Basic Financial Statements For the Years Ended June 30, 2013 and 2012
Table of Contents Independent Auditor's Report 1-2 Management's Discussion and Analysis 3-8 Basic Financial Statements: Statements of Net Position 9 Statements of Revenues, Expenses and Changes in Net Position 10 Statements of Cash Flows 11-12 13-29 Page
Management's Discussion and Analysis This section of the Sonoma State Enterprises, Inc. (the Organization) annual financial report presents management s overview and analysis of the financial activities of the Organization for the fiscal years ended June 30, 2013 and 2012. We encourage the reader to consider the information presented here in conjunction with the financial statements as a whole. Introduction to the Basic Financial Statements This discussion and analysis is intended to serve as an introduction to the Organization s audited financial statements, which are comprised of the basic financial statements and the footnotes as listed in the table of contents. This annual report is prepared in accordance with the Governmental Accounting Standards Board Statement 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The Business-Type Activity (BTA) reporting model is used which best represents the activities of the Sonoma State University (University) and its auxiliaries. The Organization is one of three non-profit auxiliaries on the University campus. The required financial statements include the Statement of Net Position; the Statement of Revenues, Expenses and Changes in Net Position; and the Statement of Cash Flows. These statements are supported by notes to the financial statements and this summary. All sections must be considered together to obtain a complete understanding of the financial picture of the Organization. Statement of Net Position: This statement includes all assets and liabilities using the accrual basis of accounting as of the statement date. The difference between the two classifications is represented as Net Position. The net position section of the statement identifies major categories of restrictions on these assets and reflects the overall financial position of the Organization as a whole. Statement of Revenues, Expenses and Changes in Net Position: This statement presents the revenues earned and the expenses incurred during the year using the accrual basis of accounting. Under the accrual basis of accounting, all increases or decreases in net position are reported as soon as the underlying event occurs, regardless of the timing of the cash flow. Consequently, revenues and/or expenses reported during this fiscal year may result in changes to cash flow in a future period. Statement of Cash Flows: This statement reflects inflows and outflows of cash, summarized by operating, financing and investing activities. The direct method was used to prepare this information, which means that gross rather than net amounts were presented for the year s activities. Notes to the Financial Statements: This additional information is essential to a full understanding of the data reported in the basic financial statements. Reporting Entity The financial statements of the University will be separated between the University and its component units. The latter are separate I.R.C. 501(c)(3) non-profit auxiliary organizations whose financial information will be presented in a discrete column and in the footnotes of the University s financial statements. Consequently, these auxiliaries must comply with the same governmental rulings and must present their individual separate audited financial statements in the same format. 3
Management's Discussion and Analysis Analytical Overview Net position increased in total by $664,133 during the year ended June 30, 2013. When compared to the prior year there was an overall decline in operating income. This decline was offset by a reduction in nonoperating expenses so overall there was an increase in the net position for the year, as mentioned, but only an increase of $259,077 over the previous year. Net position increased by $405,056 during the year ended June 30, 2012. While there was an increase in operating income, there was a large increase in nonoperating expenses when compared to the previous year. Condensed Statements of Net Position as of June 30, 2013 and 2012 Change Assets: 2013 2012 $ % Current assets $ 3,531,042 $ 3,226,562 $ 304,480 9% Capital assets, net 4,562,470 4,636,704 (74,234) -2% Other long term investments 6,705,921 6,448,018 257,903 4% Total assets 14,799,433 14,311,284 488,149 3% Liabilities: Current liabilities 789,139 728,089 61,050 8% Noncurrent liabilities 3,991,342 4,228,376 (237,034) -6% Total liabilities 4,780,481 4,956,465 (175,984) -4% Net Position: Net investment in capital assets 334,094 187,185 146,909 78% Unrestricted 9,684,858 9,167,634 517,224 6% Total net position $ 10,018,952 $ 9,354,819 $ 664,133 7% Condensed Statements of Net Position as of June 30, 2012 and 2011 Change Assets: 2012 2011 $ % Current assets $ 3,226,562 $ 3,053,085 $ 173,477 6% Capital assets, net 4,636,704 4,988,176 (351,472) -7% Other long term investments 6,448,018 6,131,071 316,947 5% Total assets 14,311,284 14,172,332 138,952 1% Liabilities: Current liabilities 728,089 773,050 (44,961) -6% Noncurrent liabilities 4,228,376 4,449,519 (221,143) -5% Total liabilities 4,956,465 5,222,569 (266,104) -5% Net position: Net investment in capital assets 187,185 332,339 (145,154) -44% Unrestricted 9,167,634 8,617,424 550,210 6% Total net position $ 9,354,819 $ 8,949,763 $ 405,056 5% 4
