CALIFORNIA BAPTIST UNIVERSITY Riverside, California

Transcription

1 Riverside, California Independent Auditor s Report and Consolidated Financial Statements For the Years Ended June 30, 2016 and 2015

2 AUDITED CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 CONTENTS AUDITED FINANCIAL STATEMENTS: Page Independent Auditor s Report Consolidated Statements of Financial Position Consolidated Statements of Activities Consolidated Statements of Cash Flows... 7 Notes to Consolidated Financial Statements Supplementary Schedule of Financial Position Supplementary Schedule of Activities... 30

3 INDEPENDENT AUDITOR S REPORT Board of Trustees California Baptist University Riverside, CA Report on the Financial Statements We have audited the accompanying consolidated financial statements of California Baptist University (the University), which comprise the consolidated statements of financial position as of June 30, 2016 and 2015, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated 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 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 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 of 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. -1-

4 Board of Trustees California Baptist University Opinion In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of California Baptist University as of June 30, 2016 and 2015, and the related consolidated activities and cash flows for the fiscal years then ended in conformity with accounting principles generally accepted in the United States of America. Other Matters Supplementary Information Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying financial information identified as supplementary information is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 15, 2016, on our consideration of the University s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the University s internal control over financial reporting and compliance. VICENTI, LLOYD & STUTZMAN LLP Glendora, CA September 15,

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION June 30, 2016 and CURRENT ASSETS: Cash and cash equivalents $ 82,530,009 $ 38,686,466 Accounts receivable - students 8,677,732 9,381,202 Less: Allowance for doubtful accounts (1,983,822) (1,954,610) Accounts receivable - other, net 10,715,283 7,524,829 Pledges receivable, current portion 2,813, ,000 Inventories 987,276 1,361,536 Prepaid expenses and other assets 1,526,593 1,237,668 Total current assets 105,266,699 57,020,091 LONG-TERM ASSETS: Cash restricted for bond debt service reserves 22,311,978 14,628,978 Pledges receivable, net of current portion 9,750,473 3,225,476 Security deposit 200, ,643 Notes receivable 3,360,878 3,441,364 Long-term debt issuance costs 5,037,615 3,570,426 Total long-term assets 40,660,950 25,081,887 LONG-TERM INVESTMENTS: Treasury notes, bill, and other securities 16,761,841 16,087,620 Real estate 2,259,875 2,259,875 Total long-term investments 19,021,716 18,347,495 PROPERTY, PLANT AND EQUIPMENT, at cost: Land 36,368,962 36,037,830 Land improvements 28,129,614 23,125,381 Buildings 137,759, ,403,834 Building improvements 49,775,830 45,512,529 Leasehold improvements 29,164,868 30,952,751 Equipment and furniture 49,544,502 45,506,858 Vehicles 1,508,150 1,377,435 Construction-in-progress 33,178,668 5,757,669 Accumulated depreciation (87,558,189) (75,344,364) Total property, plant and equipment 277,871, ,329,923 Total assets $ 442,821,212 $ 347,779,396 The accompanying notes are an integral part of these financial statements. -3-

6 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION June 30, 2016 and CURRENT LIABILITIES: Accounts payable $ 8,584,654 $ 6,092,260 Accrued liabilities 6,002,876 7,725,903 Accrued interest payable 2,530,131 1,865,498 Funds held in custody for others 2,227,593 2,128,675 Deposits and deferred revenue 2,796,865 2,379,588 Revolving line of credit - 6,000,000 Notes payable 137, ,356 Capital lease obligations 1,339,922 1,262,216 Bonds payable 3,600,000 3,310,000 Total current liabilities 27,219,512 31,113,496 LONG-TERM LIABILITIES: Notes payable 5,100,256 5,019,918 Capital lease obligations 678,542 2,048,498 Bonds payable 260,073, ,161,431 Federal student loan funds 1,080,461 1,089,183 Total long-term liabilities 266,932, ,319,030 NET ASSETS: Unrestricted 115,069,161 97,778,395 Temporarily restricted 17,730,080 9,346,488 Permanently restricted 15,869,594 14,221,987 Total net assets 148,668, ,346,870 Total liabilities and net assets $ 442,821,212 $ 347,779,396 The accompanying notes are an integral part of these financial statements. -4-

