FULLER THEOLOGICAL SEMINARY AND SUBSIDIARY

Transcription

1 FULLER THEOLOGICAL SEMINARY AND SUBSIDIARY Combined Financial Statements With Independent Auditors Report And Federal Awards in Accordance with the Uniform Guidance Year Ended June 30, 2017

2 TABLE OF CONTENTS Independent Auditors Report 1-2 Combined Financial Statements Combined Statements of Financial Position 3 Combined Statements of Activities 4-5 Combined Statements of Cash Flows 6-7 Notes to Combined Financial Statements 8-49 Federal Awards Schedule of Expenditures of Federal Awards 50 Notes to Schedule of Expenditures of Federal Awards Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditors Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Auditee Summary Schedule of Prior Audit Findings 61 Auditee Corrective Action Plan 62 Page

3 INDEPENDENT AUDITORS REPORT Board of Trustees Fuller Theological Seminary and Subsidiary Pasadena, California Report on the Combined Financial Statements We have audited the accompanying combined financial statements of Fuller Theological Seminary and Subsidiary (the Organization ) which comprise the combined statements of financial position as of June 30, 2017 and 2016, and the related combined statements of activities and cash flows for the years then ended, and the related notes to the combined financial statements. Management's Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion Burbank Boulevard, Suite 307 Tarzana, CA capincrouse.com

4 Board of Trustees Fuller Theological Seminary and Subsidiary Pasadena, California Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of June 30, 2017 and 2016, and the changes in its net assets and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the combined financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance), is presented for purposes of additional analysis and is not a required part of the combined financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the combined financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 26, 2017 on our consideration of the Organization s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization s internal control over financial reporting and compliance. Tarzana, California October 26,

5 COMBINED STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2017 AND 2016 (dollars in thousands) ASSETS Cash and cash equivalents $ 10,666 $ 3,836 Investment in repurchase agreement (Note 17) - 2,308 Investments (Notes 4, 5, and 16) 93,779 98,479 Receivables, less allowance for uncollectible accounts of $1,545 and $2,031 in 2017 and 2016, respectively (Notes 6 and 16) 9,616 6,546 Prepaids and other assets, net (Note 2) 5,431 5,604 Property and equipment, net (Notes 7 and 8) 91,065 93,159 Beneficial interest in perpetual trusts (Note 2) 3,784 3,516 Beneficial interest in investments of financially interrelated entity (Note 16) 32,761 41,536 Beneficial interest in net assets of financially interrelated entity (Note 16) 28,177 27,619 Total assets $275,279 $282,603 LIABILITIES Accounts payable and accrued expenses (Note 7) $ 5,444 $ 4,873 Trust and annuity liabilities Deposits Unearned revenue 3,963 4,238 Due to auxiliary organizations (Note 16) Line of credit (Note 8) - 7,500 Debt, net of deferred financing fees (Notes 2 and 8) 41,103 51,856 Due to U.S. government (Note 6) Interest rate swaps (Note 8) 418 5,073 Total liabilities 53,259 76,035 COMMITMENTS (Note 9) NET ASSETS Unrestricted (Notes 11 and 14) 44,627 30,863 Temporarily restricted (Notes 12 and 14) 61,029 66,252 Permanently restricted (Notes 13 and 14) 116, ,453 Total net assets 222, ,568 Total liabilities and net assets $275,279 $282,603 Please see notes to combined financial statements. -3-

6 COMBINED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2017 (dollars in thousands) Unrestricted Temporarily Restricted Permanently Restricted REVENUE AND SUPPORT Tuition and fees $28,201 $ - $ - $ 28,201 Tuition assistance (6,248) - - (6,248) Net tuition income 21, ,953 Private gifts and grants (Notes 2, 7 and 16) 6,800 12,115 7,539 26,454 Government grants Public service 1, ,000 Sales and services of auxiliary enterprises 7, ,328 Net investment returns (Note 4) 2,546 6, ,503 Change in value of split-interest agreements - (44) (1) (45) Change in beneficial interest in investments of financially interrelated entity - 3,247-3,247 Change in beneficial interest in net assets of financially interrelated entity - 2,262-2,262 Gain on sale of property 2, ,653 Other 1, ,776 Total revenue and support 44,245 24,268 7,807 76,320 NET ASSETS RELEASED FROM RESTRICTIONS 30,387 (29,491) (896) - Total revenue, support, and releases from restrictions 74,632 (5,223) 6,911 76,320 EXPENSES Instruction 21, ,256 Public service 3, ,581 Academic support 4, ,894 Student services 5, ,927 Research 4, ,227 Auxiliary enterprises 6, ,694 Institutional support (Note 15) 15, ,500 Total expenses 62, ,079 CHANGE IN NET ASSETS BEFORE CHANGE IN VALUE OF INTEREST RATE SWAPS 12,553 (5,223) 6,911 14,241 Change in value of interest rate swaps (Note 8) 1, ,211 CHANGE IN NET ASSETS 13,764 (5,223) 6,911 15,452 NET ASSETS, Beginning of year 30,863 66, , ,568 NET ASSETS, End of year $44,627 $61,029 $116,364 $222,020 Total Please see notes to combined financial statements. -4-

7 COMBINED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2016 (dollars in thousands) Unrestricted Temporarily Restricted Permanently Restricted REVENUE AND SUPPORT Tuition and fees $28,651 $ - $ - $ 28,651 Tuition assistance (6,133) - - (6,133) Net tuition income 22, ,518 Private gifts and grants (Notes 2 and 16) 3,790 9, ,903 Government grants Public service Sales and services of auxiliary enterprises 7, ,197 Net investment returns (Note 4) (9,802) 4,394 (224) (5,632) Change in value of split-interest agreements - (39) (1) (40) Change in beneficial interest in investments of financially interrelated entity - (3,448) - (3,448) Change in beneficial interest in net assets of financially interrelated entity - (2,806) - (2,806) Other 1, ,710 Total revenue and support 26,413 7, ,402 NET ASSETS RELEASED FROM RESTRICTIONS 17,925 (15,302) (2,623) - Total revenue, support, and releases from restrictions 44,338 (7,370) (2,566) 34,402 EXPENSES Instruction 23, ,371 Public service 2, ,954 Academic support 5, ,024 Student services 6, ,421 Research 2, ,784 Auxiliary enterprises 7, ,398 Institutional support (Note 15) 15, ,473 Total expenses 63, ,425 CHANGE IN NET ASSETS BEFORE CHANGE IN VALUE OF INTEREST RATE SWAPS (19,087) (7,370) (2,566) (29,023) Change in value of interest rate swaps (Note 8) (785) - - (785) CHANGE IN NET ASSETS (19,872) (7,370) (2,566) (29,808) NET ASSETS, Beginning of year 50,735 73, , ,376 NET ASSETS, End of year $30,863 $66,252 $109,453 $206,568 Total Please see notes to combined financial statements. -5-

8 COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2017 AND 2016 (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 15,452 $(29,808) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation 2,729 3,032 Amortization of deferred financing costs Accretion of expense 2 3 Provision for uncollectible accounts 537 1,034 Change in value of interest rate swaps (1,211) 785 Change in value of split-interest agreements Realized and unrealized (gains) losses on investments, net (9,010) 6,704 Gain on disposition of long-lived assets (2,653) - Loss on bond refinancing Change in beneficial interest in investments of financially interrelated entity 8,775 5,862 Change in beneficial interest in net assets of financially interrelated entity (558) 3,931 Contributions recognized from gift annuities - (125) Contributions restricted for purchase of long-term investments (7,539) (282) Change in operating assets and liabilities: (Increase) decrease in receivables (3,763) 2,589 Decrease (increase) in prepaids and other assets 173 (137) Increase (decrease) in accounts payable and accrued expenses 569 (1,021) Decrease in deposits (85) (186) Decrease in unearned revenue (276) (225) Increase (decrease) in amount due to auxiliary organizations 20 (10) Decrease in amount due to U.S. Government (79) (536) Net cash provided by (used in) operating activities 3,364 (8,211) CASH FLOWS FROM INVESTING ACTIVITIES Cash disbursed for notes receivable (137) (126) Collection of notes receivable Purchase of investments (5,464) (5,261) Proceeds from sale of investments 18,896 17,931 Proceeds from sale of property and equipment 3,003 - Purchase of property and equipment (839) (1,206) Proceeds from (increase in) repurchase agreement 2,308 (4) Net cash provided by investing activities 18,061 11,544-6-

9 COMBINED STATEMENTS OF CASH FLOWS, Continued FOR THE YEARS ENDED JUNE 30, 2017 AND 2016 (dollars in thousands) CASH FLOWS FROM FINANCING ACTIVITIES Debt principal repayments (59,760) (1,044) Proceeds from borrowings on long-term debt 41,250 - Proceeds from borrowings on line of credit - 2,000 Principal payments on line of credit - (2,000) Cash settlement of interest rate swap (3,445) - Payments to annuitants (55) (39) Proceeds from gift annuities issued Payment of deferred loan and financing costs (124) - Proceeds from contributions restricted for purchase of long-term investments 7, Net cash used in financing activities (14,595) (151) NET INCREASE IN CASH AND CASH EQUIVALENTS 6,830 3,182 CASH AND CASH EQUIVALENTS, Beginning of year 3, CASH AND CASH EQUIVALENTS, End of year $ 10,666 $ 3,836 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest (none capitalized): $ 2,033 $ 2,370 Non-cash transaction: Deferred financing costs $ 124 $ - Additions to capital lease obligations $ 145 $ - Please see notes to combined financial statements. -7-

