Spartan Shops, Inc. (a California State University Auxiliary Organization)

Transcription

1 Spartan Shops, Inc. (a California State University Auxiliary Organization) Financial Statements and Report of Independent Certified Public Accountants June 30, 2017

2 For the Year Ended June 30, 2017 Table of Contents Report of Independent Certified Public Accountants 3-5 Report of Independent Certified Public Accountants 6-7 on Internal Control Over Financial Reporting and on Compliance and Other Matters required by Government Auditing Standards Management Discussion and Analysis Basic Financial Statements Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position Statement of Cash Flows Notes to Financial Statements Required Supplementary Information Schedule of Post-Employment Health Care Benefits Funding Progress Supplementary Information Schedule of Operating and Administrative Expenses Schedule of Net Position Schedule of Revenues, Expenses and Changes in Net Position Other Information

3 Grant Thornton LLP 10 Almaden Blvd, Suite 800 San Jose, CA REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS T Board of Directors Spartan Shops, Inc. Report on the financial statements We have audited the accompanying financial statements of the business-type activities of Spartan Shops, Inc. (a California State University Auxiliary Organization) (the Entity ) as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise the Entity s basic financial statements as listed in the table of contents. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 3 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the businesstype activities of Spartan Shops, Inc. (a California State Auxiliary Organization) as of June 30, 2017, and the respective changes in net financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other matters Required supplementary information Accounting principles generally accepted in the United States of America require that the Management Discussion and Analysis on pages 8-15 and the Schedule of Post-Employment Health Care Benefits Funding Progress on page 38, be presented to supplement the basic financial statements. Such information, although not a required part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. This required supplementary information is the responsibility of management. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America. These limited procedures consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Entity s basic financial statements. The supplementary information on pages 40-55, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures. These additional procedures included comparing and reconciling the information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. 4 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

5 Other reporting required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report, dated September 12, 2017 on our consideration of the Entity s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of 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 Entity s internal control over financial reporting and compliance. GRANT THORNTON LLP San Jose, California September 12, Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

6 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS REQUIRED BY GOVERNMENT AUDITING STANDARDS Board of Directors Spartan Shops, Inc. We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Spartan Shops, Inc. (the Entity ), which comprise the statement of net position as of June 30, 2017, and the related statements of revenues, expenses and changes in net position and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated September 12, Internal control over financial reporting In planning and performing our audit of the financial statements, we considered the Entity s internal control over financial reporting ( internal control ) to design audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of internal control. Accordingly, we do not express an opinion on the effectiveness of the Entity s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Entity s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in the Entity s internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 6 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

7 Compliance and other matters As part of obtaining reasonable assurance about whether the Entity s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Intended purpose The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Entity s internal control and compliance. Accordingly, this report is not suitable for any other purpose. GRANT THORNTON LLP San Jose, California September 12, Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

8 Management s Discussion and Analysis SPARTAN SHOPS, INC. MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2017 (unaudited) This section of Spartan Shops of San José State University ( Spartan Shops, Inc. or the Company ) annual financial report includes Management s Discussion and Analysis of the financial performance of Spartan Shops for fiscal years ended June 30, 2017 and This discussion should be read in conjunction with the financial statements and notes. Introduction to Spartan Shops of San José State University Spartan Shops is a not-for-profit campus benefit corporation founded in 1956 for the purpose of providing support services to the San Jose State University ( SJSU ) campus community. These services include bookstore management, dining services, event services, and 13 rental units for faculty and staff. Spartan Shops, Inc. is committed to building strong partnerships and developing future leaders. We strive to integrate environmental and financial responsibility within our practices, while providing dynamic customer service and evolving with the needs of the San José State University Community. Spartan Shops is comprised of four major divisions: Retail Services This division includes Spartan Bookstore and Dining Services. In April 2011, Spartan Shops entered into an agreement with Barnes & Noble College Booksellers to operate Spartan Bookstore for a period of ten years. In July 2015, Spartan Shops extended the agreement with Barnes & Noble to operate Spartan Bookstore until June 30, Spartan Bookstore offers course materials and related items to our students and campus community. Dining Services consists of the residential meal program incorporated within The Commons, retail foodservice operations located on campus, and catering services. Sales within Dining Services are anticipated to increase due to greater meal plan participation and an overall growth in campus enrollment. Event Services This division includes Event Center Arena, Mobile Concepts, Hammer Theatre Complex, and Spartan Stadium concessions and novelty services provided to guests of each venue in addition to South Campus athletic facilities. In October 2016, Spartan Shops entered into a five year service agreement with SJSU Student Union, Inc. to provide food and beverage concession services to the Event Center Arena. Spartan Shops has also entered into a four year service agreement from July 1, 2015 through June 30, 2019 with Spartan Athletics to provide food & beverage concession services, novelty services and catering services at Spartan Stadium and South Campus. The company also operates food trucks, through the Mobile Concepts department, to provide additional meal options on campus. Commercial Services This division includes Real Estate Services provided to SJSU faculty and staff. Spartan Shops Real Estate division provides 13 off campus rental housing units at below market rates for SJSU faculty and staff. Finance, Human Resources, Information Technology This division includes Finance and Accounting, Human Resources, and Information Technology departments. The Finance and Accounting department is responsible for providing financial tracking, reporting, payroll, and compliance expertise and support pertaining to all company related financials. 8

