Independent Auditor s Report

Transcription

1 Independent Auditor s Report Board of Trustees Ferris State University We have audited the accompanying balance sheet of Ferris State University as of June 30, 2004 and 2003, and the related statements of revenue, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the University s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ferris State University as of June 30, 2004 and 2003, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued a report under separate cover, dated August 20, 2004 on our consideration of the University s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grants for the year ended June 30, 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 opinions 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 and should be considered in assessing the results of our audit. The Management s Discussion and Analysis presented on pages 3 through 12 is not a required part of the basic financial statements but is supplemental information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplemental information. However, we did not audit the information and express no opinion on it. August 20, 2004

2 Management s Discussion and Analysis The following discussion and analysis of Ferris State University s financial statements provides an overview of the University s financial activities for the year ended June 30, Management has prepared the financial statements and the related footnote disclosures along with the discussion and analysis. Responsibility for the completeness and fairness of this information rests with University administration. Using this Report This annual financial report includes the report of independent auditors, the management discussion and analysis, the financial statements, notes to financial statements and supplemental information. The financial statements included in this report are: the Statement of Net Assets, the Statement of Revenues, Expenses and Changes in Net Assets and the Statement of Cash Flows. The financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) accounting principles, which establish standards for public colleges and universities. Financial Highlights The University s financial position increased during the fiscal year ended June 30, In total, the University s net assets increased $13.9 million or 6.7% from the previous year. The growth is primarily due to the management of University resources in the context of uncertain economic times and a long term investment plan that resulted in an increase in the Ferris Foundation endowment market value of $5 million. The reduction of $5.8 million or 10.8% of the University s base appropriation by the State of Michigan required cost reductions and improved efficiencies by the University community to maintain academic programs and the financial position of the University. The following chart provides a graphical breakdown of net assets by category for the fiscal years ended June 30, 2004 and Millions Unrestricted Restricted - Expendable Invested in capital assets Restricted - Nonexpendable

3 Management s Discussion and Analysis (Continued) The Balance Sheet and the Statement of Revenues, Expenses and Changes in Net Assets These two statements will help the reader answer the questions, Is Ferris State University as a whole, better or worse off as a result of the year s activities? The Balance Sheet and the Statement of Revenues, Expenses, and Changes in Net Assets report information on the University as a whole and on its activities in a way that helps answer this question. When revenues and other support exceed expenses, the result is an increase in net assets. When the reverse occurs, the result is a decrease in net assets. The relationship between revenues and expenses may be thought of as Ferris State University s operating results. These two statements report the University s net assets and net asset changes. One can think of net assets the difference between assets and liabilities as one way to measure the University s financial health, or financial position. Over time, increases or decreases in the net assets are one indicator of whether the University s financial health is improving or deteriorating. Many other nonfinancial factors, such as the trend in student applications, student retention, condition of the buildings, and strength of the faculty also need to be considered to assess the overall health of the University. These statements include all assets and liabilities using the accrual basis of accounting, which is similar to the accounting used by most private-sector institutions. All of the current year s revenues and expenses are taken into account regardless of when cash is received or paid. 4

4 Net Assets Management s Discussion and Analysis (Continued) Total net assets increased by $13.9 million to $221.1 million. Total unrestricted net assets are $48.6 million. Of this total, $32.5 million is identified for departmental use, maintenance and replacement of facilities, debt service and Foundation endowments. The unrestricted and undesignated amount of $16.1 million is comprised of $14.7 million for self supporting departmental, student loan and auxiliary activities, and $1.4 million for a physical plant equipment storage building and other minor construction projects on campus. Following is a comparison of the major components of the net assets of the University and operating results for years ended June 30, 2004 and 2003: Net Assets as of June 30 (in millions) Increase (Decrease) Percent Change Current assets $ 51.6 $ 57.7 $ (6.1) Non-current assets: Capital assets, net of depreciation (1.6) Other Total assets $ $ $ % Current liabilities $ 18.6 $ 22.2 $ (3.6) Long-term liabilities (2.6) Net assets: Invested in capital assets (0.8) Restricted - Expendable Restricted - Nonexpendable Unrestricted Total net assets % Total liabilities and net assets $ $ $ % 5

5 Management s Discussion and Analysis (Continued) Operating Results for the Year Ended June 30 (in millions) Increase (Decrease) Percent Change Operating Revenues Tuition and fees, net $ 67.1 $ 56.7 $ 10.4 Grants and contracts (0.3) Departmental activities Auxiliary activities, net Other (0.2) Total Operating Revenues % Total Operating Expenses (2.5) (1.5%) Net Operating Loss (49.0) (64.7) % Nonoperating Revenues Nonoperating Revenues State Appropriations (5.8) Gifts Investment Income Interest on Capital Related Debt (3.9) (4.5) 0.6 Total Nonoperating Revenues (0.4) (0.7%) Income (Loss) before Other Revenues and Expenses 9.1 (6.2) % Other Revenues Capital appropriations (4.9) Capital grants and contracts Total Other Revenues (4.9) (50.5%) Increase in Net Assets $ % Net Assets - Beginning of Year Net Assets - End of Year $ $

