,408)
               Adjustments to reconcile      net income (loss) to
                 net cash provided by operating         activities    -
                   Depreciation      and amortization                              37,321                38,222
                   Gain on sale of land                                      (17,305,393)                -
                    Bad debt expense                                                                     18,398
                    Change in assets and liabilities           -
                      Decrease in accounts receivable                              819,909           1,237,449
                      Increase in accrued interest         receivable               (9,757)             -
                      Decrease (increase)       in deferred rent
                         receivable                                                419,604            (399,900)
                      Decrease (increase)       in deferred interest
                         receivable                                                217,284            (908,183)
                      Increase in accounts payable and accrued
                         liabilities                                            1,026,814              495,368
                      Increase in deposits held for developers                    324,718            1,367,712
                      (Decrease) increase in accrued
                         interest    payable                                 (23,745,036)            9,962,753
                      Increase in accrued annual leave                                  1,642            12,960
                      Increase in other liabilities                                 507,631                 8,824
                                                                           ------------         ---------_--
                         Total   adjustments                                 (37,705,263)           11,833,603

                         Net cash (used in) provided       by
                            operating  activities                            (26,669,686)            7,356,195
             CASB FLOWSFROM INVESTING ACTIVITIES:
               (Purchase) sale of Federal securities                         (20,567,723)          15,632,OOO
               Proceeds from sale of land                                     58,414,253
               Purchase of land                                                                  (22,4;7,010)
               Land additions                                                 (2,511,303)
               Increase in construction   in progress                         (7,647,004)          (6,8;4,219)
               (Purchase) sale of equipment, furniture
                 and fixtures                                                     (38,762)                 13,685
               Leasehold improvements                                                                      (3,930)
               Decrease in invested capital                                    (1,0;2,655)             (722,975)
                                                                           ------------         ------------
                         Net cash provided by (used in)
                           investing  activities                              26,546,806         (14,362,449)
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                                       Page 16                   GAO/AFMDBO-22Pennsylvania Avenue Development Corporation
CASH FLOWS FROMFINANCING ACTIVITIES:
  Principal     payment on notes payable to U.S.
     Treasury                                                                      (2,504,250)
  Appropriation     from U.S. Government                         8,616,OOO          6,321,OOO
  Expended appropriations                                       (2,647,652)        (2,471,988)
  Appropriation     returned to U.S. Government                    (163,875)          (215,435)
                                                            ------------       ------------
           Net cash provided     by financing
             activities                                          5,804,473          1,129,327
                                                            ------------       ---_--------
NET INCREASE (DkCREASE) IN CASH                                  5,681,593        (5,876,927)

CASH, beginning   of year                                       16,447,245         22,324,172
                                                            ------------       ------------
CASH, end of year                                           $ 22.128.838       $ 16,447,245
                                                            LIC==39*==:5=I     ~~sa3100!%~1~~~
SUPPLMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:

    Caeh paid during the year for       intereet
      (net of amount capitalized)                           $ 35,473,416       $    955,561
                                                            ICPzcI==IS=EI=     =am=zc==a*====

                      The accompanying notes are an integral
                             part of these statements.




                            Page17                 GAO/AFMD-SO-22Pen~ylvaniaAvenueDevelopmentCorporation
    to Finsnclrl Statemonta




                                     AS OF SEPTIIMBER
                                                    30, 1988 AND 1987 (UNAUDITED)