9 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2017 (unaudited) The Human Resources department offers expertise and support in the areas of Employee Relations, Compensation and Benefits, Staffing and Training, Workers Compensation and Safety, and Risk Management. The Information Technology department provides company-wide support for all business applications and services while strategically designing the infrastructure to enable tomorrow s business growth. Spartan Shops is currently a $25.5M operation and employs approximately 58 regular benefited employees. Spartan Shops also employs an estimated 900 students and temporary casual part-time employees. 9

10 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2017 (unaudited) Introduction to the Financial Statements Spartan Shops financial statements include the statement of net position, statement of revenues, expenses and changes in net position, and statement of cash flows. These statements are supported by notes to the financial statements and Management s Discussion and Analysis. All sections must be considered together to obtain a complete understanding of the financial picture of Spartan Shops. Statement of net position: The statement of net position includes all assets and liabilities. Assets and liabilities are reported on an accrual basis as of the statement date. Statement of revenues, expenses and changes in net position: The statement of revenues, expenses and changes in net position presents the revenues earned and expenses incurred during the year on an accrual basis. Statement of cash flows: The statement of cash flows presents the inflows and outflows of cash for the year and is summarized by operating, capital and financing and investing activities. These statements are prepared using the direct method of cash flows and, therefore, present gross rather than net amounts for the year s activities. Overview Summary The following discussion highlights management s understanding of the key financial aspects of Spartan Shops financial activities as of and for the fiscal years (FY) ended June 30, 2017 and Included are comparative analyses of current and prior year s activities and balances and a discussion of changes in Spartan Shops net position. Condensed Summary of Net Position Spartan Shops condensed summary of net position as of June 30 is as follows: Difference Assets Current assets $ 5,598,906 $ 7,583,384 $ (1,984,478) Noncurrent assets 8,226,033 7,784, ,773 Total assets $ 13,824,939 $ 15,367,644 $ (1,542,705) Liabilities Current liabilities $ 2,401,356 $ 3,362,930 $ (961,574) Noncurrent liabilities 2,260,081 3,480,845 (1,220,764) Total liabilities $ 4,661,437 $ 6,843,775 $ (2,182,338) Net Position Unrestricted: Net investment in capital assets $ 6,449,208 $ 5,034,935 $ 1,414,273 Unrestricted 2,714,294 3,488,934 (774,640) Total net position $ 9,163,502 $ 8,523,869 $ 639,633 10