6 Operating Revenues Management s Discussion and Analysis (Continued) Operating revenues include all transactions that result in the sales and/or receipts from goods and services such as tuition and fees, residence halls and dining. In addition, certain federal, state and private grants are considered operating if they are not for capital purposes and are considered a contract for services. The following two major factors significantly impacted operating revenue: Student tuition and fee revenue increased $10.4 million due to the Board approved tuition increase of 9.2% and moderate enrollment growth. Auxiliary activities revenue increased by $2.7 million primarily due to Residential Life and dining rate increase of 6% and increased residence hall occupancy. Nonoperating Revenues Nonoperating revenues are all revenue sources that are primarily non-exchange in nature. They consist primarily of state appropriations, gifts, and investment income (including realized and unrealized gains and losses). Nonoperating revenue was significantly impacted by the following factors: The state appropriation of $47.8 million reflects a 10.8% reduction from the 2003 level. This reduction from the State of Michigan is in addition to last year s reduction of 3.5%. Gift revenue of $6.9 million. Investment income increased by $4.2 million to $7.3 million. Investment income and realized gains totaled $0.9 million plus the unrealized gain on investments of $6.4 million. This reflects Foundation investment performance that exceeded our overall benchmarks for the year by 1.2%. The University investment performance exceeded both the annual and long term benchmarks by a small amount. 7

7 Management s Discussion and Analysis (Continued) Other Revenues Other revenue consists of items that are typically nonrecurring, extraordinary, or unusual to the University. An example would be state capital appropriations, additions to permanent endowments, and transfers from related entities. Other revenue changes were the result of the following factors: State capital appropriations decreased by $4.9 million to $4.6 million due to the completion of the Granger Center of Construction and HVACR. The new Granger Center was opened for classes in the Fall of The following is a graphic illustration of total revenues by source: State Capital App. 2% Investment Income 4% Gifts 4% Departmental Activities 5% Tuition & Fees 36% State Appropriations 26% Other 0% Auxiliary Activities 16% Grants 7% 8

8 Operating Expenses Management s Discussion and Analysis (Continued) Operating expenses are all the costs necessary to perform and conduct the programs and primary purposes of the University. The total of these expenses was reduced by $2.5 million from 2003 levels. Included in this reduction are the results of budget reduction plans implemented by the University in the personnel and departmental expense areas with partial offsets in labor and benefit economics. Utilities costs decreased by 5% due to electric and gas favorable usage experience for the year. The following is a graphic illustration of operating expenses by function: Aux. Act. 13% Other 1% Student Aid 7% Depreciation 6% Instruction 36% Oper/Maint. 9% Instit. Support 11% Student Services 6% Academic Support 11% A non-operating expense of interest on capital related debt reduced $0.6 million to $3.9 million in 2004 as a result of the refunding of the 1988 series bonds in

9 Management s Discussion and Analysis (Continued) Statement of Cash Flows Another way to assess the financial health of the University is to look at the Statement of Cash Flows. Its primary purpose is to provide relevant information about the cash receipts and cash payments of an entity during a period. The Statement of Cash Flows also helps users assess an entity s: ability to generate future net cash flows ability to meet its obligations as they come due needs for external financing Cash Flows for the Year Ended June 30 (in millions) Increase (Decrease) Cash Provided by (Used in): Operating activities $ (37.9) $ (53.9) $ 16.0 Noncapital financing activities (6.0) Capital and related financing activities (10.0) (13.2) 3.2 Investing activities (6.9) 2.5 (9.4) Net Decrease in Cash (0.2) (4.0) 3.8 Cash - Beginning of Year (4.0) Cash - End of Year $ 14.7 $ 14.9 $ (0.2) The University s liquidity decreased slightly primarily due to the reduction in state appropriations. Major sources of funds from operations came from student tuition and fees, grants and contracts along with residential life and other auxiliary activities. These sources were offset by expenditures for operations such as payments to employees and suppliers and loans issued to students. The net total of cash used in operations decreased by $16.0 million from State appropriations, gifts and grants received during the current year provide noncapital financing sources. The net cash generated in this area decreased by $6.0 million. The State of Michigan appropriation reduction was $5.2 of this reduction. Cash used by capital and related financing activities totaled $10.0 million, primarily from the capital assets acquired during the year of $8.3 million and debt and interest payments of $6.6 million. This was partially offset by proceeds from state capital appropriations of $4.6 million. Capital related usage decreased $3.2 million from Cash used in investing activities totaled $6.9 million. 10

10 Capital Assets and Debt Administration Capital Assets Management s Discussion and Analysis (Continued) At June 30, 2004, the University had $212 million invested in capital assets, net of accumulated depreciation of $133 million. Depreciation charges were consistent with 2003 at $9.7 million. Details of these assets are shown below: Increase (Decrease) Percent Change Land, land improvements, and infrastructure $ 18.5 $ 17.1 $ % Buildings and improvements % Furniture, fixtures and equipment (1.7) (2.0%) Construction in progress (13.1) (88.5%) Total $ $ $ % The major capital addition completed this year and the source of the funding (in millions): Granger Center for Construction and HVACR. Funded by the State of Michigan, the University and Private donations $15.6 Debt At year-end, the University had $81.8 million in debt outstanding. The table below summarizes this amount by type of debt instrument Increase (Decrease) Percent Change General Revenue Bonds $ 81.8 $ 84.3 $ (2.5) (3.0%) There were no additional bonds issued in The University s revenue bond rating is A2. More detailed information about the long-term liabilities is presented in the footnotes to the financial statement. 11