10 1. ORGANIZATION Fuller Theological Seminary and Subsidiary (the Organization ) is an international and multiethnic community that trains pastors, missionaries, psychologists, educators, and community leaders. The Organization contains three academic areas: The Schools of Theology, Psychology and Intercultural Studies, as well as certain specialized centers of learning. Founded in 1947 by Charles E. Fuller, a pioneering radio evangelist, and Harold J. Ockenga, pastor of the historic Park Street Church in Boston, the Organization s enrollment today exceeds 3,800 students who attend classes on the main campus in Pasadena, California, at the regional campuses, and through distributed learning. The main campus covers 12 acres near City Hall in downtown Pasadena, California. Regional campuses are located in Northern and Southern California, Washington, Arizona, Colorado, and Texas. Fuller Theological Seminary (the Seminary ) formed a California limited liability company, CGF Properties LLC (the Subsidiary ), in January The Subsidiary is wholly owned by the Seminary and operates exclusively to further the exempt purposes of its sole member, the Seminary. The Subsidiary s operations primarily consist of rental operations related to the Organization s owned student housing and guest center in the Pasadena area. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The combined financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Net Asset Categories The Organization records and classifies revenues, expenses, gains, and losses as unrestricted, temporarily restricted, or permanently restricted based on the existence or absence of donor-imposed restrictions. The Organization reports information regarding its financial position and activities according to the following net asset categories: Unrestricted Net Assets Unrestricted net assets include all support that is not subject to donor-imposed restrictions. Unrestricted endowment returns include income and gains earned on endowment investments that are available for appropriation under the spending policy approved by the Board of Trustees of the Organization (the Board ) (see Note 4, Investments). Board-designated net assets include unrestricted support that was designated for specific purposes by the Board and net investment in property and equipment. Temporarily Restricted Net Assets Temporarily restricted net assets include gifts and income from endowments that are subject to donor-imposed restrictions that either lapse or can be satisfied. When donor-imposed restrictions on temporarily restricted donations are met, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the combined statements of activities as net assets released from restrictions. -8-

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Net Asset Categories, continued Permanently Restricted Net Assets Permanently restricted net assets are subject to permanent donor-imposed restrictions. Generally, the donors permit the Organization to use all or part of the income earned on permanently restricted net assets for general or specific purposes. Net Asset Releases and Transfers During the year ended June 30, 2017, the Organization had releases and transfers between net asset categories as follows (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Transfer to temporarily restricted net assets $ (117) $ 117 $ - Transfer to permanently restricted due to donor restrictions being met - (48) 48 Transfer from permanently restricted net assets due to donors changing the restriction of funds (944) Release of purpose or time restriction 30,504 (30,504) - Total net asset transfers $30,387 $(29,491) $( 896) During the year ended June 30, 2016, the Organization had releases and transfers between net asset categories as follows (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Transfer from unrestricted net assets $ (10) $ 10 $ - Transfer from permanently restricted net assets due to donors changing 296 2,327 (2,623) the restriction of funds Release of purpose or time restriction 17,639 (17,639) - Total net asset transfers $17,925 $(15,302) $(2,623) Cash and Cash Equivalents Cash and cash equivalents include demand deposit bank accounts and short-term highly liquid investments with maturities of three months or less at the time of purchase. Cash and cash equivalent accounts may, at times, exceed federally insured limits. The Organization has not experienced any losses in such accounts. -9-

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Investments Investments are reported at fair value, which is determined by management utilizing market quotes for publicly traded securities and based upon observed market information and assumptions that market participants for the same investments recognize in buying and selling the investments. The observed market information consists of net asset values provided by investment managers, general partners, third-party administrators, and custodians. For donated investments, cost basis is determined by the fair value of the asset on the date the asset is received by the Organization. Interest and dividend income and gains and losses on investments are reported in the statements of activities as increases or decreases in unrestricted net assets, unless their use is temporarily or permanently restricted by donor stipulations or by law. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and such changes could materially affect the amounts reported in the financial statements. Investment purchases and sales are accounted for on a trade-date basis, which results in receivables and payables on trades that have not yet settled at the financial statement date. Realized gains and losses are calculated using specific identification of units held. Interest income is recorded when earned. Dividends are recorded on the ex-dividend date. The Organization utilizes risk controls to meet investment objectives authorized by the Board. Such risk controls include the use of outside investment managers meeting predetermined criteria and third-party quantitative and qualitative risk measurement evaluation tools. The Organization believes its risk control practices are appropriate to meet investment objectives. Other Assets The Organization has recorded an asset in its combined financial statements related to its right to repurchase and resell seven freestanding single-family residential units on behalf of present and future faculty members. The value of the right to repurchase, which is included in prepaids and other assets at June 30, 2017 and 2016, was $4,922,000, which is the lower of cost or fair value. Inventories At June 30, 2016 the Organization wrote-off the balance of its used book inventory. At June 30, 2017 and 2016, inventories also included approximately $45,000 of inventory related to general organizational supplies. -10-

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Property and Equipment Property and equipment of the Organization are recorded at cost at the date of acquisition or estimated fair value at the date of donation. Depreciation and amortization are computed using the straight-line method over the following estimated service lives: Buildings Furniture and equipment Leasehold improvements Automobiles Library books years 3 10 years Shorter of useful life or term of lease 10 years 10 years The Organization takes a half year of depreciation for buildings, furniture and equipment, automobiles and library books, in the year of acquisition and depreciation for leasehold improvements based on the term of the lease and the month the leasehold improvement is placed in service. Split-Interest Agreements The Organization has various types of split-interest agreements reflected in the combined financial statements. Charitable Remainder Trusts The Organization is designated as the remainderman of various split-interest agreements where donors have established and funded trusts under which specified distributions are to be made to a designated beneficiary or beneficiaries over the trust s term. Upon the termination or maturity of the trust, all assets are distributed to the designated remainder interests. A remainder interest that is unconditionally designated to the Organization is recorded as a contribution at the fair value of trust assets, less the present value of the estimated future payments to be made under the specific terms of the trust, and is subsequently revalued at the end of each year. The beneficiaries income interest, irrevocable remainder interest designated to others, and revocable remainder interest are recorded as a liability in the combined statements of financial position under the heading trust and annuity liabilities. Changes in value of liabilities are measured based on the fair value of related assets and are recorded directly to the liability. The discount rate used represents the various riskadjusted rates in existence at the date of the gifts and ranged from 2.60% to 8.40%. -11-

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Split-Interest Agreements, continued Charitable Gift Annuities Donors have contributed assets to the Organization in exchange for a promise by the Organization to pay a fixed amount for a specified period of time to the donor or to individuals or organizations as specified by the donor. Under the terms of such agreements, donors make gifts directly to the Organization and the related liability for fixed payments is a general obligation of the Organization. The Organization uses the actuarial method of recording charitable gift annuities. Under this method, the asset is recorded at fair value when a gift is received. The present value of the aggregate annuity payable is recorded as a liability, based upon life expectancy tables, and the remainder is recorded as a contribution in the appropriate net assets category. The liability account is credited with investment income and gains and is charged with investment losses and payments to beneficiaries. Periodic adjustments are made between the liability account and the net asset account for actuarial gains and losses. The actuarial liability is based on the present value of future payments discounted at the risk-adjusted interest rates in existence at the date of the gift and over the estimated lives according to the State of California Department of Insurance Annuity 2000 Mortality Table. The Organization is subject to additional legally mandated annuity reserve requirements by the State of California on its gift annuity contracts. Trusts Held by a Third Party Various donors have established and funded irrevocable trusts naming the Organization as a beneficiary. The assets are held by third-party trustees and invested for income returns distributable to the beneficiaries. The distributions from some of the trusts carry restrictions on their use, such as for scholarships, others are unrestricted. These beneficial interests are recorded as permanently restricted endowments or temporarily restricted term endowments. At June 30, 2017 and 2016, the fair value of such trusts was $3,784,000 and $3,516,000, respectively. Donors may have established and funded other trusts, which are administered by entities other than the Organization. Under the terms of the trusts, the Organization may have the irrevocable right to receive all or a portion of the income earned on the trust assets either in perpetuity or for the life of the trusts. The Organization is not aware of any other such trusts, except those noted above. Student Financial Assistance Programs The Organization participates in the delivery of student financial assistance programs under various programs administered by the Department of Education. The related activity is subject to audit both by independent certified public accountants and by representatives of the administering agency regarding compliance with applicable regulations. Any resultant findings of noncompliance could potentially result in the required return of related funds received and/or the assessment of fines or penalties or the discontinuation of eligibility for participation. -12-

