A U D U B O N C O M M ISS IO N

M anagem ent's Discussion and AnaJysis, Financial Statem ents as of and for the Year Ended Decem ber 31, 2002 and Independent A uditors' Report

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TABLE O F CO NTENTS

Page

M ANA GEM EN T'S DISCU SSION AN D AN ALY SIS 1

IND EPEND ENT AUD ITORS' REPORT 9

GEN ERA L-PU RPO SE FIN AN CIAL STA TEM ENTS

Com bining Balance Sheet 11

Com bining Statem ent of Re,,enues, Expenses and Changes in N et A ssets 13

Com bining Statem ent of Cash Flow s 14

N otes to General-Purpose Financial Statem ents 15

IN D EPEND EN T AUD ITORS' REPORT ON COM PLIAN CE AND ON INTERN AL CONTROL OVER FIN AN CIAL REPORTIN G BASED ON AN AUD IT O F FIN AN CIA L STA TEM EN TS PERFORM ED IN A CCORD AN CE W ITH G O VERNM EN T A UDIT1N G STANDARDS M A NAG EM ENT'S DISCUSSIO N A ND A NA LYSIS

The discussion and analysis of the Audubon Commission's (the "Commission") financial performance provides an overall revi ew of th e Com m ission's fin ancial activities for the year ended D ecem ber 31, 2002. It should be read in conjunction with the combining financial statements in this report.

O verview of the Financial Statem ents

Th is annual report consists of four components - the M anagement's Discussion and Analysis (this section), the Independent Auditors' Rep ort, the Combining Financial Statements, and the Auditors Report on Com pliance and on Internal Control over Finan cial Rep orting.

Th e Combining Financial Statements of the Comm ission report the combining financial position of the Comm ission and th e combin ing results of its operations and its cash flows. Th e com binin g financial statem ents are prepared on th e accrual basis of accoun ting.

Th e Combining Balance Sheet includes all of the Comm ission's assets and liabilities an d provides information about the Commission's investments in resources (assets) an d its obligations to the Com ission's creditors (liabilities). It also provides inform ation on the capital structure of the Comm ission, and the liquidity and financial flexibility of the Comm ission. Th e Combining Statement of Revenues, Expenses and Changes in Net Assets rep orts on the current year's perform ance of the C om m ission's operations.

The Combining Statement of Cash Flows provides information on the Commission's cash from operations, investing and finan cin g activities.

The Notes to Financial Statements provide inform ation th at is essential in order to gain a full un derstanding of the data in the com bining financial sta tem ents.

The last section, the Independent Auditors' Report on Compliance and on lnternal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards, briefly discusses the Com m ission's com pliance and intern al control that could affect the financial sta tem ents am ounts.

Financial H ighlights

~ N et Assets increased $4,706,380 or 6.0% over 2001 due to 2002 net incom e. N et incom e in 2001 totaled $1,391,200,

~ Restricted Assets increased $924,932 over 2001 and Restricted Liabilities in creased $224,299 over 2001, primarily due to capital projects at the an d Audubon Golf Course.

~ Additions to Capital Assets totaled $9,859,514 in 2002. A detailed analysis is included for your review . Current Liabilities increased $1,731,442 partly due to an increase in the payable due to the Audubon N ature Institute Inc. The Institu te m anages and operates the A udubon Com m ission under contractu al m anagem ent agreem ents. Com m on or central bank accounts are used to achieve econom ies of scale. The balance of th e increase is due to increases in Current Accounts Payable and A ccrued Liabilities over prior year.

Long-term Liabilities decreased by $2,469,923 or 4.3% over 2001 due to paym ents of debt service on bonds payable.

A udubon Com m ission O perating Facilities Net Results for the year ended Decem ber 31, 2002* W ith Prior Year and Budget Com parisons (In Thousands)

Actua Actual Budget 2002 2001 VA RIA NCE 2002 VA RIA N CE

Aquarium /IM AX W oldenberg Riverfront Park $3,824 $ 3,553 $ 271 $ 3,757 $ 67

Audubon Zoo and Park & Audubon Golf Course (2,845) (2,491) (354) (3,040) 195

Research Center/Species Survival Center (80) (96) 46 (126) Nature Center (86) (32) (63) (23) TOTA L O PERATIO NS

* Excludes capital revenues and expenditures, and the depreciation associated with buildings and fixed exhibitry.

~ There were no significant variances between actu al and budget net results for the year 2002

~ The Research Center/Species Survival Center variance is m ainly due to gr ants and donations revenue deficit.

- 2 - Condensed Statem ent of Revenues, Expenses, and Changes in Net Assets

Year ended Decem ber 31 2002 2001 Change

Operating Revenues $ 25,659,712 $25,738,881 $ (79,169)

O perating Expenses 35.283.909 34,033,750 1,250,159

O perating Loss (9,624,197) (8,294,869) (1,329,328)

Non Operating Revenues, nat 14.330.577 9.686.089 4,644,488

Net Incom e $ 3.315.160

Com m ents on Condensed Statem ent of Revenues, Expenses and Changes in Net A ssets O perating R evenues and Expenses

~ Admissions Revenue of $12,540,991 was less than prior year by $326,134. Overall visits for 2002 of approxim ately 2.3 m illion visitors trailed prior year by 2% .

~ M iscellaneous operating revenues exceeded prior year by approxim ately $270,000

~ The increase in operating expenses can be m ainly attributed to salaries and benefits. The following factors contributed to this increase:

o Additional staf due to th e re-opening of the Audubon Golf Course

o Higher m edical and other em ployee benefit costs.

o Salary adjustments in various departments to allow for cost of living increases and also to match sim ilar industry salary and w age rates.

o The A udubon A quarium of the Am ericas opened a food court in m id 2001. Th e 2002 financial statem ents include salary an d ben efits expenses for a com plete year.

N on-O perating R evenues

~ Private and government grants and donations for capital projects, education programs and operating support exceeded prior year by $3,640,345. Th e increase can be attributed to additional gr an ts received in 2002 for capital projects at Audubon Zoo and Audubon Golf Course.

~ Tax M illage revenue exceeded prior year 's total by $381,670

- 3 - A udubon C om m ission-Net Capital A ssets

Beginning Depreciation/ Ending Balance Retirem ents Balance 2002 Additions 2002 2002 Aquarium and Riverfront Park $ 65,873,480 $ 1,100,585 $(3,152,743) $ 63,821,322

Audubon Zoo & Park 41,526,684 1,916,272 (2,127,788) 41,315,168 Audubon G olf Course 1,943,058 6,463,140 (31,438) 8,374,760 Survival Center/Research Center 15,845,357 174,962 (850,239) 15,170,080

743,403 Nature Center .~ _{253,274) . 694,684 Total $(6.415.482) $J29,376.014

Audubon Park Golf Course com pleted its renovations and re-opened to rave review s in October 2002. Golf publications and other m edia have recognized it am ong the best courses in the south. Tee tim es are booked constantly; from a fm ancial standpoint, the cour se is perform ing well ahead of initial projections. W ith native plantings and careful managemen t practices in place to attract w ildlife, the golf course is on track to receive design ation as a sign ature course by Audubon International.