11 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2017 (unaudited) Assets: Total assets decreased $1,543K from FY 2016 to FY 2017, primarily due to the decrease in current assets of $1,985K and the increase of noncurrent assets of $442K. Current assets decreased $1,985K due to the decrease of $1,762K in cash, the increase of $62K in short-term investments, the increase of $37K in accounts receivable, the decrease of $344K in the prepaid expenses and the increase of $22K in inventory. The reduction of $1,762K in cash is primarily due to the use of $1,507K to pay for capital assets and pay off the $683K balance in notes payable, secured by the 355 Reed Street property. The Company purchased new equipment and made capital improvements in various units including but not limited to Steak N Shake for $191K, an Information Technology refresh for $130K, and The Commons renovation for $332K. Due to the implementation of the new accounting software system, Intacct, effective in July 1, 2017, the Company paid most of its vendor invoices on the last day of the fiscal year to prepare for a smooth transition to the new system which resulted in an increase of $255K in outstanding accounts payable checks. Short-term investments increased by $62K due to the dividend, interest income and unrealized and realized gain received during the year. Accounts receivable has increased by $37K due to an increase of $63K in accounts receivables trade, an increase of $33K in the year-end meal plan balance, an increase of $33K from Barnes & Noble commission and receivables, a decrease of $46K from the upgrades and repairs to the President s House, a decrease of $35K in Pepsi sponsorship and a decrease of $11K from other receivables. Prepaid expenses has decreased $344K from prior year since the $500K prepayment to Barnes & Noble was used to settle the final balance due to Barnes & Noble for the purchase of fixtures and equipment for the new Bookstore facility. On the other hand, the prepaid expense for The Commons small wares and Information Technology maintenance support were increased by $77K. Prepaid work study and prepaid dining services supplies were also increased by $18K and $22K respectively. The Company continues to contribute to the postretirement plan more than the annual required contribution which resulted in an increase of $39K in prefunding of the OPEB obligation. Inventory was increased by $22K compared to prior year due to the additional inventory required to prepare for the summer operation of various dining units. Noncurrent assets increased $442K due to the net increase of $450K in capital assets and the net decrease of $8K in notes receivables. Capital assets increased $450K due to an addition of $1,579K in new fixed assets, $1,128K in depreciation and $1K from a loss due to disposal of fixed assets. The decrease of $8K in notes receivables was the result of a payoff of one homebuyer loan in September 2016 and the annual discount value recognized for the remaining 13 loans. Liabilities: Total liabilities decreased $2,182K from FY 2016 to FY 2017, primarily due to the decrease in current liabilities of $961K and the decrease of noncurrent liabilities of $1,221K. Current liabilities decreased $961K due to a decrease of $1,051K in accounts payable, an increase of $76K in labor and benefits liability and an increase of $14K in other liabilities. 11

12 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2017 (unaudited) Accounts payable has decreased $1,051K due to the payoff of $1,027K in capital expenditures and sales tax accrued the prior year such as $219K for the Subway project, $229K for the Starbucks project, $76K in the Dining Commons remodel project, $453K in the Bookstore facility improvement project, and $50K in sales tax payable. Accounts payable also was decreased by the net of $24K as the result of transferring $100K for Bookstore future maintenance to the current unearned revenue account, a reduction of $236K for Starbucks equipment invoices in the prior year, an increase of $137K in SJSU rent, an increase of $40K in utilities and janitorial services, an increase of $165K for the final balance due to Barnes & Noble and a decrease of $30K in other accounts payable. The increase in labor and benefits liability is due to the increase in accrued salaries of $31K, accrued vacation of $24K and an increase in accrued worker s compensation and other benefits of $21K. Noncurrent liabilities decreased $1,221K overall due to a decrease of $134K for the capital lease balance, $757K for notes payable balance, and $330K for unearned revenue due to $14K scheduled annual payments and amortization, and $316K recognition as revenue in fiscal year ending June 30, Net position: Total net position increased $640K from FY 2016 to FY 2017 due to the increase in net investments in capital assets of $1,414K, and the decrease in unrestricted assets of $774K. The net investment in capital assets increased $1,414K, primarily due to the overall increase of $450K in fixed assets and the reduction of $964K of debt balance due to the annual principal scheduled payments and the payoff of one notes payable. 12

