Sonoma State Enterprises, Inc.

Transcription

1 Financial Statements and Supplemental Information

2 Table of Contents Independent Auditors Report 1-2 Management's Discussion and Analysis 3-8 Basic Financial Statements: Statements of Net Position 9 Statements of Revenues, Expenses and Changes in Net Position 10 Statements of Cash Flows Supplemental Information: Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Governmental Auditing Standards Page

3 INDEPENDENT AUDITORS REPORT To the Audit Committee Sonoma State Enterprises, Inc. Report on the Financial Statements We have audited the accompanying financial statements of Sonoma State Enterprises, Inc., which comprise the statement of net position as of June 30, 2014, and the related statements of revenues, expenses, and changes in net position and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sonoma State Enterprises, Inc. as of June 30, 2014, and the changes in its net position and its cash flows for the years then ended in accordance with principles generally accepted in the United States of America. Prior Period Financial Statements The financial statements of Sonoma State Enterprises, Inc. as of June 30, 2013 were audited by other auditors whose report dated September 12, 2013 expressed an unmodified opinion on those statements.

4 INDEPENDENT AUDITORS REPORT, CONTINUED Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 3-8 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 11, 2014, on our consideration of Sonoma State Enterprises 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 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 Sonoma State Enterprises internal control over financial reporting and compliance. AKT LLP San Diego, California September 11, 2014

5 Management's Discussion and Analysis This section of the Sonoma State Enterprises, Inc. (the Organization) annual financial report presents management s overview and analysis of the financial activities of the Organization for the fiscal years ended June 30, 2014 and We encourage the reader to consider the information presented here in conjunction with the financial statements as a whole. Introduction to the Basic Financial Statements This discussion and analysis is intended to serve as an introduction to the Organization s audited financial statements, which are comprised of the basic financial statements and the footnotes as listed in the table of contents. This annual report is prepared in accordance with the Governmental Accounting Standards Board Statement 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The Business-Type Activity (BTA) reporting model is used which best represents the activities of the Sonoma State University (University) and its auxiliaries. The Organization is one of three non-profit auxiliaries on the University campus. The required financial statements include the Statements of Net Position, the Statements of Revenues, Expenses and Changes in Net Position, and the Statements of Cash Flows. These statements are supported by notes to the financial statements and this summary. All sections must be considered together to obtain a complete understanding of the financial picture of the Organization. Statements of Net Position: This statement includes all assets and liabilities using the accrual basis of accounting as of the statement date. The difference between the two classifications is represented as Net Position. The net position section of the statement identifies major categories of restrictions on these assets and reflects the overall financial position of the Organization as a whole. Statements of Revenues, Expenses and Changes in Net Position: This statement presents the revenues earned and the expenses incurred during the year using the accrual basis of accounting. Under the accrual basis of accounting, all increases or decreases in net position are reported as soon as the underlying event occurs, regardless of the timing of the cash flow. Consequently, revenues and/or expenses reported during this fiscal year may result in changes to cash flow in a future period. Statements of Cash Flows: This statement reflects inflows and outflows of cash, summarized by operating, financing and investing activities. The direct method was used to prepare this information, which means that gross rather than net amounts were presented for the year s activities. Notes to the Financial Statements: This additional information is essential to a full understanding of the data reported in the basic financial statements. Reporting Entity The financial statements of the University will be separated between the University and its component units. The latter are separate I.R.C. 501(c)(3) non-profit auxiliary organizations whose financial information will be presented in a discrete column and in the footnotes of the University s financial statements. Consequently, these auxiliaries must comply with the same governmental rulings and must present their individual separate audited financial statements in the same format. 3

6 Management's Discussion and Analysis Analytical Overview Net position increased in total by $1,173,065 during the year ended June 30, When compared to the prior year there was a decline in operating income. This decline was offset by strong investment returns and a reduction in the gifts to the University due to the completion of the student center facility. Net position increased in total by $664,133 during the year ended June 30, When compared to the previous year there was an overall decline in operating income which was offset by a reduction in nonoperating expenses. Condensed Statements of Net Position as of June 30, 2014 and 2013 Change Assets: $ % Current assets $ 4,639,997 $ 3,531,042 $ 1,108,955 31% Capital assets, net 4,303,117 4,562,470 (259,353) -6% Other long term investments 6,961,272 6,705, ,351 4% Total assets 15,904,386 14,799,433 1,104,953 7% Liabilities: Current liabilities 975, , ,955 24% Noncurrent liabilities 3,737,275 3,991,342 (254,067) -6% Total liabilities 4,712,369 4,780,481 (68,112) -1% Net Position: Net investment in capital assets 311, ,094 (22,319) -7% Unrestricted 10,880,242 9,684,858 1,195,384 12% Total net position $ 11,192,017 $ 10,018,952 $ 1,173,065 12% Condensed Statements of Net Position as of June 30, 2013 and 2012 Change Assets: $ % Current assets $ 3,531,042 $ 3,226,562 $ 304,480 9% Capital assets, net 4,562,470 4,636,704 (74,234) -2% Other long term investments 6,705,921 6,448, ,903 4% Total assets 14,799,433 14,311, ,149 3% Liabilities: Current liabilities 789, ,089 61,050 8% Noncurrent liabilities 3,991,342 4,228,376 (237,034) -6% Total liabilities 4,780,481 4,956,465 (175,984) -4% Net position: Net investment in capital assets 334, , ,909 78% Unrestricted 9,684,858 9,167, ,224 6% Total net position $ 10,018,952 $ 9,354,819 $ 664,133 7% 4