Audubon Louisiana N ature Center opened a totally renovated D iscovery Loft, sponsored by The Booth -Bricker Fund, in M ay 2002. A ll-new interactive exhibits, including a life-sized tree and live an im als, encourage visitors of all ages--especially our youngest guests- to use all five senses as they explore nature.

Audubon Aquarium of the Am ericas opened an exhibit showcasing the w onders of the Flower Garden Banks N ational M arine Sanctuary , a very unusual coral reef in the G ulf of M exico-----400 m iles from the Caribbean where these anim als are typically found. The Aquarium also opened a com pletely rem odeled food court featu ring well-known franchises operated by A udubon N ature Institu te.

Fabrication began on four major exhibits in Audubon Insectarium: the Field Camp, Life Underground, Louisiana Sw am p, and Form osan Subterran ean Term ites. Film in g- in High D efinition form at- began for the Aw ards N ight m ulti-sensory th eater experience. Th e Insectarium will open in 2004. Th e Insectarium capital project expen ditures are included in the Audubon Nature Institu te Inc. Financial Statem en ts .

Audubon's w eb site underwent a total renovation, th anks to th e hire of our first-ever webm aster. On the virtual front, A udubon also launched very successful outbound e-m ail program s to m em bers and other VIPs.

- 4 - Audubon Zoo broke ground on two very exciting projects: (1) The Gottesman Family Endangered Species Carousel, w hich opened M ay 2003, is surrounded by three birthday party room s that w ere carved out of a renovation to a W PA building that formerly housed the Nocturnal House. (2) The Jef and Bob N im s Com m un ity Center set to open in O ctober 2003 w ill allow us to expand education progr am s and better serve our comm unity . Th e Nim s Center includes an early-childhood classroom , a com puter classroom , an outdoor classroom and a m eeting space/elassroom .

A udubon Com m ission-Statem ent of Net A ssets 2001 Change A ssets Cash and Cash Equivalents $ 5,776,306 $ 6,066,743 $ (290,437) A ccoun ts Receivable 458,257 476,658 (18,401) A ccrued Interest Receivable 23,489 4,102 19,387 Prepaid Item s 690,423 449,985 240,438 Inventory 700,346 546,275 154,071 Restricted A ssets 4,480,553 3,555,621 924,932 N ondepreciable Capital Assets 800,000 800,000 D epreciable Capita l A ssets, N et 128,576,014 125,131,982 3,444,032 O th er A ssets 11,970,378 12,252,202 (281,824) Total Assets $ 4.192.198

Liabilities A ccounts Payable $ 4,893,976 $ 4,103,430 790,546 Payable to A udubon N ature Institu te 5,695,607 4,754,711 940,896 Payables from restricted assets 4,023,557 3,799,258 224,299 Long term liabilities 55,212,148 57,682,071 (2,469,923) Total Liabih'ties $ (514.182~

N et A ssets Invested in CapitalA ssets $ 74,620,862 $ 68,006,274 $ 6,614,588

Unrestricted 9,029,616 ~ 10,937,824 (1,908,208) Total N etAssets

To~al Liabilities and N et A ssets

- 5 - Com m ents on the Statem ent of Net A ssets

The increase of $924,932 in Restricted A ssets can be attributed to the capital improvem ent receivables of the Audubon Golf Course totaling $1,401,450.

Net Depreciable Capital Assets increase of $3,444, 032 is due to an increase in net capital assets of the Audubon Golf Course and the Audubon Zoo of $6,463,140 an d $1,916,272, respectively, offset by th e increase in accum ulated depreciation.

Th e decrease in Long Term Liabilities is m ostly attributable to th e bondholder's paym ent of Lim ited Tax Bonds and Revenue Bonds of $1,840,000 an d $980,000, respectively.

Notew orthy A chievem ents in 2002 * Audubon Zoo and Audubon Aquarium of the Am ericas set national benchm ark highs for visitor satisfaction according to exit surveys conducted by John M orey and A ssociates. In 2002, th e second year in a row , the Zoo set a benchm ark high.

~ Audubon Louisiana N ature Center w elcom ed its 2 m illionth visitor. Its outstanding m anagem ent procedures enabled the N ature Center to receive a prestigious $112,500 general operating support grant from the Institute of M useum and Library Services~ the second consecutive aw ard received by the N ature Center.

~ A udubon's Com m unity Relations progr am , underwritten by HCA , The H ealthcare Com pany, distributed over 100,000 "Learning Adventure" coupons- good for $2/head adm ission for up to six people- to Orleans Parish public school stu dents, teacher s and em ployees in schools receiving Title I funds. The program also launched a Black History m onth celebration, partnered with Recreation D epartm ent and Sum m er W itness to provide free adm ission to sum m er cam pers, and m ade trem endous progr ess toward M inority Business Enterprise pur chasing goals. ~ Over 120,000 7th through 12th grade stu dents across the state received Taylor/A udubon Students and Scholars m em berships to the A quar ium and/or Zoo. The one year m em bership allow s each stu dent and one parent to visit th e Aquarium and/or Zoo free.

~ Bank One Zoo-to -D o celebrated its 25th anniversary. As one of th e country's m ost successful one- night, non-m edical fundraiser, Bank One Zoo-to-Do raised over $1 m illion in support of Zoo projects.

Statem ent of Purpose/M ission Statem ent is a 501 (c) 3 not-for-profit entity that manages and operates the Audubon Commission's facilities consisting of nine museums and parks dedicated to Celebrating the Wonders of Nature. To m eet its goals of fostering education, research, w ildlife conserv ation, fam ily entertainm ent, and positive econom ic im pact, Audubon Com m ission an ually offers over 2 m illion people the chance to explore som e of the world's m ost intriguing natu ral habitats, from native Louisiana swam plands to th e exotic Am azon Rainforest. Through its public facilities- Audubon Zoo, Audubon Par k, Audubon Aquarium of the Am ericas, Enter gy IM AX~ Theatre, W oldenberg Riverfront Park, and Audubon Louisiana N ature Center and W ildern ess Par k, Audubon has given N ew Orleans fam ilies an d their visitors new and ever-expanding opportunities to en joy and contemplate the wonders of life. And through its

- 6 - research arm s, Audubon Center for Research of Endangered Species and Freeport-M cM oRan Audubon Species Survival Center, it works to ensure the sam e opportunities for future generations.