11 Management s Discussion and Analysis (Continued) Economic Factors That Will Affect the Future The State of Michigan continues to have major budget challenges as we move into fiscal year The state universities and the Governor arrived at an agreement on limiting the tuition increase for the Fall of 2004 to 2.4% or the cost of living increase. In exchange for tuition increase restraint, the Governor agreed to restore 3% of the appropriation reduction taken in 2004 fiscal year. The Board of Trustees approved the 2005 budget with this agreement as part of the plan. If subsequent reductions are made or the 3% is not able to be restored, the University will need to make the appropriate budget and tuition adjustments. The University has addressed funding reductions of the past two years through position reductions and restraints on all other expense areas. The State budget trend for higher education over the last two years has increased the need to emphasize the importance of private giving. Ferris State University has been fortunate to have corporate partners involved with programs and participation from alumni and friends. The leadership of the University is focused on strengthening the individual and corporate giving programs. The University continues its efforts to recruit and retain an increased number of high caliber students. We have seen a continued trend of increased enrollment for the Fall of The total enrollment of the University including Kendall College of Art and Design is expected to approach 12,000 students. Expanding University resources and enrollment growth while increasing the admission standards of our student applicants continue to be priorities for the institution in the year ahead. 12

12 Balance Sheet June Assets Current Assets Cash and cash equivalents - Note 2 $ 14,689,382 $ 14,901,770 Short Term Investments - Note 2 22,756,133 23,676,191 Accounts receivable - Note 3 12,233,599 17,799,850 Inventories 969, ,270 Prepaid expenses and other assets 912, ,372 Total current assets 51,561,256 57,687,453 Non-current assets Endowment investments - Note 2 22,980,549 18,186,732 Other long term investments - Note 2 18,944,144 8,586,848 Student loan receivable - Note 3 18,406,636 17,982,674 Bond issuance costs 2,055,807 2,170,665 Capital assets, net - Note 4 211,987, ,626,566 Total noncurrent assets 274,374, ,553,485 Total assets $ 325,935,596 $ 318,240,938 Liabilities and Net Assets Current Liabilities Accounts payable and accrued liabilities $ 10,094,971 $ 14,123,192 Deferred revenue 5,066,290 4,423,115 Long-term liabilities - current portion - Note 5 3,433,093 3,659,395 Total current liabilities 18,594,354 22,205,702 Noncurrent Liabilities Deposits 918, ,360 Long-term liabilities - Note 5 85,295,695 87,963,055 Total noncurrent liabilities 86,214,160 88,864,415 Total liabilities 104,808, ,070,117 Net Assets Invested in capital assets, net of related debt 136,931, ,749,692 Restricted for Nonexpendable: Scholarships 11,660,373 10,535,919 Expendable: Scholarships 4,434,029 2,063,968 Research 84, ,501 Instructional department uses 329,745 95,042 Loans 18,801,662 18,865,584 Capital projects Other 240,091 1,692,044 Unrestricted 48,644,925 36,039,871 Total net assets 221,127, ,170,821 Total Liabilities and Net Assets $ 325,935,596 $ 318,240,938 See Notes to Financial Statements. 13

13 Statement of Revenue, Expenses and Changes in Net Assets Year Ended June Revenues Tuition and fees (Net of scholarship allowances of $10,519,513 for 2004 and $9,895,110 for 2003) $ 67,053,103 $ 56,720,120 Federal grants and contracts 13,040,448 12,999,396 State and local grants and contracts 609, ,729 Nongovernmental grants 284, ,041 Departmental activities 8,801,577 8,259,505 Auxiliary enterprises (Net of scholarship allowances of $3,680,192 for 2004 and $3,601,428 for 2003) 29,483,733 26,791,939 Other operating revenues 448, ,525 Total operating revenue 119,721, ,517,255 Expenses Operating expenses Instruction 62,655,556 62,117,233 Research 386, ,895 Public service 333, ,395 Academic support 18,584,927 19,156,541 Student services 10,629,925 10,697,407 Institutional support 18,788,428 21,878,781 Operation and maintenance of plant 14,838,617 14,920,383 Depreciation 9,691,318 9,688,992 Student aid 10,961,456 10,224,494 Auxiliary enterprises 21,583,836 21,194,451 Other expenses 285, ,268 Total operating expenses 168,739, ,204,840 Operating loss (49,017,707) (64,687,585) Nonoperating Revenues (Expenses) State Appropriations 47,829,980 53,577,031 Gifts 6,923,735 6,344,886 Investment Income 7,309,403 3,083,616 Interest on Capital Asset - related Debt (3,939,955) (4,477,108) Net Nonoperating revenues 58,123,163 58,528,425 Income (loss) before other revenues and expenses 9,105,456 (6,159,160) State Capital Appropriations 4,596,370 9,461,406 Additions to permanent endowments 254, ,672 Increase in net assets 13,956,261 3,507,918 Net Assets Net Assets - Beginning of Year 207,170, ,662,903 Net Assets - End of Year $ 221,127,082 $ 207,170,821 See Notes to Financial Statements. 14