13 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2017 (unaudited) Spartan Shops condensed summary of revenues, expenses and changes in net position for the years ended June 30 is as follows: Condensed Summary of Revenues, Expenses and Changes in Net Position Differences Operating Revenues Auxiliary enterprise revenues: Union Square and other retail $ 10,199,719 $ 8,568,327 $ 1,631,392 The Commons 11,217,023 11,238,538 (21,515) Catering services 2,062,579 1,859, ,064 Event services 751, ,385 53,891 Commercial services 252, ,723 10,498 Total auxiliary enterprise revenues 24,482,818 22,605,488 1,877,330 Other Operating Revenues Commission income 1,039,748 1,100,455 (60,707) Other income 27,148 34,946 (7,798) Total other operating revenues 1,066,896 1,135,401 (68,505) Total operating revenues 25,549,714 23,740,889 1,808,825 Operating Expenses Operating 13,724,159 12,407,722 1,316,437 Auxiliary enterprise cost of sales 8,421,216 7,909, ,311 Administrative 2,073,189 2,153,702 (80,513) Depreciation and amortization 1,127, , ,583 Transfer to SJSU Scholarship Fund 5,000 5,000 - Total operating expenses 25,351,483 23,311,665 2,039,818 Net operating income 198, ,224 (230,993) Nonoperating Revenues (Expenses) Interest income from notes receivable 81,634 19,186 62,448 Interest income from investments 64,454 49,182 15,272 Unrealized and realized gain (loss) 15,758 (17,145) 32,903 Interest expense (78,911) (108,573) 29,662 Loss on disposal of fixed assets (1,378) (7,154) 5,776 Miscellaneous income (expense) 359,845 (54,290) 414,135 Total nonoperating revenues (expenses) 441,402 (118,794) 560,196 Increase in net position 639, , ,203 Net Position Net position at beginning of year 8,523,869 8,213, ,430 Net position at end of year $ 9,163,502 $ 8,523,869 $ 639,633 13

14 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2017 (unaudited) Operating revenues: Total operating revenues increased $1,877K from FY 2016 to FY Union Square and other retail sales increased by $1,631K mainly due to the full year operation of the Starbucks and Subway with the sales increased by $857K and $444K respectively. Panda Express continues to be our most popular franchise with an increase of $119K in sales compared to prior year. While the sales within our Union Square self-branded concepts such as Commissary, Waffle Coop and Smokin Sammy s were increased by $105K, $88K and $123K respectively, our franchise concept sales for Le Boulanger, On Fourth Cafe and other retail sales units were decreased by $139K, $135K and $165K respectively. Mojo Burger sales also decreased by $159K and this franchise concept was discontinued in late December 2016 and was replaced by Steak N Shake in June Village Market retail sales increased by $493K due to the restructuring of the store operation and the 50% increase in dining dollars for the Gold and Platinum meal plans. Dining Commons sales decreased $22K due to a decrease in sales to International Center and Non-resident meal plans. Catering sales increased $203K due to additional catering services provided in the Spartan Stadium suites, the Simpkins Center Gold Room, as well as feeding the SJSU athletes, band and cheer squads and various departments on campus. Event Services sales increased $54K. Mobile concepts and Hammer Theatre sales increased by $80K and $82K respectively due to the full operation of three food trucks and more events held at the Hammer Theatre during the year. On the other hand, sales at the Event Center and CEFCU Stadium were decreased by $93K and $15K due to less events held at the Event Center and lower concession sales at the stadium. Real estate services rent income increased by $10K due to a rent increase during the year. Other operating revenues: Total other operating revenues decreased by $69K due to the decrease in commission income of $61K and the decrease in other income of $8K. Commission income decreased $61K from FY 2016 to FY 2017 primarily due to the decrease of $31K in commission from the contract management of Spartan Bookstore with Barnes & Noble, the decrease of $21K in Pepsi Commission income and the decrease of $9K for other commission. Other income decreased $8K from FY 2016 to FY 2017 due to the decrease in marketing and advertising services and other income. Operating expenses: Total operating expenses increased $2,040K overall from FY 2016 to FY Operating expenses increased $1,316K primarily due to the net increase of $911K in labor, benefits and contract labor. Increases to labor expense were a result of several factors including increases in minimum wage, salary compression as a result of increased minimum wage, and the need for additional student labor as the new Subway and Starbucks franchises units were now operating through the entire year. Franchise fees and rent expenses increased $251K due to more sales generated from new and existing operations during the year. Utilities and disposal services expenses decreased $93K due to the allocation of utilities cost to other assignable space in the Student Union building and the bookstore s new space. Operating supplies cost was increased by $32K while the telephone charge was decreased by $16K due to the switch from land line to wi-fi data usage for the operation of the Point-Of-Sales systems in various concession locations. Facility fees decreased by $41K due to less events being held at the Event Center Arena throughout the year and a net operating loss at the On Fourth café. Bank service fees increased by $47K, much of which is attributed to the opening of Subway and 14