Decisions at all Audubon facilities are m easured against the eight basic tenets of it's m ission statem ent: provide a guest experience of outstanding quality; exhibit th e diversity of wildlife; preserve native Louisiana habitats; educate our diverse audience about the natural world; enhan ce the care an d survival of w ildlife through research and conservation; provide opportunities for recreation in natural settings; operate a financially self-sufficient colleetiun of museum s and parks; an d weave quality en tertainment through the guest experience. Developed by senior staf with input from its employees in July 1995, the m ission statem ent was officially approved by th e Audubon Nature Institu te Board of Direetors and signed by all em ployees in August 1996.

Audubon Nature Institute m anages its nine facihties on behalf of the city of New Orleans, under contract wi th the Audubon Comm ission, th e public agency entrusted with its care sin ce 1914. Audubon Nature Institute has grown from 100 percent city/state funding for Audubon Zoo operating expenses to I00 percent self-susta ining on earned incom e for all of its public facilities. Audubon holds a five-year m anagem ent contract with th e Audubon Comm ission that is renewed each year. This unique public/private partnership allows the Com m ission to fulfill public responsibilities of capita l fun ding and own ership while enablin g Audubon to shape education and conservation in itiatives.

Th e Audubon Commission (AC), a 24-member board appointed to six-year terms by the M ayor of New Or leans, is th e highest govern in g body for all nin e facilities. All m em ber s m ust be voters registered in Or lean s Parish. Th e AC m eets quarterly, adm in isters all voter-approved m onies from bond or tax revenues, an d approves and controls design and development of Audubon projects. Audubon Nature In stitu te's 32-m ember board, elected by th e m ember households of Audubon Louisiana N ature Center, Audubon Zoo and Audubon Aquarium of th e Am ericas, m eets six tim es annually an d adm inisters funds generated by facility operations and fund-raising.

History Th e genesis of Audubon Nature Institu te is rooted in historic Audubon Park, a natural setting for fam ily recreation since the 1800s, and Audubon Zoo, which evolved from a sin gle flight cage built in 1916 to a 58-acre habitat ranking am ong th e nation's exem plary zoos and standing as a vital public advocate for conservation and environm ental education.

Strong public and private support for the Zoo resulted in the facility 's Phoenix-like rise in the 1970s when it replaced cram ped cages with lush natural habitats and shifted its im age from "anim al ghetto" to "urban oasis." The success of the Zoo (funded by the 1972 passage of a spe cial referendum that generated $1.9 million in general obligation bonds for its restoration) provided impetus for future Audubon Nature Institute projects, which inspired similar levels of community support and commitmen t. W oldenberg Riverfront Park opened in 1989, giving th e city its first direct access to th e downtown M ississippi riverfront and providing a breathtaking setting for Audubon Aquarium of the Am ericas (1990), where visitors explore aquatic environs ranging from th e to th e Gulf of M exico; Freeport- M cM oRan Audubon Species Surv ival Center, a 1,200-acre san ctu ary where endangered anim als, exotic an d indigenous, live and breed undisturbed, debuted in 1993; Audubon Louisiana N ature Center, an 86- acre preserv e wi thin the New Or leans city limits merged wi th th e Institute in 1994; Entergy IM AX~ Th eatre at the A quarium prem iered in 1995, utilizin g th e m ost advanced m otion picture technology available to transport audien ces into th e world's am azing environm ents; Audubon Center for Research of Endangered Species opened in 1996 and is now developing new protocols for assisted reproduction techniques to advance successful breeding of critically endangered species; an d W ilderness Park began

- 7 - operating as an educational "field" resource for life science study by school and scout groups in 1996. Audubon Nature Institute plans to open Audubon Insectarium , which will focus on the world of insects and arthropeds, by Fall 2004.

Contacting the Com m ission's Financial M anager This fm'ancial report is designed to provide our citizens, custom ers, and creditors wi th a general overview of the Com m ission's finances. If you have an y questions about this report or need additional fin ancial inform ation, please contact the Director of Finan ce, Audubon Nature Institute, 6500 M agazine S~'eet, New Orleans, LA 70118.

- 8 - Deloitte & Touche LLP Suite 3700 701 Poydras Street New Orleans, Louisiana 70139 3700

Tel: (504) 581 2727 Fax: (504) 561-729~. www.deloitte.com D eloitte & Touche

INDEPENDENT AUDITO RS'REPORT

To the Board of D irectors of the Audubon Com m ission:

W e have audited the accom panying general-purpose financial statem ents of the Audubon Com m ission (the Commission), a component unit of the City of New Orleans, as of an d for the year ended D ecem ber 31, 2002, as listed in the Table of Contents. These genera l-purpose financial statem ents are the responsibility of the Comm ission's m anagem ent. Our responsibility is to express an opinion on these genera l-purp ose financial statem ents based on our audit. The prior year sum m arized m em orandum only totals have been derived from the genera l-purpose finan cial statem ents of the Audubon Com m ission as of D ecem ber 31, 2001 and for the year th en en ded, which statem en ts wer e audited by oth er auditors who have ceased operations. Th ese auditors expressed an unqualified opinion on those fin ancial statem ents in their report dated M ar ch 29, 2002.

W e conducted our audit in accordance with auditing standar ds gener ally accepted in the United States of Am erica an d the standards applicable to financial audits contained in Government Auditing Standards issued by th e Com ptroller G ener al of th e United States. Those stan dards require that w e plan and perform the audit to obtain reasonable assur an ce about wheth er the financial statem ents are free of m aterial

In our opinion, the general-purp ose finan cial statem ents referred to above, presen t fairly, in all m aterial respects, the financial position of the Com m ission as of D ecem ber 31, 2002 and the changes in its net assets and its cash flow s for the year th en ended in conform ity w ith accounting principles gener ally accepted in the United States of Am erica.

A s discussed in Note 1 to the financial statem ents, in 2002 the Com m ission changed its fin ancial statem ent presentation to conform to Govern m ental Accoun ting Standards Boar d Statem en t No. 34 and, retroactively, reform atted the 2001 sum m arized m em oran dum only totals for the change. The change in reportin g did not im pact total assets, net assets or net in com e as previously reported for 2001.

M anagem en t's discussion an d an alysis on pages 1 through 8 is not a required part of th e basic consolidated finan cial statem ents but is supplem en tary inform ation required by the Governm ental A ccounting Standards Board. W e ha ve applied certain lim ited procedures, which consisted principally of inquiries of m anagem ent regarding the m eth ods of m easurem ent an d presentation of the required supplem entary inform ation. H ow ever , we did not audit the in form ation an d express no opinion on it.