7 Management's Discussion and Analysis Statement of Net Position Variance Analysis Between 2014 and 2013 Current assets increased by $1,108,955. Current assets include: cash and cash equivalents, short-term investments, accounts receivable, prepaid expenses, and other current assets. There was an increase in the amount due from the University for catering services because there was an increased number of events that happened this year in June. The overall increase in current assets was planned to try and build the liquidity of the Organization s working capital reserve in the form of cash and short-term investments. Capital assets, net decreased by $259,353. Depreciation expense of $299,201 for the year and new purchases of $40,213 along with a $365 loss on disposal account for this fluctuation. Other long-term investments increased by $255,351. The increase was due to $98,495 of interest and dividend income along with a $16,283 realized gain, both of which were reinvested along with a $215,573 unrealized gain. This increase was partially offset by a transfer of $75,000 to the money market account in order to rebalance and be in compliance with the Organization s investment policy. Overall, the unrealized gain on these investments exceeds their cost. Current liabilities increased by $185,955. Current liabilities include: accounts payable, unearned revenue, current portion of long term debt and other current liabilities. This increase is primarily in accounts payable, unearned revenue and other liabilities. There was an increase in accounts payable primarily due to year end timing along with an increase in the June payroll due to the University. The increase in unearned revenue relates to an increase in the price of the meal plan for the upcoming fall semester. The increase in other liabilities is primarily due to increased balances on student/employee wolfbuck cards due to increased promotions during the year. Long-term debt obligation, noncurrent portion decreased by $254,067. This is the result of the scheduled principal payments being made during the year and the reclassification of amount due to current liabilities. Net position increased by $1,173,065 reflecting the cumulative net change in assets and liabilities for the year. Statement of Net Position Variance Analysis Between 2013 and 2012 Current assets increased by $304,480. The increase was related to the Organization s efforts to build the liquidity of working capital reserve in the form of cash and short-term investments. Capital assets, net decreased by $74,234. During the prior year there was an asset impairment of $130,886 that was recognized, this was related to the leasehold improvements that were located at three of the Organization s dining venues (Ameci s, University Club and the Pub). With the new Student Center building opening it was determined that these venues would be closed. The impairment expense along with depreciation expense of $298,450 for the year and new purchases of $355,102 account for the fluctuation. Other long-term investments increased by $257,903. In the prior year there was $60,133 of interest and dividend income which was reinvested along with a $197,770 unrealized gain. Overall, the unrealized gain on these investments exceeds their cost. 5

8 Management's Discussion and Analysis Current liabilities increased by $61,050. This increase was primarily in the accounts payable and unearned revenue category. The increase in unearned revenue relates to an increase in the freshman housing headcount and the increase in the price of the meal plan for the upcoming fall semester. Long-term debt obligation, noncurrent portion decreased by $237,034. This was the result of the scheduled principal payments being made during the year and the reclassification of amount due to current. Net position increased by $664,133 reflecting the cumulative net change in assets and liabilities for the year. Condensed Statements of Revenues, Expenses and Changes in Net Position for the Fiscal Change $ % Revenues and expenses Operating revenues $ 9,634,891 $ 7,889,958 $ 1,744,933 22% Operating expenses (8,725,893) (6,614,619) (2,111,274) 32% Net operating income 908,998 1,275,339 (366,341) -29% Nonoperating revenues (expenses) Gifts, noncapital (30,000) (700,449) 670,449-96% Investment earnings, net 644, ,234 65,052 11% Interest on capital-related debt (289,854) (305,745) 15,891-5% Other nonoperating expenses (60,365) (184,246) 123,881-67% Net nonoperating revenues (expenses) 264,067 (611,206) 875, % Change in net position 1,173, , ,932 77% Net position, beginning of year 10,018,952 9,354, ,133 7% Net position, end of year $ 11,192,017 $ 10,018,952 $ 1,173,065 12% Condensed Statements of Revenues, Expenses and Changes in Net Position for the Fiscal Years Ended June 30, 2013 and 2012 Change $ % Revenues and expenses Operating revenues $ 7,889,958 $ 7,950,433 $ (60,475) -1% Operating expenses (6,614,619) (5,698,188) (916,431) 16% Net operating income 1,275,339 2,252,245 (976,906) -43% Nonoperating revenues (expenses) Gifts, noncapital (700,449) (1,718,980) 1,018,531-59% Investment earnings, net 579, , ,955 51% Interest on capital-related debt (305,745) (320,571) 14,826-5% Other nonoperating expenses (184,246) (190,917) 6,671-3% Net nonoperating revenues (expenses) (611,206) (1,847,189) 1,235,983-67% Change in net position 664, , ,077 64% Net position, beginning of year 9,354,819 8,949, ,056 5% Net position, end of year $ 10,018,952 $ 9,354,819 $ 664,133 7% 6

