Wolf Trap Foundation: Debt Restructuring Alternatives

Published by the Government Accountability Office on 1990-09-27.

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


                    United States General Accounting Office / 4 $? 3/ b                   ’~- -


For Release          Wolf   Trap   Foundation
on Delivery
Expected    at
1:00 p.m.            Debt   Restructuring       Alternatives
September     27,

                    Statement      of
                    Dennis    J.   Duquette
                    Director,      Civil    Agency    Audits

                    Before    the
                    Subcommittee      on National        Parks
                    and Public     Lands
                    Committee     on the Interior          and   Insular       Affairs
                    House of Representatives

GAO/T-AFMD-go-34                                                              GAO Form 160 (121’37)

     Mr.     Chairman           and Members of                     the    Subcommittee:

              We are        pleased            to be here                today      to discuss              GAO's assessment                     of
     the     financial           condition              of the           Wolf     Trap       Foundation                for     the
     Performing           Arts         and possible                 alternatives               for        restructuring                 its
     debt     to the        U.S.        government.

              We reviewed               the Foundation's                     most        recently            audited           financial
     statements           for      the        fiscal         years        ending         October           31,    1988 and 1989,
     and other           pertinent             information                provided           to us by the Foundation's
     Executive           Vice      President.                  Based on our                analysis           of this
     information,               we believe              that        the     Foundation               is    financially                healthy
     and should           be able             to make annual                 payments           of about               $500,000           in
     settlement           of     its     debt          to the        U.S.        government.                At the            same time,
     it     is clear       to us that                  the     present           total      debt          of over            $17 million
     in principal               and interest                 would        be very          difficult             for         the
     Foundation           to repay,              even under               the     most      generous             of repayment

              We note           that     the Senate-passed                        bill       to restructure                    the
     Foundation's               repayment              terms        would        forgive        one-half               the     existing
     debt     and would            not    assess             interest            on the        remaining               portion          of     the
     debt.        As an alternative,                         the     accumulated              interest            to date             could      be
     forgiven,         and the principal,                           which        amounts        to about               $8.5        million,
     could       be repaid             over      no more than                   25 years        at no less                   than     $200,000
     per     year.        We have provided                      several           repayment               alternatives                within
these        parameters             for      your         consideration                    as attachment               I to      this

          Before        I get         into     the          details               of our analysis               and suggested
alternatives,                let     me spend               a few minutes                   providing           some background
related            to Wolf         Trap.


          Wolf       Trap     Farm Park              for          the        Performing          Arts       in Fairfax              County,
Virginia,            was established                      by an act                of Congress           in October                1966
from      a private           donation            of over                100 acres            of land          and $2 million               to
build        the     Filene         Center          for      staging               performances.                Wolf        Trap     is    the
only      national          park       dedicated                  to     the presentation                   and cultivation                 of
the      performing           arts         and is           administered                   by the       U.S.       Park Service.

          The Wolf          Trap       Foundation                  for        the    Performing             Arts       is    a
nonprofit            organization              formed              at the           request          of the U.S.
government            to be responsible                           for        the    programs          and educational
activities            at Wolf          Trap.              The Foundation                    is also         responsible              for
public        relations,             publicity,                   marketing,               ticketing,           general
administration,                    and underwriting                          of    these      activities.

          On April          4, 1982,           the         Filene             Center,         Wolf      Trap’s       centerpiece
and principal               outdoor           amphitheater,                        was completely               destroyed            by
fire.*        At the        time       of     the         fire,          Wolf       Trap      was self-insured                   by the

U.S.      government.              Faced with                the        potential         loss     of audience              and
programming,              and in an effort                       to shorten             the    length      of time          needed
for      reconstruction,                  the     Foundation                 agreed      to take        on the
responsibility                  of reconstructing                       the    Filene         Center.

          To enable             the Foundation                   to do so,            in October          1982,      the
Congress          provided          for     a $17 million                     construction             program       for      a new
Filene         Center.           The $17 million                    program           consisted         of a $9 million
government              grant     and up to               $8 million             in S-year         government              loans      to
be repaid           on November             23,          1988.

          Due to additional                      fire,       safety,           and contract             modifications,
the    final        construction                cost       of     the        Filene      Center        was $21.6           million,
instead          of the         $17 million               originally             estimated.             The additional
$4.6      million          is being         paid          by the         Foundation.

          Part      of    the construction                       cost        included         a settlement           with       the
contractor              over     a contract               dispute            involving         change      orders          and the
accelerated              construction               program.                 Under      the    terms      of   the
settlement,              the Foundation                   agreed         to pay the contractor                    $1.14
million          over     a 6-year          period.               To date,            payments         totaling       $735,000
have been made, with                       the      balance             of    $405,000         due in annual
installments              of $135,000               ending          in 1992.