15 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Revenue Recognition Revenue and support are recorded using the accrual method. Revenues are recognized when earned by the Organization. Tuition and Fees Tuition is recorded as revenue ratably over the academic quarter. Fees are recorded when incurred. Unearned tuition is reported as a liability in the current year, deferring recognition as revenue until the following year. Collectability of student accounts and notes receivable is reviewed both individually and in the aggregate. An allowance has been established based on experience, and balances deemed uncollectible are written off through a charge to bad debt expense or the provision for doubtful accounts, and a credit to accounts receivable. Private Gifts and Grants Revenue is recorded from private gifts and grants when received. Unconditional promises to give are recorded as contributions upon receipt of binding documentation at the net present value of the amounts expected to be collected. Conditional promises to give are recognized as revenue when the conditions are substantially met. Contributions resulting from split-interest agreements, measured at the time the agreements are entered into, are based on the difference between the fair value of the assets received or present value of those promised and the present value of the obligation to third-party recipients under the agreements. All gifts, bequests, and other public support are included in unrestricted net assets, unless specifically restricted by the donor or the terms of the gift or grant instrument. Contributions resulting from unconditional promises to give (pledges) are recognized as contribution revenue when the donor s commitment is received. Pledges with payments due to the Organization in future periods are recorded as increases in temporarily restricted or permanently restricted net assets at the estimated present value of future cash flows, net of allowance of estimated uncollectible promises. Allowance is made for uncollectible contributions receivable based upon the Organization s analysis of past collection experience and other judgmental factors. Government Grants Revenue is recorded from government grants as reimbursable expenses are incurred. Other Revenues All other revenues are recorded when service is rendered, goods are sold, or accommodations provided. -13-

16 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Functional Allocation of Expenses The costs of providing various programs and other activities of the Organization have been summarized on a functional basis in the combined statements of activities. Accordingly, certain costs have been allocated among the programs and services benefited based on the judgment of management. Some of the costs so allocated are the following (in thousands): Depreciation Depreciation and and Amortization Interest Amortization Interest Instruction $ 245 $ - $ 342 $ - Public service Academic support Student services Research Auxiliary enterprises 629 1, ,649 Institutional support: Organizational support Fund-raising $2,826 $2,035 $3,171 $2,373 Interest expense for the years ended June 30, 2017 and 2016, includes $2,000 and $3,000, respectively of accretion expense related to the Organization s asset retirement obligation that is discussed in footnote 7. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment losses are recognized if the carrying amount of the asset exceeds the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. Management has concluded that there is no impairment of long-lived assets for which a financial statement adjustment for impairment is required as of June 30, 2017 or 2016, respectively. -14-

17 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Income Taxes The Organization is a nonprofit organization that is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code (IRC) and comparable state laws(s). However, the Organization is subject to federal income tax on any unrelated business taxable income. In addition, the Organization is not classified as a private foundation within the meaning of Section 509(c) of the IRC. Accordingly, no provision for federal income tax has been recorded in the accompanying combined financial statements. Management believes the Organization will continue to be exempt from income taxes. Use of Estimates The preparation of combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses, during the reporting period. Actual results could differ from those estimates. Adoption of Recently Issued Pronouncement In April 2015, the Financial Accounting Standards Board (FASB) issued guidance that replaces the existing accounting standards for debt issuance costs in Accounting Standard Update (ASU) , Simplifying the Presentation of Debt Issuance Costs, with retrospective application required. The guidance is effective for fiscal years beginning after December 15, 2015, and requires debt issuance costs related to a recognized debt liability to be presented in the combined statements of financial position as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts (i.e., a contra liability), rather than as an asset. The Organization adopted the provisions of this guidance in the year ended June 30, See note 8 for the unamortized discount of debt issuance costs. Interest Rate Swaps The Organization accounts for interest rate swaps in accordance with FASB ASC 815, Derivatives and Hedging. ASC 815 requires all derivatives to be reflected at fair value as either assets or liabilities, depending on the rights or obligations under the contracts. Refer to Note 8 for a description of interest rate swaps. -15-

18 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of estimated fair value of financial instruments is made in accordance with the Financial Instruments Topic of the Financial Accounting Standards Board s Accounting Standards Codification for organizations with assets greater than $100 million. The estimated fair values of financial instruments, based on available market information and appropriate valuation methodologies, as of June 30, 2017 and 2016, are presented below (in thousands): Assets: Carrying Amount Fair Carrying Value Amount Fair Value Cash and cash equivalents $ 10,666 $ 10,666 $ 3,836 $ 3,836 Investment in repurchase agreement - - 2,308 2,308 Investments 93,779 93,779 98,479 98,479 Receivables, net 9,616 9,616 6,546 6,546 Beneficial interest in perpetual trusts 3,784 3,784 3,516 3,516 Beneficial interest in investments of financially interrelated entity 32,761 32,761 41,536 41,536 Beneficial interest in investments of financially interrelated entity 28,177 28,177 27,619 27,619 Liabilities: Trust and annuity liabilities Interest rate swap agreements ,073 5,073 Debt instruments payable 41,103 41,103 59,356 51,

19 3. FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued The following methods and assumptions were used by the Organization in estimating the fair value of its financial instruments at June 30, 2017 and 2016: Cash and cash equivalents, receivables, The carrying value approximates fair value due to the short-term maturity of these instruments. Investment in repurchase agreement Funds were treated as collateralized financings and were recognized initially at fair value which represents the amount of cash deposited and the amount received when the investment repurchase agreement matured. Investments Investments are recorded at fair value based on quoted market prices for similar instruments, except for investments where readily determinable market values do not exist, which are recorded at estimated fair value, determined by the Organization using methods and significant assumptions the Organization considers appropriate based on its understanding of the underlying characteristics of the investments. See Notes 2 and 5 for additional information on the fair values of investments and the underlying assets of the investments, including the carrying value of those assets not valued at fair value on a recurring basis. Receivables The basis for fair value is described and included with cash above as valuation method is the same. Beneficial interest in perpetual trusts The fair value of beneficial interest in perpetual trusts is based on the Organization s share of the overall assets held by other organizations. Beneficial interest in investments of financially interrelated entity The fair value of beneficial interest in the investments of financially interrelated entity are based on the current fair values of the related investments as reported by the financially interrelated entity at the date of the combined financial statements. See Notes 2 and 16 for additional information on the basis for fair value. Beneficial interest in net assets of financially interrelated entity The fair value of beneficial interest in the net assets of financially interrelated entity are based on the current fair values of the related investments as reported by the financially interrelated entity at the date of the combined financial statements. See Notes 2 and 16 for additional information on the basis for fair value. Trust and annuity liabilities The fair value is based on the present value of future cash flows to annuitants using published mortality rates. See Note 2. Interest rate swap agreements The fair value of interest rate swap agreements is the estimated amount that the organization would pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the swap counter parties. -17-

20 3. FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued Debt instruments payable Based on the borrowing rates currently available to the Organization for loans with similar terms and average maturities, the carrying value of the Organization s debt obligations approximates its fair value. The borrowing rates are based on variable rates, which reset periodically approximating fair value. 4. INVESTMENTS Investments are primarily managed by independent investment managers and held by outside custodians that are managed primarily by a financially interrelated entity and an independent investment consulting company. The composition of investments as of June 30, 2017 and 2016, is as follows (in thousands): Common trust funds: Fuller Endowment Fund LLC $76,294 $ - Mission Core Fund I - 16,305 Common and preferred stocks ,932 Corporate bonds Government bonds Co-mingled bonds - 2,322 Mutual funds ,522 Co-investments 11,735 11,812 Trust deed and other notes receivable Money market funds 3,069 10,735 Total investments $93,779 $98,479 Fuller Endowment Fund LLC invests primarily in equity securities, mutual funds, investment trusts, regulated investment companies, hedge funds and private equity funds. Mission Core Fund I invests primarily in equity securities, including common stocks and securities convertible into common stocks, and shares of investment trusts, regulated investment companies, and private equity funds, options, warrants, puts, and calls. Derivative instruments are utilized on a limited basis in covered hedging transactions. During the year ended June 30, 2017 the Organization refinanced its debt and as a result the pledge of its investments to collateralize its line of credit ended. During the year ended June 30, 2016, $7,500,000 of the Organization s investments were pledged to collateralize its line of credit. The amount used to collateralize the line of credit was held in a separate bank account that was included in money market funds above. -18-

21 4. INVESTMENTS, Continued The Organization has provided co-investment opportunities to newly appointed faculty and administrators since Under the arrangement, the Organization loans funds for the purchase of a residence and retains a subordinate security interest in the property. Upon sale or refinance of the property, the Organization is repaid the principal, plus a percentage of the gain that corresponds to the proportion of the purchase price originally invested. In the event of a loss upon sale or refinance, the Organization is to be repaid the principal in full as per the terms of the co-investment agreements. As of June 30, 2017 and 2016, co-investments from various faculty members and administrators of the Organization are active and outstanding in the amount of $11,735,000 and $11,812,000, respectively, and are included in investments in the accompanying combined statements of financial position. The summary by range of co-investments outstanding as of June 30, 2017 and 2016, is as follows: $100,000 or less 9 10 Between $100,000 and $200, $200,000 and greater Total co-investments Funding for co-investments outstanding as of June 30, 2017 and 2016, has been provided by two internal sources as follows (in thousands): Number Amount Number Amount Faculty co-investment fund - $ - 1 $ 83 Endowment fund 43 11, ,729 Total funding by source 43 $11, $11,812 Net investment returns as of June 30, 2017 and 2016, consist of the following (in thousands): Interest and dividend income $1,271 $ 1,553 Net realized gains 5,959 2,000 Net unrealized investment gains (losses) 3,372 (8,279) Investment expenses (1,099) (906) Net investment returns $9,503 $(5,632) -19-