9 Management's Discussion and Analysis Revenue and Expense Variance Analysis Between 2014 and 2013 Operating revenues are sales net of cost of goods sold, and are comprised of dining services (The Kitchens, Cash Operation venues, Prelude, Catering, Vending and Concessions), outsourced bookstore operations and rental operations (Salazar building leasehold improvements). Operating revenues increased by $1,744,933. This fluctuation was expected since the price of the dining meal plan increased and more options were provided to the students. This represents about $1.2 million of the increase, not including cost of sales. The remainder of the growth was in the cash operation venues; with the opening of the new Student Center the Organization saw strong support in the cash operations area. The cash operation venues consist of Charlie Browns, Toast, Lobos, Overlook, the Café and Weyden & Brewster. Operating expenses increased by $2,111,274. The majority of the increase incurred was in the salary and benefit area which increased $1.3 million over the prior year. There was also a large increase in space rental expense. These increases were anticipated with the opening of the Student Center. Investment income, net increased by $65,052. The increase over the previous year is primarily due to increased interest/dividend income. Total investment income includes interest and dividends of $412,430 (which includes all interest and dividends along with the faculty/staff housing land lease income from the University), a $16,283 realized gain and $215,573 of unrealized gain. The remaining nonoperating expenses decreased by $810,221. The majority of the decrease is related to amounts transferred to the University, which are indicated as Gifts, noncapital. In the current year the Organization only transferred $30,000 to support two performances at the Green Music Center. In the prior year the Organization transferred a total of $650,449 to fund its final obligation to the Student Center project and $50,000 to support the grand opening of Weill Hall at the Green Music Center. Also in the prior year there was an asset impairment for the leasehold improvements for the dining venues that were closing due to the move into the Student Center. Revenue and Expense Variance Analysis Between 2013 and 2012 Operating revenues decreased by $60,475. This fluctuation was expected as the student headcount was very comparable to the previous year. Operating expenses increased by $916,431. The majority of the increase incurred was in the categories of supplies, uniforms, equipment rental, non-capitalized equipment, contractual services as well as non contractual services. There was also a slight increase in salaries and benefits. These increases were anticipated with the opening of the Prelude venue and concessions operations located at the Green Music Center. Investment income, net increased by $195,955. The increase over the previous year was primarily due to market fluctuations. Total investment income includes interest and dividends of $381,464 (which includes all interest and dividends along with the faculty/staff housing land lease income from the University), and $197,770 of unrealized gain. The remaining nonoperating expenses decreased by $1,040,028. The majority of the decrease was related to amounts transferred to the University. The Organization transferred a total of $650,449 to fund its final obligation to the Student Center project ($269,429 of this was related to equipment for the building). The Organization also transferred $50,000 to support the grand opening of the Weill Hall at the Green Music Center. 7

10 Management's Discussion and Analysis In the previous year the Organization transferred $1,118,980 to fund its obligation to the Student Center project and $600,000 to support hospitality spaces at the Green Music Center. Factors Impacting Future Periods The Organization holds land classified as investments on the statements of net position which the University intends to purchase for faculty and staff housing. This land will be purchased after sewer and water arrangements are negotiated between the University and local agencies. Additional planning, development, construction and operating expenses may be incurred related to the development of outdoor concession venues and an expanded concert and event schedule at the Green Music Center. Revenue increases would also be expected with an expanded concert and event schedule. The Organization fully opened operations in the Student Center. This next fiscal year will be the first, full operating year in the new facility. Prudent revenue and expense planning has been obtained, however unforeseen and/or unexpected items may impact results positively and/or negatively. The fiscal impact will be analyzed and incorporated into future budgets. Rental payments to the University Housing Program are expected to increase substantially over the next fiscal year to offset expected and planned higher debt service associated with the Student Center. After this fiscal year, and into the foreseeable future, rent will be stabilized at or near the higher level. Expected and planned revenue increases are expected to offset this expense. The California State University s funding and enrollment is tied to the economic health of the State of California. While the upcoming year s funding is stable, future years are uncertain. Enrollment reductions and increases would likely have an impact on the revenue of the Organization. 8