Deloitte Tohucmhaet su -9 - In accordance w ith Governm ent Auditing Standards, w e have also issued our report dated April 25, 2003 on our consideration of the Com m ission's internal control over financial reporting and on our tests of its com pliance with certain provisions of law s, regulations, contracts, an d grants. That report is an integral part of an audit perform ed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

April25,2003

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NOTES TO GENERA L-PURPOSE FINANCIAL STATEM ENTS DECEM BER 31, 2002

1. SUM M ARY O F SIG NIFICANT ACCO UN TING POLICIES

GeneralInformation - Audubon Park is located on a 400-acre tract within the City of New Orleans (the City) that includes the Audubon Zoo, trails for jogging, biking and horseback riding, an 18-hole golf course and numerous athletic fields. Act 83 passed by the Louisiana Legislature (the Legislature) in 1871 auth orized th e Board of Park Com m issioners to acquire th e land which is now known as A udubon Park. In 1914, the Legislature passed A ct 191 which created a Com m ission to be entrusted w ith th e m anagem ent an d control of Audubon Park. A ct 191, as am ended, is the curren t auth ority for th e present Audubon Park Commission (the Commission) which is composed of 24 members who are appointed by the M ayor with the approval of th e City Council Each m ember serves a six-year term , with four members' term s expiring each year. The Comm ission is considered a com ponent unit of the City and its statements are included in the City 's annual finan cial statemen ts. On Jan uary 1, 1996, th e Comm ission's nam e was changed from Audubon Park Comm ission to Audubon Comm ission effective with the City's adoption of am endm ents to its H om e Rule Charter.

On November 4, 1986, City voters approved the levy of a three and four-fifths (3-4/5) mills property tax to fmance the construction an d certain operating expenses of the Aquarium of the Americas (the Aquarium). Th e vote was taken pursuant to Act 309, passed by the Legislature earlier in 1986, which provided that th e Com m ission would develop, construct and operate th e Aquarium an d authorized th e City to levy an d collect the aforementioned ad valorem tax, subject to voter approval, on behalf of the Com m ission. The City acts thr ough th e Comm ission in th e issuance of the bonds auth orized by Act 309, an d through the Board of Liquidation, City Debt, in the sale of its bonds. Construction of the Aquarium of the Americas and Riverfront Park was begun in 1987 and the bonds (Audubon Park Commission Aquarium Bonds, Series 1988 - $25,000,000) were issued in 1988. Construction was com pleted and th e A quarium was opened to the public in Septem ber 1990. Phase II of th e A quarium was com pleted in 1995.

On Jun e 1, 1990, the Comm ission and the City entered into an agreem ent for the construction and operation of a W ilderness Park an d Species Survival Center on approxim ately 64 acres of property owned by the City. Th e agreement requires an annual payment to th e City 's General Fun d of one dollar ($1.00) per year for a period of fifty (50) years, commencing on M ay 1, 1990 and term inating on February 28, 2040. The Audubon Center for Research of Endangered Species is located adjacent to the Species Survival Center on 986 acres of United States Coast Guard property. The United States Coast Guard has gr anted the Com m ission a 25-year land use license wi th a 25-year renewal option. Im provem ents com pleted on this site by th e Comm ission include a 36,000 square-foot research laboratory .

Effective October 1, 1994, th e Comm ission received assignm ent of a facility lease by the Society for Environmental Education (as lessee) with the City (as lessor). Th e Society does business as the Louisiana N ature Center.

- 15 - The Commission has contractual management agreements with the Audubon Nature Institute, Inc. (the In stitute), a nonprofit organization, under which the Institute ma nages and operates the Commission facilities located at the Audubon Zoo and Park, the A quarium and River front Park, th e Species Survival Center and the Louisiana Nature Center. The In stitu te employs individuals to oper ate an d ma intain th e Com m ission's facilities; how ever, all oper ating revenues an d expenses, including salary expe nse, related to th ese facilities are recorded on th e records of th e related facility. Th e In stitu te also supports the Comm ission financially through specific donations and grants obtained by th e Institute for opera tions or capital im provem en ts of Comm ission facilities.

Basis of Presentation - Fund Accounting - Th e proprietary fund is used to account for the Com m ission's ongoing operations an d activities which are sim ilar to th ose in th e private sector. Proprietary funds are accounted for usin g a flow of econom ic resource m easurem ent focus under which all assets an d all liabilities associated with th e operation of th ese funds are in cluded in th e balance sheet. Th e operating statements present increases (revenues) and decreases (expenses) in total net assets. The Com m ission m ain ta ins one proprieta ry fund type - the enterprise fund.

Basis of Accounting- Th e Commission prepares financial statements in accordance with accoun ting principles generally accepted in th e United States. Such principles require m anagem ent to m ake estim ates and assum ptions th at affect th e reported am ounts of assets and liabilities and disclosur e of contingent assets and liabilities at th e date of th e finan cial statem ents and th e reported am ounts of revenues and expenses during th e reporting period. A ctu al results could differ from these estim ates.

N ew Accounting Pronouncem ent - Effective January 1, 2002, the Comm ission adopted Govern m ental Accounting Standards Board Statemen t (GASBS) No. 34, Basic Financial Statements - and Management's Discussion and Analysis -for State and Local Governments. GASBS No. 34 established standards for external financial reportin g for all state and local governm enta l entities. It requires th e classification of net assets into three com ponents - invested in eapital assets, net of related debt; restricted; and unrestricted. Th ese classifications ar e defined as follow s:

Invested in capital assets, net of related debt- This component of net assets consists of capital assets, including restricted capital assets, net of accum ulated depreciation and reduced by th e outstanding balances of any bonds, m ortgages, notes, or other borrow ings that are attributable to the acquisition, construction, or im provem ent of those assets.

Restricted -Th is com ponent of net assets consists of constrain ts placed on net asset use through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, or law s or regulations of oth er governm ents or constraints im posed by law through constitu tional provisions or enabling legislation.

~ Unrestricted- This component of net assets consists of net assets that do not m eet th e definition of "restricted" or "in vested in capital assets, net of related debt."

Th e adoption of GA SBS No. 34 had no effect on the basic financial statem ents except for the classification of net assets in accordance with the statem ent, th e reflection of capital contributions and additions to endowm ents as changes in net assets, the reclassification of in terest incom e to non-operating revenue, th e reclassification of in terest expense to non-operating expenses, and th e change from the indirect to the direct m eth od of reporting cash flow s from operating activities. Th e change in reporting form at did not im pact total assets, net assets or net incom e as previously rep orted for 2001. The m em orandum only totals for th e year en ded D ecem ber 3 I, 2001 w ere reform atted to reflect the adoption of GA SBS N o. 34, which was also applied to the fiscal year 2001 finan cial statem ents.