7 CONSOLIDATED STATEMENT OF ACTIVITIES For the Year Ended June 30, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Net Assets Net Assets Net Assets Net Assets REVENUES: Student tuition and fees $ 210,576,287 $ - $ - $ 210,576,287 Tuition discounts (49,695,848) (49,695,848) Net tuition and fees 160,880, ,880,439 Sales and service 15,048,545 15,048,545 Private gifts 669,851 10,700, ,907 12,133,450 Cooperative program 305, ,286 Investment return 279, , ,553 Net unrealized loss on investments (69,980) (787,267) (857,247) Interest income 82,841 82,841 Other 6,300,681 6,300,681 TOTAL REVENUE 183,497,603 10,126, , ,386,548 Net assets released from restrictions 1,742,446 (1,742,446) - - TOTAL REVENUES AND NET ASSETS RELEASED FROM RESTRICTIONS 185,240,049 8,383, , ,386,548 EXPENSES: Educational and general activities: Instruction 73,470,985 73,470,985 Academic support 6,369,571 6,369,571 Student services 30,858,109 30,858,109 Institutional support 33,292,578 33,292,578 Scholarships and fellowships 546, ,006 Auxiliary expenditures 20,420,258 20,420,258 Development and fundraising expenses 2,107,076 2,107,076 TOTAL EXPENSES 167,064, ,064,583 RECLASSIFICATIONS (884,700) - 884,700 - INCREASE IN NET ASSETS 17,290,766 8,383,592 1,647,607 27,321,965 BEGINNING NET ASSETS 97,778,395 9,346,488 14,221, ,346,870 ENDING NET ASSETS $ 115,069,161 $ 17,730,080 $ 15,869,594 $ 148,668,835 The accompanying notes are an integral part of these financial statements. -5-

8 CONSOLIDATED STATEMENT OF ACTIVITIES For the Year Ended June 30, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Net Assets Net Assets Net Assets Net Assets REVENUES: Student tuition and fees $ 193,703,056 $ - $ - $ 193,703,056 Tuition discounts (44,809,228) (44,809,228) Net tuition and fees 148,893, ,893,828 Sales and service 16,133,907 16,133,907 Private gifts 2,025, , ,560 3,192,633 Cooperative program 333, ,404 Investment return 205, , ,174 Net unrealized gain on investments (625) (745,690) (746,315) Interest income 25,090 25,090 Other 5,204,205 5,204,205 TOTAL REVENUE 172,820, , , ,884,926 Net assets released from restrictions 1,333,096 (1,333,096) - - TOTAL REVENUES AND NET ASSETS RELEASED FROM RESTRICTIONS 174,154,019 (771,653) 502, ,884,926 EXPENSES: Educational and general activities: Instruction 66,676,295 66,676,295 Academic support 6,155,979 6,155,979 Student services 28,793,905 28,793,905 Institutional support 30,141,385 30,141,385 Scholarships and fellowships 211, ,739 Auxiliary expenditures 20,772,162 20,772,162 Development and fundraising expenses 2,128,615 2,128,615 TOTAL EXPENSES 154,880, ,880,080 DONOR REDESIGNATIONS - (174,515) 59,520 (114,995) INCREASE (DECREASE) IN NET ASSETS 19,273,939 (946,168) 562,080 18,889,851 BEGINNING NET ASSETS 78,504,456 10,292,656 13,659, ,457,019 ENDING NET ASSETS $ 97,778,395 $ 9,346,488 $ 14,221,987 $ 121,346,870 The accompanying notes are an integral part of these financial statements. -6-

9 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2016 and CASH FLOWS from OPERATING ACTIVITIES: Change in Net Assets $ 27,321,965 $ 18,889,851 Adjustments to reconcile change in net assets to net cash flows from operating activities: Depreciation 12,213,825 11,135,758 Amortization of debt issuance costs and bond discount 224, ,875 Loss on exchange of property - 1,197,936 Net realized (gain) loss on investments (187,723) (611,152) Net unrealized (gain) loss on investments 857, ,315 Contributions restricted for long-term purposes (762,907) (502,560) (Increase)/decrease in operating assets: Accounts receivable - students - (net) 732,682 (1,140,694) Accounts receivable - other (3,190,454) (646,313) Pledges receivable - non-endowment (8,555,625) 901,884 Notes receivable 80,486 (805,895) Inventories 374,260 (227,294) Prepaid expenses, and other assets (288,925) 541,463 Security deposit 15,637 (3,476) Increase/(decrease) in operating liabilities: Accounts payable 2,492,394 (4,857,816) Accrued liabilities (1,058,394) (613,818) Deferred revenue and deposits 417,277 (64,556) Funds held for others 98, ,245 Net cash flows from operating activities 30,785,119 24,334,753 CASH FLOWS from INVESTING ACTIVITIES: Net sale (purchase) of investments (1,343,745) (447,845) Purchase of property, plant, and equipment (42,755,749) (27,254,341) Net cash flows from investing activities (44,099,494) (27,702,186) CASH FLOWS from FINANCING ACTIVITIES: Repayments of capital lease obligations (1,292,250) (1,267,011) Repayments of notes payable (131,547) (229,061) Repayments of bonds payable (3,590,000) (3,120,000) Payments made for debt issuance costs (1,667,439) - Net proceeds from (repayments of) line of credit (6,000,000) 1,000,000 Proceeds from bonds payable 76,767,969 - Collections of contributions restricted for long-term purposes 762, ,560 Change in cash restricted for bond debt service reserves (7,683,000) 1,064 Change in federal student loan funds (8,722) 8,445 Net cash flows from financing activities 57,157,918 (3,104,003) Net increase (decrease) in cash and cash equivalents 43,843,543 (6,471,436) Cash and cash equivalents at the beginning of the year 38,686,466 45,157,902 Cash and cash equivalents at the end of the year $ 82,530,009 $ 38,686,466 The accompanying notes are an integral part of these financial statements. -7-

