AGENDA: September 13, 2011 4. 14COUNCIL

REPORTCATEGORY: Consent

DEPT.: Finance and Administrative Services

Crn' of MOUNTAIN vow TITLE: Acceptance of Auditors' Reports of Lessee

Compliance with City's Lessees

RECOMMENDATION

Accept and file the special agreed-upon procedure reports (Attachments 1 and 2 to the staff

report) for Silicon Shores Corporation and Michaels at Shoreline, City lessees of City-ownedproperties, pertaining to the year ended December 31, 2010, including staff comments.

FISCAL IMPACT—None.

BACKGROUND

The City has lease agreements with concession operators and receives rental income fromthese lease agreements. The City annually contracts with the independent auditors Maze &Associates (Maze) to perform special agreed-upon procedures to determine if the lessees are

in compliance with the financial and other aspects of the lease agreements. Pursuant to these

lease agreements, rent is based on the gross receipts of the lessees' operations. As such, the

focus of Maze is testing and verifying the accuracy of gross receipts reported and rent paid tothe City. Determination of the financial position of the lessees is not within the scope of thesereviews.

The City requested Maze perform reviews of:

Silicon Shores Corporation

Michaels at Shoreline

ANALYSIS

SILICON SHORES CORPORATION

The City contracted with Maze to perform certain agreed-upon procedures analyzing theaccounting records of Silicon Shores Corporation (Silicon Shores) to verify compliance withthe agreement between the City and Silicon Shores. This report was performed for the yearended December 31, 2010.

The auditors performed various tests, including analytical review procedures, recalculationsand vouching to source documents of Silicon Shores' accounting records, to determinecompliance with the rent provisions of the lease agreement.

AGENDA: September 13, 2011

PAGE: 2

Conclusion

The auditors obtained a limited understanding of the internal accounting controls over cashreceipts. No items were noted that would indicate a weakness in internal accounting controlsover cash receipts.

Overall, net sales for the year ended December 31, 2010 increased 4.49 percent. Net café salesincreased 12. 55 percent, and sailing rentals and retail sales declined 5.03 percent and9.15 percent, respectively, over the prior year. The decline in sailing rentals and retailrevenue can be attributed to the general decline in the economy.

Total rent due to the City increased 3.31 percent for a total of$ 125,874. Silicon Shores paid127,519, an overpayment of$ 1, 645 which has subsequently been refunded to Silicon Shores

by the City.

MICHAELS AT SHORELINE

The City contracted with Maze to perform certain agreed-upon procedures of the accountingrecords of Michaels at Shoreline (Michaels) to verify compliance with the agreement betweenthe City and Theodore F. Faravelli as the operator of Michaels.

The auditors performed various tests, including analytical review procedures, recalculations

and vouching to source documents of Michaels' accounting records, to determine compliancewith the rent provisions of the lease agreement.

Conclusion

The auditors obtained a limited understanding of the internal accounting controls over cashreceipts. No items were noted that would indicate a weakness in internal accounting controlsover cash receipts.

Overall, sales for the year ended December 31, 2010 have declined approximately 1. 59 percentover the prior year due to a continued sluggish economy. However, the restaurant isshowing signs of improvement given the decrease in sales for 2008 and 2009 were 4.70 percentand 6.47 percent, respectively. Also, banquet sales increased 1. 68 percent over the previousyear.

Total rent due for the year was $156, 756. The total amount collected during the yearwas $144,502 and the additional $12,254 due the City has been subsequently paid by thelessee.

A new lease agreement was executed for Michaels at Shoreline effective April 1, 2011.

AGENDA: September 13, 2011

PAGE: 3

The lessees have been notified of this meeting's agenda, and a representative from Maze &Associates will be present to answer questions. Staff is also available to respond to anyquestions.

PUBLIC NOTICING—Agenda posting.

Prepared by: Appr n ed b .