- 16 - Restricted Assets - Restricted assets consist prim arily of inveslm ents m aintained in the applicable enterprise fund in accordance with bond indentures. This category is also used to report am ounts receivable from public agencies in connection with the funding of capital projects. Investm ents - Investm ents are stated at cost or am ortized cost, which does not m aterially differ from m arket value.

Inventory - Inventory is stated at the lower of cost, determ ined by the f'rrst-in, first-out method, or m arket.

CapitalAssets - Capital assets are recorded at historical cost, net of accum ulated depreciation. Depreciation is computed using the s~a'aight-line method over the estimated useful lives (ranging from 10 - 35 years for buildings and fixed exhibitry and 3 - 15 years for equipmen t) of the assets. W hen assets are retired or otherwise disposed of, the cost and related accum ulated depreciation are rem oved from the accounts and any resulting gain or loss is recognized in revenue or expense for th e period. The cost of m ainten ance and repairs is charged to operations as incurred and significant renew als an d betterm ents ar e capitalized.

Vacation and Sick Leave - Annual vacation leave and sick leave are accrued when earned in the enterp rise funds (approximately $538,000 and $461,000 at December 31, 2002 and 2001, respectively) and rep orted in accounts payable and oth er accru ed liabilities in th e combining balance sheet.

Total Colum ns on CombinedStatcm ents - Th e total colum ns on the Com bined Statem ents are captioned "M em orandum Only" to indicate th at th ey are presented only to facilitate fin ancial analysis. This column does not present financial position, results of operations, or cash flows, in conform ity with accounting principles generally accepted in th e United States. Such data is not com parable to a consolidation sin ce interfund elim inations have not been m ade.

Statement of Cash Flows - For purposes of the Statement of Cash Flows, the en terprise funds consider all investm ents with an original m aturity of ninety days or less to be cash equivalents. Cash and cash equivalents at December 31, 2002 consisted of unrestricted cash and investments of $5,776,306.

Budgeting - Operating and capital expenditure budgets are adopted by th e Com m ission on a basis consistent w ith accounting principles generally accepted in th e United Sta tes. Budget inform ation is utilized for analytical purposes, and the budget process is a key component of th e Comm ission's m anagem ent control environm ent.

M em bership Revenue Recognition - The Comm ission sells annual Aquarium , Zoo and Nature Center m emberships. The primary m em bership benefit is adm ission to these facilities at no additional costs during the m em bership term . Th e earnings process is considered com plete at th e tim e of sale since no increm ental costs are incurred as a result. A ccordingly m em bership revenues are recognized when Audubon receives paym ent and issues the m em bership card.

CA SH AND TEM PO R ARY IN VE STM ENTS

Cash on Deposit and Time Certificates of Deposit- The Commission's deposits at banks at December 31, 2002 were $5,669,806 (excluding $106,500 of cash on hand and excluding certificates of deposit totaling $307,088 that are categn rized as restricted assets). The bank balances with respect to these deposits were $7,713,891. The Comm ission's bank balance is categorized below to give an in dication of the level of risk assum ed by th e Com m ission at year -end.

- 17 - Category 1 includes insured or collateralized cash with securities held by its agent in th e Com m ission's nam e. Category 2 includes eollateralized cash with securities held by th e pledging financial institution's trust departm ent or its agent in th e Comm ission's nam e. Category 3 includes uncollateralized cash, including any bank balance th at is collateralized w ith securities held by the pledging financial institu tion, or by its trust departm ent or agent but not in th e Comm ission's nam e. At December 31, 2002, $6,202,425, $207,088 and $1,304,378 of the bank balan ce of the Comm ission's cash was Category 1, Category 2 and Category 3 level of risk, respectively.

Investments - The carrying and market values of the Commission's investments (including certificates of deposit) as of December 31, 2002 were approximately $3,054,708. At December 31, 2002, all of the Com m ission's investm ents are Category 2 level of risk which includes uninsured and unregister ed investm ent securities held by fin ancial institution trust departnaents or agents in the Comm ission's nam e

O THE R A SSETS

On April 30, 1992, the Com m ission, th e City and the Board of Com m issioners of th e Port of N ew Orleans (the Port) en tered into an agreement titled "Riverfront Economic Development Agreement" (the Agreement) under which the Commission paid $13,000,000 ($11,000,000 from the sale of the Comm ission's Aquarium Revenue Bonds, Series 1992A, and $2,000,000 from self-generated funds of the Comm ission) to the Port. In consideration for the $11,000,000 of the payment, the Commission was relieved of all rents or fees due for occupancy pursuant to an agr eem ent with th e Port dated October 23, 1987 th at provided for th e developm ent and occupancy of an aquarium and related facilities by th e Comm ission over the 99-year term of the agreem en t. Th e $11,000,000 paym ent was recorded as prep aid rent and is being am ortized over th e rem ain ing term of th e agr eem en t.

In consideration for $2,000,000 of th e paym ent, th e City, which becam e th e sole owner of the Rivergate Facility under the agr eem ent, agr eed to tran sfer and assign the second $200,000 of annual net incom e from th e parking facilities at th e Rivergate to the Comm ission for twenty years begin ing with th e 1992 calendar year. In the event parking operations w ere discontinued at the Rivergate, the agr eem ent provided for the City to m ake a lum p sum paym ent to th e Com m ission for the rem ainin g paym ents discounted at seven percent, or to continue to pay the $200,000 an ually in month ly in stallments of $16,666. Parking operations were discontinued an d th e City has elected to continue paying the $200,000 annually through 2011. As paym ents are received from th e City, th is receivable, carried in Other Assets, is reduced for th at portion of th e paym ent representing return of principal, with the balance credited to inter est incom e.

Unant ortized bond issue costs represent costs incurred in the issuance of th e revenue bonds and the limited tax bonds (Note 5). Th ese costs are being amortized over the life of the bonds. Depreciation and am ortization expense for the year ended Decem ber 31, 2002 related to th ese assets am ounted to approxim ately $6,407,000.