22 5. FAIR VALUE MEASUREMENT FASB ASC 820 requires characterizing holdings as Level 1, Level 2, or Level 3 based upon the various inputs or methodologies used to value the holdings as summarized below: Level 1 Quoted prices in active markets for identical holdings Level 2 Significant observable market-based inputs, other than Level 1 quoted prices, or unobservable inputs that are corroborated by market data Level 3 Significant unobservable inputs that are not corroborated by observable market data The inputs or methodologies used for valuing the Organization s holdings are not necessarily an indication of the risks associated with investing in those holdings. The estimated fair value amounts have been determined by the Organization using available market information and appropriate valuation methodologies. Management judgment is required to develop estimates of fair value for certain holdings as enumerated in Note 2. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Organization could have realized in an actual market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. -20-

23 5. FAIR VALUE MEASUREMENT, Continued The following section describes the valuation methodologies used by the Organization to measure its investments at fair value: Level 1 Investments include cash and cash equivalents and all investments listed on major exchanges or liquid public markets. Fair values are based on quoted market prices provided by the custodians or other market-based sources for identical instruments at or near the measurement date. As required by FASB ASC 820, quoted prices are not adjusted for investments deemed large relative to that investment s market, even when a sale could reasonably impact the quoted price. Level 2 Investments include real estate and promissory notes backed by real estate. Fair values are based on comparable property sales or appraisals, or expected collection for notes. Level 3 Investments include investment funds managed by a financially interrelated entity and an independent investment consulting company, of which investments are comprised of private limited partnerships in investment funds or fund of funds comprised of marketable securities, private equity limited partnerships, and stocks, notes and warrants in privately owned companies. The fair value of these interests are determined by reference to quarterly reporting information that details the net asset value of the investments as corroborated by annual audits of the investment funds, and by Organization review and judgment based upon all available information about those investment funds. Management s estimates are based on information provided by third-party administrators, general partners, and fund managers. There have been no changes in valuation techniques. Where significant, inputs used to measure fair value of any investment which fall into different levels of the fair value hierarchy, that investment is included in the lowest level which relates to any such input. Management s assessment of the significance of each input in relationship to all inputs in their entirety requires judgment specific to each investment. The Organization uses appropriate valuation techniques to determine fair value based on inputs available. When available, the Organization measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value. Level 3 inputs are only used when Level 1 or Level 2 inputs were not available. -21-

24 5. FAIR VALUE MEASUREMENT, Continued The following table displays the Organization s fair value of assets measured on a recurring basis as of June 30, 2017 (in thousands): Level 1 Level 2 Level 3 Total Fuller Endowment Fund LLC $ - $ - $76,294 $76,294 Common and preferred stocks: Domestic stocks Preferred stocks Total common and preferred stocks Corporate bonds: B1 credit rating Total corporate bonds Government bonds: United States Treasury Notes Mortgage backed securities Total government bonds Mutual funds: Growth funds Co-investments - 11,735-11,735 Real Estate and other notes Money market funds 3, ,069 $5,254 $12,231 $76,294 $93,

25 5. FAIR VALUE MEASUREMENT, Continued Included within the assets above are investments in other investment funds that calculate net asset value per share (or its equivalent). The following table summarizes the fair value of those investments as of June 30, 2017 (in thousands): Level 3 Fair Value Unfunded Commitments Redemption Frequency Fuller Endowment Fund LLC (a) $76,294 $ - Monthly, Quarterly $76,294 $ - Redemption Notice Period None (a) The Fuller Endowment Fund LLC primarily includes investments in equity securities, mutual funds, investment trusts, regulated investment companies, hedge funds and private equity funds. The Fuller Endowment Fund LLC focuses on providing superior rates of absolute return and may utilize a wide variety of investment strategies, including event-driven strategies, relative value strategies, global macro strategies, equity strategies, and credit strategies, as well as unique financing or business situations. This fund may hold a portion of its assets in cash equivalents and money market funds pending the investment of assets in Portfolio Funds, to maintain the liquidity necessary to effect withdrawals, temporarily during periods of adverse market conditions or for other purposes. The fair value of this investment has been estimated using the net asset value per share of the fund. -23-

26 5. FAIR VALUE MEASUREMENT, Continued The following table displays the Organization s fair value of assets measured on a recurring basis as of June 30, 2016 (in thousands): Level 1 Level 2 Level 3 Total Mission Core Fund I $ - $ - $16,305 $ 16,305 Common and preferred stocks: Domestic stocks 14, ,044 Foreign stocks 1, ,765 Preferred stocks Total common and preferred stocks 15, ,932 Corporate bonds: B1 credit rating Total corporate bonds Government bonds: United States Treasury Notes Mortgage backed securities Total government bonds Co-mingled bonds fund 2, ,322 Mutual funds Growth funds 10, ,230 Value fund 9, ,429 Equity fund Income fund 4, ,481 Emerging fund 3, ,887 Total return fund 10, ,643 Total mutual funds 39, ,522 Co-investments - 11,812-11,812 Real Estate and other notes Money market funds 10, ,735 $69,393 $12,781 $16,305 $98,

27 5. FAIR VALUE MEASUREMENT, Continued Included within the assets above are investments in other investment funds that calculate net asset value per share (or its equivalent). The following table summarizes the fair value of those investments as of June 30, 2016 (in thousands): Level 3 Fair Value Unfunded Commitments Redemption Frequency Mission Core Fund I (b) $16,305 $ - Monthly, Quarterly $16,305 $ - Redemption Notice Period 120 days (b) The Mission Core Fund I primarily includes investments in a combination of investment funds, such as equity long/short hedge funds, equity securities, including common stocks and securities convertible into common stocks, and shares of investment trusts, regulated investment companies, and private equity funds, options, warrants, puts, and calls. The Mission Core Fund I focuses on providing superior rates of absolute return and may utilize a wide variety of investment strategies, including event-driven strategies, relative value strategies, global macro strategies, equity strategies, and credit strategies, as well as unique financing or business situations. This fund may hold a portion of its assets in cash equivalents and money market funds pending the investment of assets in Portfolio Funds, to maintain the liquidity necessary to effect withdrawals, temporarily during periods of adverse market conditions or for other purposes. The fair value of this investment has been estimated using the net asset value per share of the fund. -25-

28 5. FAIR VALUE MEASUREMENT, Continued The following is a reconciliation of Level 3 holdings (in thousands) for which significant unobservable inputs were used in determining value for the years ended June 30, 2017 and The Organization-owned portion of total realized and unrealized gains and losses of Level 3 holdings are included in net investment returns in the statements of activities. Fuller Endowment Fund LLC Mission Core Fund I Total At estimated fair value at June 30, 2015 $ - $22,366 $22,366 Net sales - (4,485) (4,485) Net realized and unrealized gains - (1,576) (1,576) At estimated fair value at June 30, ,305 16,305 Net purchases (sales) 74,018 (17,106) 56,912 Net realized and unrealized gains 2, ,077 At estimated fair value at June 30, 2017 $76,294 $ - $76,294 Total net realized and unrealized gains and losses are recorded in the combined statements of activities as net investment returns. -26-

29 6. RECEIVABLES Receivables as of June 30, 2017 and 2016, consist of the following (in thousands): Student accounts receivable $2,907 $2,803 Student notes receivable Pledges receivable 5,869 3,122 Government-guaranteed student loans Notes receivable Auxiliary enterprise trade receivables 1, Employee advances Other ,161 8,577 Less allowance for uncollectible accounts (1,545) (2,031) Net receivables $9,616 $6,546 Pledges receivable as of June 30, 2017 and 2016, are expected to be realized as follows (in thousands): Within one year $2,843 $1,452 Between one year and five years 2,934 1,518 Greater than five years ,021 3,241 Less discount (152) (119) Net pledges receivable $5,869 $3,122 Amounts expected to be collected in future years are recorded at the present value of estimated future cash flows discounted at the risk-adjusted interest rate at the date of the contribution. The discount rates used ranged from 0.83% to 4.60%. -27-

30 6. RECEIVABLES, Continued The Organization administers the Federal Perkins Loan Program. U.S. government funding for loans made under the federal student loan program in the amount of $593,000 and $672,000, respectively, for the years ended June 30, 2017 and 2016, are reflected as due to U.S. government in the accompanying combined statements of financial position. The Organization monitors the allowance for credit quality of financing receivables and allowance for credit losses. Allowance for Credit Losses and Recorded Investment in Financing Receivables for the Year Ended June 30, 2017 (in thousands): Allowance for credit losses: Government Guaranteed Student Loans Notes Receivable Student Notes Receivable Total Ending balance $ - $ - $ - $ - Financing receivables: Ending balance $595 $370 $91 $1,056 Ending balance: individually evaluated for impairment $ - $370 $91 $ 461 Ending balance: collectively evaluated for impairment $595 $ - $ - $ 595 Ending balance: loans acquired with deteriorated credit quality $ - $ - $ - $

31 6. RECEIVABLES, Continued For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of June 30, 2017 (in thousands): Government Guaranteed Student Loans Notes Receivable Student Notes Receivable Total Performing $517 $356 $71 $ 944 Nonperforming $595 $370 $91 $1,056 Allowance for Credit Losses and Recorded Investment in Financing Receivables for the Year Ended June 30, 2016 (in thousands): Allowance for credit losses: Government Guaranteed Student Loans Notes Receivable Student Notes Receivable Total Ending balance $ - $ - $ - $ - Financing receivables: Ending balance $698 $612 $96 $1,406 Ending balance: individually evaluated for impairment $ - $612 $96 $ 708 Ending balance: collectively evaluated for impairment $698 $ - $ - $ 698 Ending balance: loans acquired with deteriorated credit quality $ - $ - $ - $