I
I             (1)       ORGANIZATION
                        The Pennsylvania Avenue Development Corporation (the “Corporation”),  a
                        wholly owned government corporation,  was created by Congress under the
                        Pennsylvania Avenue Development Corporation Act of 1972 (the “Act”).    The
                        Act provided for the preparation and implementation of a development plan
                        for certain areas adjacent to Pennsylvania Avenue between the Capitol and
                        the White House.
                        The construction   and development is a joint venture between the Federal
                        government and private industry.     The Corporation is financing a program
                        of extensive public improvements and expanded pedestrian amenities.      To
                        facilitate  private development, the Corporation buys and assembles
                        properties in the area and leases or sells them back to private investors
                        for development according to the Pennsylvania Avenue Plan (the “Plan”).
                        A private investor may also purchase land directly     from a land owner and
                        develop it in accordance with the Plan.
                        The Corporation utilizes   four separate funds for its operations.      The
                        financial  statements include all funds of the Pennsylvania Avenue
                        Development Corporation.     Interfund ,and interoperational transactions and
                        balances have been eliminated.
                        The Salaries and Expense Fund is an annual appropriation       to pay salaries
                        and the administrative expenses of the Corporation.
                        The Land Acquisition  and Development Fund is a revolving fund that
                        provides the Corporation with the resources with which to assist
                        prospective developers in their efforts to assemble real estate for
                        development projects consistent with the development plan. The
                        Corporation may borrow money from the U.S. Treasury. Such borrowings are
                        repaid to the Treaeury with revenues from selling or leasing acquired
                        property to private developers (see Note 10).
                        The Public Development Fund utilizes    multiyear appropriations   to pay for
                        public development activities  and projects.     These public service costs
                        include : public improvements, historic    preservation, and relocation
                        assistance to displaced tenants of buildings purchased by the
                        Corporation.   In fiscal 1988, the Corporation established a special
                        funding mechanism designated for the development of an international
                        cultural and trade center on the Federal Triangle property in the
                        District  of Columbia.
                    i




                                          Page 18                GAO/APMD-go-22 Pennsylvania Avenue Development Corporation
                        Pluaneial Statementa




      The Donations and Other Items Fund accounts for contributions  from
      individuals,  corporations, and private organizations to the Corporation
      and the related disbursements of these contributions.
      The Corporation’s program is expected to be complete by the end of 1992,
      at which time the Corporation’s legislation  provides for successor
      agencies to assume responsibility  for maintenance of properties and
      public improvements and continuing conformance to the Plan.
(2)   SUMMARY
            OF SIGNIFICANT ACCOUNTING
                                    POLICIES
      Basis of Accounting - Assets, liabilities,  revenues, and expenses are
      recognized on the accrual basis of accounting following generally
      accepted accounting principles.
      Statement of Cash Flows - The Corporation, as required by generally
      accepted accounting principles,  has presented a statement of cash flows
      for the year ended September 30, 1988. The Corporation, as permitted by
      Statement of Financial Accounting Standards No. 95, “Statement of Cash
      Flows,” has elected to restate the September 30, 1987, Statement of
      Changes in Financial Position.
      g     - Land includes charges for direct land purchase costs, appraisals,
      feasibility  studies, title searches, insurance, fees, surveys, property
      owner reimbursements, and demolition of buildings.    The Corporation
      considers buildings acquired through land purchase to have no economic
      value as the buildings will be demolished and, therefore, the buildings
      are not recorded as a separate asset.
      Capitalization     of Interest - Interest charges incurred on borrowings from
      the U.S. Treasury are considered a cost of acquiring land and are,
      therefore, capitalized      into land. Whena property achieves its final
      development and is substantially      ready for sale or transfer, the interest
      is considered an operating expense of the accounting period.        Interest
      capitalized    during development is included in cost of land sold.
      Depreciation - Depreciation is computed on the straight-line   method based
      on the estimated useful life of the assets, which is 12 years for
      furniture   and 5 years equipment and leasehold improvements, over the term
      of the lease.
      Deferred Rent - The Corporation’s long-term leases with developers
      provide for developer incentives,    in the form of deferrals of rent due,
      to achieve affirmative  action and early project completion objectives.
      Such deferrals cannot exceed 50 percent of the base rent due and must be
      repaid, with accrued interest,    in accordance with terms of the lease
      agreement.
    Investment8 - The Corporation invests in short-term Treasury Securities
    and records them at the lower of aggregate cost or market value. At
  u September 30, 1988, cost approximated market value.