5. BO ND S AND LO AN PAYA BLE

Bonds payable at D ecem ber 31, 2002 are com prised of the follow ing:

Lim ited tax bonds:

6.10% to 6.30% Audubon Com m ission Aquarium Bonds, Series 1993 due in annual installments of $1,635,000 to $2,890,000 in principal plus interest through October 2013 $ 24,200,000 3.00% to 5.275% A udubon Com m ission A quarium Bonds, Series 2001 A due in annual installm en ts of $10,000 to $3,595,000 in principal plus interest through O ctober 2017 13,485,000 3.00% to 4.70% A udubon Com m ission A quarium Bonds, Series 2001 B due in annual installm ents of $55,000 to $1,260,067 in principal plus interest through O ctober 2021 6,628,572 5.00% to 6.50% Audubon Com m ission Im provem ent and Refunding Zoo Bonds, Series 1997, due in annual installm ents of $175,000 to $365,000 in principal plus interest through December 2016 3,635,000

Revenue bonds

4.50% to 5.00% 1997 Audubon Com m ission A quarium Revenue Refunding Bonds Series 1997, due in an ual installm ents of $1,065,000 to $1,520,000 in principal plus interest through April 2012 12,725,000 Deferred losses on refinancings, net of am ortization (3,293,892) U nam ortized discount, net

Total 56,771,169

Less: Current m aturities and curent portion of deferred losses

Bonds payable - long term

On January 1, 1993, the Comm ission issued $50,925,000 Audubon Park Comm ission for th e City of New Orleans Aquarium Bonds, Series 1993 with an average interest rate of 6.25%, to (i) advance refund $23,455,000 principal am oun t of outstanding Aquarium Bonds, Series 1988 maturing October 1, 1993 to October 1, 2008 with an average interest rate of 8.11%; (ii) finance further construction, extension an d improvement of the Aquarium and related facilities; (iii) fund certain reserves; and (iv) pay costs of issuan ce of the Bonds. The Bonds are special an d lim ited obligations of the City payable from an d secured solely by the proceeds of a special ad valorem tax. Th e tax is being levied at the rate of four and eleven-hundredths (4.11) mills. $26,050,024 of the proceeds from the 1993 Series bonds were used to purchase United States governm en t securities which were deposited in an irrevocable trust to provi de for all future debt serviee paym ents on th e 1988 Series bonds. As a result, the 1988 Series bonds are considered to be defeased and the liability for these bonds has been removed from the balance sheet. The reacquisition price of the 1988 Series bonds exceeded its net carrying am ount by $2.1 million. This

- 19 - difference, reported in the accom panying financial statem ents as a deduction from bonds payable, is being charged to interest expense through 2008 using the straight-line m eth od.

On N ovem ber 1,2001, th e Com m ission issued $13,555,000 Audubon Com m ission Aquarium Refunding Bonds, Series 2001 A and $6,683,572 Audubon Comm ission Aquarium Bonds, Series 2001 B w ith an average interest rate of 4.5% . Series A w as issued to advance refund $13,390,000 of Aquarium Series 1993 bonds with an average interest rate of 6.25% m aturing in October 2014 through 2017. The advance refunding included escrowing $14,573,000 into an irrevocable trust to provide for future debt service for a portion ($I 3,309,000) of the Aquarium Series 1993 bonds; therefore that portion of th e A quarium Series 1993 bonds w as rem oved from th e balance sheet in fiscal 2001. The reacquisition price exceeded th e recorded book value by approxim ately $I.I m illion which is reported in th e fin ancial statem ents as a deduction to bonds payable and is bein g charged to interest expen se through 2017 using th e straight-line m eth od. Series B was issued to fin an ce fu rther conslruetion, extension and im provem en t of th e Aquarium and related facilities, in cludin g th e developm ent, design and construction of the Audubon In sectarium . Proceeds from the bonds are also used to pay the costs of issuance of the bonds. These bonds are special and lim ited obligations of th e City payable from and secured solely by the proceeds of a property tax levied at a rate of three an d four -fifths m ills.

In December 1996, the Com m ission received a comm itm ent to purchase its $4,500,000 Improvement and Refunding Bonds, Series 1997. The proceeds of the issue were used to advance refund $1,895,000 in Series 1979 and 1988 Improvem ent Bonds, an d provide $2.5 million for capital improvements at Audubon Zoo. Th e advance refunding included escrow in g $1,943,500 into an irrevocable trust to provide for fu ture debt service on th e defeased bonds.

Debt serv ice applicable to the limited tax bonds is held by the Board of Liquidation, City Debt. No tax bonds m ay be sold without approval of the Board of Liquidation. Property taxes levied by th e City of New Orleans and dedicated to the payment of these lim ited tax bonds are collected by the City of New Orleans and, as required by law , paid to the Board of Liquidation as collected. The m illages for th ese lim ited tax bonds were established at the tim e th e bonds were issued, based upon th e approval of the City's voters. The property ta xes ar e recorded as nonoperating revenue for the appropriate fun d.

In Decem ber 1997, th e Comm ission issued its $16,380,000 Aquarium Reven ue Refunding Bonds, Series 1997 to advance refund its $14,200,000 Series 1992 A Aquarium Revenue Bonds. Th e advan ce refunding included escrowing $16,048,000 into an irrevocable trust to provide for all future debt serv ice paym ents on the Series 1992 A bonds; th erefore, the 1992 A bonds were rem oved from the balance sheet. Th e reacquisition price exceeded th e recorded book value by $2.2 m illion which is reported in the financial statem ents as a deduction to bonds payable and is being charged to interest expense in equal annual am ounts through 2012.

In February 2003, the Comm ission received a comm itm ent to purchase its $22,285,000 Aquarium Refunding Bonds, Series 2003 A which are expected to be issued in July 2003. Th e proceeds of this issue will be used to advance refund $22,565,000 of the Audubon Comm ission Aquarium Bonds, Series 1993. Th ese 2003 A series bonds will be issued on complete parity with the Aquarium Refunding Bonds, Series 2001 A and 2001 B .

Th e various bond indentures contain significant lim itations an d restrictions on annual debt service requirem ents, m ain tenance of and flow of m onies through various restricted accounts, m inim um am ounts to be m aintained in various sinking fun ds, and m inim um revenue bond coverages. M anagem ent believes th e Com m ission is in com pliance w ith all such sign ificant lim itations and restrictions at Decem ber 31, 2002.