Ii 4, b

1/4 C r Suzanne Niederhofer Patty J. KoAssistant Finance and Administrative Finance and Administrative

Services Director Services Director

aniel H. Rich'

City Manager

SN/ PJK/ 7/ CAM

546-09- 13- 11M-E^

Attachments: 1. and 2. Agreed-Upon Procedure Reports

ATTACHMENT 1

AGREED UPON PROCEDURES REPORT

FOR THE CITY OF MOUNTAIN VIEW

SILICON SHORES CORPORATION

FOR THE YEAR ENDED DECEMBER 31, 2010

MAZE &ASSOCIATES

ACCOUNTANCY CORPORATION

3478 Buskirk Ave. - Suite 215

Pleasant Hill, California 94523925) 930-0902 • FAX( 925) 930-0135

maze @mazeassoclates.com

www.mazeassociates.com

Independent Accountant' s Report on Applying Agreed-Upon Procedures

Ms. Patty KongFinance and Administrative Services Director

City of Mountain View500 Castro Street

Mountain View, California 94039-7540

Dear Patty:

We have performed the procedures described below, which were agreed to by the City of MountainView, to assist you in assessing the reasonableness of the rent paid to the City by Silicon ShoresCorporation for the twelve months ended December 31, 2010. This engagement to apply agreed-uponprocedures was performed in accordance with standards established by the American Institute ofCertified Public Accountants. The sufficiency of these procedures is solely the responsibility of theCity' s management. Consequently, we make no representation regarding the sufficiency of theprocedures described below either for the purpose for which this report has been requested or for anyother purpose.

Background Information

On March 28, 2000, the City Council, as landlord, approved a Second Amendment to the Lease withSpinnaker Enterprises, Inc., providing for the latter to transfer its leasehold interest in the lease fromSpinnaker Enterprises, Inc. to Silicon Shores Corporation effective April 1, 2000. Silicon ShoresCorporation, as assignee to the lease, is to operate Shoreline Lake' s boating program and relatedactivities. The lease requires Silicon Shores Corporation to pay percentage rent each month equal to 7%of gross food service receipts and 10% of all other gross receipts.

Procedures and Findings

The procedures and associated findings are as follows:

We read the lease between City of Mountain View and Spinnaker Enterprises, Inc. dated March25, 1993 and associated amendments.

A Professional Corporation1

We obtained a limited understanding of the internal accounting controls over cash receiptsthrough observation and inquiry with Silicon Shores' personnel. Based on our limited inquiresand observations it appears that Silicon Shores has adequate controls in place to reduce the risk

of material misstatement to a relatively low level.

The general ledger is based on Silicon Shores Corporation' s fiscal year which ends December

31, 2010. We reviewed the unaudited balance sheet and income statement prepared by SiliconShores' accountant, Rich Parodi, for the related 12 month period in order to analyze revenues

during the agreed upon procedures period.

We also compared Silicon Shores' net sales, ( net of gratuities), for fiscal years 2009 and 2010.

We did so on a monthly basis as well as on an aggregate basis. Net sales for the twelve monthsincreased 4.49% and the rental payment to the City increased 3. 31% over the same twelvemonths of the prior year.

We compared each revenue account in the unaudited combined income statement for the twelve

months ended December 31, 2009 to the same twelve months in 2010. Café sales increased

12. 55% over the same twelve months of the prior year. Sailing rental gross sales decreased5. 03% and retail gross sales decreased 9. 15%. Overall sales were up due to the increase in Cafesales. Retail sales are closely correlated with camps and classes. The decline in overall classes,due to the economy, for windsurfing, kayaking and sailing caused the retail sales drop for gearand accessories, which contributed to the rental operation decline.

We obtained the daily cash register information from the Daily System Sales Detail reports, asthe cash register system is part of the Company' s financial system( POS). We randomly selectedone different business day from each month. Each of the daily cash receipts was traced throughthe daily Deposit/Cash Receipt Reconciliation to the General Ledger and to the bank statement.We were able to trace our selections, which totaled$ 54,552. 55 to the actual receipts recorded inSilicon Shore' s receipts records to within$ 22. 00, or four tenths of one percent.