                       Page 19                 GAO/AFMD-90-22 Pennsylvania Avenue Development Corporation



                                                ‘5;    .
                                               ,,J
                                               :Ji’
                                               I I                                      I    ,.‘Qr.‘,
                                                                                                ,;      ‘;   I
                            Financial Statements   ,




(3)   CASH

      Included in the cash balance at year-end are deposits held for developers
      pending satisfactory    completion of various development projects.
      Subsequent to September 30, 1988, the Corporation returned $1,437,100 to
      such developers.     Cash as of September 30, 1988 and 1987, is comprised of
      the following:
                                                                                          1987
                                                                       1988            (Unaudited)
      Appropriation  fund balances with
        U.S. Treasury                                              $14,894,071         $14,596,809
      Donat ions                                                           71,355             474,850
      Revolving fund                                                  5,470,982                  7,874
      Restricted cash held for developers                             1,692,430           1,367,712
                                                                   -----------         -----------
                Total cash                                         $229128,838         $16,447,245
                                                                   =3’=r=====E         31=5=1=1=1=

(4)   ACCOUNTS
             RECEIVABLE
      Accounts receivable      as of September 30, 1988 and 1987, is comprised of
      the following:
                                                                                       1987
                                                                      1988          (Unaudited)
      Government                                                    $155,067         $ 51,988
      Nongovernment                                                      4,280         927,268
                                                                    --------         --------
                Total                                               $159,347         $979,256
                                                                    zE==a===         =====x==

(5)   LAND
      Land as of September 30, 1988 and 1987, is comprised of the following:
                                                                                           1987
                                                                     1988              (Unaudited)
      Land held for lease and resale                             $39,726,629         $ 76,039,208
      Land improvements                                            21,429,245           21,429,246
      Capitalized interest                                          1,150,047             3,405,023
                                                                 -----------         ------------
                Total   land                                     $62,305,921         $100,873,477
                                                                 =zE==131==Ill       *zslcIIooIP~*c1

  Y




                         Page20                        GAO/AF’MLb9O-22 Pennsylvania Avenue Development Corporation
    *:
t
                                               Financial Statemente




         I
             (6)   CONSTRUCTION
                              IN PROGRESS
                   Construction in progrees represents capital improvements to streets,
                   parks, sidewalks, and other related improvements located within the area
                   being developed. When the capital improvements projects are completed,
                   the account is reclassified as land.
             (7)   EQUIPMENT,FURNITUREAND FIXTURES
                   Equipment, furniture  and fixtures                 as of September 30, 1988 and 1987, is
                   comprised of the following:
                                                                                                             1987
                                                                                              1988        (Unaudited)

                   Acquisition     at   cost                                            $ 440,424         s 399,527
                   Less - Accumulated depreciation                                        (321,932)         (284,441)
                                                                                        ---------         ---------
                   Equipment, furniture           and fixtures,       net               $ 118,492         $ 115,086
                                                                                        =f~3~=Ia~         zep=IIL;==Is=
             (8)   LEASEHOLD
                           IMPROVEMENTS
                   Leasehold improvements as of September 30, 1988 and 1987, is comprised
                   of the following:
                                                                                                             1987
                                                                                             1988         (Unaudited)
                   Improvements at cost                                               $ 1,459,550        $ 1,459,550
                   Less - Accumulated depreciation                                      (1,459,550)        (19457,585)
                                                                                      -----------        --------e--
                   Leasehold improvements, net                                        $         -        $        1,965
                                                                                      PI=IPP=III=        ==3m===LI*

             (9)   ACCOUNTS
                          PAYABLEANDACCRUED
                                          LIABILITIES
                   Accounts payable and accrued liabilities                   as of September 30, 1988 and
                   1987, is comprised of the following:
                                                                                                             1987
                                                                                             1988         (Unaudited)
                   Government                                                          $ 447,194            $215,744
                   Nongovernment                                                         1,362,073            566,708
                                                                                       ----------           --------
                                 Total accounts payable and
                                   accrued liabilities                                 $1,809,267           $782,452




                                           Page21                           GAO/AFMD-90-22   PennsylvaniaAvenue Development Corporation
                            FinancialStatements   I




