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, 2013

2 For the Year Ended June 30, 2013 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 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 150 Almaden Boulevard, Suite 600 San Jose, CA REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS T F 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, 2013, 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 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 3

4 statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the business-type activities of Spartan Shops, Inc. (a California State Auxiliary Organization) as of June 30, 2013, and the respective changes in 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 8-13 and the Schedule of Post-Employment Health Care Benefits Funding Progress on page 36, 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. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 4

5 Supplementary information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Entity s basic financial statements. The supplementary information on pages 38-46, 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. Other reporting required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report, dated September 16, 2013, 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. San Jose, California September 16, 2013 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 5

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 business-type activities, of Spartan Shops, Inc (a California State University Auxiliary Organization) (the Entity ) as of and for the year ended June 30, 2013, and the related notes to the financial statements, which collectively comprise the Entity s basic financial statements, and have issued our report thereon dated September 16, 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. 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. 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. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 6

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. San Jose, California September 16, 2013 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 7

8 Management s Discussion and Analysis SPARTAN SHOPS, INC. MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2013 (unaudited) This section of Spartan Shops of San José State University (Spartan Shops, Inc.) annual financial report includes Management s Discussion and Analysis of the financial performance of Spartan Shops for fiscal years ended June 30, 2013 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 center concessions, and 13 rental units for faculty and staff. Our mission is to enrich the lives of the campus community by efficiently providing exceptional retail and commercial products and services, while reinvesting for the long-term benefit of SJSU. We are committed to learning from the past, executing in the present, and planning for the future. Spartan Shops is comprised of three major divisions: Retail Services This division includes Spartan Bookstore, Dining Services, and Event Center Arena Concessions. In April 2011, Spartan Shops entered into an agreement with Barnes & Noble College Booksellers to operate Spartan Bookstore for a period of ten years. 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 Dining 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. In October 2011, Spartan Shops entered into a five-year agreement with SJSU Student Union, Inc. to provide food and beverage concession services to the Event Center Arena. 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 and Administrative Technology This division includes the following departments: Finance and Accounting, Human Resources, and Information Technology. The Finance and Accounting department is responsible for providing financial tracking, reporting, payroll, and compliance expertise and support pertaining to all company related financials. 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 infrastructure to enable tomorrow s business growth. Spartan Shops is currently an $18M+ operation and employs approximately 49 regular benefited employees. Spartan Shops also employs an estimated 600 students and temporary casual part-time employees. 8

9 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2013 (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. Effective July 1, 2011, Spartan Shops has restated its financial statements that were previously prepared in accordance with reporting standards established by the Financial Accounting Standards Board ( FASB ) to the reporting standards established by the Governmental Accounting Standards Board ( GASB ). Statements of net position: The statement of net position include all assets and liabilities. Assets and liabilities are reported on an accrual basis as of the statement date. Statements of revenues, expenses and changes in net position: The statement of revenues, expenses and changes in net position present the revenues earned and expenses incurred during the year on an accrual basis. Statements of cash flows: The statement of cash flows present the inflows and outflows of cash for the year and are summarized by operating, 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 years ended June 30, 2013 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 $ 6,757,168 $ 6,365,671 $ 391,497 Noncurrent assets 6,114,714 6,230,405 (115,691) Total assets $12,871,882 $12,596,076 $ 275,806 Liabilities Current liabilities $ 1,654,936 $ 1,638,665 $ 16,271 Noncurrent liabilities 4,503,419 4,690,808 (187,389) Total liabilities $ 6,158,355 $ 6,329,473 ($171,118) Net Position Unrestricted: Investments in capital, net of debt $ 2,250,894 $ 1,857,242 $ 393,652 Unrestricted 4,462,633 4,409,361 53,272 Total net position $ 6,713,527 $ 6,266,603 $ 446,924 9