15 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2017 (unaudited) Starbucks. Travel and meeting and recruitment increased by $59K. Small equipment and janitorial maintenance have increased by $95K and $71K, respectively. Auxiliary enterprises cost of sales increased $511K due to the increase in overall sales at all operations. Administrative expenses decreased $81K mainly due to a decrease of $86K in salaries, wages, and employee benefits, $48K in office supplies, and $42K in professional services. Advertising and program expenses has increased $16K and repair and maintenance has increased $59K. Travel and meeting, dues and subscriptions, taxes and licensees and rent expenses increased by $20K. Nonoperating revenues (expenses): Nonoperating revenues (expenses) come from sources that are not part of the Spartan Shops primary business functions. Included in this classification are interest income, interest expense, unrealized and realized gain and loss due to changes in the fair value of investments, gain and loss on disposal of fixed assets and miscellaneous income. Transfer of assets from affiliated organizations: Spartan Shops of San José State University ( Spartan Shops, Inc. or the Company ) contributed $5K to the SJSU Scholarship Fund. This occurs annually when the Company generates a profit. 15

16 (a California State University Auxiliary Organization) AUDITED FINANCIAL STATEMENTS June 30, 2017

17 June 30, 2017 Statement of Net Position Assets Current assets Cash $ 2,080,739 Short-term investments 1,872,745 Receivables, net of allowance for doubtful accounts 941,738 Inventories 307,654 Prepaid expenses 396,030 Total current assets 5,598,906 Noncurrent assets Notes receivable, less discount and allowance for bad debt 251,625 Capital assets, net 7,974,408 Total noncurrent assets 8,226,033 Total assets $13,824,939 Liabilities and Net Position Current liabilities Accounts payable $ 1,370,791 Accrued salaries and benefits payable 277,111 Accrued compensated absences 162,185 Unearned revenue, current portion 114,215 Capital lease obligation, current portion 134,000 Notes payable, current portion 97,920 Other liabilities 245,134 Total current liabilities 2,401,356 Noncurrent liabilities Unearned revenue, net of current portion 966,801 Notes payable, net of current portion 1,293,280 Total noncurrent liabilities 2,260,081 Total liabilities 4,661,437 Net Position Net investment in capital assets 6,449,208 Unrestricted 2,714,294 Total net position $ 9,163,502 The accompanying notes are an integral part of this financial statement. 17

18 For the Year Ended June 30, 2017 Statement of Revenues, Expenses and Changes in Net Position Operating Revenues Auxiliary enterprise revenues: Union Square and other retail $ 10,199,719 The Commons 11,217,023 Catering services 2,062,579 Event services 751,276 Commercial services 252,221 Total auxiliary enterprise revenues 24,482,818 Other Operating Revenues Commission income 1,039,748 Other income 27,148 Total other operating revenues 1,066,896 Total operating revenues 25,549,714 Operating Expenses Operating 13,724,159 Auxiliary enterprise cost of sales 8,421,216 Administrative 2,073,189 Depreciation and amortization 1,127,919 Transfer to SJSU Scholarship Fund 5,000 Total operating expenses 25,351,483 Net operating income 198,231 Nonoperating Revenues (Expenses) Interest income from notes receivable 81,634 Interest income from investments 64,454 Unrealized and realized gain 15,758 Interest expense (78,911) Loss on disposal of fixed assets (1,378) Miscellaneous income 359,845 Total nonoperating revenues (expenses) 441,402 Increase in net position 639,633 Net Position Net position at beginning of year 8,523,869 Net position at end of year $ 9,163,502 The accompanying notes are an integral part of this financial statement. 18