(10)   NOTESAND INTERESTPAYABLETO THE U.S. TREASURY
       The Corporation has various unsecured loans outstanding with the U.S.
       Treasury.    At September 30, 1988, there were no outstanding principal
       and interest payments that were due to the U.S. Treasury within one
       year. The Corporation has the option of extending the original due date
       of principal   and interest up to a maximumof 40 years, pursuant to the
       borrowing agreements between the Corporation and the U.S. Treasury. At
       September 30, 1988, the Corporation had an unused line of credit with
       the U.S. Treasury totaling $23,746,543.
       The Corporation’s weighted-average interest rate for notes outstanding
       during the year was 12.7 percent.  Interest expense for the year ended
       September 30, 1988, was $11,728,830 and included capitalized interest of
       $624,572 included in land.
       The long-term notes which mature in each of the five years succeeding
       September 30, 1988, are as follows:
               Fiscal     Year                                  Principal
                   1989                                        s      -
                   1990                                            3,160,366
                   1991
                   1992
                   1993 and thereafter                           46,742,916
                                                               -----------
                                                               $49,903,282
                                                               ==3s=a====r

(11)   INVESTEDCAPITAL
       Invested capital    as of September 30, 1988 and 1987, is comprised of the
       following:
                                                                                     1987
                                                                   &NJ3           (Unaudited)
       Appropriation for land and land
         improvements                                         $113,441,271       $107,116,551
       Appropriations for equipment                                     20,741             18,467
                                                              ------------       ------------
                  Total invested capital                      $113,462,012       $107,135,018
                                                              IIIIEIDIIIZCPC     I~i=P=DiaP=~=



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                            Page 22                   GAO/AFMD-99-22 Pennsylvania Avenue Development Corporation
                                 Flnandal gtatements




I

I
    (12)   UNEXPENDED
                   APPROPRIATIONS
           Unexpended appropriations        as of September 30, 1988 and 1987, is
           comprised of the following:
                                                                                          1987
                                                                        1988           (Unaudited)
           Unobligated                                               $7,647,358        $6,518,986
           Undelivered     orders                                     6,167,861         9,140,674
                                                                   w----------       -----------
                         Total unexpended appropriations           $13,815,219       $15,659,660
                                                                   IIP=‘IIP==f       PPIIPP’IIPI
    (13)   SALE OF LAND
           During the year ended September 30, 1988, the Corporation              sold real
           estate sites as follows:

               Property                           Sales Price         cost          Gain on Sale
               Square 254                         $43,101,900      $27,154,550       $15,947,350
               Square 408                           15,312,353       13,954,310          1,358,043
                                                  -----------      -----------       -----------
                             Total                $58,414,253      $41,108,860       $17,305,393
                                                  I=PlleP=EI==I    aEICPIIEIs=PL     ‘%PlrP3tD=I

           Additionally,  the Corporation entered into a contract to sell the
           Laneburgh’s building and adjacent buildings.    The Corporation, in
           accordance with generally accepted accounting principles,       will not
           recognize this sale until fiscal 1989 because the sale was not
           consunnnated until after year-end. A $500,000 deposit relating to the
           sale of this building   is included in cash and other liabilities     in the
           accompanying balance sheet at September 30, 1988.
    (14)   RENTALINCOME
           Rental income was generated from long-term leases of Corporation
           properties to developers and short-term leasing of properties awaiting
           redevelopment.




                               Page 23                   GAO/AFMD-90.22 Pennsylvania Avenue Development Corporation
                                                                                                            P




                              Financial Statements




       The future minimum leasing revenues on noncancelable, long-term
       operating leases, exclusive of deferred rent payments, are as follows:
                    1989                                      $    802,350
                    1990                                           802,350
                    1991                                           802,350
                    1992                                           802,350
                    After 1992                                  69,804,450
                                                              ---w-------
                    Total future   minimum rentals            $73,013,850
                                                              PPII=z=I=zP
(15)   INTERESTINCOME
       The Corporation earns interest on the rent that developers are allowed
       to defer and, in accordance with an agreement with the U.S. Treasury, on
       its daily cash balance.   Interest income for fiscal years 1988 and 1987
       was as follows:
                                                                                     1987
                                                                      1988        (Unaudited)
       On gifts  and donations                                    s       1,622   $       1,412
       On Federal  securities                                          336,704         737,997
       On daily cash balance at U.S. Treasury                          131,343         870,975
       On deferred rent                                                638,726         542,367
                                                                  ----------      ----------
                      Total interest    income                    $1,108,395      $2,152,751
                                                                  I=====s=z3      IDtL’z:-=PI2s