- 20 - A summ ary of changes in long-term debt during 2002 is as follows:

Beginning Ending Balance Balance 2002 Additions Paym ents 2002 Lim ited tax bonds $49,788,572 $(1,840,000) $47,948,572 Revenue bonds ,, 13,705,000 (980,000) 12,725,000 $ 63,493,572 $ - $ ~2,820,000) $60,673,572

D ebt service requirem ents on all bonds outstanding as of D ecem ber 31, 2002, including interest paym ents of approxim ately $34,011,000, are as follows:

Years Ending Am ounts Decem ber 31, Representing Interest Llm its d Tex Revenue Included Bonds Bonds in Total

2003 $ 4,235,084 $ 1,651,620 $ 5,886,704 $ 2,946,704 2004 4,231,834 1,588,508 5,820,342 2,795,342 2005 4,231,258 1,622,685 5,853,943 2,633,944 2006 4,232,744 1,647,156 5,879,900 2,459,900 2007 4,230,133 1,662,663 5,892,796 2,272,797 2008- 2012 21,180,217 7,867,188 29,047,405 8,187,405 2013 - 2017 20,843,397 20,843,397 2,838,397 2018 - 2021 15,460,000 15.460.000 9.876.428

$ 78,644,667 $16,039,820 $ 94,684 487 $ 34,010 917

A certain Endowm en t Incom e Trust Fund loaned the Comm ission $725,000 in 1979 and $500,000 in 1982 for capital im provem ents within th e Audubon Park and Zoo. The loans are structured sim ilarly and accru e interest at 5% . Each loan is to be repaid annually from 50% of any operatin g surplus of the Audubon Park and Zoo, excluding any intergovernm ental revenues. Am ounts not repaid after 25 years are to be forgiven by th e lender. The 1982 agreem ent also requires m inim um annual paym en ts of $25,000 which com m enced January 1, 1992. Accordingly, the Comm ission has recorded a repaym en t liability of $1,045,836 at December 31, 2002 which includes accrued interest. N o repaym ent liability has been recorded under the 1979 loan agr eem ent due to the contingent nature of the agr eem ent.

6. RETIREM EN T SY STEM

Em ployees of the Institute that provide services for th e Com m ission in accordance with th e term s of the management agr eem en t m ay participate on an optional basis in a tax-deferred an uity plan established by the Institute for the benefit of all full-tim e em ployees. The plan provides for th e purchase of annuities which qualify for tax deferral. Participating em ployees eonWibute between 2% and 15% of their salary , not to exceed $10,500, an d the Comm ission, through its man agem ent agr eement with the Institu te, m atches em ployee contributions up to 3% of base salary. Th e retirem ent expense provision for 2002 amounted to approximately $409,000.

- 21 - RELA TED PA RTY TRA N SACTIO N S

The Com m ission and th e Institute are related through the interaction of their Boar ds of Directors and contractu al m anagem en t agreem en ts under which the In stitute m anages and operates Com m ission facilities. To assure efi cicncics through econom ics of scale, these entities often en gage in operations through one organization th at ben efit the other organ ization. One example of this is the use of cornm on or central bank and investment accounts. As of Decem ber 3 l, 2002, the Com m ission had a payable balance duc to the Institute of approxim ately $5,696,000.

The Comm ission also received additional fin ancial support from the Institute in the form of specific gifts and grants of appr oximately $4,119,000 and distributions from th e Institutc's Endowm ent Fun d amounting to approxima tely $483,000 (included in interest income) during 2002.

COM M ITM ENTS AND CONTIN GENCIES Litigation - Certain claims and suits have been filed against the Commission. The ma jority of these claim s arc covered by insurance and, based on all available inform ation and consultation w ith the Com m ission's legal counsel, m anagem ent does not believe the ultim ate resolution of these m atters w ill have a significant efect on th e Com m ission's fin an cial position or results of operations.

Self Insurance Risk M anagement- The Commission is self-insured for worker's compensation, short- term disability an d dental insurance benefits. W orker 's compensation expense provided for 2002 totaled $189,000. The following is a sum mary of the activity in the liability for workers' compen sation for the year ended D ecember 31, 2002:

Beginning Ending Balance Balance 2002 Expense Paym entS 2002 W orkers'compensationliability $329,564 $ 188,626 ~$ 311,62 $206569

- 22 - Deloitte &Touche LLP Suite 3700 701Poydras Street New Orleans, Louisiana 70139 3700

TPI: (504) 581-2727 Fax: (504) 551 7293 www.d eloitte.com D eloitte & Touche

INDEPENDENT A UDITO RS' REPO RT ON COM PLIANCE AND O N INTERNA L CO NTROL OVER FINANCIA L REPO RTING BASED O N AN AUDIT O F FINANCIAL STATEM ENTS PERFO RM ED IN ACCO RDA NCE W ITH G OVERNM ENT AUDITING STA NDARDS

To the Board of D irectors of The Audubon Com m ission: W e have audited the gen eral purpose financial statements of the Audubon Commission (the Commission), a com ponen t unit of the City of N ew Orlean s, as of and for the year ended Decem ber 31, 2002, and have issued our report th er eon dated April 25, 2003. W e conducted our audit in accordance with auditing standards generally accepted in th e United States of Am erican an d th e standards applicable to finan cial audits contained in Governm ent Auditing Standards, issued by th e Comptroller G eneral of the United States.

Com pliance

A s part of obtaining reasonable assurance about whether th e Com m ission's general-purpose fin an cial statem ents are free of m ater ial m isstatem en t, we perform ed tests of its com pliance with certain provisions of laws, regul ations, contracts, and grants, noncom pliance wi th which could have a direct and m aterial efect on the determ ination of financial sta tem ent am ounts. How ever , provi ding an opinion on com plian ce wi th th ose provisions was not an objective of our audit, and accordingly, we do not express such an opinion. Th e results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards.

nternal Control Over Financial Reoortino

In planning and perform ing our audit, we considered the Com m ission's internal control over finan cial reporting in order to determ ine our auditing procedur es for the purpose of expressing our opinion on the general-purp ose financial statem ents an d not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all m atter s in the internal control over financial reporting that m ight be m aterial weaknesses. A m aterial weakn ess is a condition in which th e design or operation of one or m ore of th e internal control com ponents does not reduce to a relatively low level th e risk th at m isstatem ents in am oun ts that would be m aterial in relation to th e financial statem ents being audited m ay occur an d not be detected wi thin a tim ely period by em ployees in the norm al cour se of per forming their assigned functions. W e noted no m atters involving th e intern al control over finan cial reporting an d its operation that we consider to be m aterial weakn esses.

Th is report is intended for the inform ation and use of the board of directors, m anagem ent an d the City of N ew Orleans, an d is not intended to be and should not be used by anyone other than these specified parties.

April 25, 2003

Deloitte Tohucmhaet su - 23 - D eloitte & Touche

of Directors:

our audit of the fin ancial statem ents of Audubon Com m ission for th e year ended December 31, 2002 (on which we have issued our report dated April 25, 2003), we considered its internal control in order to determ ine our auditing procedur es for th e purpose of expressin g an opinion on th e financial statem ents and not to provide assurance on th e Com m ission's in tern al control. Such consideration would not necessarily disclose all m atters in th e Com m ission's internal control that m ight be ma terial weaknesses under standar ds established by th e Am erican Institute of Certified Public Accountants. A description of th e responsibility of m anagem ent for establishing and ma intaining in ternal controls, and of the objectives and inherent limitations of internal control, is set forth in the attached Appendix, and should be read in conjunction with this report. A material weakness is a condition in which the design or operation of one or m ore of th e in ternal control com ponents does not reduce to a relatively low level th e risk th at m isstatem ents caused by error or fraud in am ounts that would be m aterial in relation to the fin ancial statem ents bein g audited m ay occur and not be detected within a tim ely period by em ployees in th e norm al cour se of perform ing th eir assigned functions. W e noted no m aters involving th e Com m ission's in ternal control and its oper ations that w e consider to be m aterial w eaknesses as defined above.