19 For the Year Ended June 30, 2017 Statement of Cash Flows Cash Flows from Operating Activities Cash received from sales $ 24,445,771 Payments to suppliers (16,024,692) Payments to employees (8,727,624) Other receipts 1,066,896 Net cash provided by operating activities 760,351 Cash Flows from Capital and Related Financing Activities Purchase of capital assets (1,579,299) Payments on capital lease obligation (174,000) Payments on notes payable (790,271) Interest paid (78,911) Net cash used in capital and related financing activities (2,622,481) Cash Flows from Investing Activities Purchase of investments (390,988) Sales of investments 345,000 Investment income 64,454 Other income from notes receivable 81,634 Net cash used in by investing activities 100,100 Net decrease in cash and cash equivalents (1,762,030) Cash and Cash Equivalents Beginning of year 3,842,769 End of year $ 2,080,739 Reconciliation of Net Operating Income to Net Cash Provided by Operating Activities Net operating income $ 198,231 Adjustments to reconcile net operating income to net cash provided by operating activities: Depreciation and amortization 1,127,919 Imputed interest on notes receivable 8,229 Other 359,845 Change in assets and liabilities: Receivables (37,047) Inventories (22,592) Prepaid expenses 343,833 Unearned revenue (244,627) Accounts payable (1,000,966) Accrued liabilities 27,526 Net cash provided by operating activities $ 760,351 The accompanying notes are an integral part of this financial statement. 19

20 For the Year Ended June 30, 2017 Notes to Financial Statements Note 1 - Organization Spartan Shops, Inc. (Spartan Shops or the Company) was incorporated in Spartan Shops serves as an auxiliary organization and is a component unit of San Jose State University (the University) to provide and manage the campus bookstore, dining services, event services, and certain real estate properties. In April 2011, the Company entered into an agreement with Barnes & Noble College Booksellers for the daily operation of the Spartan Bookstore. The company extended the contract agreement with Barnes & Noble in July 2015 to operate the Spartan Bookstore through June Note 2 - Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared using the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America, as promulgated by the Governmental Accounting Standards Board (GASB). The Company uses the full accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred, regardless of timing of the related cash flows. The Company considers those assets to be current, which can be reasonably expected as part of its normal business operation, to be converted to cash and available for liquidation of current liabilities within 12 months of the statement of net position date. Liabilities that are considered to be current can be reasonably expected as part of its normal business operation to be liquidated within 12 months of the statement of net position. All other assets and liabilities are considered to be noncurrent. For purposes of financial reporting, the Company is considered a special purpose government engaged only in business-type activities. Use of 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 the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, postemployment benefit obligation, and self-insured workers compensation liability. Fair Value of Financial Instruments The Company has determined that the amounts reported for financial assets and liabilities, including cash and cash equivalents, short-term investments, receivables, payables and a capital lease obligation, are considered to have carrying amounts that approximate fair value because of the short maturity of these financial instruments or market interest rates of such instruments. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity from the date of purchase of three months or less to be cash equivalents. 20

21 For the Year Ended June 30, 2017 Notes to Financial Statements Note 2 - Summary of Significant Accounting Policies (continued) Investments Investments are carried at fair market value, as determined by quoted market prices, with realized and unrealized gains and losses included on the statement of revenues, expenses and changes in net position. Dividend and interest income are accrued when earned. Receivables Receivables are stated at net realizable value. The Company uses the specific write-off method of accounting for bad debts, which recognizes bad debt expenses at the time the account is deemed worthless by analyzing the creditworthiness of the customers. Historically, this method approximates the allowance method. No allowance for doubtful accounts was booked as of June 30, 2017 as catering receivables are considered fully collectible due to the Company s customers being comprised primarily of faculty, staff and other auxiliary organizations on campus. Inventories All inventory items are recorded at the lower of cost, determined by the FIFO method, or market. The Company recorded no inventory allowance due to the rapid turnover and low inventory value related to the food service industry. Capital Assets and Depreciation The Company s policy is to capitalize all asset additions greater than $5,000. Capital assets, including intangible assets, are recorded at cost when purchased and at fair value, on the date donated, when donated. Real estate costs have been allocated to individual building units based on a specific-identification method. When capital assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss is included on the statement of revenues, expenses and changes in net position. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets which range from 3 to 30 years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of useful life of the related asset or the term of the lease, which ranges from 5 to 15 years. The University is committed to purchasing the Company s leasehold improvement assets, at full book value, should the lease or operating agreement not be extended. The Company classifies computer software as intangible assets which are depreciated using the straight-line method over the estimated useful life of 5 years. Depreciation and amortization expense was $1,127,919 for the year ended June 30, 2017 (including amortization expense on capital lease assets and intangible assets). The total cost of assets under capital leases was $1,131,078, with related accumulated amortization of $1,066,230 at June 30, Accrued Vacation The Company accrues vacation benefits for eligible employees at various rates depending on length of service. Employees are paid for unused vacation time at the end of employment. At June 30, 2017, the Company had a balance of $162,185 in accrued vacation liability. 21