We also obtained the monthly Revenue Collections and Rent Calculation for all 12 monthsprepared by Christina Ferrari, President of Silicon Shores. Backup for the calculations wasbased on the monthly" Profit& Loss" reports and Point of Sale interface reporting records. Thereconciliations were attached to the rent checks sent to the City every month. We tested itsmathematical accuracy and traced monthly sales amounts to Silicon Shores' General Ledger andrent check amounts to check copies and the corresponding bank statement. Our recalculation ofthe rent paid to the City showed rent was overpaid $ 1, 645 for the year, after adjustments madefrom 2009. ( See next page for recomputation). Annual net sales, not including gratuities, totaled

1, 581, 134 as reported on Silicon Shores' unaudited income statement prepared by itsaccountant. The corporate tax return prepared by an outside firm, reported gross sales of

1, 605, 213. The difference of$24, 079 was caused by reporting gross revenues in the tax returnand net revenues in the income statement. Sales discounts and cash over(short) expenses were

reported as expenses in the tax return, but netted with revenues in the income statement. We

recomputed net revenues from tax return data by subtracting sales discounts and cash over( short)expenses from revenue and arrived at net revenues which were within$ 1 of the amount reportedin the income statement.

2

We recomputed the concession rent payable for the twelve months ended December 31, 2010, as

paid to the City. This rent is based on 7% of Café sales, net of gratuities, and 10% of all othersales, net of gratuities, reduced by one half of certain utility expenses. For the year endedDecember 31, 2010 concession rent was calculated as follows:

Gross Net Percentage

Sales Gratuities Sales Rent

Cafe Sales( 7%) 925, 546 0 925,546 64,788

Sailing/Rental Sales( 10%) 642, 569 0 642, 569 64, 257

Retail Sales( 10%) 13, 019 0 13, 019 1, 302

Totals 1, 581, 134 0 1, 581, 134 130, 347

Less utilities 4, 473

Net Rent Due to City for Yr 2010 125, 874

Actual Rent paid to City for Yr 2010 127, 602

Less Adjustments from 2009 Rent Calculation:

FY09 Underpayment included in the October 10 Rent 83) 127,519

Rent overpayment for Yr 2010 1, 645)

Note: The adjustments made in Yr 2010 to correct underpayments for Yr 2009 have been taken

into consideration to properly calculate the amount due for Yr 2010. Silicon Shores overpaidCity by$ 1, 645 in Yr 2010.

Employee discounts for food purchases at the Café totaled $2,215 for the twelve months endedDecember 31, 2010. This amount appears reasonable and is within the 2% of gross sales allowed

by the lease agreement.

The Company' s original " Silicon Shores 2010 Reconciliation" report submitted to the Cityshowed Cafe Sales of$ 919, 835. The Company' s final report provided to us showed $ 925, 546.We traced the difference of $5, 711 to an adjustment made by the Company due to billingadjustments for events/ activities.

We were not engaged to, and did not, perform an audit in accordance with generally accepted auditingstandards, the objective of which would be the expression of an opinion on the specified elements,

accounts, or items. Accordingly, we do not express such an opinion. Had we performed additionalprocedures, other matters might have come to our attention that would have been reported to you.

This report is intended solely for the information and use of the City of Mountain View and should notbe used by those who have not agreed to the procedures and taken responsibility for the sufficiency of theprocedures for their purposes. This report is a matter of public record and this does not limit thedistribution of this report.