32 6. RECEIVABLES, Continued For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of June 30, 2016 (in thousands): Government Guaranteed Student Loans Notes Receivable Student Notes Receivable Total Performing $579 $505 $74 $1,158 Nonperforming $698 $612 $96 $1,406 For student loans, the credit quality indicator is performance determined by delinquency status and, for Government Guaranteed Student Loans, origination and servicing of the loan. Delinquency status is updated monthly by the Organization s loan servicer. Government Guaranteed Student Loans that are originated and serviced properly under Department of Education regulations can be assigned to the Department of Education when deemed no longer collectible. The Organization is not aware of any material amount of loans not properly originated or serviced under Department of Education regulations. Age analysis of past due financing receivables as of June 30, 2017, is as follows (in thousands): Government Guaranteed Student Loans Notes Receivable Student Notes Receivable Total In default, less than 240 days $ 9 $ 14 $20 $ 43 In default, greater than 240 days, less than 2 years In default, greater than 2 years, less than 5 years In default, greater than 5 years Total in default Current Total financing receivables $595 $370 $91 $1,056 Recorded investment >90 days and $ - $ - $ - $ - accruing -30-

33 6. RECEIVABLES, Continued Age analysis of past due financing receivables as of June 30, 2016, is as follows (in thousands): Government Guaranteed Student Loans Notes Receivable Student Notes Receivable Total In default, less than 240 days $ 55 $ - $22 $ 77 In default, greater than 240 days, less than 2 years In default, greater than 2 years, less than 5 years In default, greater than 5 years Total in default Current ,158 Total financing receivables $698 $612 $96 $1,406 Recorded investment >90 days and $ - $107 $ - $ - accruing Impaired loans with no related allowance recorded for the year ended June 30, 2017, are as follows (in thousands): Government Guaranteed Student Loans Notes Receivable Student Notes Receivable Total Recorded investment $78 $14 $20 $112 Unpaid balance $78 $14 $20 $112 Related allowance $ - $ - $ - $ - Average recorded investment $ 3 $14 $10 $ 27 Interest income recognized $ - $ - $ - $ - There were no financing receivables on nonaccrual status as of June 30,

34 6. RECEIVABLES, Continued Impaired loans with no related allowance recorded for the year ended June 30, 2016, are as follows (in thousands): Government Guaranteed Student Loans Notes Receivable Student Notes Receivable Total Recorded investment $119 $107 $22 $248 Unpaid balance $119 $107 $22 $248 Related allowance $ - $ - $ - $ - Average recorded investment $ 4 $107 $11 $122 Interest income recognized $ - $ 10 $ - $ 10 There were no financing receivables on nonaccrual status as of June 30, PROPERTY AND EQUIPMENT Property and equipment as of June 30, 2017 and 2016, consist of the following (in thousands): Land $ 14,208 $ 14,298 Buildings and building improvements 98,570 98,785 Leasehold improvements Equipment 9,597 9,452 Automobiles Library books 3,380 2,817 Information system technology 2,112 2, , ,541 Less accumulated depreciation and amortization (37,819) (35,464) 91,018 93,077 Construction in progress Net property and equipment 91,065 93,159 Less total debt (Note 8) (41,103) (59,588) Net investment in property and equipment $ 49,962 $ 33,

35 7. PROPERTY AND EQUIPMENT, Continued Included in equipment is $4,698,000 and $4,553,000 of property held under capital leases as of June 30, 2017 and 2016, respectively, which as of June 30, 2017 and 2016 is net of accumulated amortization of $4,420,000 and $4,338,000, respectively. Depreciation and amortization expense for property and equipment for fiscal year 2017 and 2016 totaled $2,729,000 and $3,032,000, respectively, and is allocated to the various functional expenses (see Note 2) based on departmental use of specific assets in most cases and estimated use for the remainder. During the year ended June 30, 2017, title to certain property and buildings related to student housing and the guest center were transferred to the Subsidiary. Those property and buildings were used to secure the new debt (see Note 8). On July 1, 2007, the Organization recorded asset retirement obligations under FASB ASC 410, Asset Retirement and Environmental Obligations, related to certain fixed assets, primarily for disposal of regulated materials upon eventual retirement of the assets which is included in accounts payable and accrued expenses in the accompanying combined statements of financial position. The following schedule summarizes asset retirement obligation activity for the years ended June 30, 2017 and 2016 (in thousands): Obligations incurred $ - $ - Obligations settled (21) - Accretion expense (included in depreciation and amortization expense) 2 3 Revisions in estimated cash flows - - Beginning balance Ending balance $144 $

36 8. DEBT Debt as of June 30, 2017 and 2016, consists of the following (in thousands): Secured line of credit, which expired on November 30, $ - $ 7,500 Notes payable, secured by Organization land and buildings, payable in monthly installments of $17 including interest, over various periods through fiscal year 2023, with a fixed interest rate of 4.024% per Annum - 2,967 Capital leases with annual installment payments of $56 and $134, respectively, including interest rates ranging from 2.56% to 6.47% through March Notes payable, secured by certain subsidiary land and buildings, payable in monthly installments ranging from $193 to $225, including interest, through March 1, Approximately 60.6% of the debt carries a fixed rate of 4.884% per annum (per the swap agreement) and the remainder of the debt carries a variable interest rate of prime less.25% per annum. Variable interest rate was 4.0% as of June 30, ,088 - Variable rate demand refunding revenue bonds, Series 2011A; financing of principal matured in February ,088 Total debt 41,223 59,588 Less: Deferred financing costs (120) (232) Total debt, net of deferred financing costs $41,103 $59,

37 8. DEBT, continued Total future minimum principal payments on the above debt as of June 30, 2017, are summarized as follows (in thousands): Fiscal Year Ending June 30, Notes and Trust Deeds Payable Capital Lease Deferred Financing Costs Total 2018 $ 655 $ 56 $ (14) $ (14) (14) (14) (14) 775 Thereafter 37,491 - (50) 37,441 Total debt 41, (120) 41,117 Less interest - (14) - (14) Total debt, net of interest $41,088 $135 $(120) $41,103 Refinancing During the year ended June 30, 2017, the Organization completed its plan to refinance its debt through a combination of new bank financing, liquidation of investments, and the sale of a small office building that had excess capacity. In preparation for the refinancing, the Organization first paid off its line of credit in November, It also paid off its note payable secured by Organization land and buildings in December 2016 through the proceeds of the sale of its office building. In addition, the Organization refinanced its variable rate demand refunding revenue bonds, Series 2011A (the Series 2011 Bonds ) in February This included the Organization liquidating $9,700,000 from a fund at The Fuller Foundation (the Foundation ) which reduced its beneficial interest in investments of the Foundation. The majority of the funds liquidated was used to pay down existing debt prior to the refinance and the remaining portion of the liquidation was to be used for other strategic liquidity needs. Funds from the Investment in Repurchase account were also released upon refinancing of the Series 2011 Bonds (see Note 8) and used to reduce the overall amount refinanced. Existing interest rate swaps were terminated and a new interest rate swap was entered into with the new lender by the Subsidiary. The Subsidiary (see Note 2) was also established to facilitate the debt refinancing and holds both the assets related to the Organization s housing and guest center operations as well as the related debt. -35-

38 8. DEBT, continued Variable Rate Loan The Organization refinanced its Series 2011 Bonds with a Variable Rate Loan (the Loan ) in the amount of $41,250,000. The Loan was entered into by the Subsidiary and is secured by certain property and buildings related to student housing and the guest center. The Seminary signed a continuing guarantee of payment and performance related to the loan. In addition, there is an agreement whereby all revenue and rents of the Subsidiary are deposited into a control account to which the lender has a continuing security interest for the duration of the Loan. The Loan carries a variable interest rate, based on the Wall Street Journal Prime rate, less.25%. Interest and principal are payable monthly through March 2027, based on the 10 year amortization of the Loan. Interest expense incurred in connection with the Loan for the year ended June 30, 2017 was $1,208,000. The effective variable interest rate as of June 30, 2017 was 4.0% per annum. The Loan also requires the Subsidiary to maintain one or more interest rate swap agreements of not less than 50% of the principal amount of the Loan outstanding as a hedge against the Subsidiary s interest rate risk. Accordingly, in connection with issuance of the Loan, the Subsidiary entered into an Interest Rate Swap Transaction with East West Bank (the 2017 Swap Agreement ) dated February 28, 2017, the trade date, with a notional amount of $25,000,000, reducing in varying amounts starting April 3, 2017 through March 1, The effective date of the swap was March 1, 2017, with a termination date of March 1, The 2017 Swap Agreement effectively changed the Subsidiary s interest rate exposure on approximately 60% of its Loan to a fixed rate of 4.884% based on the USD-Prime-H.15 rate. As of June 30, 2017, the interest rate swap had a fair value of $(418,000). The Loan documents contain several covenants, the most significant of which requires the Subsidiary to maintain a debt service coverage of at least 1.30 to 1, based on a trailing fourquarter basis. The Subsidiary is also required to file quarterly unaudited financial statements and covenant calculations within 30 days of the quarter close. Additionally, the Organization is required to file quarterly unaudited financial statements within 45 days of the quarter close and audited financial statements within 150 days after its fiscal year end. The Subsidiary was in compliance with all financial and reporting covenants during the year ending June 30,