22 For the Year Ended June 30, 2017 Notes to Financial Statements Note 2 - Summary of Significant Accounting Policies (continued) Revenue Recognition Dining Services and Event Services revenue are recorded at the point of sale for retail locations and on a monthly basis for non-retail locations based on the terms of meal plans purchased by students. Bookstore revenue is recorded based on commission of sales from Barnes & Noble. Real estate rental revenue is recorded on a monthly basis for the rental period. Certain operating revenues that benefit a period of time longer than one year are recorded as unearned revenue or deposit on the accompanying statement of net position and are recognized over the contractual period of time in which they are earned. Advertising Costs Advertising costs are expensed as incurred. Advertising expense was $125,599 for the year ended June 30, Tax-Exempt Status and Income Taxes The Company is exempt from federal and state income taxes under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701(d). In addition, the Company has been determined by the Internal Revenue Service not to be a private foundation within the meaning of Section 509(a) of the Code, as determined by the Internal Revenue Service in a letter dated October 15, Therefore, it is tax-exempt from income tax except for the tax on unrelated business income. The Company does generate some taxable income, and it currently has a net operating loss (NOL) carried forward of $364,632 for federal and $20,119 for state purposes, representing a deferred tax asset. The NOL carried forward expires in 2022 through A valuation allowance has been recorded for the full amount of this deferred tax asset, as management does not believe it will realize any future tax benefit from the deferred tax asset. Concentration of Credit Risk The Company places its cash with financial institutions deemed to be creditworthy. Cash balances may, at times, exceed insured deposit limits. The Company does not believe the cash accounts are subject to significant credit risk due to its regularly monitoring of the account balance. The Company s customer base is comprised primarily of other auxiliary organizations and the University, including students, faculty and staff. See Note 10 for disclosures regarding these concentrations. Net Position Net position consists of net investment in capital assets, restricted and unrestricted net position. Net investment in capital assets consist of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. This calculation excludes unspent debt proceeds, if any. 22

23 For the Year Ended June 30, 2017 Notes to Financial Statements Note 2 - Summary of Significant Accounting Policies (continued) Net investment in capital assets consists of the following at June 30, 2017: Investment in capital assets, net $7,974,408 Less related debt: Notes payable 1,391,200 Capital lease obligation 134,000 Net investment in capital assets $6,449,208 Restricted net position represent amounts appropriated or legally segregated for a specific purpose. The Company s net position is reported as restricted when there are limitations imposed on their use either through enabling legislation adopted by the Company or through external restrictions imposed by creditors, grantors, laws or regulations of other governments. The Company has no restricted net position. The board has designated net position (as a component of unrestricted net position) at June 30, 2017, totaling $660,904 consisting of a reserve designated for planned major equipment purchases, remodeling and facility acquisitions. The designated assets may also serve as a source of emergency funds in the event of a temporary shortage of working capital (i.e., 60 days or less). The board designates these amounts to maintain a required minimum balance of 2.5 percent of annual projected revenue, as presented in the Company s Annual Business Plan. A reduction of $7,766 was made to the designated fund in fiscal year Classification of Revenues and Expenses The Company considers operating revenues and expenses in the statement of revenues, expenses and changes in net position to be those revenues and expenses that result from transactions or other activities that are connected directly to the Company s primary functions. Certain other transactions are reported as non-operating revenues and expenses in accordance with GASB Statement No. 33. These non-operating revenues and expenses include the interest income, unrealized and realized gain or losses, interest expenses and miscellaneous income and expenses. Pronouncements Issued The GASB has issued GASB Statement No.75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, that will be effective for the year ending June 30, GASB 75 introduces the concept of a Measurement Date for each fiscal year and the net unfunded OPEB liability will be reported in the statement of net position. Amortization periods, discount rate and the determination of a targeted funding contribution will be changed comparing to GASB 45 statement. The implementation of GASB Statement No. 75 is expected to have a significant impact on the financial statement for the fiscal year beginning on and after June 30, Note 3 - Investments The Company categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs. 23