14 Statement of Cash Flows Year Ended June Cash Flows from Operating Activities Tuition and fees $ 68,712,607 $ 56,925,973 Grants and contracts 15,569,634 14,206,267 Payments to suppliers (90,915,212) (84,868,441) Payments to employees (72,831,378) (73,810,491) Interest collected on student loans 448, ,525 Loans issued to students (4,882,287) (5,838,866) Collection of loans from students 4,458,325 4,139,059 Auxiliary Enterprise Charges 29,483,733 26,791,939 Other receipts 12,038,888 8,020,011 Net Cash used in Operating Activities (37,916,792) (53,871,024) Cash Flows from Noncapital Financing Activities State appropriations 48,908,849 54,132,246 Gifts and Grants for other than capital purposes 6,563,042 6,223,665 Private gifts for endowment purposes 254, ,672 Federal direct loan lending receipts 42,901,000 36,805,000 Federal direct loan lending disbursements (44,037,272) (36,809,488) Net Cash provided by Noncapital Financing Activities 54,590,054 60,557,095 Cash Flows from Capital and Related Financing Activities Proceeds from issuance of capital debt - 10,340,000 Capital appropriations 4,596,370 9,461,406 Capital grants and gifts received 360, ,221 Purchase of capital assets and construction (8,299,804) (18,530,664) Principal paid on capital debt (2,510,000) (2,380,481) Interest paid on capital debt (4,111,257) (4,107,625) Payment to refunding bond escrow agent - (7,993,226) Bond issue costs paid on new debt issue - (153,551) Net Cash used in Capital and Related Financing Activities (9,963,998) (13,242,920) Cash Flows from Investing Activities Proceeds from sales and maturities of investments 6,881,309 3,357,089 Investment income 918,689 2,409,055 Purchase of investments (14,721,650) (3,250,745) Net cash provided by (used in) Investing Activities (6,921,652) 2,515,399 Net Decrease in Cash and Cash Equivalents (212,388) (4,041,450) Cash and Cash Equivalents, Beginning of Year 14,901,770 18,943,220 Cash and Cash Equivalents, End of Year $ 14,689,382 $ 14,901,770 See Notes to Financial Statements. 15

15 Statement of Cash Flows (Continued) Year Ended June Operating loss $ (49,017,707) $ (64,687,585) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 9,691,318 9,688,992 Amortization of bond issuance costs 114, ,858 Loss on disposal of fixed assets 247, ,175 Decrease (increase) in assets: Accounts receivable 5,623,654 (677,568) Student loan receivable (423,962) (1,131,794) Inventories, prepaids, and other assets (572,500) (548,793) Increase (decrease) in liabilities: Accounts payable and accrued liabilities (4,028,221) 2,611,312 Deposits and unearned revenue 660, ,543 Accrued sick leave and employee buyouts (212,360) 99,836 Net cash used in operating activities $ (37,916,792) $ (53,871,024) See Notes to Financial Statements. 16

16 Notes to Financial Statements June 30, 2004 and 2003 Note 1 - Basis of Presentation and Significant Accounting Policies Ferris State University (the University) is an institution of higher education created by the Michigan Constitution of 1963 and is considered to be a component unit of the State of Michigan (the State). Its Board of Trustees is appointed by the Governor of the State. Accordingly, the University is included in the State s financial statements as a discrete component unit. Transactions with the State relate primarily to appropriations for operations and capital improvements and grants from various state agencies. Basis of Presentation The financial statements have been prepared in accordance with generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board (GASB) in Statement 34, Basic Financial Statements-and Management s Discussion and Analysis-for State and Local Governments issued in June, 1999 and Statement 35, Basic Financial Statements and Management s Discussion and Analysis of Public College and Universities issued in November, The University now follows the business-type activities reporting requirements of GASB Statement No. 34 that provides a comprehensive one-line look at the University s financial activities. The financial statements have been prepared incorporating totals from The University and The Ferris Foundation (the Foundation). The Foundation was established as a separate nonprofit corporation which exists for the sole purpose of soliciting, collecting, and investing donations for the benefit of the University. Foundation Board of Directors membership includes members of the University s Board, certain officers of the University as set forth in the Foundation bylaws, and other community representatives elected by the Foundation Board. The University has a significant fiduciary relationship with the Foundation. Therefore, the Foundation is treated as a blended component unit of the University and the financial statements of the Foundation have been combined with those of the University. Restricted Net Assets Restricted net assets represent amounts over which third parties have imposed restrictions that cannot be changed by the Board, including amounts that the Board has agreed to set aside under contractual agreements with third parties. Funds held by the Foundation for endowments or donor designated purposes were $11,660,373 and $10,535,919 at June 30, 2004 and 2003, respectively. The remaining restricted balance consists primarily of funds restricted for student loans, scholarships, and other purposes. 17