          The Filene             Center         was substantially                       completed        by June           1984 and
reope"ned         for     performances.

            In January          1985,         the     main       girder         of the newly            constructed
center        fractured.               The repair             work        was completed               in May 1986 at a
cost        of $4.1      million,             increasing              the    total       cost     to rebuild              the
Filene        Center         to $25.7          million.               To help         fund      the    repairs,           an
additional            $1,435,000              was borrowed                from       the government.

            In 1988,         we were asked                 by Senators             Johnston           and McClure              of the
Subcommittee             on Interior                of     the    Senate         Appropriations               Committee           to
review        the     financial          condition               of    the Foundation                 and propose
alternatives             for      restructuring                  the Foundation's                 debt     to the          U.S.
government.             As a result                 of     our    effort,          we issued           two reports1
which       provided           information               on the        financial            condition         of the
Foundation            and several              debt        restructuring                alternatives.                On
March        22,     1990,      the Senate               passed        a bill         (S.1859)         to restructure
the     repayment            terms      and conditions                  of      the government             loans.

          At the       request          of the           Subcommittee              staff,        we recently              reviewed
the     current        financial              condition           of    the Foundation                 and performed
certain        analyses           of    its     operating              trends         to ascertain            its     financial
viability            and provide              the     Subcommittee               with       a range      of    repayment
options        for     your       consideration.                      We met with            Foundation             personnel
and gathered             information                from      the      records          of the Foundation                  and

l-Government Loans:   Financial  Information on the Wolf Trap
Foundation   tar the Performing  Arts (GAO/AFMD-88-42FS, May 16, 1988)
and Government Loans:     Loan Restructuring for the Wolf Trap
Foundation   for the Performing  Arts (GAO/AFMD-88-54FS, September 19,

        from      its     financial              statements,                which             are     audited             annually          by an
        independent              public          accounting                firm.              The Foundation's                      last        audit
        covered         the      fiscal          year     ended        October                 31,      1989.             These audited
        financial             statements            were      the      primary                 source             of data          for     our
        financial             analysis,           along       with          the          Foundation's                    unaudited          monthly
        financial             reports           through       July          31,          1990.


                In our          May       1988 report,                we stated                  that        the         Foundation's
        cumulative             operating            results           were          $505,651                for         the     period      1981
        through         1987.           This      amount         was net                 of    losses             in 1981,          1982,        1983,
        and 1985.              Since        1987,        however,             the         Foundation's                    financial
        condition             has been growing                   stronger.

               --       The Foundation                   reported             total            assets             of $13.9          million           at
                        July       31,     1990.          Of this             amount,                over         $10 million              was cash
                        and short-term                   investments.                         Also      included                were     land        and
                        buildings,               which     were        reported                  at a net                book     value         of    $2.7
                        million,           but     which         include                 30 acres            of         land     adjacent            to
                        Wolf       Trap         Farm Park         with           a market               value            that     may be
                        considerably                higher        than             its        book value.

               --       Against           its     assets         of    $13.9              million,                the     Foundation
                        reported           liabilities                of     about             $2.6      million,                exclusive            of
                        its     debt       to the         U.S.        government.                       Over $2 million                     of       this

      amount        consisted            of deferred                 revenue      from        advance        ticket

 --   The Foundation's                    net        equity      amounted         to about          $11 million
      as of July              31,     1990,          of which          $680,000        were endowment
      funds       and $3.5            million          were      funds       otherwise          restricted             as
      to use.

 --   Revenues          from         ticket      sales          grew from         $7 million            in 1988 to
      $7.5       million        in      1989;         as of July            31,   1990,        sales     were
      $1 million              over      the Foundation's                    projected          budget.          The
      Foundation's              1990 budget                  projected         total       sales       of $7.6

 --   Attendance           has recently                  been averaging                about       70 percent           of
      seating          capacity,              which      Foundation            officials           believe        is
      exceptional              for      a facility              with       a diversified            program           such
      as that          provided          by Wolf             Trap.

 --   Net contributions                       from     the      public       through          the Foundation's
      various          fund     raising          programs              amounted        to about         $1.4
      million          in 1988,          $1.1         million          in 1989,        and $1 million                 as of
      July       31,    1990.

 --   The National              Park Service                  pays      certain        Wolf     Trap     operating
ii    costs,        including            maintaining                 the    grounds        and buildings               and

                providing            technical             theater            assistance                for     the Filene
                Center.           Federal         funding               for     this      purpose              now exceeds
                $2.8     million         annually,                 including            a $600,000               grant.