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: California Baptist University is a private institution of higher education, offering both undergraduate and graduate courses to students. The University is located in Riverside, California. GENERAL: The University maintains its accounts in accordance with the principles and practices of fund accounting. Fund accounting is the procedure by which resources for various purposes are classified for accounting purposes in accordance with activities or objectives specified by donors. These consolidated financial statements, which are presented on the accrual basis of accounting, have been prepared to focus on the University as a whole and to present balances and transactions according to the existence or absence of donor-imposed restrictions. This has been accomplished by classification of transactions into three classes of net assets permanently restricted, temporarily restricted, or unrestricted, as follows: Fund Group Current Unrestricted Fund (Operating Fund) Current Restricted Funds Endowment Funds Net Investment in Plant Unexpended Plant Funds Loan Funds Net Asset Class Unrestricted Temporarily Restricted Unrestricted/Temporarily/Permanently Restricted Unrestricted Unrestricted/Temporarily Restricted Temporarily Restricted Net assets and revenues, expenses, gains and losses are classified based on the existence or absence of donor-imposed restrictions as follows: Unrestricted net assets - Net assets not subject to donor-imposed restrictions. Temporarily restricted net assets - Net assets subject to donor-imposed restrictions that will be met by actions of the University and/or the passage of time. Permanently restricted net assets - Net assets subject to donor-imposed restrictions that they be maintained permanently by the University. Generally, the donors of these assets permit the institution to use all or part of the income earned on related investments for general or specific purposes. -8-

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Expiration of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as releases between the applicable classes of net assets. Student tuition and fees are recorded as revenues in the period during which the academic services are rendered. Student tuition and fees received prior to when services are rendered are recorded as deferred revenues. Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value at the time of the gift. Income and realized net gains on investments of endowment and similar funds are reported as follows: 1. As increases in permanently restricted net assets if the terms of the gift or the University's interpretation of relevant state law require that they be added to the principal of a permanent endowment fund; 2. As increases in temporarily restricted net assets if the terms of the gift impose restrictions on the use of the income; 3. As increases in unrestricted net assets in all other cases. NET ASSETS: Unrestricted net assets consist of the following: Operating Fund $ 58,849,788 $ 40,820,795 Board designated quasi-endowment 25,000,000 25,000,000 Underwater Endowments (294,250) (224,270) Plant Funds 32,271,228 32,737,612 Hemet LLC (71,096) (41,335) Lancer Plaza LLC (686,509) (514,407) Total $ 115,069,161 $ 97,778,395-9-

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) Temporarily restricted net assets consist of the following: Current Restricted Funds $ 15,711,471 $ 6,374,472 Unexpended Plant Funds - Restricted Projects 764, ,949 Endowment Earnings to be Distributed 1,250,067 2,203,474 Loan Funds 3,593 3,593 Total $ 17,730,080 $ 9,346,488 For the years ended June 30, 2016 and 2015 permanently restricted net assets consist of endowment principal and pledges in the amount of $15,869,594 and $14,221,987, respectively. Contributions with restrictions met in the same year - Contributions received with donor-imposed restrictions that are met in the same year as received are reported as revenues of the temporarily restricted net asset class, and a reclassification to unrestricted net assets is made to reflect the expiration of such restrictions. Temporarily restricted net assets released from restrictions during the year are from the following categories: Instruction $ 428,394 $ 299,789 Academic support 36,671 27,697 Student services 177, ,549 Institutional support 301, ,456 Scholarships and fellowships 547, ,086 Fundraising 12,103 9,561 Auxiliary expenditures 112,935 90,214 Capital additions and transfers 125, ,744 Total $ 1,742,446 $ 1,333,096 ACCOUNTS RECEIVABLE: Allowance for doubtful accounts is accounted for on the reserve method. -10-