10 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2013 (unaudited) Assets: Total assets increased $276K from FY 2012 to FY 2013, primarily due to the increase in current assets of $391K and the decrease of noncurrent assets of $116K. Current assets increased $391K due to the increase of $200K in DC Board receivable, $35K in inventory, $40K in initial fees for new venues that are expected to be opened in fiscal year 2014, $240K in investment that were classified as long term investment prior year, and the decrease of $124K in accounts receivable due to the collection effort. Noncurrent assets decreased $116K due to the net increase of $114K in capital assets purchased and the current year depreciation expense, the increase of $10K in notes receivable, and the decrease of $240K in the long-term investments that were classified as short term investment in the current year. Liabilities: Total liabilities decreased $171K from FY 2012 to FY 2013, primarily due to the increase in current liabilities of $16K and the decrease of noncurrent liabilities of $187K. Current liabilities increased $16K, primarily due to the increase in accounts payable for Dining Commons facility fee and new point of sales system of $290K, the decrease in accrued liabilities such as accrued salaries, accrued vacation, payroll withholding and gold points balance of $174K, and the decrease of $100K in Barnes & Noble short-term deposit which were classified as unearned revenue under noncurrent liability for the current year. Noncurrent liabilities decreased $187K overall due to the decrease of $161K for capital lease balance, $124K for notes payable balance, and $28K for unearned revenue due to scheduled annual payments and amortization. In addition, the post-retirement obligation has increased $28K and the unearned revenue increased $100K due to the classification of Barnes and Noble initial capital investment deposit from current liability. Net position: Total net position increased $447K from FY 2012 to FY 2013 due to the increase in investments in capital of $394K, and the increase in unrestricted assets of $53K. The investments in capital, net of debt increased $394K, primarily due to the overall increase in fixed assets of $114K and the reduction of $279K of debt balance due to the annual principal scheduled payments. 10

11 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2013 (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: Student Union and other retail $ 6,753,983 $ 5,921,193 $ 832,790 Dining Commons 9,399,148 9,275, ,938 Catering and Event center 1,359,631 1,440,276 (80,645) Commercial services 231, ,792 10,529 Total auxiliary enterprise revenues 17,744,083 16,857, ,612 Other Operating Revenues Commission income 1,094,763 1,219,534 (124,771) Other income 118, ,920 (269,988) Total other operating revenues 1,213,695 1,608,454 (394,759) Total operating revenues 18,957,778 18,465, ,853 Operating Expenses Operating 9,421,335 8,874, ,186 Auxiliary enterprises cost of sales 6,783,203 6,357, ,748 Administrative 1,576,691 1,454, ,991 Depreciation and amortization 675, ,098 (46,901) Transfer to SJSU Scholarship Fund 5,000 5,000 0 Total operating expenses 18,461,426 17,413,402 1,048,024 Net operating income (loss) 496,352 1,052,523 (556,171) Nonoperating Revenues (Expenses) Interest income 70,468 62,372 8,096 Unrealized and realized losses (1,336) (7,946) 6,610 Interest expense (132,839) (160,453) 27,614 Gain (Loss) on disposal of fixed assets 4,835 (2,140) 6,975 Miscellaneous income 9,444 11,122 (1,678) Total nonoperating revenues (expenses) (49,428) (97,045) 47,617 Increase (decrease) in net position 446, ,478 (508,554) Net Position Net position at beginning of year, as previously reported 6,266,603 5,532, ,047 Restatement, net 0 (221,431) 221,431 Net position at beginning of year as restated 6,266,603 5,311, ,478 Net position at end of year $ 6,713,527 $ 6,266,603 $ 446,924 11