39 8. DEBT, CONTINUED Deferred Financing Costs At June 30, 2017 and 2016, net deferred financing costs of $120,000 and $232,000, respectively, consist of $124,000 and $971,000, respectively of total deferred financing costs, net of $4,000 and $739,000, respectively, in accumulated amortization. Deferred financing costs include legal fees and other costs incurred to refinance the 2011 Bank Qualified Bond financing (the 2011 Bonds ) during the year ended June 30, 2017 and legal fees and other costs incurred to issue the 2011 Bank Qualified Bond financing (the 2011 Bonds ), and the related forward swap associated with the 2011 Bonds during the year ended June 30, The debt and related swap instruments are discussed further below. These costs are amortized using the straight-line method over the life of the debt instruments, which is ten and seven years, respectively. Lines of Credit The Organization no longer holds a line of credit for the year ended June 30, 2017, as noted above. The Organization had one short-term line of credit, secured by four of the Organization s buildings, for temporary working capital, short-term financing and potential real estate property acquisitions, with a maximum borrowing of $7,500,000 for the year ended June 30, 2016 under a revolving line of credit facility that expired on November 30, In addition, as of June 30, 2016, the line of credit was collateralized by $7,500,000 of the Organization s investments. During the year ended June 30, 2016, borrowings under the facility were secured and accrued interest at a rate ranging from 2.75 to 4.50%. The line of credit was subject to the same covenants as the 2011 Bonds, the most significant of which were minimum requirements for ratios of debt service coverage, as well as liquidity. Additionally, the Organization was required to file audited financial statements 150 days after its fiscal year end. The Organization was in compliance with all financial and reporting covenants during the year ending June 30, 2016, except for the quarters ended December 31, 2015 with regards to its liquidity to debt and fixed charge coverage ratios and March 31, 2016 with regards to its fixed charge coverage ratio. The Organization entered into a forbearance agreement with U.S. Bank National Association (the Bank ) dated September 22, 2016, whereby the Bank had agreed to forbear until November 30, 2016, from exercising its rights and remedies related to the Organization s non-compliance with the covenants noted above. Additionally, the Organization was not required to comply with the liquidity to debt ratio as of and for the period ended June 30, 2016, nor was it required to comply with the fixed charge coverage ratio as of and for the periods ended June 30, 2016 and September 30,

40 8. DEBT, Continued Bonds Payable The Organization had student revenue housing bonds, general obligation bonds, and bank qualified bonds which were refinanced as noted above which included: Refunding Revenue Bonds In February 2011, CECFA issued bonds in the amount of $52,980,000 (the Series 2011A Bonds ) on behalf of the Organization, pursuant to a trust indenture dated February 1, 2011 (the 2011 Trust Indenture ). Under the 2011 Trust Indenture, proceeds from the Series 2011A Bonds were restricted to (i) defeasance of the existing Series 2008A Bonds and the Series 2004A Bonds, and (ii) to pay the costs of issuance of the Series 2011A Bonds, including certain costs incurred in connection with the bond purchase agreement. In February 2011, the Organization entered into a supplemental agreement with Firstar Realty L.L.C. (the Purchaser ), an Illinois limited liability company which is an affiliate of the Bank, which provided for the purchase of the Series 2011A Bonds (the 2011 Bond Purchase Agreement ). The 2011 Bond Purchase Agreement granted the Purchaser a security interest in all of the Organization s deposit accounts maintained with the Bank. In addition, the 2011 Bond Purchase Agreement was secured by a deed of trust which provided the Purchaser a first priority mortgage and assignment of leases and rents with respect to certain property of the Organization. The Series 2011A Bonds carried a flex private variable placement interest rate, based on the sum of London InterBank Offered Rate (LIBOR), any prevailing liquidity premium, and 1.75%, multiplied by the Tax Exempt multiplier of the Purchaser. Interest and principal were payable monthly through February 2017, based on the 30 year amortization of the Series 2011A Bonds. Interest expense incurred in connection with the Series 2011A Bonds for the years ended June 30, 2017 and June 30, 2016 was $638,000 and $1,957,000, respectively. The effective variable interest rate as of June 30, 2016 was 1.85% per annum. The 2011 Bond Purchase Agreement also required the Organization to maintain one or more interest rate swap agreements of not less than 50% of the principal amount of the Series 2011A Bonds outstanding as a hedge against the Organization s interest rate risk. Accordingly, in connection with issuance of the Series 2011A Bonds issuance, the Organization entered into an Interest Rate Swap Transaction with U.S. Bank National Association (the 2011 Swap Agreement ) dated June 29, 2011, the trade date, with a notional amount of $18,500,000, reducing in varying amounts starting August 1, 2016 through August 1, The effective date of the swap was August 3, 2015, with a termination date of March 1, The 2011 Swap Agreement effectively changed the Organization s interest rate exposure on its floating rate Series 2011 Bonds to a fixed rate of 2.86% based on one-month LIBOR multiplied by 67.00%. As of June 30, 2016, the interest rate swap had a fair value of $(798,000). This agreement was terminated as of the date of the refinance as noted above. -38-

41 8. DEBT, Continued Bonds Payable, continued Refunding Revenue Bonds, continued The Organization had previously entered into three International Swaps and Derivatives Association, Inc. Master Agreements with a different counterparty, which were subsequently transferred to the 2011 Bonds. The first International Swaps and Derivatives Association, Inc. Master Agreement dated October 23, 2008, the trade date, had a notional amount of $20,000,000, reducing in varying amounts starting August 1, 2006 through August 1, The effective date of the swap was September 1, 2005, with a termination date of August 1, 2015, with a fixed 30-day LIBORbased rate of 3.60%. As of June 30, 2016, the interest rate swap had a fair value of $0. The second International Swaps and Derivatives Association, Inc. Master Agreement dated October 23, 2008, the trade date, had a notional amount of $10,000,000, reducing in varying amounts starting September 1, 2006 through September 1, The effective date of the swap was May 1, 2006, with a termination date of August 1, 2035, with a fixed 30-day LIBOR-based rate of As of June 30, 2016, the interest rate swap had a fair value of $(2,386,000). The third International Swaps and Derivatives Association, Inc. Master Agreement dated May 8, 2008, with a trade date of April 29, 2008, had a notional amount of $10,000,000, reducing in varying amounts starting September 1, 2009 through September 1, The effective date of the swap was June 2, 2008, with a termination date of August 1, 2028, with a fixed 30-day LIBOR-based rate of 3.245%. As of June 30, 2016, the interest rate swap had a fair value of $(1,889,000). All three of these agreements were terminated as of the date of the refinance as noted above. The Series 2011 Bonds documents contained several covenants, the most significant of which was minimum requirements for ratios of debt service coverage, as well as liquidity. Additionally, the Organization was required to file audited financial statements 150 days after its fiscal year end. The Organization was in compliance with all financial and reporting covenants during the year ending June 30, 2016 except for the quarters ended December 31, 2015 with regards to its liquidity to debt and fixed charge coverage ratios and March 31, 2016 with regards to its fixed charge coverage ratio. The Organization entered into forbearance agreements with the Bank and the Purchaser dated September 22, 2016 whereby the Bank and the Purchaser had agreed to forbear until February 28, 2017, from exercising their rights and remedies related to the Organization s non-compliance with the covenants noted above. Additionally, the Organization was not required to comply with the liquidity to debt ratio as of and for the period ended June 30, In addition, the forbearance agreement provided that the Organization was not required to comply with the fixed charge coverage ratio as of and for the periods ended June 30, 2016 and September 30,

42 8. DEBT, Continued Bonds Payable, continued Refunding Revenue Bonds, continued A condition of the forbearance agreement required the Organization to refinance the Series 2011 Bonds by February 28, 2017, with a new lender. The Organization was required to have a binding commitment letter from the new lender no later than January 31, Management had developed a plan to repay the Series 2011 Bonds through a combination of new bank financing, liquidation of investments, and the sale of a small office building that had excess capacity as noted above. Interest Interest on the above debt, excluding amortized loan fees for the years ended June 30, 2017 and 2016, was $2,033,000 and $2,370,000, respectively. For the years ended June 30, 2017 and 2016, total interest expense of $2,035,000 and $2,373,000, respectively, which includes an additional $2,000 and $3,000 for the years ended June 30, 2017 and 2016, respectively, related to accretion, is allocated to the functional expense categories according to the purpose of the borrowings (see Note 2). 9. COMMITMENTS Federal Grants Certain federal grants, including financial aid which the Organization administers and for which it receives reimbursements, are subject to audit and final acceptance by federal granting agencies. Current- and prior-year costs of such grants are subject to adjustment upon audit. The amount of expenditures that may be disallowed by the grantor, if any, cannot be determined at this time, although management expects such amounts, if any, would not have a material impact on the Organization s financial position or changes in net assets. Contractual Agreements In connection with the sale of certain properties during the year ended June 30, 2014, the Organization entered into a two-year master lease agreement with the purchaser to ensure that the sale did not adversely affect current students that were tenants in these buildings. During the year ended June 30, 2016, the Organization incurred approximately $60,000 in rental expense which was offset by approximately $14,000 of rental income received from tenants, resulting in a net annual cost to the Organization of approximately of $46,000. The master lease expired in July