W e did note oth er m aters related to the Com m ission's in tern al control an d certain other accounting, adm inistrative or opera ting m atters. Our comm ents are presented in Exhibit I an d are listed in th e table of contents thereto.

This report is intended solely for th e inform ation an d use of th e board of directors, m anagem ent, oth ers within the organization and th e State of Louisiana Legislative Auditor an d is not intended to be and should not be used by anyone other th an these specified parties.

W e will be pleased to discuss th ese com m ents with you an d, if desired, to assist you in im plem enting any of the suggestions.

Your s truly,

Deloitte Touche Tohm atsu A UD UBO N CO M M ISSIO N

TA BLE O F CO NTENTS

Page

Payroll Related Observations 1

Operating Agreem ent Between Audubon Com m ission and Audubon Institute 2

Capital A ssets 2

A ccrual A ccounts 3 EXH IBIT I

PAYROLL RELATED OBSERVATIONS

Observation:

The Payroll and Benefits Adm inistrator has full access to the payroll system and can process corrections

and edits to the payroll accounts with out need of a supervisor's signature or review .

Recom m endation:

W e suggest that som eone in Finan ce or H um an Resources sign an d approve an y significan t payr oll adjustments. A report could be generated weekly highlighting employees added and payroll adjustm ents made that could be reviewed and reconciled back to supporting documents on a test basis to ensure all adjustments are proper.

M anagem ent's Response:

The Intern al Audit of Audubon N ature Institute/Audubon Com m ission is currently revi ewing payroll- processing procedures. Audubon w ill work with our external auditors D eloitte & Touche to ensure that all necessary chan ges th at need to be m ade to the curent procedures will be im plem ented prior to th e extern al interim audit.

D & T suggests Audubon w ork w ith AD P to develop the capacity to update the m aster em ployee list at any tim e during the year to reflect current employee changes. This should assist in preventing term inated employees from receiving improper payroll checks after term in ation.

M an agem ent's Response

The Intern al Audit of Audubon N ature Institute/Audubon Com m ission is currently reviewing payr oll- processing procedures. Audubon will work with our external auditors Deloitte & Touche to ensure that all necessary changes th at need to be m ade to th e curren t procedures will he im plem ented prior to th e extern al interim audit.

Observation: Recom m endation:

D& T suggests departm ent supervisors review detailed payroll registers for their departm ent to identify any unusual or significant errors.

M anagem ent's Response:

The Internal Audit of Audubon N ature Institute/A udubon Com m ission is currently reviewing payroll- processing procedures. Audubon will work with our external auditors Deloitte & Touche to ensure th at all necessary changes that need to be m ade to th e current procedur es wi ll be im plem ented prior to th e extern al interim audit.

OPERATING AGREEM ENT BETW EEN AUBUDON COM M ISSION AND AUDUBON INSTITUTE

Observation:

W e noted that the operating agreem ent between Audubon Comm ission and Audubon Institu te calls for certain costs to be hom e by th e In stitute such as utilities and insur ance expenses. Th ese costs, however are not bein g treated as Institu te costs and instead are recorded on the books and records of the Com m ission. Per discussion wi th m anagem ent, this practice has been consistent for m any year s.

Recom m endation:

W e recomm end th e entities follow th e term s of the executed operating agr eem ent or am end th e agr eem ent to reflect th e current practices. This should elim inate inconsistencies an d non-com pliance w ith th e operating agr eem ent.

M anagem ent's Response:

Th e agreem ent betw een Audubon Nature Institute and Audubon Comm ission will be am ended to reflect the current practice.

CAPITAL A SSETS

Observation:

Our procedures disclosed that Audubon maintains no form al policy or procedur es for periodically perform ing physical inventories of it capital assets.

Periodically validating th e physical existence and condition of in dividual item s of property, plant and equipm ent is an im portant control in the safeguar din g of assets and an im portant procedure in validating the integrity of Audubon's fixed asset subsidiary re cords.

W e recomm end Audubon establish a policy for perform ing periodic physical observations of property plant and equipm ent and reconcilin g th e results of such observations to th e capital asset subsidiary records. M anagem ent's Response:

The Finance Departm ent w ill establish a form al policy for periodically perform ing physical inventories of

its capital assets, prior to the external interim audit. The Internal A udit, together with the assistance of Fin ance personnel, will carry out periodic audits on Audubon's capital assets.

During our audit no supporting calculation was available for several accrual accounts, specifically the liability for sales tax payable, accru ed legal costs and the workers' com pensation liability. It appears that there is no existing support for th ese estim ates.

Recom m endation:

Audubon should perform an estim ation of sales tax payable based upon historical actual paym en ts or an estimate of future payments based upon actual sales. The legal accrual should be adjusted based upon discussion w ith attorn ey's han dling litigation and th eir estim ate of probable am ounts due. The workers' com pensation liability should be recorded based upon estim ates of open eases as well as unrecorded cases using actu al historical experiences on these types of claim s. Such accruals should be revisited at least twice a year an d adjusted to management's best estimate.

M anagem ent's Response:

Audubon's Internal Audit will perform a com prehensive analysis of th ese existing balan ces and recommend any necessary adjustments.

- 3 - APPENDIX

M A NA G EM ENT 'S FOR, AND THE OBJECTIVES AND LIM ITATIONS O F,

The following comments concerning managemen t's responsibility for internal control and the objectives and inherent lim itations of internal control are adapted from the Statem ents on Auditing Standards of th e Am erican /nstitute of Certified Public Accountants.

M anagem ent's Responsibility

M anagem ent is responsible for establishing and m aintaining intern al control, In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits an d related costs of controls.

Objectives The objectives of internal control are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from un auth orized use or disposition, and that transactions ar e executed in accordance with m anagem ent's auth orization and recorded properly to perm it th e preparation of financial statem ents in conform ity with accoun ting principles gen erally accepted in th e United States of A m erica.

Lim ita tions

Because of inherent lim itations in any in ternal control, m isstatem ents due to error or fraud m ay occur an d not be detected. Also, projections of any evaluation of internal control to future periods are subject to the risk th at the internal control m ay becom e inadequate because of changes in conditions or th at th e degree of com pliance with the policies or procedures m ay deteriorate.