11 Statements of Net Position June 30, Assets Current assets Cash and cash equivalents $ 871,805 $ 873,839 Short-term investments 3,238,435 2,320,302 Accounts receivable 420, ,029 Prepaid expenses and other assets 109, ,872 Total current assets 4,639,997 3,531,042 Noncurrent assets Capital assets, net 4,303,117 4,562,470 Other long-term investments 6,961,272 6,705,921 Total noncurrent assets 11,264,389 11,268,391 Total assets 15,904,386 14,799,433 Liabilities Current liabilities Accounts payable 177,161 91,600 Unearned revenue 318, ,179 Long-term debt obligation, current portion 254, ,034 Other liabilities 225, ,326 Total current liabilities 975, ,139 Noncurrent liability Long-term debt obligation, net of current portion 3,737,275 3,991,342 Total liabilities 4,712,369 4,780,481 Net position Net investment in capital assets 311, ,094 Unrestricted 10,880,242 9,684,858 Total net position $ 11,192,017 $ 10,018,952 See accompanying 9

12 Statements of Revenues, Expenses and Changes in Net Position Year Ended June 30, Operating revenues Sales and services of auxiliary enterprises, net $ 8,623,849 $ 6,853,423 Other operating revenues 1,011,042 1,036,535 Total operating revenues 9,634,891 7,889,958 Operating expenses Auxiliary enterprise expenses 8,426,692 6,316,169 Depreciation and amortization 299, ,450 Total operating expenses 8,725,893 6,614,619 Operating income 908,998 1,275,339 Nonoperating revenues (expenses) Investment income, net 644, ,234 Gifts, noncapital (30,000) (700,449) Interest on capital-related debt (289,854) (305,745) Other nonoperating expenses (60,365) (184,246) Net nonoperating revenues (expenses) 264,067 (611,206) Increase in net position 1,173, ,133 Net position Net position at beginning of year 10,018,952 9,354,819 Net position at end of the year $ 11,192,017 $ 10,018,952 See accompanying 10

13 Statements of Cash Flows Year Ended June 30, Increase (decrease) in cash and cash equivalents Cash flows from operating activities Sales and services of auxiliary enterprises $ 8,479,875 $ 6,956,939 Other receipts 1,011,042 1,036,535 Payments to University for wages (3,653,141) (2,567,414) Payments to suppliers (4,653,511) (3,710,930) Net cash provided by operating activities 1,184,265 1,715,130 Cash flows from noncapital financing activities Gifts, noncapital (30,000) (700,449) Other nonoperating expenses (60,000) (53,360) Net cash used for noncapital financing activities (90,000) (753,809) Cash flows from capital and related financing activities Principal payments on capital debt (237,034) (221,143) Interest paid on capital debt (289,854) (305,745) Purchase of capital assets (40,213) (355,102) Net cash used for capital and related financing activities (567,101) (881,990) Cash flows from investing activities Investment income 295, ,814 Proceeds from sale of investments 3,900,000 3,200,000 Purchase of investments (4,725,000) (3,870,000) Net cash used in investing activities (529,198) (374,186) Net decrease in cash and cash equivalents (2,034) (294,855) Cash and cash equivalents, beginning of the year 873,839 1,168,694 Cash and cash equivalents, end of the year $ 871,805 $ 873,839 See accompanying 11

14 Statements of Cash Flows (continued) Year Ended June 30, Increase (decrease) in cash and cash equivalents Reconciliation of operating income to net cash provided by operating activities Operating income $ 908,998 $ 1,275,339 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 299, ,450 Change in assets and liabilities: Accounts receivable (227,335) 81,168 Prepaid expenses and other assets 34,479 15,014 Accounts payable 85,561 22,811 Unearned revenue 43,573 19,179 Other liabilities 39,788 3,169 Net cash provided by operating activities $ 1,184,265 $ 1,715,130 Noncash investing, capital, and financing activities Impairment on capital assets $ - $ 130,886 Dividends & realized gains reinvested $ 132,911 $ 85,650 Unrealized gains on long-term investments $ 215,573 $ 197,770 Loss on disposal of assets $ 365 $ - See accompanying 12

