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November 14, 1991
HONORABLE CITY COUNCIL
Palo Alto, California
LYTTON GARDENS. INC. AUDITED FIJtANCI~~ ... BTATEHEN'TS: KARCH ~l, 1990
NiP 1991
Members of th~ Council:
This is an inforrr.ational report and no Council action is required.
bR2tl ill Brie.f
This report tran~mits information from the audited financial
stat~ments for Lytton Gardens, Inc. (LGI) for the fiscal years
ending March 31, 1990 and 1991. The statements ~ere received on
November 8, 1991. In previous reports to the city Council, staff
expressed concern that LGI had failed to make full payments in
December 1989, June 1~90, December 1990 and June 1991, on bonds
iEsued under the city of Palo Alto's name. The financial state
ments show that, through the date of the al.'di t, LGI continued to
have an operating deficit of appr~ximately $0.5 million, and that
the overall fund deficit increased by 14 percent from $3~8 million
t~ $4.4 million.
Backqrour.4
In August 1991 (CMR:387:91), staff informed the City council that
LGI had failed to mak~ semi-annual interest payments on City of
Palo Alto Insured Revenue Bonds Refunding Series 1986. The bond
trustee, Security Pacific Bank had used the bond reserve account to
ensure that bondholders were paid. This action was taken ~ith the
knowledge and consent of the Office of Statewide Rea I th Planning
and Development of the State of Cal i forrda {OSHPD), who have
insured the bonds. Wi t.hdrawa 1 s from the reserve account have
placed the 1986 bonds in technical default. Staff met ~ith the
~anagement of LGI and contacted OSHPD 1 and were assured by both
that further calls on the reserve .... 'Quld not be necessary.
CMR:504:91
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riD.ncial statu, of LGI as of M:_~rch 31. 1991
The audited financial statements show that expenses exceeded
revenues: for each of the t'NO previous fiscal years, by $451,155 in
1990-91 and by $544,6S5 in 1989-90. The accumulated tund deficit
for LeI stood at $4~350,945 ('IS of March 31, 1991, up 14 percent
from the previous year's deficit of $3 I S06,2?O.
The notes to the financial statements confirm the default situation
with the 1986 bonds. The auditor states:
·LGI is required to maintain a bond reserve account in the
amount of $1,298,000 a~d also to m3xe monthly deposits to the
Trustee to previde for insurance, interest and principal
payments due each June 15 and December 154 In addition, LGI
is required to deposit $2,500 per month into a capital
replacement account commencing December 19814 These funds are
to be used to purchase additional depreciable assets, to pay
debt service Cind for working capital. During fiscal 1991 the
deposits to the Trustee totalled $230 /000, out of a required
to~al of $983,380. As a result, the Trustee was req~ired to
utilize, ~ith the approval of the Office of State~ide Health
Planning and Development, the bond reserve account in order to
meet the debt service payments in June and December 1990 and
June 1991. Ir April 1991 a depvsit of $70,000 was made. From
May 1'991, throt.Lgh September 1991, the required l'nont.hly deposits
of $81,948 ha.ve been made. As of Sep~ember .30, 1991 the bond
reserve account totals $782,800.
As a result of the utilization of thE'. bond reserve account,
LeI is i~ default of the Regulatory Agreement (~ith OSHPD)4
LeI is required too establl.sh a plan to repay the bond reserve
deficit, which totals approximately $515,000 at September 30,
1991. In addition, the default permits OSHPD to conduct an
evaluation of, and direct the Corporation with respect to, the
lI',a!1agement and operation of the property. To date no action
has been suggested by OSHPD ~ith resp~ct to these rights.-
staff will continue to monitor the financial status of LGI and will
return to Council if it appears that payments by LGI and reserves
hele: by the Trustee are not SUfficient to make payments to the
bondholders.
CMR~5D4:91
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.. 'riLl ZAN
City anager
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