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ATTACHMENT 2

AGREED UPON PROCEDURES REPORTFOR THE CITY OF MOUNTAIN VIEW

MICHAELS AT SHORELINE

FOR THE YEAR ENDED DECEMBER 31, 2010

MAZE &ASSOCIATES

ACCOUNTANCY CORPORATION

3478 Buskirk Ave. - Suite 215

Pleasant Hill, California 94523

925) 930-0902 • FAX( 925) 930-0135

maze@mazeassoclates.com

www.mazeassociates.com

Independent Accountant' s Report on Applying Agreed-Upon Procedures

Ms. Patty KongFinance and Administrative Services Director

City of Mountain View500 Castro StreetP. O. Box 7540Mountain View, California 94039- 7540

Dear Patty:

We have performed the procedures described below, which were agreed to by the management of the Cityof Mountain View, California, solely to assist you in assessing the reasonableness of the rent paid to theCity by Michaels at Shoreline( Michaels) as tenant for the year ended December 31, 2010. This agreed-upon procedures engagement was performed in accordance with standards established by the AmericanInstitute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibilityof the City' s management. Consequently, we make no representation regarding the sufficiency of theprocedures described below either for the purpose of which this report has been requested or for any otherpurpose.

Background Information

On March 30, 1993, the City, as landlord, entered into a lease agreement with Theodore F. Faravelli, tomanage the operations of the Shoreline Restaurant and Banquet Facility, known as Michaels at Shoreline.The initial lease term was for seven years commencing February 1, 1994 with two options to extend thelease for periods of five years each. The lease year was subsequently amended to be accounted for on acalendar year basis. The lease option to extend for five years were exercised in January 2001 and January2006.

Michaels agreed to furnish the City with a monthly summary of gross receipts( as defined) within 15 daysof the close of each calendar month and an annual summary of gross receipts within 30 days of the closeof each lease year. Within three years of the receipt of any annual summary of gross receipts, the City isentitled to audit such summary. Michaels is also required to submit to the City, within 90 days after theend of each lease year, an income statement and balance sheet compiled by a certified public accountantin accordance with generally accepted accounting principles.

Michaels has two main revenue sources — a Cafe with indoor and outdoor seating, and Banquet roomfacilities.

A Professiogal Corporation

Procedures and Findings

The procedures and associated findings are as follows:

General

We read the Agreement between the City of Mountain View and Theodore F. Faravelli aspromoter of Michaels at Shoreline, dated March 30, 1993 and all associated amendments.

We obtained a limited understanding of the internal accounting controls over cash receiptsthrough observation and inquiry of Michaels' personnel. Michaels' procedures for handling cashreceipts, and the related internal controls, are summarized in Appendix A.

We reviewed the monthly revenue spreadsheets prepared by Michaels, and analyzed the monthlyfluctuations in food sales from the prior year. Overall, sales numbers have dropped

approximately 1. 59% compared to the prior year due to the economy. However, the restaurant isshowing signs of improvement given that the decrease in sales for 2008 and 2009 were 4.70%and 6. 48% respectively and banquet sales increased 1. 68% from the prior year.

Gross Receipts

Café

We sampled one business day from each month in 2010 and obtained the Café' s related dailycash register Z-Reports. The Z-Reports provide a summary of sales segregated into threepayment categories: cash, credit card, or check.

We compared the total of such tapes to the Café' s daily revenue summaries; traced the cashregister tapes to daily deposit slips and bank statements, and found them to be materially inagreement.

Banquet room

We sampled one business day from each month in 2010 and obtained the Banquet room bills. Wetested the mathematical accuracy of the bills, and found no errors.

We compared the total of such bills to the related daily revenue summaries; traced the paymentsto deposit slips and bank statements, and found them to be materially in agreement.

Combined

We recomputed the above referenced daily revenue summaries, which combine Café and Banquetroom receipts, and found them to be mathematically accurate. We compared total revenue per thedaily revenue summaries to the daily deposit amount from the bank statements, and found them tobe in agreement. We also compared total revenue from the daily revenue summaries to theamounts in the monthly revenue spreadsheets, and found them to be in agreement.

We compared the combined Café and banquet room revenue as shown on the monthly revenuespreadsheet to the Rent Statement submitted to Michaels' Certified Public Accountant for use in

compiling the annual financial statements, and found them to be in agreement.