17 Notes to Financial Statements June 30, 2004 and 2003 Note 1 - Basis of Presentation and Significant Accounting Policies (Continued) Unrestricted Net Assets The University has designated the use of unrestricted net assets as follows: Designated for General Fund Division Use $ 5,316,000 $ 9,047,000 Designated for Encumbrances 2,423,782 3,185,801 Designated for Maintenance and Replacement 14,703,285 6,972,561 Designated for Debt Service Reserve 1,440,573 1,440,573 Designated for Foundation Endowments 8,624,453 6,257,593 Unrestricted and Undesignated 16,136,832 9,136,343 Total Unrestricted Net Assets $ 48,644,925 $ 36,039,871 Accrual Accounting The accompanying financial statements have been prepared on the accrual basis of accounting. Cash and Cash Equivalents Cash and cash equivalents consist of all highly liquid investments with an initial maturity of three months or less. Investments Investments, including those of the Foundation, are recorded at fair value, based on quoted market prices. Inventories Inventories, consisting primarily of supplies, are stated at the lower of cost or market using the first-in, first-out method. Bond Issuance Costs The bond issuance costs are being amortized over the life of the bonds using the straight-line method. 18

18 Notes to Financial Statements June 30, 2004 and 2003 Note 1 - Basis of Presentation and Significant Accounting Policies (Continued) Capital Assets Capital assets are recorded at cost or, if acquired by gift, at the fair market value as of the date of acquisition. Library books are recorded using a historically based estimated value. Depreciation is provided for physical properties on a straight-line basis over the estimated useful life of the assets. Revenue State appropriations are recognized when received or required by the State of Michigan. Reclassifications Certain prior year amounts have been reclassified to conform to the presentation used in the current year. Note 2 - Cash and Investments Cash and Cash Equivalents Cash and cash equivalents consist of the following: Cash (checks issued in excess of available cash balances) $ 347,610 $ (184,159) Money market funds 14,341,772 15,085,929 Total $ 14,689,382 $ 14,901,770 The above total of checks issued in excess of available cash balances was reflected in the accounts of the banks (without recognition of outstanding checks and deposits in transit) in the amount of $1,233,564 and $1,147,074 at June 30, 2004 and 2003, respectively. Of the amount, $457,415 and $311,373 was covered by federal depository insurance at June 30, 2004 and 2003, respectively. Money market deposits are generally uninsured and uncollateralized. 19

19 Note 2 Cash and Investments (Continued) Investments Notes to Financial Statements June 30, 2004 and 2003 The Board of Trustees has authorized certain University administrators to invest in short, intermediate and long-term pools of investments, depending on the nature and need of funds. An established Board policy is followed for the investment of University funds. The primary investment objective for the investment pools is as follows: Short-term investment pool to provide for the preservation of capital. Funds needed for expenditures in less than one year will be considered short-term. Intermediate investment pool to provide for preservation of capital and maximization of income without undue exposure to risk. Funds needed for expenditures within one to five years will be considered intermediate term. Long-term investment pool to provide for long-term growth of principal and income without undue exposure to risk. Funds not needed for expenditures within five years will be considered long-term. The University s general policy toward the long-term investment pool shall be to diversify investments within both equity and fixed income securities so as to provide a balance that will enhance total return. The University invests with selected money managers as part of an institutional mutual fund or in segregated accounts at the investment management company. Performance objectives for each pool of investments have been established to measure the total return of a manager against a comparable index, as well as the amount of risk the manager is taking. The University uses the service of an outside investment counsel in providing performance measurements and asset allocation recommendations. Investment income and realized gains or losses are distributed using an average cash method on accounts designated to receive investment earnings. Unrealized gains or losses are distributed based on cash balances on June

20 Note 2 - Cash and Investments (Continued) Notes to Financial Statements June 30, 2004 and 2003 The University s investments are recorded on the financial statements under the following categories: Short Term Investments $ 22,756,133 $ 23,676,191 Endowment Investments 22,980,549 18,186,732 Other Long-Term Investments 18,944,144 8,586,848 Total $ 64,680,826 $ 50,449,771 The University utilizes the pooled method of accounting for substantially all of its investments, which consist of the following: Cash Value of Life Insurance Policies $ 700,980 $ 682,599 Mutual Funds: Equity Funds 19,019,092 13,599,478 Bond Funds 28,153,522 20,896,597 Marketable Securities 3,907 30,175 Common Funds: Global Bond Fund 6,439,865 4,488,672 Equity Index Fund 9,181,898 9,834,928 Short-term Fund - 917,322 Real Estate Securities Fund 1,181,562 - Total Investments $ 64,680,826 $ 50,449,771 Certificates of deposit and other investments are generally uninsured. Investments are primarily held either in the name of a custodian or a broker. The University's ownership is reflected in the internal records of the custodian or broker. The mutual and common fund investments are not categorized because they are not evidenced by securities that exist in physical or book entry form. The remaining investments are classified as a Risk Category 3, which includes investments that are neither insured nor registered and are held by either the counterpart or the counterpart s trust department (or agent) but are not in the University s name. 21

21 Notes to Financial Statements June 30, 2004 and 2003 Note 3 - Accounts Receivable and Student Loans Receivable Accounts receivable consist of the following: Student $ 3,231,337 $ 5,831,670 Grants & Contracts 1,136,272 1,040,441 State Appropriations 8,460,516 9,539,385 Other 1,333,738 3,076,421 Total accounts receivable 14,161,863 19,487,917 Less allowance for doubtful accounts 1,928,264 1,688,067 Total accounts receivable, net $ 12,233,599 $ 17,799,850 Student loans receivable of $18,406,636 and $17,982,674 for the years ended June 30, 2004 and 2003, respectively, are recorded net of an allowance for doubtful accounts of $3,000,000 for 2004 and