43 9. COMMITMENTS, Continued Operating Leases The Organization has entered into operating leases for certain property and equipment, which expire at various dates, including month-to-month contracts through fiscal year ending Lease expense for the years ended June 30, 2017 and 2016, was $2,210,000 and $2,333,000, respectively. Future minimum lease payments under operating leases that have remaining noncancelable lease terms in excess of one year are as follows (in thousands): Fiscal Year Ending June 30, Office Equipment Real Property Total 2018 $ 66 $ 665 $ Thereafter Total future minimum lease payments $169 $2,171 $2,340 Commitments in Limited Partnerships The Organization entered into two limited partnership investments during the year ended June 30, Commitments in those limited partnerships are as follow (in thousands): Original commitments $ - $2,000 Commitments paid - (408) Remaining commitments $ - $1,592 Number of partnerships - 2 These commitments were transferred to the Fuller Endowment Fund LLC during the year ended June 30, Litigation The Organization is not a party to any litigation, claims, and assessments arising out of matters occurring in its normal business operations and management is unaware of any pending matters with probable negative outcomes except for one matter for which it has accrued a liability for the potential outcome as of June 30,

44 10. RETIREMENT PLAN The Organization participates in a defined contribution retirement plan through the Teacher s Insurance and Annuity Association and College Retirement Equities Fund that covers substantially all full-time academic and nonacademic personnel. Contributions to the plan are based on a percentage of compensation. For the plan years ending December 31, 2017 and 2016, participants will be vested after 2 years of service. During the year ended June 30, 2017, the Organization reduced its contribution rate to the plan There is no past service liability and the annual retirement provision is funded currently. Retirement expense was $1,031,000 and $1,826,000, respectively for the years ended June 30, 2017 and UNRESTRICTED NET ASSETS Unrestricted net assets as of June 30, 2017 and 2016, are available as follows (in thousands): Undesignated, including investment in property $ 12,998 $ 1,307 and equipment of $49,962 and $33,571, respectively Unrestricted net asset transfer to gain pool (8,865) (10,653) Board-designated and other unrestricted endowments 38,987 38,843 Board-designated student and staff loans 1,507 1,366 Total unrestricted net assets $44,627 $30,

45 12. TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets as of June 30, 2017 and 2016, are restricted as follows (in thousands): Contributions restricted for academic and institutional support $15,080 $13,161 Beneficial interest in investments of financially interrelated entity restricted for academic 32,761 41,536 and institutional support Beneficial interest in net assets of financially interrelated entity restricted for academic and 12,419 10,918 institutional support Annuity Total temporarily restricted net assets $61,029 $66, PERMANENTLY RESTRICTED NET ASSETS Permanently restricted net assets as of June 30, 2017 and 2016, are restricted as follows (in thousands): Investments in perpetuity, the income from which is expendable to support: Other academic programs $ 9,399 $ 9,205 Beneficial interest in net assets of financially interrelated entity restricted for academic and institutional support 15,758 16,701 Academic programs, as specified by donors 55,212 51,281 Endowed chairs 35,995 32,266 Total permanently restricted net assets $116,364 $109,

46 14. ENDOWMENT NET ASSETS The Organization has elected under the California Uniform Prudent Management of Institutional Funds Act ( California UPMIFA ) to preserve the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this election, the Organization classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by California UPMIFA. In accordance with California UPMIFA, the Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: The duration and preservation of the fund The purposes of the Organization and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the Organization The investment policies of the Organization As of June 30, 2017 and 2016, the endowment net assets composition by type of fund is as follows (in thousands): 2017 Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted endowment funds $ - $ - $91,207 $ 91,207 Board-designated and other unrestricted endowment funds 38, ,987 Total funds $38,987 $ - $91,207 $130, Donor-restricted endowment funds $ - $ - $83,547 $83,547 Board-designated and other unrestricted endowment funds 38, ,843 Total funds $38,843 $ - $83,547 $122,

47 14. ENDOWMENT NET ASSETS, Continued The changes in endowment net assets for the years ended June 30, 2017 and 2016, are as follows (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets - June 30, 2015 $37,274 $ - $84,629 $121,903 Investment return: Investment income 57 1, ,618 Investment expense - (866) (62) (928) Realized gains and losses, net 21 1, ,910 Unrealized gains and losses, net (297) (7,012) (458) (7,767) Total investment return (219) (4,477) (471) (5,167) Contributions Appropriated for expenditure (214) (6,274) - (6,488) Other changes 2,002 10,751 (893) 11,860 Endowment net assets - June 30, ,843-83, ,390 Investment return: Investment income 12 1, ,482 Investment expense (9) (999) (58) (1,066) Realized gains and losses, net 48 3,733 2,264 6,045 Unrealized gains and losses, net 288 3,900 (1,790) 2,398 Total investment return 339 8, ,859 Contributions - - 7,539 7,539 Appropriated for expenditure (198) (6,657) - (6,855) Other changes (Note 2) 3 (1,430) (312) (1,739) Endowment net assets - June 30, 2017 $38,987 $ - $91,207 $130,

48 14. ENDOWMENT NET ASSETS, Continued The Organization s endowment consists of over 200 individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board to function as endowments. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds, including funds designated by the Organization s Board to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The description of the amounts classified as permanently restricted net assets and temporarily restricted net assets is as follows (in thousands): Permanently restricted net assets The portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by California UPMIFA $91,207 $83,547 Total endowment funds classified as permanently restricted net assets $91,207 $83,547 Temporarily restricted net assets The portion of perpetual endowment funds subject to a time restriction under California UPMIFA: Without purpose restrictions $ - $ - Total endowment funds classified as temporarily restricted net assets $ - $ - From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or California UPMIFA requires the Organization to retain as a fund of perpetual duration. In accordance with accounting principles generally accepted in the United States of America, deficiencies of this nature that are reported in unrestricted net assets were $10,573,000 and $11,974,000, respectively, as of June 30, 2017 and These deficiencies resulted from net investment losses that occurred after the investment of the permanently restricted contributions. -46-

49 14. ENDOWMENT NET ASSETS, Continued The Organization has adopted an investment policy for endowment assets that attempts to provide a predictable stream of funding to programs supported by its endowment, while seeking to maintain the fair market value of original gifts as of the gift date of the donor-restricted endowment funds (absent explicit donor stipulations to the contrary). Endowment assets include those assets of donor-restricted funds that the Organization must hold in perpetuity or for a donor-specified period. Under this policy, as approved by the Board, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of the S&P 500 index, while assuming a moderate level of investment risk. The Organization expects its endowment funds, over time, to provide an average rate of return in excess of its spending withdrawal rate. To satisfy its long-term rate-of-return objectives, the Organization relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Organization targets a diversified asset allocation that places a greater emphasis on equity investments to achieve its long-term objectives within prudent risk constraints. The Organization s investment policy provides for a normal annual spending withdrawal rate as determined by the Board calculated on the lesser of the most currently available quarter-end market value or the average 12-quarter value of its endowment fund. In situations of extreme inflation, deflation, or market disruption, the Board may consider adjustments to the spending rate calculations. The sources of the payout are earned income on the endowment assets (interest, dividends, and rents), previously reinvested income, and a portion of realized and unrealized capital gains. In establishing this policy, the Organization considered the long-term expected return on its endowment. Accordingly, over the long term, the Organization expects the current spending policy to allow its endowment assets to increase annually. This is consistent with the Organization s objective to maintain the fair market value of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return. The Organization is in the process of reallocating some of its resources to better meet the future needs of its operations. The first step in this process consisted of reallocating certain investments in real estate to quasi-endowment so that there would be additional sources of funding for new operating initiatives that would better meet the needs of the Organization s students through increased annual endowment withdrawals. The Organization is also in the process of developing its online degrees and program offerings as well as re-defining its degree programs and the required units to better meet the needs of its current and future students. As part of its reorganization plan, the Organization has made cumulative temporary borrowings against its quasi-endowment to fund operations during the years ended June 30, 2017 and 2016 of $25,713,000 and $15,613,

50 14. ENDOWMENT NET ASSETS, Continued The effective withdrawal rate for the year ended June 30, 2017 was 5.60%, based on the June 30, 2016, market value of the endowment fund. The increase in the effective withdrawal rate for the year ended June 30, 2017, reflects the impact of significant market losses due to overall negative market performance during the year ended June 30, The effective withdrawal rate for the year ended June 30, 2016, was 5.32%, based on the June 30, 2015, market value of the endowment fund. To meet the Board authorized spending rate, previously reinvested income and realized gains were withdrawn for fiscal year 2017 and 2016 in the amount of $6,855,000 and $6,488,000, respectively. 15. INSTITUTIONAL SUPPORT Institutional support includes the following expense categories (in thousands): Organizational support $13,066 $13,442 Fund-raising 2,434 2,031 Total institutional support $15,500 $15, RELATED-PARTY TRANSACTIONS The Organization received contributions and pledge payments from Trustees during the years ended June 30, 2017 and 2016, totaling $7,672,000 and $3,073,000, respectively. As of June 30, 2017 and 2016, approximately $24,676,000 and $43,471,000, respectively, of the investment balance in the accompanying combined statements of financial position represents trust accounts for which directors of The Fuller Foundation (the Foundation ), a financially interrelated entity, or Trustees of the Organization were the grantor or co-trustee. The Organization provides certain administrative services to various student auxiliary organizations. Funds held for these organizations as of June 30, 2017 and 2016, were $162,000 and $142,000, respectively. -48-