2

Tenant Financial Statements

We read the compilation report prepared and signed by Michaels' Certified Public Accountant,Johanson & Yau Accountancy Corporation. This report indicated that the compiled financialstatements were prepared in accordance with Statements on Standards for Accounting andReview Services issued by the AICPA.

We prepared a reconciliation of gross receipts per the monthly revenue spreadsheets to grossreceipts per the statement of earnings for the year ended December 31, 2010 compiled byJohanson& Yau Accountancy Corporation, as follows:

Gross receipts per support to rent checks sent City:Café receipts, net of sales tax, per monthly recap 913,252

Window Sales, net of sales tax, per monthly recap 63, 493

Banquet receipts, net of sales tax, per monthly recap 790, 197

Total per monthly-recap 1, 766,942

Correction of error in September 2010 Monthly recap 50)

Gross receipts per compiled financial statements 1, 766,892

The September 2010 monthly Rent Report sent to the City erroneously included $ 677 as theBanquet Room Fee instead of the correct amount of$627. Michael' s staff found the error prior to

the preparation of the tax return and financial statements.

We recomputed percentage rent on gross receipts, as defined in Exhibit B of the Agreement based

on gross receipts, net of sales tax, as calculated above. We compared the monthly recap reportsto the worksheets submitted to the City on a monthly basis and compared the twelve actualpayments with the monthly recap reports and recalculated the rents. We determined thatMichaels underpaid the City as calculated below:

Gross Receipts Rental% Rent

Gross receipts up to$ 2 million @ 8% 1, 766,892 8. 00% $ 141, 351

Equipment rental($ 100 per month) 1, 200

Rent per gross receipts calculation 142,551

Minimum rent per lessee agreement based on prior year minimum rent 155,556

Equipment rental($ 100 per month) 1, 200

Minimum rent due 156,756

Rent Due to City for lease year 2010Greater of Rent per gross receipts calculation or Minimum rent due) 156,756

Rent payments received by the City with monthly rent reports 144,502

Over) Under payment to the City, lease year 2010 12,254

Catch-up Payment in March 2011 to City for 2010 Rent Owed( Check# 32657) 12, 254

Rent due to City for lease year 2010 0)

3

In March 2011 Faravelli Inc. paid off the 2010 rent underpayment of$ 12, 254. We traced thispayment to check number 32657 dated 3/ 18/ 11 and to the Wells Fargo online bank statement.

Bank Deposits

We obtained Michaels' bank statements for January 2010 through December 2010 and selectedtwo deposits per month from the statements and traced the deposits to the daily receipts and Z-tapes supporting the deposits as well as to the deposit slip. We noted that deposits per the bankstatements were short by $ 11 or less than one-tenth of one percent to total deposited tested. Wealso traced the deposits to the appropriate monthly revenue worksheet without exceptions.

We were not engaged to, and did not perform an audit in accordance with generally accepted auditingstandards, the objective of which would be the expression of an opinion on financial statements, specified

elements, accounts, or other items. Accordingly, we do not express such an opinion. Had we performedadditional procedures, other matters might have come to our attention that would have been reported toyou.

This report is intended solely for the information and use of the City of Mountain View and should not beused by those who have not agreed to the procedures and taken responsibility for the sufficiency of theprocedures for their purposes. This report is a matter of public record and this does not limit thedistribution of this report.

April 22, 2011

Attachment

Appendix A-1

Michaels at Shoreline— Cash Receipts

Purpose

To document the flow of information throughout the cash receipts cycle, and to obtain an understandingof the policies and procedures in place to control the integrity of the data. We interviewed Jozette Salas,Office Manager to evaluate the internal control over cash receipts.

General Overview

Michaels has two on-site Operational Managers and one Office Manager. Both Ted and Carol Faravelli

function as General Manager, with Carol focused on Banquet Sales. The Accounting Assistant AyishaGroce occasionally performs operational ( floor) duties. Michaels' Office Manager Jozette Salas islocated off-site. The accounting records are sent to Michaels' Certified Public Accountant on a quarterlybasis.