22 Notes to Financial Statements June 30, 2004 and 2003 Note 4 - Capital Assets Capital asset activity for the year ended June 30, 2004 was as follows: Beginning Ending Balance Additions Retirements Transfers Balance Land Improvements $ 6,347,079 $ - $ - $ 421,977 $ 6,769,056 Infrastructure 6,390, ,026,602 7,416,919 Building and Building Improvements 223,793,292 - (66,205) 17,060, ,787,996 Furniture, Fixtures and Equipment 85,364,065 3,806,578 (5,471,988) - 83,698,655 Subtotal - Depreciable Assets 321,894,753 3,806,578 (5,538,193) 18,509, ,672,626 Land 4,362, ,362,013 Construction in Progress 14,808,561 5,375,450 - (18,509,488) 1,674,523 Subtotal - Nondepreciable Assets 19,170,574 5,375,450 - (18,509,488) 6,036,536 Total $ 341,065,327 $ 9,182,028 $ (5,538,193) $ - $ 344,709,162 Less Accumulated Depreciation: Land Improvements $ 3,516,557 $ 170,997 $ - $ - $ 3,687,554 Infrastructure 2,444, , ,768,747 Building and Building Improvements 73,079,379 5,284,422 (66,205) - 78,297,596 Furniture, Fixtures and Equipment 48,398,568 3,911,409 (4,341,916) - 47,968,061 Total Accumulated Depreciation $ 127,438,761 $ 9,691,318 $ (4,408,121) $ - $ 132,721,958 Capital Assets, Net $ 213,626,566 $ 211,987,204 23

23 Notes to Financial Statements June 30, 2004 and 2003 Note 4 - Capital Assets (Continued) Capital asset activity of the year ended June 30, 2003 was as follows: Beginning Ending Balance Additions Retirements Transfers Balance Land Improvements $ 6,323,198 $ - $ - $ 23,881 $ 6,347,079 Infrastructure 6,065, ,177 6,390,317 Building and Building Improvements 209,784,188 50,000-13,959, ,793,292 Furniture, Fixtures and Equipment 87,369,765 3,206,447 (5,212,147) - 85,364,065 Subtotal - Depreciable Assets 309,542,291 3,256,447 (5,212,147) 14,308, ,894,753 Land 4,001, , ,362,013 Construction in Progress 13,114,833 16,001,890 - (14,308,162) 14,808,561 Subtotal - Nondepreciable Assets 17,116,736 16,362,000 - (14,308,162) 19,170,574 Total $ 326,659,027 $ 19,618,447 $ (5,212,147) $ - $ 341,065,327 Less Accumulated Depreciation: Land Improvements $ 3,366,659 $ 149,898 $ - $ - $ 3,516,557 Infrastructure 2,171, , ,444,257 Building and Building Improvements 68,125,935 4,953, ,079,379 Furniture, Fixtures and Equipment 47,855,267 4,312,490 (3,769,189) - 48,398,568 Total Accumulated Depreciation $ 121,518,958 $ 9,688,992 $ (3,769,189) $ - $ 127,438,761 Capital Assets, Net $ 205,140,069 $ 213,626,566 24

24 Notes to Financial Statements June 30, 2004 and 2003 Note 4 - Capital Assets (Continued) Construction in progress consisted of the following projects: HVACR $ - $ 12,993,834 Ice Arena - 598,148 Swan 4th floor 407,398 - Science Wing Addition 71,349 - Viron Energy 1,172, ,958 Other 22, ,621 Total Construction in Progress $ 1,674,523 $ 14,808,561 There were no significant contracts in process at June 30, 2004 and 2003, related to the above projects. The following estimated useful lives are used to compute depreciation: Buildings Library books Land improvements and infrastructure Equipment 50 years 5 years 20 years 7-15 years Several of the buildings on campus were financed through the issuance of bonds by the State of Michigan Building Authority (SBA). The SBA bonds are secured by a pledge of rentals to be received from the State of Michigan pursuant to a lease agreement entered into between the SBA, the State of Michigan and the University. During the lease term, the SBA will hold title to the buildings, the State of Michigan will make all lease payments to the SBA, and the University will be responsible for all operating and maintenance costs. At the expiration of the lease, the SBA will transfer the title of the buildings to the University. The renovations are being recorded as plant and equipment as expenditures are incurred by the SBA, and revenue from the State of Michigan is being recorded for the same amount. 25