24 For the Year Ended June 30, 2017 Notes to Financial Statements Note 3 Investments (continued) The Company has the following recurring fair value measurements as of June 30, 2017: Mutual funds of $1,872,745 are valued using quoted market prices (Level 1 inputs) Investments at June 30, 2017, consist of the following: Fair Value Investment Type Mutual funds $ 1,872,745 Total investments $ 1,872,745 Less than 1 year Less than 2 years Less than 3 years Maturities Less than 4 years Less than 5 years Greater than 5 years Investment Type Mutual funds $ 1,872,745 $ - $ - $ - $ - $ - Total $ 1,872,745 $ - $ - $ - $ - $ - Investment policy: The Company s investment policy sets forth the guidelines for the investments of the Company. The Company s two primary sources of funds for investment are its working capital fund and the capital outlay fund. The working capital fund shall be invested in short-term investments and the capital outlay fund can be invested in liquid but longer term investments. The performance benchmark of the capital outlay fund will be equal to the Lehman Bros. intermediate bond index. Interest rate risk: Interest rate risk is the risk changes in the market interest rate that will adversely affect the fair value of an investment. In accordance with the policy, the Company manages the risk of market value fluctuations due to overall changes in general levels of interest rates by limiting the average maturity of investments within the portfolios. Concentration of credit risk: The Company s investment policy permits investments in certificates of deposit, U.S. Government obligations, U.S. Government bonds, corporate bonds, publicly traded investments, SJSU investment funds, SJSU Foundation investment funds, other investments that meet security, liquidity and yield requirements as approved by the finance committee and mutual funds. Custodial credit risk: Custodial credit risk is the risk that, in the event of the failure of the counterparty, the Company will not be able to recover the value of its investments or collateral securities that are in the possession of the outside party. To minimize this risk, the Company has identified investments that they have determined to have a low risk of failure by the counterparty. With respect to investments, custodial credit risk generally applies only to direct investments in marketable securities. Custodial credit risk disclosures do not apply to indirect investment in securities through the use of mutual funds and government investment pools. Custodial credit risk for deposits is the risk that the Company will not be able to recover its deposits in the event of a failure of a depository institution. In the ordinary course of the Company s operations, deposit balances in checking accounts can exceed the Federal Deposit Insurance Corporation (FDIC) insured limits. In accordance with the policy, all certificates of deposit are FDIC-insured and limited to $250,000 at any one institution. 24

25 For the Year Ended June 30, 2017 Notes to Financial Statements Note 4 - Capital Assets The following activity took place in capital assets during 2017: Beginning of year Additions Transfers Retirements and Other End of year Capital assets not being depreciated: Land $ 2,310,000 $ - $ - $ - $ 2,310,000 Construction in process 738,863 1,526,248 (2,153,656) - 111,455 Intangible assets - 53,051 (53,051) - - Total capital assets not being depreciated $ 3,048,863 $ 1,579,299 (2,206,707) $ - $ 2,421,455 Capital assets being depreciated: Buildings $ 1,763,726 $ - $ - $ - $ 1,763,726 Leasehold improvements 2,185, ,192-3,166,209 Equipment, furniture and fixtures 4,724,227-1,172,464 (58,304) 5,838,387 Intangible assets 931,503-53,051 (220,020) 764,534 Total capital assets being depreciated $ 9,604,473 $ - $ 2,206,707 $ (278,324) $ 11,532,856 Total capital assets $ 12,653,336 $ 1,579,299 $ - $ (278,324) $ 13,954,311 Less accumulated depreciation Buildings $ (846,085) $ (62,288) $ - $ - $ (908,373) Leasehold improvements (1,243,440) (296,436) - - (1,539,876) Equipment, furniture and fixtures (2,209,067) (718,608) - 56,926 (2,870,749) Intangible assets (830,338) (50,587) - 220,020 (660,905) Total accumulated depreciation $ (5,128,930) $ (1,127,919) $ - $ 276,946 $ (5,979,903) Net capital assets being depreciated $ 4,475,543 $ (1,127,919) $ 2,206,707 $ (1,378) $ 5,552,953 Net capital assets $ 7,524,406 $ 451,380 $ - $ (1,378) $ 7,974,408 25