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) INVESTMENTS: The University considers its marketable securities as available for sale, as they are not intended to be held to maturity, nor are they considered operating assets, and as such are carried at fair value. INVENTORIES: Inventories are valued at the lower of cost (first-in/first-out) or market. 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 that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. FUNCTIONAL EXPENSES: Expenses are charged directly to program or management in general categories based on specific identification. Indirect expenses such as depreciation, interest and maintenance expenses have been allocated based on percentage of functional expenditures to total expenditures. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost of purchase or fair market value at date of gift. Depreciation is calculated on the straight-line method. Useful lives used in the calculation of accumulated depreciation by major category of assets are as follows: Buildings and improvements (considering the date originally constructed or purchased and remaining useful life) Equipment and fixtures Vehicles years 10 years 7 years Depreciation expense for the years ended June 30, 2016 and 2015 was $12,213,825 and $11,135,758, respectively. METHOD OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of Lancer Plaza LLC (owned by LEH) due to the nature of the lease between the University and Lancer Plaza LLC related to this real estate property. All inter-company accounts and transactions have been eliminated. -11-

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) METHOD OF CONSOLIDATION: (continued) The accompanying consolidated financial statements include the accounts of California Baptist University Development Foundation, a wholly owned tax exempt corporation. The purpose of the Foundation is to seek out contributions, predominantly long term gifting, of which the University is the recipient. The University funds the operating expenditures of the Foundation. The accompanying consolidated financial statements include the accounts of CBU Hemet Street, LLC, a single member LLC. The purpose of the CBU Hemet Street LLC is to hold property title for the University. All inter-company accounts and transactions have been eliminated. ADVERTISING: The University had $2,900,856 and $2,791,900 in advertising expenses for the years ended June 30, 2016 and 2015, respectively. CONCENTRATION OF RISK: The University maintains several cash deposits with financial institutions. Because of the need to periodically maintain high balances in its accounts for operational purposes, a portion of the deposits were uninsured at the end of the fiscal year. INCOME TAXES: The University is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code and from state income taxes; accordingly, no provision for income taxes is made in the financial statements. The University has evaluated its tax positions and the certainty as to whether those positions will be sustained in the event of an audit by taxing authorities at the federal and state levels. The primary tax positions evaluated are related to the University s continued qualification as a taxexempt organization and whether there is unrelated business income activities conducted that would be taxable. Management has determined that all income tax positions are more likely than not of being sustained upon potential audit or examination; therefore, no disclosures of uncertain income tax positions are required. The University files informational returns in the U.S. federal jurisdiction, and the state of California. The statute of limitations for federal and California state tax purposes is generally three and four years, respectively. SUBSEQUENT EVENTS: All events subsequent to the statement of financial position date of June 30, 2016 through September 15, 2016, which is the date these financial statements were available to be issued, have been evaluated in accordance with accounting principles generally accepted in the United States of America. -12-

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 2 CASH AND CASH EQUIVALENTS: Cash and cash equivalents and cash restricted for bond debt service reserves were comprised of the following: Cash available for operations $ 57,281,017 $ 13,520,755 Cash reserve/quasi-endowment 25,000,000 25,000,000 Cash available for student financial aid 248, ,711 Cash restricted for bond debt service reserves 22,311,978 14,628,978 Total $ 104,841,987 $ 53,315,444 NOTE 3 INVESTMENTS: Investments in marketable securities are reported at fair value. Other investments are reported at carrying value (purchase cost or fair value at date of gift). Cost and fair values are as follows at June 30: Description (Level): Cost Fair Value Cost Fair Value Appian Way real estate (3) $ 2,175,000 $ 2,175,000 $ 2,175,000 2,175,000 $ (b) Land (3) 6,500 6,500 6,500 6,500 (b) Property of a dissolved church (3) 78,375 78,375 78,375 78,375 (b) Non-endowment investments 2,259,875 2,259,875 2,259,875 2,259,875 Church debenture notes (3) 7,750 7,750 7,750 7,750 (b) Texas Baptist Foundation (1) 113, , , ,920 (a) Common Fund - Equity and Bonds (1) 2,192,226 2,197, , ,682 (a) California Baptist Foundation - Partnership (3) 239, , , ,293 (b) California Baptist Foundation - Funds (1) 12,868,414 14,127,053 12,963,488 15,062,975 (a) Endowment investments 15,421,588 16,761,841 13,891,861 16,087,620 Total investments $ 17,681,463 $ 19,021,716 $ 16,151,736 $ 18,347,495 (a) Marketable securities (b) Other investments -13-