25 Notes to Financial Statements June 30, 2004 and 2003 Note 5 - Long Term Obligations Long Term obligation activity for the year ended June 30, 2004 was as follows: Beginning Ending Current Balance Additions Deductions Balance Portion General Revenue Bonds, Series 2002 $ 10,340,000 $ - $ 340,000 $ 10,000,000 $ 495,000 General Revenue Bonds, Series ,000, ,000, ,000 General Revenue Bonds, Series ,385, ,000 46,570, ,000 General Revenue Refunding Bonds, Series ,545, ,000 1,955, ,000 General Revenue Refunding Bonds, Series ,660, ,000 12,285, ,000 General Revenue Bonds, Series , , Total Bonds and Notes Payable 84,320,000-2,510,000 81,810,000 2,455,000 Other Liabilities Accrued Sick Leave 5,530, ,910-5,940,695 - Accrued Employment Contract Buyouts 622, , Accrued Long-Term Interest Payable 1,149,395 3,939,955 4,111, , ,093 Total $ 91,622,450 $ 4,349,865 $ 7,243,527 $ 88,728,788 $ 3,433,093 Long-term obligation activity for the year ended June 30, 2003 was as follows: Beginning Ending Current Balance Additions Deductions Balance Portion General Revenue Bonds, Series 2002 $ - $ 10,340,000 $ - $ 10,340,000 $ 340,000 General Revenue Bonds, Series ,000, ,000,000 - General Revenue Bonds, Series ,165, ,000 47,385, ,000 General Revenue Refunding Bonds, Series ,110, ,000 2,545, ,000 General Revenue Refunding Bonds, Series ,020, ,000 12,660, ,000 General Revenue Bonds, Series , , , ,000 General Revenue Refunding Bonds, Series ,006,849-3,006, Total Bonds and Notes Payable 79,061,849 10,340,000 5,081,849 84,320,000 2,510,000 Other Liabilities Accrued Sick Leave 6,053, , ,773 5,530,785 - Accrued Employment Contract Buyouts - 622, ,270 - Accrued Long-Term Interest Payable 6,212,924 4,477,108 9,540,637 1,149,395 1,149,395 Total $ 91,327,893 $ 15,584,816 $ 15,290,259 $ 91,622,450 $ 3,659,395 26

26 Note 5 - Long-Term Obligations (Continued) General Revenue Bonds, Series 2002 Notes to Financial Statements June 30, 2004 and 2003 The University issued $10,340,000 of 2.0 to 4.3 percent General Revenue Bonds. A rating of AAA was assigned to these bonds by Standard & Poor s. The bonds are insured, payable from general revenues of the University, callable at a premium, and mature in varying amounts through Proceeds from this issuance were used to refund the outstanding balance of the General Revenue Bonds, Series 1988 and related accrued interest, $1,000,000 in funds for the energy retrofitting and modifications for the College of Business, Pharmacy and Allied Health buildings, $900,000 for the Ice Arena Mechanical System, $100,000 for the State Street modifications and costs incidental to the issuance of the bonds. General Revenue Bonds, Series 2001 The University issued $11,000,000 of 4.0 to 5.25 percent General Revenue Bonds. A rating of AAA was assigned to these bonds by Standard & Poor s. The bonds are insured, payable from general revenues of the University, callable at a premium, and mature in varying amounts through Proceeds from this issuance were used for the construction and equipping of a new Grounds Storage Building for $1,000,000, $6,500,000 for various building and site acquisitions, improvements, renovations, and remodeling projects at the Big Rapids and Grand Rapids campuses, and additions and remodeling of the Heating, Ventilation, Air Conditioning and Refrigeration Technology Center (HVACR) of $3,500,000, and costs incidental to the issuance of the bonds. The HVACR project has a total estimated cost of $18,000,000 with sources of $1,000,000 from gifts, $13,500,000 from the State Building Authority, and the remainder from these bond proceeds. General Revenue and Refunding Bonds, Series 1998 The University issued $49,935,000 of 3.60 to 5.0 percent General Revenue Bonds. A rating of AAA was assigned to these bonds by Standard & Poor s. The bonds are insured, payable from general revenues of the University, callable at a premium, and mature in varying amounts through Proceeds from the issuance in the amount of $38,862,500 were placed in an irrevocable trust for the purpose of refunding certain maturities of the General Revenue Bonds, Series 1993 and Series The remaining proceeds of approximately $11,000,000 were used for multiple purposes including the acquisition and renovations of the building adjacent to the Kendall College of Art and Design, construction related to the student recreation center, the sports complex and convocation area, the Katke golf course, and costs incidental to the issuance of the bonds. 27

27 Note 5 - Long-Term Obligations (Continued) General Revenue Bonds, Series 1997 Notes to Financial Statements June 30, 2004 and 2003 The University issued $29,085,000 of 4.75 to 5.90 percent General Revenue Bonds. A rating of "AAA" was assigned to these bonds by Standard & Poor's. The bonds are insured, payable from general revenues of the University, callable at a premium, and mature in varying amounts during the fiscal years 2003 to Proceeds from this issue continue to be used for the University s 25 percent match of a $50 million state funded library, and the acquisition, construction, furnishing and equipping of a student recreation center, a student convocation center, Kendall College of Art and Design, and costs incidental to the issuance of the bonds. The bonds were partially defeased in General Revenue and Refunding Bonds, Series 1995 The University issued $14,700,000 of 3.70 to 5.25 percent General Revenue and Refunding Bonds. A rating of "AAA" was assigned to these bonds by Standard & Poor's. The bonds are insured, payable from general revenues of the University, callable at a premium, and mature in varying amounts through fiscal year Proceeds from this issuance in the amount of $11,161,588 were placed in an irrevocable trust for the purpose of paying the future principal and interest of a portion of the General Revenue Refunding Bonds, Series The remaining proceeds of approximately $3,500,000 were used for a new replacement boiler in the central heating plant, land acquisition and to pay for the costs related to the issuance of the bonds. General Revenue Bonds, Series 1993 The University issued $14,000,000 of 3.35 to 6.25 percent General Revenue Bonds. The bonds are payable from general revenues of the University, callable at a premium, and mature in varying amounts through fiscal year Proceeds from this issue were used for the acquisition, construction, furnishing and equipping of student family apartments, and costs incidental to the issuance of the bonds. The bonds were partially defeased during Accrued Sick Leave The University provides termination benefits upon retirement resulting from unused sick days, and defined by each respective labor contract and administrative policy. The liability, which is calculated based on eligible service requirements and earned sick leave hours, is recorded using the vesting method and based on those employees currently eligible. Effective July 1, 2001, all nonunion employees hired after July 1, 2001 are no longer eligible for the sick leave payout upon retirement. 28