15 Note A. Organization Sonoma State Enterprises, Inc. (the Organization) was formed as an auxiliary organization of the California State University (CSU) as defined in Education Code Section and provides services to the campus of Sonoma State University (the University). As such, the Organization is a component unit of the CSU, which is a component unit of the State of California. The Organization is involved in the following activities: The retail activity oversees the outsourced operations of the Sonoma State University Bookstore. This retail activity was outsourced in July The food service activity operates the residence hall food services, various food venues and vending services. Note B. Summary of Significant Accounting Policies Financial Reporting Entity The Organization is a legally separate tax-exempt component unit of the University. The University is part of the CSU system. Costs are allocated to specific activities where possible. Costs not identified with specific activities that relate to the full scope of the Organization's activities are allocated to the operational activities. The Organization's board appointments require approval from the University President, and as a result, the Organization follows the reporting principles promulgated by the Governmental Accounting Standards Board (GASB). The basic financial statements present only the Statements of Net Position, Statements of Revenues, Expenses and Changes in Net Position, and Statements of Cash Flows of the Organization. These statements do not purport to present financial information of the CSU system as a whole. Basis of Presentation The accompanying basic financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. 13

16 Note B. Summary of Significant Accounting Policies (continued) Basis of Presentation (continued) The basic financial statements required by GASB Statements No. 34, as amended and 35 include a statement of net position, a statement of revenues, expenses and changes in net position, and a statement of cash flows. As a component unit of a public institution, the Organization has chosen to present its basic financial statements using the reporting model for special-purpose governments engaged only in business-type activities. This model allows all financial information for the Organization to be reported in a single column in each of the basic financial statements. In accordance with the business-type activities reporting model, the Organization prepares its statements of cash flows using the direct method. Classification of Current and Noncurrent Assets and Liabilities The Organization considers assets to be current that can reasonably be expected, as part of its normal business operations, to be converted to cash and be available for liquidation of current liabilities within twelve months of the statement of net assets date. Liabilities that reasonably can be expected, as part of normal business operations, to be liquidated within twelve months of the statement of net position date are considered to be current. All other assets and liabilities are considered to be noncurrent. Cash and Cash Equivalents The Organization considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. The Organization considers amounts included in the California State University internal investment pool to be investments. Inventory Inventory is stated at the lower of cost or market value using the first-in, first-out method. Inventory totaled $101,393 and $131,727 at June 30, 2014 and 2013, respectively, and is included in prepaid expenses and other assets in the Statements of Net Position. Investments Investments are reflected at fair value using quoted market prices, except for investments in land and real estate, which are reflected at cost. Realized and unrealized gains and losses are included in the accompanying Statements of Revenues, Expenses and Changes in Net Position as investment income. The long range investment goal of the Organization is to ensure the continued health and growth of the Organization by achieving a maximum rate of return on assets based on a desired level of risk and consistent with prudent investment management. The general policy of the Organization shall be to diversify investments so as to provide a balance that will enhance total return while avoiding undue risk concentration in any single asset class or investment category. 14

17 Note B. Summary of Significant Accounting Policies (continued) Investments (continued) Changes in the fair value of investments are reported as part of investment income in the Statements of Revenues, Expenses and Changes in Net Position. For the year ended June 30, 2014 there was an unrealized gain included in investment income of $215,573 and for the year ended June 30, 2013 there was an unrealized gain in investment income of $197,770 included in investment income. The cumulative differences between cost and fair value was a gain of $359,374 and $143,801 for the years ended June 30, 2014 and 2013, respectively. Investments in real property include approximately 89 acres of land that was purchased by the Organization in July Capital Assets Capital assets, which include property, equipment, and intangible assets, are stated at cost. Capital assets with a value of $5,000 or more and with a useful life of one year or more are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of assets, which range from five to thirty-nine years. Amortization of intangible assets, which consist of franchise fees and software is computed using the straight-line method over their useful lives of five years. Depreciation expense is shown separately in the Statements of Revenues, Expenses and Changes in Net Position rather than being allocated among other categories of operating expenses. Unearned Revenues Unearned revenue consists of payments received in advance from the University in accordance with an operating agreement. Net Position The Organization's net position is classified into the following categories: Net investment in capital assets: Capital assets, net of accumulated depreciation, amortization and outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. Unrestricted: All other categories of net position whose use is not restricted. Unrestricted net position may be designated for use by management or the Board of Directors to support future operations. 15