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 3 INVESTMENTS: (continued) Levels 1 through 3 have been assigned to the fair value measurement of investments. The fair value level of measurement is determined as follows: Level 1 - quoted prices in an active market for identical assets. Level 2 - quoted prices for similar assets and market-corroborated inputs. Level 3 - the organization s own assumptions about market participation, including assumptions about risk, developed based on the best information available in the circumstances. The University s level 3 investments include real estate and a partnership interest. Neither of these investments are measured on a recurring basis. Real estate investments were measured using appraisals at the measurement date. The appraisals applied the market approach using comparable data available for similar properties. The following schedule summarizes the investment activity of the University and its classification in the consolidated statement of activities for the years ended June 30, 2016 and 2015: June 30, 2016 Temporarily Unrestricted Restricted Total Interest and dividends $ 8,202 $ - $ 8,202 Interest and dividends distributed by California Baptist Foundation 271, , ,491 Distributions from California Baptist Foundation (637,371) (637,371) Income activity at California Baptist Foundation 283, ,508 Net realized gains at California Baptist Foundation 187, ,723 Total investment return $ 279,940 $ 212,613 $ 492,553 June 30, 2015 Temporarily Unrestricted Restricted Total Interest and dividends $ 10,764 $ 7,893 $ 18,657 Interest and dividends distributed by California Baptist Foundation 194, , ,381 Distributions from California Baptist Foundation (471,469) (471,469) Income activity at California Baptist Foundation 213, ,453 Net realized gains at California Baptist Foundation 611, ,152 Total investment return $ 205,392 $ 642,782 $ 848,

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 4 PLEDGES RECEIVABLE: Total unconditional promises to give were as follows: Receivable in less than one year $ 2,813,628 $ 783,000 Receivable in one to five years 11,115,667 3,036,000 Receivable over five years - 750,000 Total 11,115,667 3,786,000 Less, discount to net present value (1,365,194) (560,524) Net long-term pledges receivable 9,750,473 3,225,476 Total pledges receivable $ 12,564,101 $ 4,008,476 Pledges receivable represent promises to give which have been made by donors but have not yet been received by the University. Pledges which will not be received in the subsequent year have been discounted using an estimated rate of return of six percent which could be earned if such contributions had been made in the current year. The University considers pledges receivable fully collectible; accordingly, no allowance for uncollectible pledges has been provided. NOTE 5 ENDOWMENT FUNDS: The University s endowment consists of individual funds established for a variety of purposes. As required by generally accepted accounting principles, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. The Board of Trustees of the University has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the University classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donorrestricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by UPMIFA. -15-

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 5 ENDOWMENT FUNDS: (continued) In accordance with UPMIFA, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the various funds (2) The purposes of the donor-restricted endowment funds (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the University (7) The investment policies of the University The University has adopted investment and spending policies, approved by the Board of Trustees, for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment funds while also maintaining the purchasing power of those endowment assets over the long-term. Accordingly, the investment process seeks to achieve an after-cost total real rate of return, including investment income as well as capital appreciation, which exceeds the annual distribution with acceptable levels of risk. Therefore, the University expects its endowment assets, over time, to produce an average rate of return greater than the spending policy plus inflation. Investment risk is measured in terms of the total endowment fund; investment assets and allocation between asset classes and strategies are managed to not expose the fund to unacceptable levels of risk. The University has a policy of appropriating for distribution each year 4% of its endowment fund s average fair value of the prior 12 quarters through the calendar year-end preceding the fiscal year in which the distribution is planned. The University expects the current spending policy to allow its endowment funds to grow at a rate greater than inflation, which is consistent with the nature and duration of the individual endowment funds, many of which must be maintained in perpetuity because of donor-restrictions, and the possible effects of inflation. The University s board has established a quasi-endowment fund by designating a portion of the operating fund to act as an endowment fund. The intent of the quasi-endowment fund is to build long-term cash growth through reallocation of operating funds. The University intends to reallocate future excess operating cash flows to the quasi endowment fund and may borrow from this fund from time to time for short-term cash flow needs. -16-

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 5 ENDOWMENT FUNDS: (continued) Endowment Net Asset Composition by Type of Fund as of June 30, 2016: Temporarily Permanently Unrestricted Restricted Restricted Total Board designated quasi-endowment $ 25,000,000 $ - $ - $ 25,000,000 Donor-restricted endowment funds (294,250) 1,250,067 15,869,594 16,825,411 Total endowment funds $ 24,705,750 $ 1,250,067 $ 15,869,594 $ 41,825,411 Changes in Endowment Net Assets for the Fiscal Year Ended June 30, 2016: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning $ 24,775,730 $ 2,203,474 $ 14,221,987 $ 41,201,191 Investment return: Investment income 279, , ,553 Net appreciation (depreciation) (69,980) (787,267) (857,247) Total investment return 209,960 (574,654) - (364,694) Reclassifications 884, ,700 Contributions 762, ,907 Endowment spending (279,940) (378,753) (658,693) Endowment net assets, ending $ 24,705,750 $ 1,250,067 $ 15,869,594 $ 41,825,411 Due to cumulative losses on investments, at June 30, 2016 and 2015 the fair value of assets for certain donor-restricted endowment funds was less than the amounts required by donors in the amount of $294,250 and $224,270, respectively. Endowment Net Asset Composition by Type of Fund as of June 30, 2015: Temporarily Permanently Unrestricted Restricted Restricted Total Board designated quasi-endowment $ 25,000,000 $ - $ - $ 25,000,000 Donor-restricted endowment funds (224,270) 2,203,474 14,221,987 16,201,191 Total endowment funds $ 24,775,730 $ 2,203,474 $ 14,221,987 $ 41,201,