28 Note 5 - Long-Term Obligations (Continued) Principal and Interest Maturities and Interest Expense Notes to Financial Statements June 30, 2004 and 2003 Total principal and interest maturities on all debt obligations as of June 30, 2004, are as follows: Year Principal Interest Total 2005 $ 2,455,000 $ 3,862,781 $ 6,317, ,560,000 3,760,629 6,320, ,665,000 3,652,021 6,317, ,780,000 3,537,740 6,317, ,895,000 3,416,758 6,311, ,650,000 14,944,430 31,594, ,155,000 10,450,720 31,605, ,665,000 5,183,461 22,848, ,930,000 1,668,787 12,598, ,055, ,506 2,220,506 $ 81,810,000 $ 50,642,833 $ 132,452,833 Interest expense was approximately $3,900,000 and $4,500,000 for the years ended June 30, 2004 and 2003, respectively. Defeased Debt During fiscal year 2003, the University in-substance defeased (extinguished) $2,701,368 of principal and $5,291,858 of accrued interest related to the 1988 General Revenue Bonds as part of the issuance of the General Revenue Bonds Series 2002 discussed above. The gain on defeasance for the year ended June 30, 2003 was $206,266. In addition, during fiscal year 1998, the University in-substance defeased (extinguished) $10,860,000 of principal related to the 1993 General Revenue Bonds and $25,975,000 of principal related to the 1997 General Revenue Bonds as part of the issuance of the General Revenue and Refunding Bonds Series 1998 discussed above. 29

29 Note 5 - Long-Term Obligations (Continued) Notes to Financial Statements June 30, 2004 and 2003 Since the General Revenue bonds, Series 1988 and a portion of the General Revenue bonds, Series 1993 and Series 1997 were in-substance defeased (extinguished), neither the assets of the irrevocable trust nor the bonds are reflected in the University s statements of financial condition. Future principal and interest due on these bonds will be paid from the funds placed in the irrevocable trust, and the interest earned on these funds. Of the various bonds in-substance defeased, $41,471,310 remains outstanding at June 30, Note 6 - Retirement Plans The University provides non-contributory retirement plans for all qualified employees. In December, 1995, the State enacted H.B that precludes University employees hired after March 28, 1996 from participating in the Michigan Public School Employees Retirement System (MPSERS). Employees currently covered under the MPSERS plan will continue to remain in that plan. The University will contribute to MPSERS the amount of their eligible wages mandated by state statute. MPSERS is a statewide, cost-sharing multi-employer defined benefit public employee retirement system governed by the State of Michigan. The System provides retirement, survivor and disability benefits to plan members and their beneficiaries. The Michigan Public School Employees Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for the System. That report may be obtained by writing to the System at 7150 Harris Drive, P.O. Box 30673, Lansing, MI Under this plan, the University is required to contribute the full actuarial funding contribution amount to fund pension benefits, plus an additional amount to fund retiree health care benefit amounts on a cash disbursement basis. The pension benefit rate totaled 7.35 percent for the period July 1, 2003 through June 30, 2004 of the covered payroll to the plan. The University s contributions to the MPSERS plan for the years ended June 30, 2004, 2003, and 2002 were approximately $1,581,000, $1,709,000, and $1,633,000, respectively. Under the MPSERS Act, all retirees participating in the MPSERS Pension Plan have the option of continuing health, dental and vision coverage. Retirees having these coverages contribute an amount equivalent to the monthly cost for Part B Medicare and 10 percent of the monthly premium amount for the health, dental and vision coverages. The University s required contributions for postemployment health care benefits were approximately $3,460,000 and $3,764,000 for the years ended June 30, 2004 and 2003, respectively. 30

30 Notes to Financial Statements June 30, 2004 and 2003 Note 6 - Retirement Plans (Continued) Prior to March 28, 1996, faculty and non-bargaining unit job groups were eligible to participate in the Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF) plan. TIAA-CREF is a defined contribution plan where the University generally contributes 12 percent of employees pay for administration, faculty, or head resident employee groups and 10 percent for all other eligible employee groups to the plan and has no liability beyond that contribution. All eligible employees hired after March 28, 1996 have the option to participate in either TIAA-CREF or a second defined contribution plan with Fidelity Investments Tax Exempt Service Company (Fidelity Investments). The Fidelity Investments plan calls for the same contribution rates. Kendall College staff also participate in a defined contribution plan through TIAA-CREF with contribution rates ranging from 5 to 15 percent of base salary. Plan participants maintain individual annuity contracts with TIAA-CREF or Fidelity Investments which are fully vested. For the years ended June 30, 2004 and 2003, the University contributed approximately $4,782,000 and $4,763,000 to the TIAA-CREF plan and approximately $580,000 and $560,000 to the Fidelity Investments plan, respectively. 31