(16)   PERSONNEL
              COMPENSATION
                        ANDBENEFITS
       The employees of the Corporation are covered by either the U.S. Civil
       Service Retirement Plan or the Federal Employees Retirement System.
       The cost of the Corporation’s contribution    to the pension plans is
       included in the personnel compensation and benefits expenditures.      All
       permanent, full-time  and part-time employees who were employed by the
       U.S. government prior to January 1, 1984, are covered by the
       contributory  Civil Service Retirement System plan, unless they elected
       to be covered instead by the Federal Employees Retirement System. The
       Corporation makes biweekly contributions    to the plan equal to the
       employee’s biweekly contributions.    Employees hired after January 1,
       1984 are covered by, and make contributions    in accordance with, the
       Federal Employees Retirement System.
     The cost of the Corporation’s contribution          to the retirement plans
     amounted to $97,998 and $68,366 in fiscal          years 1988 and 1987,
   ~ respectively.




                             Page 24                 GAO/AFMD-90.22 Pennsylvania Avenue Development Corporation
                             Financial Statements




(17)   PROPERTY
              MANAGEMENT
                      EXPENSE
       The Corporation manages its owned real properties that have not been
       redeveloped. The Corporation collects the rent and pays the expenses
       associated with these properties.   In addition, the Corporation incurs
       other property management expenses which are associated with the parks,
       plazas, and other public improvements within the Corporation’s project
       area. Property management expense for fiscal 1988 and 1987 is comprised
       of the following:
                                                                                       1987
                                                                          1988      (Unaudited)
       Square development property          expenses                    $ 57,059      $ 18,392
       Public development property          expenses                      698,133       255,366
                                                                        _-------      __---_--
                     Total                                              $755,192      $273,758
                                                                        __------
                                                                        --------      --------
                                                                                      -----m--

(18)   RESTRICTIONS
       In addition to the statutory controls established by government
       corporation control laws (31 U.S.C. 9101 through 9109). the Corporation
       is subject to management oversight by the Office of Management and
       Budget . Such oversight could affect the Corporation’s financial
       position or operating results in a manner that differs from those that
       might have been obtained if the Corporation were autonomous.
(19)   PRIOR-PERIODADJUSTMENTS
       Subsequent to the issuance of its 1987 financial    statements, the
       Corporation discovered an error in the amount of $73,722 in the
       determination of its 1987 rental income, an error of $42,085 in the
       determination of its property management expense, and $150,000 in the
       determination of unexpended appropriation.     In addition, an adjustment
       totaling $1,367,712 has been recorded in 1987, to properly reflect
       restricted   cash and deposits held for developers.
       Accordingly, the 1987 financial statements have been restated to correct
       these   errors,the effect of which increased the previously recorded loss
       for 1987 from $4.253.686 to $4,477,408, decreased the previously
       recorded unexpended appropriation balance at September 30, 1987, from
       $15,809,660 to $15,659,660 and increased the invested capital balance at
       September 30, 1987, from $107,092,933 to $107,135,018.




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                             Page 25                   GAO/AFMD-90-22 Pennsylvania Avenue Development Corporation
           (20)   COMMITMENTS
                  The Corporation leases office space under a noncancelable operating
                  lease agreement which expires in 1990. Minimum rentals are as follows.
                          Fiscal Year
                             1989                                $588,072
                             1990                                  294,036
                                                                 --------
                                    Total                        $882,108
                                                                 IP==31=a




(eleoee)                            Page26              GAO/AFMD-9622
                                                                    PennsylvaniaAvenueDevelopmentCorporation
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