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 5 ENDOWMENT FUNDS: (continued) Changes in Endowment Net Assets for the Fiscal Year Ended June 30, 2015: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning $ 24,776,355 $ 2,590,519 $ 13,659,907 $ 41,026,781 Investment return: Investment income 205, , ,174 Net appreciation (625) (745,690) (746,315) Total investment return 204,767 (102,908) - 101,859 Donor redesignations 59,520 59,520 Contributions 502, ,560 Endowment spending (205,392) (284,137) (489,529) Endowment net assets, ending $ 24,775,730 $ 2,203,474 $ 14,221,987 $ 41,201,191 NOTE 6 NOTES RECEIVABLE: Notes receivable consist primarily of loans due from students under the Perkins Loan program. NOTE 7 CAPITAL LEASE OBLIGATIONS: The University has lease financing agreements, secured by equipment and furniture costing $4,834,062, expiring between June 2014 and June 2019, bearing interest rates between 3.49% and 3.93%. The outstanding balance at June 30, 2016 and June 30, 2015 was $2,018,464 and $3,310,714, respectively. Minimum future capital lease payments are: Year Ended June 30, 2017 $ 1,394, , ,008 Less: Amount representing interest (115,478) Present value of future minimum lease payments $ 2,018,

21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 8 OPERATING LEASES: The University has commitments for lease agreements for various equipment and properties which meet the criteria for classification as operating leases. Generally, the leases provide for renewal for various periods at stipulated rates. The minimum lease commitment on these leases, including renewal options exercised after June 30, 2016 is as follows: Year Ended June 30, 2017 $ 1,796, , , , ,919 Total $ 3,192,781 NOTE 9 LONG-TERM DEBT: The University issued Bonds in the amount of $88,800,000, to refinance selected long term obligations and continue capital expansion. (See Note 10) 79,840,000 81,440,000 The University issued Bonds in the amount of $25,000,000 to finance capital expansion. (See Note 10) 23,830,000 24,150,000 The University issued Bonds in the amount of $55,710,000 to refinance existing debt and to finance capital expansion. (See Note 10) 52,800,000 53,715,000 CBU Hemet Street, LLC obtained a $5,464,000 1 st Trust Deed loan on real property. The loan has an initial fixed interest rate of 4.03% and converts to an adjustable rate after five years. The loan requires monthly principal and interest payments of $29,113 until October 1, 2024, at which time the remaining principal and interest is due. 5,237,727 5,369,274 Lancer Plaza, LLC issued Bonds in the amount of $32,275,000 to finance capital expansion. (See Note 10) 30,715,637 31,166,431 The University issued Bonds in the amount of $76,830,000 to refinance existing debt and to finance capital expansion. (See Note 10) 76,487,969 - Total notes and bonds payable obligations $268,911,333 $195,840,

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 9 LONG-TERM DEBT: (continued) Future maturities under notes and bonds payable are as follows: Year Ended June 30, Thereafter Sub-total Less: Unamortized bond discount Total $ 3,761,677 3,952,401 4,153,363 4,364,039 4,594, ,715, ,540,696 (629,363) $ 268,911,333 NOTE 10 REVENUE BONDS: 2007 Issue In June 2007, the University obtained financing through the California Statewide Communities Development Authority (CSCDA). The amount loaned to the University was $88,800,000 to be applied to refinancing, construction, rehabilitation and acquisition of educational facilities and equipment. The bonds are considered unconditional general obligations of the University, secured by a pledge of certain gross revenues. The loan agreement requires the University to comply with various covenants, conditions and restrictions, including maintaining certain financial ratios. The bonds bear interest rates ranging from 5.3% to 9%. The University is required to maintain in a bond reserve cash account an amount equal to the bond reserve requirement which is currently $6,131,690, which represents an amount equal to the greatest amount of bond debt service in any fiscal year during the period commencing with the fiscal year the determination is being made and terminating with the last fiscal year in which any bond is due. Commencing on November 1, 2007 the University must deposit for credit to the bond fund account an amount sufficient to pay principal and interest payable on the next ensuing payment date. Principal is payable annually each November 1st. A portion of the bonds are subject to early redemption at the option of the University on any date after November 1, 2018 together with accrued interest. -20-