12 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2013 (unaudited) Operating revenues: Total operating revenues increased $887K from FY 2012 to FY The Student Union and other retail unit sales increased $833K due to the changes to the student meal plan program. More dining dollars were added to the student meal plans which allowed students to spend more money at the retail locations. Dining Commons sales increased $124K due to more meal plans sold during the current year. Catering sales decreased $67K and event center sales decreased $13K due to less events held during the year. Other operating revenues: Total other operating revenues decreased $395K due to the decrease in commission income of $125K and other income of $270K. Commission income decreased $125K from FY 2012 to FY 2013 primarily due to the decrease of $70K for the contract management of Spartan Bookstore with Barnes & Noble and the decrease of $55K from other commission income. Other income decreased $270K from FY 2012 to FY 2013 due to the refund of $183K from the dissolution of AOUIT (Auxiliary Organizations Unemployment Insurance Trust) trust received in FY Effective July 1, 2011, AORMA Unemployment Insurance Program (UIP) is funded through CSURMA. The forfeiture fund and other miscellaneous income received in FY2013 was $39K less than FY The Company also received $48K of Dining Commons board fund surplus which were shared with University Housing in FY Operating expenses: Total operating expenses increased $1,048K overall from FY 2012 to FY The operating expense increased $547K primarily due to the increase of $461K in labor and benefits. The company focused on implementing training programs for improved customer service. More labor was utilized in the Dining Commons facility to distribute food to customers instead of self-service which reduced food waste and cost of sales. Advertising expenses increased $43K due to the increase in promotional activities and special programs at the Dining Commons. Utilities, rent expenses, equipment rentals and franchise fees increased $128K in FY2013. Operating supplies, repairs and maintenance, staff development and small equipment were reduced by $85K in FY The auxiliary enterprises cost of sales increased $425K due to the increase of sales in the retail and Dining Commons units. Administrative expenses increased $122K due to the increase of $51K on salaries, wages, employee benefits, $26K in utilities, $18K in professional services, $57K in rent expenses due to the reversal of administrative office rent in FY 2011 in FY Advertising program increased $22K due to company donations to support the President s Vision Insurance and interest expenses decreased $26K and miscellaneous expenses decreased $26K. Depreciation and amortization decreased $47K overall from FY 2012 to FY 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 losses due to changes in the fair value of investments, gain & loss on disposal of fixed assets and the refund of post-retirement Medical Part D. 12

13 MANAGEMENT DISCUSSION AND ANALYSIS (MD&A) For the year ended June 30, 2013 (unaudited) Transfer of assets from affiliated organizations: Spartan Shops contributed $5K to the SJSU Scholarship Fund. This occurs annually when the Company generates a profit. Net position: The Entity submitted unaudited financial statements to the California State University Chancellor s Office as of and for the year ended June 30, Subsequent to that submission, the Entity restated net position at June 30, 2012 to correct the following errors: Net position at June 30, 2012, as previously reported $ 5,965,285 Restatements Change from FASB to GASB reporting model 1,155,380 Accounting for receipts from Barnes & Noble (100,000) Accounting for notes receivable (754,062) Net position at June 30, 2012, as restated $ 6,266,603 13

14 (a California State University Auxiliary Organization) AUDITED FINANCIAL STATEMENTS June 30, 2013

15 June 30, 2013 Statement of Net Position Assets Current Assets Cash $ 4,206,555 Short-term investments 1,729,338 Receivables, net of allowance for doubtful accounts 478,548 Inventories 196,651 Prepaid expenses 146,076 Total current assets 6,757,168 Noncurrent Assets Notes receivable, less discount and allowance for bad debt 203,714 Capital assets, net 5,911,000 Total noncurrent assets 6,114,714 Total assets $12,871,882 The accompanying notes are an integral part of this financial statement. 15

16 June 30, 2013 Statement of Net Position, continued Liabilities and Net Position Current Liabilities Accounts payable $ 807,801 Accrued vacation 130,096 Unearned revenue, current portion 28,429 Capital lease obligation, current portion 161,000 Notes payable, current portion 123,460 Accrued liabilities 404,150 Total current liabilities 1,654,936 Noncurrent Liabilities Unearned revenue, less current portion 1,099,500 Capital lease obligation, less current portion 644,000 Notes payable, less current portion 2,731,646 Other postemployment benefits obligation 28,273 Total noncurrent liabilities 4,503,419 Total liabilities 6,158,355 Net Position Invested in capital assets, net of related debt 2,250,894 Unrestricted 4,462,633 Total net position 6,713,527 Total liabilities and net position $12,871,882 The accompanying notes are an integral part of this financial statement. 16