          --    Net revenues,                from       all        sources,            over          expenses        amounted                to
                $546,000          in 1988,          $1,099,000                  in     1989,          and $743,000               for         the
                9 months          ending         July         31,       1990.

          These       financial          results              indicate            an organization                    that        is
financially            sound,         exclusive               of    its       debt      to the U.S.                government.
At July         31,    1990,         the Foundation                     reported          its         debt      to the U.S.
government            as $17,152,446,                   which           was comprised                   of notes          payable                of
$8,560,226,            and interest               payable               of    $8,592,220.                     The amount due
and payable            at the         time       the Foundation                      defaulted                on November                  23,
1988,       was approximately                    $15.8         million.                Until          the      repayment          issue
is     resolved,        the       interest          will           continue            to accrue.

          However,        repayment              of the            Foundation's                     $17 million           debt             to the
government            would       be very         burdensome,                   regardless                of the      repayment
schedule.             For example,               on a 20-year                   repayment               schedule          without
interest,          annual         payments          would           average            $850,000.                Over 25 years,
they      would       average         $680,000.                Furthermore,                    if     the      interest          to date
were      to be forgiven               and the           $8.5           million         principal               was to be repaid
at current            interest          rates,          the        payments            would          still      be burdensome.
For     example,        the       annual         payment            over        20 years              at 7.30       percent,                 a
recefit        Treasury       bill       rate,          would           be $827,000;                  over      30 years              it
would       be $711,000.               However,               repayment              of the $8.5                million
principal          without           interest           should            be possible                 over      a reasonable
time       frame.

           It    is our belief                   that,     based            on the Foundation's                        good
financial           health,             it     should       be able               to make annual                 payments           of up
to     $500,000          a year.               This      view        is based             on the Foundation's                       net
results,          which          averaged             $770,000             a year         over      the past           5 years,           and
the     substantial               resources              that        it     holds            in various          funds        and
property.               Of course,               there      are           no assurances                 that     future
contributions                  will          continue       at       the        present          rate      or that         the
relatively              high      attendance              figures               will      also      continue           into      the
future.           However,             the Foundation                      has considerable                    funds       on hand.
Furthermore,              the         Subcommittee               may wish               to consider              a graduated
schedule          with         lower          payments          in        the    early         years       so as to allow                 the
Foundation              to more easily                   accommodate                   the     remaining           three       payments
on its          settlement             with       the     contractor.


          In consultation                      with      the     Subcommittee                    staff,        we have made
certain          assumptions                  in arriving             at        various          loan     restructuring

                 1. Similar                  in effect          to the           Senate-passed                 bill,       which
                 forgives             half       the     approximately                    $17 million              debt,       we
                 assume the              accumulated                 interest             would         be forgiven            and the
                 loan     principal               of $8,560,226                    will        be repaid           in cash.

          2. The repayment                   period        should           be as timely             as possible
                without            placing      an unreasonable                     burden      on the Foundation.
                A 20-        to 25-year           repayment             schedule            appears       reasonable.               We
                note      that       these      loans         were made in the                  1983-85       time       frame
                and are          now over        5 years             old.

          3. There           should      be a minimum                  annual        payment         amount--which             we
                have arbitrarily                 set       at       $200,000--so             as to not        overload           the
                later        years      of     the payment              schedule            when the present              value
                of the payments                 will       be diminished.

          4. The payments                should          be due and payable                     on October           31 of
                each year,             the end of             the      Foundation's             fiscal       year,       when
                the      summer season                revenues          have been collected.                       The
                payments            should     begin         on October              31,     1990.

          Finally,           our     presentation               of alternatives                assumes that              the
Foundation            will       continue        to operate                 under     its     present        structure.
We did         not    consider          any operational                     or management             changes        which
might         be made to            increase          profitability.                  Such changes            might
include         extending            the Wolf          Trap      season         and increasing               the     number         of
performances,                booking         more commercially                      successful           events,      raising
ticket         prices,        charging          for      parking,            seeking         additional         fund-
raising         sources,            or pursuing            efforts           to reduce         operating           expenses.

’       *

                         Attachment             I to this        statement               provides         a range of debt
            repayment              alternatives            for    the        Subcommittee's                 consideration.                 These
            alternatives                 are examples            of ways to repay                      the $8,560,226             principal
            over         20 to 25 years.                  There     are many possible                         schedules.          The
            annual          payments            range     in amount              from        $200,000         to about       $500,000,
            and typically                 provide         for    lower           payments            in the early           years.         The
            early         payments         are at         reduced         amounts             so as to allow             the Foundation
            some flexibility                     in meeting         its          last        three     payments       of     $135,000           in
            settlement              of    its     contractor            dispute.