23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 10 REVENUE BONDS: (continued) 2011 Issue In June 2011, the University obtained financing through the California Statewide Communities Development Authority (CSCDA). The amount loaned to the University was $25,000,000 to be applied to the construction, rehabilitation and acquisition of educational facilities and equipment. The bonds are considered unconditional general obligations of the University, secured by a pledge of certain gross revenues. The loan agreement requires the University to comply with various covenants, conditions and restrictions, including maintaining certain financial ratios. The bonds bear interest rates ranging from 6.5% to 7.5%. The University is required to maintain in a bond reserve cash account an amount equal to the bond reserve requirement which is currently $2,100,000, which represents an amount equal to the greatest amount of bond debt service in any fiscal year during the period commencing with the fiscal year the determination is being made and terminating with the last fiscal year in which any bond is due. Commencing on November 1, 2011 the University must deposit for credit to the bond fund account an amount sufficient to pay principal and interest payable on the next ensuing payment date. Principal is payable annually each November 1st. A portion of the bonds are subject to early redemption at the option of the University on any date after November 1, 2021 together with accrued interest Issue In May 2013, Lancer Plaza LLC obtained financing through the California Statewide Communities Development Authority (CSCDA). The amount loaned to Lancer Plaza LLC was $32,275,000 to be applied to the construction, rehabilitation and acquisition of educational facilities and equipment. The bonds are considered unconditional general obligations of the LLC, secured by a pledge of certain gross revenues. The loan agreement requires the LLC to comply with various covenants, conditions and restrictions, including maintaining certain financial ratios. The bonds bear interest rates ranging from 5.125% to 5.875%. The LLC is required to maintain in a bond reserve cash account an amount equal to the bond reserve requirement which is currently $2,284,069, which represents an amount equal to the greatest amount of bond debt service in any fiscal year during the period commencing with the fiscal year the determination is being made and terminating with the last fiscal year in which any bond is due. Commencing on November 1, 2013 the LLC must deposit for credit to the bond fund account an amount sufficient to pay principal and interest payable on the next ensuing payment date. Principal is payable annually each November 1st. A portion of the bonds are subject to early redemption at the option of the LLC on any date after November 1, 2023 together with accrued interest. Bonds payable are reported on the statement of financial position net of a $629,363 and $653,569 bond discount as of June 30, 2016 and June 30, 2015, respectively. The discount is being amortized over the life of the bonds. The amortized bond discount expensed for the years ended June 30, 2016 and June 30, 2015 was $24,

24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 10 REVENUE BONDS: (continued) 2014 Issue In March 2014, the University obtained financing through the California Statewide Communities Development Authority (CSCDA). The amount loaned to the University was $55,710,000 to be applied to the refinancing, construction, rehabilitation and acquisition of educational facilities and equipment. The bonds are considered unconditional general obligations of the University, secured by a pledge of certain gross revenues. The loan agreement requires the University to comply with various covenants, conditions and restrictions, including maintaining certain financial ratios. The bonds bear interest rates ranging from 3.5% to 6.375%. The University is required to maintain in a bond reserve cash account an amount equal to the bond reserve requirement which is currently $4,113,219 which represents an amount equal to the greatest amount of bond debt service in any fiscal year during the period commencing with the fiscal year the determination is being made and terminating with the last fiscal year in which any bond is due. Commencing on May 1, 2014 the University must deposit for credit to the bond fund account an amount sufficient to pay principal and interest payable on the next ensuing payment date. Principal is payable annually each November 1st. A portion of the bonds are subject to early redemption at the option of the University on any date after November 1, 2023 together with accrued interest Issue In July 2015, the University obtained financing through the California Municipal Finance Authority (CMFA). The amount loaned to the University was $76,830,000 to be applied to the refinancing, construction, rehabilitation and acquisition of educational facilities and equipment. The bonds are considered unconditional general obligations of the University, secured by a pledge of certain gross revenues. The loan agreement requires the University to comply with various covenants, conditions and restrictions, including maintaining certain financial ratios. The bonds bear interest rates ranging from 3.5% to 5.5%. The University is required to maintain in a bond reserve cash account an amount equal to the bond reserve requirement which is currently $7,683,000 which represents an amount equal to the least of: (1) 125% of the average annual debt service on the bonds outstanding, (2) the greatest amount of bond debt service in any fiscal year during the period commencing with the fiscal year the determination is being made and terminating with the last fiscal year in which any bond is due, or (3) 10% of the principal amount of the bonds outstanding. Commencing on in July 2015 the University must make monthly deposits for credit to the bond fund account an amount sufficient to pay principal and interest payable on the next ensuing payment date. Principal is payable annually each November 1st. A portion of the bonds are subject to early redemption at the option of the University on any date after November 1, 2025 together with accrued interest. -22-