17 For the Year Ended June 30, 2013 Statement of Revenues, Expenses and Changes in Net Position Operating Revenues Auxiliary enterprise revenues: Student Union and other retail $ 6,753,983 Dining Commons 9,399,148 Catering and Event center 1,359,631 Commercial services 231,321 Total auxiliary enterprise revenues 17,744,083 Other Operating Revenues Commission income 1,094,763 Other income 118,932 Total other operating revenues 1,213,695 Total operating revenues 18,957,778 Operating Expenses Operating 9,421,335 Auxiliary enterprises, cost of sales 6,783,203 Administrative 1,576,691 Depreciation and amortization 675,197 Transfer to SJSU Scholarship Fund 5,000 Total operating expenses 18,461,426 Net operating income 496,352 Nonoperating Revenues (Expenses) Interest income 70,468 Unrealized and realized losses (1,336) Interest expense (132,839) Gain on disposal of fixed assets 4,835 Miscellaneous income 9,444 Total nonoperating revenues (expenses) (49,428) Increase in net position 446,924 Net Position Net position, beginning of the year 6,266,603 Net position, end of year $ 6,713,527 The accompanying notes are an integral part of this financial statement. 17

18 For the Year Ended June 30, 2013 Statement of Cash Flows Cash Flows from Operating Activities Cash received from sales $17,681,584 Payments to suppliers (11,654,756) Payments to employees (6,036,323) Other receipts 1,218,530 Net cash provided by operating activities 1,209,035 Cash Flows from Capital and Related Financing Activities Purchase of capital assets (789,687) Payments on capital lease obligation (157,000) Payments on notes payable (122,323) Interest paid (132,839) Net cash used in capital and related financing activities (1,201,849) Cash Flows from Investing Activities Purchase of investments (1,133,037) Sales of investments 1,163,161 Net cash provided in investing activities 30,124 Net increase in cash and cash equivalents 37,310 Cash and Cash Equivalents Beginning of year 4,169,245 End of year $ 4,206,555 Reconciliation of Net Operating Income to Net Cash Provided by Operating Activities Net operating income $496,352 Adjustments to reconcile net operating income to net cash provided by operating activities: Depreciation and amortization 675,197 Imputed interest on note receivable (9,879) Other 14,444 Change in assets and liabilities: Receivables (62,499) Inventories (34,994) Prepaid expenses 22,209 Unearned revenue (31,202) Accounts payable 289,309 Accrued liabilities (178,175) Postemployment benefits obligation 28,273 Net cash provided by operating activities $1,209,035 The accompanying notes are an integral part of this financial statement. 18

19 For the Year Ended June 30, 2013 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 center concession, and certain real estate properties. In April 2011, the Company entered into an agreement with Barnes & Noble College Booksellers for the daily operations of the Spartan Bookstore. 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 can be reasonably expected as the normal operation to be liquidated within 12 months of the statement of net position are considered current. 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. 19

20 For the Year Ended June 30, 2013 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. An allowance for doubtful accounts of $2,564 was recorded at June 30, 2013 for catering receivables. 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 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 lesser of the lease term or useful life of the related asset, which ranges from 5 to 15 years. Depreciation and amortization expense was $675,197 for the year ended June 30, 2013 (including amortization expense on capital lease assets). The total cost of assets under capital leases was $1,300,000, with related accumulated amortization of $664,532 as of 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, 2013, the Company had balances of $130,096 in accrued vacation liabilities. 20

21 For the Year Ended June 30, 2013 Notes to Financial Statements Note 2 - Summary of Significant Accounting Policies (continued) Revenue Recognition Dining services revenue is 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 $130,328 for the year ended June 30, Tax-Exempt Status and Income Taxes The Company has been recognized by the Internal Revenue Service and the Franchise Tax Board as exempt from federal and state income taxes under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701(d), respectively. 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) carry forward of $344,523 for federal and $350,686 for state purposes, representing a deferred tax asset. The NOL carry forward expires in 2021 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 s customer base comprises primarily other auxiliary organizations and the University, including students, faculty and staff. See Note 10 for disclosures regarding these concentrations. Net Position Net position consist of net position invested in capital assets, net of related debt, restricted and unrestricted net position. Net position invested in capital assets, net of related debt, 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. 21