                         Lastly,         one other         alternative                  is    to offer         the Foundation              an
            immediate              settlement           opportunity               at     an amount equivalent                   to the
            present          value        of future         payments              to be received                  by the government.
            For     example,             the    present         value        of     the       $8.5     m illion      principal,            when
            repaid          in 20 annual            payments            of       $425,000            at a 7.30       percent         interest
            rate         (using      a recent           Treasury          bill          rate),        would       be $4.4     m illion;
            orI     if     based on a 25-year                    payment            schedule,           would       be about         $3.9
            m illion.

                         M r. Chairman,            this     concludes               our       formal      statement.           W e will          be
            pleased          to answer            any questions                  that        you or other           Members of            the
            Subcommittee                 may have.


’       T

            ATTACANENT                I                                                                                                                                                                                   ATTACHMENT       I

                                                                                                                                           W O L FT R A P F O U N D A T I O N
                                                                                                                                D E B T R E P A Y M E NATL T E R N A T I V E S

                                                                                         20    Years                                                                                             25 Years
                                      ----______--_---__-_------------------                                                                                                    ----------________---------

                  Year                Alternative               Alternative                       Alternative               Alternative                      Alternative         Alternative             Alternstlvc      Alternatlde
                  Bnded                              t1                        t2                                t3                        x4                       t5                  t6                       x7            418
              Oct.        31
            -------.           .-     -----------               -----------                       -e-w-------               -----------

                  1990                          9200.000                  $250.000                         9305,000                 9215.000                    $200.000             9200,000                 $250.000       s215.000
                  1991                           200.000                   250.000                              305.000                   215.000                 200.000             200.000                  250.000         215.000
                  1992                              380.000                   350.000                           400.000                   215,000                 225.000              200.000                 280.000         215.000
                  1993                              380,000                   350.000                           400,000                   350.000                 225.000              250.000                 260.000         350.000
                  1994                              425.000                   400,000                           400,000                   365,000                 250.000              250.000                 300.000         350.000
                  1995                              425.000                   400,000                           425,000                   400.000                 250.000              250,000                 300.000         350.000
                  1996                              425,000                   430.000                           425.000                   400.000                 275,000              275,000                 300.000         350.000
                  1997                              425.000                   430.000                           425.000                   450,000                 275.000              275.000                 325.000         350.000
                  1998                              450.000                   450.000                           425.000                   450.000                 300.000              275.000                 325.000         350.000
                  1999                              450.000                   450.000                           425,000                   500.000                 300.000              300.000                 325.000         350.000
                  2000                              450,000                   450.000                           450,000                   500.000                 325.000              300.000                 350.000         350.000
                  2001                              450.000                   450.000                           450.000                   500.000                 325,000              300.000                 350.000         350.000
                  2002                              475,000                   475,000                           450.000                   500.000                 350,000              350,000                 350.000         350.000
                  2003                              475,000                   475.000                           450.000                   500.000                 350,000              350.000                 350.000         350.000
                  2004                              475.000                   475,000                           450.000                   500,000                 375,000              350,000                 350.000         350.000
                  2005                              475.000                   475,000                           475.000                   500.000                 375.000              400.000                 375.000         350.000
                  2006                              500.000                   500.000                           475,000                   500,000                 400.000              400.000                 375.000         350.000
                  2007                              500.000                   500,000                           475.000                   500,000                 400,000              400.000                 375,000         350.000
                  2008                              500.000                   500.000                           475.000                   500.000                 425.000              450.000                 375,000         350.000
                  2009                              500.226                   500,226                           475,226                   500,226                 425,000              450.000                 375.000         350.000
                  2010                                                                                                                                            450.000              450.000                 400.000         365.000
                  2011                                                                                                                                            450,000              475,000                 400.000         400.000
                  2012                                                                                                                                            475,000              475.000                 400.000         400.000
                  2013                                                                                                                                            475.000              475.000                  400.000          400.000
                  2014                                                                                                                                             460,226              460.226                 400.226          400.226
                                                                --___------                       ---w-s-----               _-w-v------                      ----w----e-         -----------             -----------      -----------

                  TOTAL              96.560.226                 98,560.226                        96.560.226                98,560,226                       $8.560.226          98.560.226              98.560.226       98.560.226
                                     ..****.****                *******.***                       ****.***.**               *******1**.                      *.*********         ***********             ***********      ***********

            Not.:          2 0 year                  straight   line                1s 9421,011                  ennually
                           25       year             stralqht   line                1s $ 3 4 2 , 4 0 9           annually