25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 11 DEBT ISSUANCE COSTS: In connection with the refinancing of debt and issuance of additional debt associated with University construction projects, the University incurred certain costs of issuance which have been capitalized as a long-term asset. These costs are amortized over the term of the related debt or written off to expense if the debt is refunded. Amortization costs for the years ended June 30, 2016 and 2015 were $200,250 and $144,669, respectively. NOTE 12 EMPLOYEE RETIREMENT PLAN: The University has a contributory annuity plan (IRC 403(b)) covering all full-time employees who have completed service requirements and are at least 21 years of age. Contributions by employees are voluntary. For June 30, 2016 and 2015, the University had 718 and 660 participants, respectively, in the plan. The University's funding of the plan for June 30, 2016 and 2015 was $3,765,742 and $3,426,415, respectively. NOTE 13 FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash equivalents, notes receivable, and the revolving note payable approximate fair value due the short maturity of these financial instruments. The fair value of pledges receivable is estimated by discounting the estimated future cash flows using the rates currently offered for deposits of similar remaining maturities. The fair value of bonds payable with fixed interest rates is based on rates assumed to be currently available for bond issues with similar terms and average maturities. The estimated fair value of these bonds payable as of June 30, 2016 and 2015 is $279,756,955 and $159,739,885, respectively. NOTE 14 SUPPLEMENTAL DISCLOSURE FOR CASH AND CASH FLOWS: A. Cash paid for interest during the years ended June 30, 2016 and 2015 was $13,880,354 and $11,970,790, respectively. Capitalized interest for the year ended June 30, 2016 and 2015 was $1,130,174 and $314,360, respectively. B. Non-cash financing activities related to capital leases and mortgages incurred for the purchase of fixed assets during the years ended June 30, 2016 and 2015 was $0 and $5,564,000, respectively. C. Non-cash investing activities related to the acquisition and disposal of property through an exchange during the years ended June 30, 2016 and 2015 in the amount of $0 and $1,359,185, respectively. D. For the purpose of the consolidated statement of cash flows, cash and cash equivalents represent investments in highly liquid accounts or debt instruments with an original maturity of three months or less and do not include endowment fund investments. -23-

26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2016 and 2015 NOTE 15 SUPPLEMENTAL DEBT SERVICE DISCLOSURES: DEBT SERVICE PAYMENTS: Per the University's board policy, annual debt payments are limited to 15% or less of the annual operating income. This does not include operating lines of credit, short-term loans, or loans that can be paid back within three years out of regular reserves. The debt service payment and operating income for June 30, 2016 was $16,540,140 and $232,870,253, respectively, resulting in a ratio of 7.1%. The debt service payment and operating income for June 30, 2015 was $12,584,378 and $217,289,226, respectively, resulting in a ratio of 5.8%. NOTE 16 CONDITIONAL ASSET RETIREMENT OBLIGATION: The University has a conditional asset retirement obligation related to asbestos and other hazardous material in the James Building. Regulations have been put into place after the construction of the building that require the University to handle and dispose of this type of material in a special manner if the building undergoes major renovations, is sold or demolished. Otherwise, the University is not required to remove the materials from the building. The University believes it does not have sufficient information to estimate the fair value of the asset retirement obligation because the settlement date or the range of potential settlement dates has not been specified by others and information is not available to apply an expected present value technique. Furthermore, management believes the potential cost of removing the materials are immaterial to the financial statements. There are no plans or expectations of plans to undertake major renovations of the areas of the building that would require removal of the materials or demolition of the building. The James Building is considered to be an important historical part of the University and is expected to be maintained by repairs and maintenance activities that would not involve the removal of the materials. Also, the need for major renovations caused by technology changes, operational changes, or other factors has not been identified. NOTE 17 LANCER EDUCATIONAL HOUSING CORPORATION: Lancer Educational Housing Corporation (LEHC) is a California nonprofit corporation organized and operated to provide student housing and auxiliary facilities. It is an exempt organization described in Section 501(c)(3) of the Internal Revenue Code. The board of LEHC is comprised of two University employees and three other unrelated persons. LEHC is the sole member of three property holding LLCs, Lancer Educational Housing LLC, Colony Student Housing LLC and Lancer Plaza LLC. Each LLC intends to maintain, operate and manage the facilities principally for the use and benefit of the students of the University. Lancer Educational Housing LLC does not have title to the land on which its facilities are located, but has a ground lease with the University. The title to the facilities and any other improvements that may be constructed by the LLC during the lease term, and any additions, alterations, restorations, repairs or replacements thereto, shall be vested in the respective LLC until the expiration of the lease term. -24-