22 For the Year Ended June 30, 2013 Notes to Financial Statements Note 2 - Summary of Significant Accounting Policies (concluded) Net Position (concluded) Net position invested in capital assets, net of related debt, consist of the following at June 30, 2013: Invested in capital assets, net $5,911,000 Less related debt: Notes payable 2,855,106 Capital lease obligation 805,000 Invested in capital assets, net of related debt $2,250,894 Restricted net position represent amounts appropriated or legally segregated for a specific purpose. The Company s net position are reported as restricted when there are limitations imposed on their use either through the 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, 2013, totaling $540,806 consisting of a reserve designated for planned major equipment purchases, remodeling and facility acquisition. 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 amounts to maintain a required minimum balance of 2.5 percent of annual projected revenue, as presented in the Company s Annual Business Plan. The Company designated an additional $41,918 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, Accounting and Financial Reporting for Nonexchange Transactions. These non-operating revenues and expenses include the interest income, unrealized and realized gain or losses, interest expenses and miscellaneous income and expenses. Note 3 - Investments Investments at June 30, 2013, consist of the following: Investment Type Fair Value Certificates of deposit $ 340,015 Mutual funds 1,134,504 Money market fund 254,819 Total investment $1,729,338 22

23 For the Year Ended June 30, 2013 Notes to Financial Statements Note 3 Investments (concluded) Maturities Less Less Less Less Less Greater Than Than Than Than Than Than Investment Type 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years Certificates of deposit $ 340,015 $ 340,015 $- - $- - $- - $- - $ - - Mutual funds 1,134,504 1,134, Money market funds 254, , Total $1,729,338 $1,729,338 $- - $- - $- - $- - $ - - 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 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. 23

24 For the Year Ended June 30, 2013 Notes to Financial Statements Note 4 - Capital Assets The following activity took place in capital assets during 2013: Beginning Retirements of Year Additions Transfers and Other End of Year Capital assets not being depreciated: Land $ 2,310,000 $ - - $ - - $ - - $ 2,310,000 Construction in process 22,762 94, ,620 Equipment, furniture and fixtures ,257 (16,829) ,428 Intangible assets , ,844 Total capital assets not being depreciated 2,332, ,687 (16,829) 3,105,620 Capital assets being depreciated: Buildings 1,763, ,763,726 Leasehold improvements 2,930, (1,395) 2,928,944 Equipment, furniture and fixtures 3,690, ,829 (255,960) 3,448,066 Intangible assets 750, (3,771) 750,678 Total capital assets being depreciated 9,135, ,829 (261,126) 8,891,414 Total capital assets 11,468, , (277,955) 11,997,034 Less accumulated depreciation: Buildings (596,933) (62,288) (659,221) Leasehold improvements (2,157,589) (173,126) - - 1,395 (2,329,320) Equipment, furniture and fixtures (2,423,622) (305,644) ,799 (2,473,467) Intangible assets (493,658) (134,139) - - 3,771 (624,026) Total accumulated depreciation (5,671,802) (675,197) ,965 (6,086,034) Net capital assets being depreciated 3,463,909 (675,197) - - (161) 2,805,380 Net capital assets $ 5,796,671 $114,490 $ - - ($ 161) $ 5,911,000 24