18 Note B. Summary of Significant Accounting Policies (continued) Classification of Revenues and Expenses The Organization considers operating revenues and expenses in the Statements of Revenues, Expenses and Changes in Net Position to be those revenues and expenses that result from exchange transactions or from other activities that are connected directly to the Organization's primary operations. Exchange transactions include charges for services rendered and the acquisition of goods and services. Certain other transactions are reported as nonoperating revenues and expenses in accordance with GASB Statement 35. These nonoperating activities include net investment income and interest expense. Income Taxes The Organization is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and from California franchise and income tax under section 23701(d) of the Revenue and Taxation code. The Organization follows accounting standards generally accepted in the United States of America related to the recognition of uncertain tax positions. The Organization recognizes accrued interest and penalties associated with uncertain tax positions as part of the statements of revenues, expenses, and changes in net position, when applicable. Management has determined that the Organization has no uncertain tax positions at June 30, 2014 and 2013 and therefore no amounts have been accrued. The Organization files income tax returns in the United States and various state and local jurisdictions. The Organization s federal income tax returns for the years prior to 2010 are closed. State and local jurisdictions have statutes of limitation that generally range from three to five years. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on management s knowledge and experience. Those estimates affect the reported amounts of assets and liabilities, and the reported amount of revenue, support and expenses. The use of management s estimates primarily relate to the depreciable lives of capital assets. Actual results could differ from those estimates. Subsequent Events The Organization has evaluated subsequent events through September 11, 2014, which is the date the financial statements were available to be issued. 16

19 Note C. Cash and Cash Equivalents and Investments Cash and Cash Equivalents Cash and cash equivalents at June 30, Book balance $ 871,805 $ 873,839 Bank balance 1,853, ,877 Difference between book and bank balance $ (982,039) $ 43,962 Significant reconciling items consist of: Deposits in transit $ 6,144 $ 201,747 Outstanding checks (1,011,283) (179,285) Cash and change fund 23,100 21,500 $ (982,039) $ 43,962 Composition of Investments The Organization participates in an internal investment pool managed by US Bank, an asset management and investment advisory firm that serves the California State University. Securities within the investment pool are not held in the Organization's name and are not insured. The investments are held in the name of California State University. Fair market value was $3,238,435 as of June 30, 2014 and $2,320,302 as of June 30, Fair market value is based on the Organization's proportionate interest in the University's US Bank account. Other investments are reported as other long-term investments on the statements of net position and totaled $6,961,272 and $6,705,921 at June 30, 2014 and 2013, respectively. 17

20 Note C. Cash and Cash Equivalents and Investments (continued) Composition of investments (continued) The composition of investments at June 30, 2014: Short-term Long-term Total CSU consolidated SWIFT pool $ 3,238,435 $ - $ 3,238,435 Real estate - 4,701,313 4,701,313 Mutual funds - 2,259,959 2,259,959 $ 3,238,435 $ 6,961,272 $ 10,199,707 The composition of investments at June 30, 2013: Short-term Long-term Total CSU consolidated SWIFT pool $ 2,320,302 $ - $ 2,320,302 Real estate - 4,701,313 4,701,313 Mutual funds - 2,004,608 2,004,608 $ 2,320,302 $ 6,705,921 $ 9,026,223 The Organization does not hold investments on behalf of others. Aggregated costs and fair values of mutual funds and real estate investments at June 30 are as follows: 2014 Cost Reported Value Mutual funds, reported at fair value $ 1,900,585 $ 2,259,959 Real estate, reported at cost 4,701,313 4,701,313 Total other long-term investments $ 6,601,898 $ 6,961, Cost Reported Value Mutual fund, reported at fair value $ 1,860,807 $ 2,004,608 Real estate, reported at cost 4,701,313 4,701,313 Total other long-term investments $ 6,562,120 $ 6,705,921 18

21 Note C. Cash and Cash Equivalents and Investments (continued) Investment income Investment income, as reflected in the statements of revenues, expenses and changes in net position includes the following for the year ended June 30: Rent $ 295,750 $ 295,750 Interest and dividends 116,680 85,714 Realized gain on long-term investments 16,283 - Unrealized gain on long-term investments 215, ,770 Total investment income, net $ 644,286 $ 579,234 Interest and dividends include all interest and dividends from investments, cash, and cash equivalents. Deposit and Investment Risk Custodial Credit Risk Custodial credit risk is the risk that in the event of the failure of the counterparty (custodial broker) the Organization would not be able to recover the value of its investments or collateral securities that are in the possession of the outside party. Financial instruments that potentially subject the Organization to custodial credit risk consist primarily of bank demand deposits and investments in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investors Protector Corporation (SIPC). The Organization had cash on deposit with one financial institution, which exceeded the federally insured limit by $1,395,139 and $446,199 as of June 30, 2014 and 2013, respectively. Other investments which qualify for SIPC coverage exceeded coverage limits by $1,468,663 and $1,138,284 at June 30, 2014 and 2013, respectively. The Organization does not have a policy for addressing custodial credit risk related to deposits and investments. Concentration of Credit Risk The Organization does not limit the amount that may be invested in any one issuer. Management believes that investments are adequately diversified and don't give rise to significant concentration of credit risk. 19