51 16. RELATED-PARTY TRANSACTIONS, Continued As of June 30, 2017 and 2016, the Organization has recorded in its combined financial statements a beneficial interest in investments of the Foundation, a financially interrelated entity, in the amount of $32,761,000 and $41,536,000, respectively, that relates to an interest in a certain stock investment that the Foundation gifted to the Organization in a prior year, and a beneficial interest in the net assets of the same financially interrelated entity in the amount of $28,177,000 and $27,619,000, respectively, related to trusts held at the Foundation that have irrevocably named the Organization as having a remainder interest in those trusts. During the year ended June 30, 2017, the Organization liquidated $9,700,000 from a fund at The Fuller Foundation, which reduced its beneficial interest in investments of the Foundation, to facilitate a refinance of the Organization s debt and to be used for other strategic liquidity needs (see Note 8). 17. INVESTMENT IN REPURCHASE AGREEMENT Indenture requirements of the Series 2011 Bonds (see Note 8) provided for the establishment and maintenance of various accounts with trustees. The indenture terms limited the use of these funds to capital expenditures, debt refinancing, and debt service payments as outlined in the agreements. On May 5, 2011, the Organization entered into an investment repurchase agreement with a third party and deposited $2,300,000 in a collateralized financing transaction. A bank trustee received collateral from the third party in the form of securities and maintained custody of those securities. Under the terms of the investment repurchase agreement, the Organization was guaranteed an annual rate of return of 2.21% and, upon maturity in 2018, the third party would have transferred cash in the amount of $2,300,000 to the bond trustee. Interest earned on the investment repurchase agreement reduced the monthly debt service payments. The investment repurchase agreement was carried on the combined statements of financial position at the amount of cash deposited plus any accrued interest. As of June 30, 2016, the balance of the investment repurchase agreement was approximately $2,308,000. These funds were released from this account upon refinancing of the Series 2011 Bonds (see Note 8). 18. SUBSEQUENT EVENTS The Organization evaluated events subsequent to June 30, 2017, and through the date the combined financial statements were issued, October 26, No material subsequent events were identified for recognition or disclosure. -49-

52 FEDERAL AWARDS

53 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JUNE 30, 2017 Federal Grantor/Pass Through Grantor/Program or Cluster Title Federal CFDA Number Federal Expenditures STUDENT FINANCIAL ASSISTANCE CLUSTER: U.S. Department of Education: Federal Direct Student Loan Program $ 15,335,916 Federal Work-Study Program ,359 Federal Perkins Loan Program (Note C) ,007 Total Student Financial Assistance Cluster 16,290,282 Total Expenditures of Federal Awards $ 16,290,282 See notes to schedule of expenditures of federal awards -50-

54 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS JUNE 30, 2017 A. BASIS OF PRESENTATION: The accompanying schedule of expenditures of federal awards (the schedule) includes the federal grant activity of Fuller Theological Seminary and Subsidiary (Organization) under programs of the federal government for the year ending June 30, The information in the schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Therefore, some amounts presented in the schedule may differ from amounts presented in, or used in the preparation of, the basic combined financial statements. Although the Organization is required to match certain grants, as defined by the grants, no such matching has been included as expenditures in the schedule. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Expenditures in the schedule are reported on the accrual basis of accounting. Such expenditures are recognized following, as applicable, OMB Circular A-122, Cost Principles for Non-Profit Organizations, or the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Negative amounts shown on the schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. The Organization has elected not to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. C. FEDERAL PERKINS LOAN PROGRAM: The Organization administers the following federal revolving loan program: Outstanding Balance at CFDA Number June 30, 2017 Perkins Loan Program $ 594,619 Total Perkins loan disbursements made to students during the fiscal year ended June 30, 2017, were $64,000. Fiscal year 2018 will be the last year that the Organization can make Perkins loan disbursements. For purposes of the schedule, the amount reported includes the outstanding loan balance at the beginning of the fiscal year, new loans disbursed during the fiscal year, and administrative cost allowance, if any. -51-

55 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS JUNE 30, 2017 D. RELATIONSHIP TO COMBINED FINANCIAL STATEMENTS: The amount of total expenditures of federal awards reconciles to the revenue in the combined statement of activities as follows: Total expenditures of federal awards $ 16,290,282 Less: Federal Direct Student Loan Program (15,335,916) Perkins loan program (765,007) Government grants per combined statement of activities $ 189,359 E. SUBRECIPIENTS, NON-CASH ASSISTANCE, FEDERAL INSURANCE, LOANS, AND LOAN GUARANTEES: The Organization did not provide any federal funds to subrecipients nor did they receive any federal non-cash assistance, insurance, loans, or loan guarantees. -52-

56 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Trustees Fuller Theological Seminary and Subsidiary Pasadena, California We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the combined financial statement of Fuller Theological Seminary and Subsidiary(the Organization), which comprise the combined statements of financial position as of June 30, 2017 and 2016, and the related combined statements of activities and cash flows for the years then ended, and the related notes to the combined financial statements, and have issued our report thereon dated October 26, Internal Control Over Financial Reporting In planning and performing our audits of the financial statements, we considered the Organization s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the combined financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified Burbank Boulevard, Suite 307 Tarzana, CA capincrouse.com

57 Board of Trustees Fuller Theological Seminary and Subsidiary Pasadena, California Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization s combined financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of combined financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain other matters that we reported to management of the Organization in a separate letter dated October 26, Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Organization s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Tarzana, California October 26,

58 INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Board of Trustees Fuller Theological Seminary and Subsidiary Pasadena, California Report on Compliance for Each Major Federal Program We have audited Fuller Theological Seminary and Subsidiary s (the Organization) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on each of the Organization s major federal programs for the year ended June 30, The Organization s major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of the Organization s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States of America; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Organization s compliance. Opinion on Each Major Federal Program In our opinion, Fuller Theological Seminary and Subsidiary s complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, Burbank Boulevard, Suite 307 Tarzana, CA capincrouse.com

59 Board of Trustees Fuller Theological Seminary and Subsidiary Pasadena, California Other Matters The results of our auditing procedures disclosed instances of noncompliance, which are required to be reported in accordance with the Uniform Guidance and which are described in the accompanying schedule of findings and questioned costs as items Our opinion on each major federal program is not modified with respect to these matters. Organization s Response to Findings The Organization s response to the noncompliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs and corrective action plan. The Organization s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control Over Compliance Management of the Organization is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Organization s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, we identified certain deficiencies in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as items that we consider to be significant deficiencies. -56-

60 Board of Trustees Fuller Theological Seminary and Subsidiary Pasadena, California Organization s Response to Findings The Organization s response to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs and corrective action plan. The Organization s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Purpose of This Report The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Tarzana, California October 26,

61 SCHEDULE OF FINDINGS AND QUESTIONED COSTS JUNE 30, 2017 Combined Financial Statements: Type of auditors report issued: unmodified Internal control over financial reporting: Section I - Summary of Audit Results = Material weakness(es) identified? yes a no = Significant deficiency(ies) identified that are not considered a material weakness? yes a none reported Noncompliance material to combined financial statements noted? yes a no Federal Awards: Internal control over major programs: = Material weakness(es) identified? yes a no = Significant deficiency(ies) identified that are not considered a material weakness? a yes none reported Type of auditors report issued on compliance for major programs: unmodified Any audit findings that are required to be reported in accordance with 2 CFR Part (a)? a yes no Identification of major program(s): CFDA Numbers Name of Federal Program or Cluster , and Student Financial Assistance Dollar threshold used to distinguish between type A and type B programs: $750,000 Auditee qualified as low-risk auditee? a yes no -58-

62 SCHEDULE OF FINDINGS AND QUESTIONED COSTS JUNE 30, 2017 Section II - Financial Statement Findings There are no current findings in internal control over financial reporting required to be reported in accordance with Government Auditing Standards. -59-

63 SCHEDULE OF FINDINGS AND QUESTIONED COSTS JUNE 30, Enrollment Reporting to NSLDS DEPARTMENT OF EDUCATION CFDA #: Federal Direct Loans Federal Award Identification # 16/17 Award Year Section III - Federal Award Findings and Questioned Costs Condition: The Organization did not always report student enrollment status to NSLDS accurately and timely. Criteria: 34 CFR (b) Context: 6 students out of 60 students tested were not reported correctly to NSLDS. All 6 were students who graduated in the spring and summer 2017 but were initially reported as withdrawn and status was not subsequently updated to graduated. These 6 students were corrected as part of the audit process. The Organization also submitted a corrected September enrollment status report and all students who graduated in spring/summer 2017 have been updated in NSLDS. Effect: Inaccurate or late reporting can impact a student s loan grace period, in school deferment eligibility, beginning loan repayments, appropriate interest charges, etc. Cause: The enrollment reporting module designed by the system data vendor is based on an undergraduate model and not capturing graduate degrees conferred as no CIP major code is reported. The registrar office has worked with the IT department and a solution has been determined to work around the system limitations and accurately report graduated status. Statistically Valid Sample: Yes Identification as repeat finding, if applicable: Yes, see Recommendation: We recommend the Organization work with software vendor to determine what enrollment status reports can be used to update NSLDS timely and accurately. Views of Responsible Officials: Management is in agreement with the finding and has addressed the issue. See attached corrective action plan. Questioned Costs: $

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