Jozette Salas summarizes on an Excel spreadsheet the day' s receipts from the Z-Reports and individualbanquet bills, and compiles monthly data from the daily compilations. The monthly sales information isput into a Recap Report, which includes both Café and Banquet room sales, and delivered to Michaels'Certified Public Accountant.

The Office Manager' s duties include general record keeping, comparing the daily deposited amount perbank to the daily Z-Reports obtained from the Operational Manager, and reconciling Michaels' bankaccount. The Office Manager summarizes on an Excel spreadsheet the day' s receipts for the Z-Reports,and assembles monthly data from her daily compilations. Any under or over per the cash registers areentered into a separate general ledger account on a daily basis by register. This helps to spot any trendse.g., one register is consistently under or over, or registers that are consistently under or over on certain

days). The monthly sales information is put into a Recap Report, which includes both Café and Banquetroom sales, and is delivered to Michaels' Certified Public Accountant who compiles an income statement,

balance sheet, and quarterly totals from the information.

Cash Receipts Cycle

Café

Payments from customers are received in the form of cash, check, or credit card at one of five registers

located in the café. ( Note: check purchases in the Cafe are immaterial; most check purchases occur for

banquets). If an error occurs while the sale is being input into the register, the employee may cancel theentire transaction and reenter the correct information. If the transaction has been completed, the

Operational Manager is required to " void" the input. A receipt is printed out for every customer.Customers give receipts to the cashier at the counter and the Chefs prepare the food according to thereceipts.

At the end of each business day or the next morning, the Operational Managers close-out the cashregisters by printing a Z-Report, which includes a financial report, cashier report and an itemized PLUreport ( if both Operational Managers are gone or busy, the Accounting Assistant will close-out theregisters).

5

The Z-Report subtotals each cash register' s receipts by the form of payment and the type of sale, andcalculates total sales for the day. The Accounting Assistant is responsible for counting the cash and thecash is stored in the safe overnight. The Accounting Assistant is also responsible for preparing the bankdeposit slip. The following business day, the receipts are deposited into Michaels' bank account, via abank courier. Deposit slip is given to Jozette Salas, Office Manager, who reconciles the Z-Report to thedeposit slip and investigates any material discrepancies.

Banquet Room

In contrast to the Cafe' s multiple cash receipts, the Banquet room will usually have one large detailed bill.Two cash registers are located in the Banquet mom bar. If the banquet is hosted ( drinks are included inthe banquet bill) then a Z-Report is attached to the related bill and included in the total price of the

banquet. If the bar is not hosted, the guests must purchase their drinks and cash receipts are handled in a

manner consistent with the Café. The forms of accepted payment are cash, check, credit card, or invoice

for house accounts. Banquet bills are either paid at the end of the banquet or billed at a later date. The

billed banquet sales are classified as accounts receivable, subsequently the Office Manager processes allpayments received. At the end of each business day or the next morning, the Operational Managerscloseout the bar cash registers as described under " Cafe" above. The Z-Report subtotals each cash

register' s receipts by the form of payment and calculates total sales for the day. The following businessday, the receipts are deposited into Michaels' bank account, via a bank courier. The deposit slip is givento Jozette Salas, Office Manager, who reconciles the Z-Report to the deposit slip and investigates anymaterial discrepancies.

Employee Purchases

Outside of customer purchases, Michaels has approximately 40 employees who receive partiallydiscounted/ free food. All employees receive free beverages ( e.g., soft drinks) and discounted prices oncertain food items. The number of days that each employee works is tracked, and they receive $ 2. 00 indiscounts for each day worked. Employees pay for the food consumed through earnings deduction ontheir timesheet; it is not rung up on the register. Managers receive free lunches and free beverages. Perthe agreement, revenue received from employee sales is not included in monthly gross receipts reported tothe City and is therefore not used in rent calculation.

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