22 Note C. Cash and Cash Equivalents and Investments (continued) Deposit and Investment Risk (continued) Interest Rate Risk Interest rate risk is the risk of exposure to fair value losses resulting from rising interest rates. At June 30, 2014 and 2013 the Organization had only a minimal interest rate risk because of its relatively small holdings in fixed income investments and no notes receivables. The Organization does have some mutual funds which, as a result of their balanced equity/bond approach, mitigate interest rate risk. The Organization's short-term investments are held as agency trust funds by the University. The California State University manages its exposure to interest rate risk by purchasing a combination of short-term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or nearing maturity evenly over time as necessary to provide the cash flows and liquidity needed for operations. The weighted average maturity for these investments range from 0.0 to 8.0 years. The California State University monitors the interest rate risk inherent in its portfolio. Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The Organization participates in an internal investment pool managed by US Bank, an asset management and investment advisory firm that serves the California State University. Investment ratings range between AAA and A, with a few investments within the pool that are not rated. 20

23 Note D. Composition of Accounts Receivable Accounts receivable at June 30 consisted of the following: 2014 Current Noncurrent Total Due from the University or other auxiliary $ 364,722 $ - $ 364,722 Other accounts receivable 55,642-55,642 Total accounts receivable $ 420,364 $ - $ 420, Current Noncurrent Total Due from the University or other auxiliary $ 164,789 $ - $ 164,789 Other accounts receivable 28,240-28,240 Total accounts receivable $ 193,029 $ - $ 193,029 21

24 Note. E Capital Assets Capital asset activity for the year ended June 30, 2014, consisted of the following: Balance June 30, 2013 Additions Reductions Balance June 30, 2014 Nondepreciable capital assets: Land and land improvements $ - $ - $ - $ - Works of art and historical treasures Construction work in progress Total nondepreciable capital assets Depreciable capital assets: Buildings and building improvements 6,655,020 - (350,768) 6,304,252 Personal property: Equipment 511,290 40,213 (198,759) 352,744 Other intangible assets 319,179 - (9,200) 309,979 Total depreciable capital assets 7,485,489 40,213 (558,727) 6,966,975 Total capital assets 7,485,489 40,213 (558,727) 6,966,975 Less accumulated depreciation: Buildings and building improvements (2,447,095) (213,289) 350,768 (2,309,616) Personal property: Equipment (401,534) (29,334) 198,394 (232,474) Other intangible assets (74,390) (56,578) 9,200 (121,768) Total accumulated depreciation (2,923,019) (299,201) 558,362 (2,663,858) Total capital assets, net $ 4,562,470 $ (258,988) $ (365) $ 4,303,117 Total depreciation and amortization $ 299,201 22

25 Note. E Capital Assets (continued) Capital asset activity for the year ended June 30, 2013, consisted of the following: Balance June 30, 2012 Additions Reductions Balance June 30, 2013 Nondepreciable capital assets: Land and land improvements $ - $ - $ - $ - Works of art and historical treasures Construction work in progress Total nondepreciable capital assets Depreciable capital assets: Buildings and building improvements 6,785,906 - (130,886) 6,655,020 Personal property: Equipment 457,587 72,350 (18,647) 511,290 Other intangible assets 36, , ,179 Total depreciable capital assets 7,279, ,102 (149,533) 7,485,489 Total capital assets 7,279, ,102 (149,533) 7,485,489 Less accumulated depreciation: Buildings and building improvements (2,215,977) (231,118) - (2,447,095) Personal property: Equipment (392,645) (27,536) 18,647 (401,534) Other intangible assets (34,594) (39,796) - (74,390) Total accumulated depreciation (2,643,216) (298,450) 18,647 (2,923,019) Total capital assets, net $ 4,636,704 $ 56,652 $ (130,886) $ 4,562,470 Total depreciation and amortization $ 298,450 An asset impairment of $130,886 was recognized during the year ended June 30, 2013 related to leasehold improvements located in three dining venues. With the new Student Center building opening it was determined that the value of the leasehold improvements should be adjusted, as they will not be utilized through their original estimated lives. Note F. Long-Term Debt Obligations Notes Payable The Organization entered into an agreement with Sonoma State University Academic Foundation (the Foundation) to borrow $6,100,000, at 8%, unsecured, beginning September 28, The Organization renegotiated this loan and entered into an agreement with the Foundation during the fiscal year The terms of the agreement require quarterly payments of $131,722 including interest at 7% per annum. These payments are based on a 19- year amortization schedule. The loan balance may be paid prior to June 28, 2025 without penalty to the Organization. 23