25 For the Year Ended June 30, 2013 Notes to Financial Statements Note 5 - Notes Receivable Effective August 20, 2007, the Company entered into a memorandum of understanding with the City of San Jose (the City) to provide a homebuyer program (the Program) for the University in order to attract and retain University faculty and staff (borrowers). The City and the Company each committed $500,000 on an annual basis to fund loans under the Program. The City underwrites and funds all loans and then provides the Company with an invoice for its portion of funded loans. Each loan was limited to $60,000 and was typically recorded as a second mortgage. Effective February 2009, each loan was limited to $50,000. The loans are due to the City in 30 or 45 years, or upon transfer of title, whichever comes first. Effective June 2008, all loans issued are for a term of 45 years to match the 45-year term of the state-mandated affordability restriction. The loans are non-interestbearing. To be eligible for the Program, properties must be located within the City s municipal boundaries. There is a 45-year affordability restriction which requires that either the property be sold only to an income-qualified household or the City and Company share in any net increase in equity that accrues between the date of the original purchase and the date of sale. This sharing of equity is based on the proportionate share of the equity increase at the time the property is sold by the homeowner, prior to the maturing of the note receivable. Any such equity share gain or loss, as well as any loan defaults, would be shared by the City and the Company in proportion to their funding of the loans. As of June 30, 2013, there were 14 loans funded by the City and one loan closed in October 2012 due to the foreclosure of the related property. The Company s receivable portion was $820,000 less a present value discount of $611,063. The Company used the weekly conventional mortgage rates which were ranged from 4.78 to 6.68 percent from the Federal Reserve when the notes were issues to calculate the present value of the notes. An allowance for doubtful account of $5,223 was recorded assuming 2.5% default rate of a loan. The Company recorded the actual bad debt expense of $8,850 for the default which occurred in fiscal year Due to the difficult budget realities for the University and the City, both entities have agreed to suspend funding of loans under the Program until the parties agree to extend the Program for future years. Notes receivable as of June 30, 2013, consists of the following: Notes receivable $820,000 Less Discount on Notes receivable (611,063) Total Notes receivable 208,937 Less Allowance for Doubtful accounts (5,223) Total Notes receivable, net $203,714 As of June 30, 2013, the amount of principal of notes receivable for future fiscal years ending June 30 is as follows: Principal 2014 $ 0 $ ,000, 820,000 Total Total $820,000 $820,000 25

26 For the Year Ended June 30, 2013 Notes to Financial Statements Note 6 - Notes Payable Notes payable as of June 30, 2013, consists of the following: Note payable to California Bank and Trust; secured by the 355 Reed Street property; monthly payments of $5,401 which includes principal and fixed interest (4.5 percent at June 30, 2013); due with one final balloon payment of $705,538 on May 1, $ 872,226 Note payable to California Bank and Trust; secured by the Historic Home properties at 386, 390 and 394 N. 4th Street; monthly principal payments of $8,160 plus fixed interest (4.5 percent at June 30, 2013); due with one final balloon payment of $1,485,120 on August 1, ,982,880 Total notes payable 2,855,106 Less current portion (123,460) Long-term portion $2,731,646 The carrying value of the collateral for the Reed Street note payable includes $1,000,000 of land and $299,044 of buildings at June 30, The carrying value of the collateral for the Historic Homes notes payable includes $1,310,000 of land and $805,461 of buildings, included on the statement of net position at June 30, The various loan agreements require the Company to comply with certain financial covenants, which were met as of June 30, As of June 30, 2013, the amount of principal and interest payments of all long-term debt for future fiscal years ending June 30 is as follows: Principal Interest Total 2014 $ 123,460 $127,230 $ 250, , , , , , , , , , , , , ,225,451 27,274 2,252,725 Total $2,855,106 $606,345 $3,461,451 Note 7 - Capital Lease Obligation During fiscal year 2010, the Company entered into a sale-leaseback arrangement with the University. The University purchased equipment from Spartan Shops for $1.3 million, with the understanding the University would apply for, and enter into, the California State University Chancellor s Office Commercial Paper Equipment Financing program to fund the purchase. Under the terms of the sale-leaseback agreement, Spartan Shops then leased the equipment for $1.3 million, and shall continue to use and maintain the equipment through its useful life, with ownership of the leased assets reverting to Spartan Shops at the end of the 8-year lease term. There was no gain or loss on the saleleaseback transaction. Spartan Shops shall submit payments, on a quarterly basis, to the University, as detailed within the repayment schedule of the agreement. The capital lease obligation with the Chancellor s Office consists of quarterly payments ranging from $44,519 to $49,131, including interest at 2.5 percent to 4.5 percent, with final payment due February 1, The interest rate for the fiscal year ended June 30, 2013, was 2.5 percent. The Company paid $157,000 in principal and $22,589 interest for the year ended June 30,