26 Note F. Long-Term Debt Obligations (continued) Long-term debt principal and related interest payment obligations subsequent to June 30, 2014 are as follows: All Other Long-Term Revenue Bonds Debt Obligations Total Principal Principal Principal and and and Principal Interest Interest Principal Interest Interest Principal Interest Interest Year ending June 30, 2015 $ - $ - $ - $ 254,067 $ 272,821 $ 526,888 $ 254,067 $ 272,821 $ 526, , , , , , , , , , , , , , , , , , , , , , , , , ,074, ,664 2,634,442 2,074, ,664 2,634, ,061 18, , ,061 18, ,409 $ - $ - $ - $ 3,991,342 $ 1,745,949 $ 5,737,291 $ 3,991,342 $ 1,745,949 $ 5,737,291 Long-Term Liabilities Activity Long-term liabilities activity for the year ended June 30, 2014 was as follows: Balance Balance Long- June 30, June 30, Term Current 2013 Additions Reductions 2014 Portion Portion Accrued compensated absences $ - $ - $ - $ - $ - $ - Capitalized lease obligations: Total capitalized lease obligations Long-term debt obligations: Other: Note payable 4,228,376 - (237,034) 3,991,342 3,737, ,067 Total long-term obligations 4,228,376 - (237,034) 3,991,342 3,737, ,067 Unamortized bond premium Unamortized loss on refunding Total long-term debt 4,228,376 - (237,034) 3,991,342 3,737, ,067 Total long-term liabilities $ 4,228,376 $ - $ (237,034) $ 3,991,342 $ 3,737,275 $ 254,067 24

27 Note F. Long-Term Debt Obligations (continued) Long-term liabilities activity for the year ended June 30, 2013 was as follows: Balance Balance Long- June 30, June 30, Term Current 2012 Additions Reductions 2013 Portion Portion Accrued compensated absences $ - $ - $ - $ - $ - $ - Capitalized lease obligations: Total capitalized lease obligations Long-term debt obligations: Other: Note payable 4,449,519 - (221,143) 4,228,376 3,991, ,034 Total long-term obligations 4,449,519 - (221,143) 4,228,376 3,991, ,034 Unamortized bond premium Unamortized loss on refunding Total long-term debt 4,449,519 - (221,143) 4,228,376 3,991, ,034 Total long-term liabilities $ 4,449,519 $ - $ (221,143) $ 4,228,376 $ 3,991,342 $ 237,034 Cash paid for interest during the years ended June 30, 2014 and 2013, totaled $289,854 and $305,745, respectively. Note G. Risk Management The Organization is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters. The Organization has joined together with other CSU auxiliaries in the CSU Risk Management Authority (CSURMA), a public entity risk pool. The Organization pays an annual premium to CSURMA for its general insurance coverage. The intent is for CSURMA to remain self-sustaining through member premiums and will reinsure through commercial companies for claims in excess of $15,000,000 limit per each insured event. For the years ended June 30, 2014 and 2013, $51,944 and $51,220 was paid for annual premiums, respectively. Note H. Commitments and Contingencies The Organization outsources its bookstore operations to Barnes and Noble College Booksellers, Inc. (B & N). The agreement with B & N continues through June 30, 2023, and then may be renewed for two additional five-year periods upon mutual agreement. Under the terms of the agreement, the Organization has commitments to provide B & N with infrastructure and services. More specifically, the Organization provides utilities, building maintenance, the existing equipment, local telephone/data service, telecommunications and network systems access, trash and extermination services, and participation in debit, credit or Wolfbucks card programs. Annually, B & N will pay the Organization a guaranteed payment or applicable percentage of gross sales, whichever is greater, plus 1% of annual sales to help offset utility expenses. Additionally, B & N provides an annual unrestricted contribution. The Organization participates in other ongoing leases with the University as noted in Note J. 25

28 Note I. Classification of Operating Expenses The Organization has elected to report operating expenses by functional classification in the statements of revenues, expenses and changes in net position, and to provide the natural classification of those expenses as an additional disclosure. For the years ended June 30, 2014 and 2013, operating expenses by natural classification consisted of the following: Scholarship Supplies Depreciation and and other and 2014 Salaries Benefits fellowships services amortization Total Functional classification: Auxiliary enterprise expenses $ 3,622,251 $ 1,190,219 $ - $ 3,614,222 $ - $ 8,426,692 Depreciation , ,201 Total $ 3,622,251 $ 1,190,219 $ - $ 3,614,222 $ 299,201 $ 8,725,893 Scholarship Supplies Depreciation and and other and 2013 Salaries Benefits fellowships services amortization Total Functional classification: Auxiliary enterprise expenses $ 2,555,141 $ 927,831 $ - $ 2,833,197 $ - $ 6,316,169 Depreciation , ,450 Total $ 2,555,141 $ 927,831 $ - $ 2,833,197 $ 298,450 $ 6,614,619 26