Management's Discussion and Analysis Analytical Overview (continued) Statement of Net Position Variance Analysis Between 2013 and 2012 Current assets increased by $304,480. Current assets include: cash and cash equivalents, short-term investments, accounts receivable, prepaid expenses, and other current assets. The increase is related to the Organization s efforts to build the liquidity of working capital reserve in the form of cash and short-term investments. Capital assets, net decreased by $74,234. During the current year there was an asset impairment charge of $130,886 that was recognized, this impairment was related to the leasehold improvements that are located at three of the Organization s dining venues (Ameci s, University Club and the Pub). With the new Student Center building opening in the fall it was determined that these venues would be closed and therefore the value of the assets were adjusted. The impairment expense along with depreciation expense of $298,450 for the year and new purchases of $355,102 account for the fluctuation. During the year the Organization upgraded its point of sale system and student one-card system along with acquiring some new equipment. Other long-term investments increased by $257,903. In this category there was $60,133 of interest and dividend income during the year which was reinvested along with a $197,770 unrealized gain. Overall, the unrealized gain on these investments exceeds their cost. Current liabilities increased by $61,050. Current liabilities include: accounts payable, unearned revenue, current portion of long term debt and other current liabilities. This increase is primarily in the accounts payable and unearned revenue category. There was an increase in accounts payable primarily due to timing of processing payables. The increase in unearned revenue relates to an increase in the freshman housing headcount and the increase in the price of the meal plan for the upcoming fall semester. Long-term debt obligation, noncurrent portion decreased by $237,034. This is the result of the scheduled principal payments being made during the year and the reclassification of amount due to current. Net position increased by $664,133 reflecting the cumulative net change in assets and liabilities for the year. Statement of Net Position Variance Analysis Between 2012 and 2011 Current assets increased by $173,477. The increase is related to the accounts receivable category which is due to timing of year end billings. Capital assets, net decreased by $351,472. There was an asset impairment of $138,183 that was related to the leasehold improvements in the bookstore building. The impairment, along with depreciation expense of $256,379, and $43,090 for new purchases account for the fluctuation over the previous year. Other long-term investments increased by $316,947. There was an addition into long-term investment of $250,000 from money market funds (cash equivalents) along with $47,213 in interest and dividends, $10,832 in realized gains and $8,902 in unrealized gain during the year. Current liabilities decreased by $44,961. This decrease is in the area of accounts payable and was due to timing however this decrease is partially offset by an increase in the wolfbuck deposits in the other liability category. Long-term debt obligation, noncurrent portion decreased by $221,143. This is the result of the scheduled principal payments being made during the year and the reclassification of amount due to current. Net Position increased by $405,056 reflecting the cumulative net change in assets and liabilities for the year. 5
Management's Discussion and Analysis Analytical Overview (continued) Statement of Net Position Variance Analysis Between 2012 and 2011 (continued) Condensed Statements of Revenues, Expenses and Changes in Net Position for the Fiscal Change 2013 2012 $ % Revenues and expenses Operating revenues $ 7,889,958 $ 7,950,433 $ (60,475) -1% Operating expenses (6,614,619) (5,698,188) (916,431) 16% Net operating income 1,275,339 2,252,245 (976,906) -43% Nonoperating revenues (expenses) Gifts, noncapital (700,449) (1,718,980) 1,018,531-59% Investment earnings, net 579,234 383,279 195,955 51% Interest on capital-related debt (305,745) (320,571) 14,826-5% Other nonoperating expenses (184,246) (190,917) 6,671-3% Net nonoperating expenses (611,206) (1,847,189) 1,235,983-67% Change in net position 664,133 405,056 259,077 64% Net position, beginning of year 9,354,819 8,949,763 405,056 5% Net position, end of year $ 10,018,952 $ 9,354,819 $ 664,133 7% Condensed Statements of Revenues, Expenses and Changes in Net Position for the Fiscal Years Ended June 30, 2012 and 2011 Change 2012 2011 $ % Revenues and expenses Operating revenues $ 7,950,433 $ 7,421,992 $ 528,441 7% Operating expenses (5,698,188) (5,775,341) 77,153-1% Net operating income 2,252,245 1,646,651 605,594 37% Nonoperating revenues (expenses) Gifts, noncapital (1,718,980) (573,350) (1,145,630) 200% Investment earnings, net 383,279 540,252 (156,973) -29% Interest on capital-related debt (320,571) (334,403) 13,832-4% Other nonoperating expenses (190,917) (60,000) (130,917) 218% Net nonoperating expenses (1,847,189) (427,501) (1,419,688) 332% Change in net position 405,056 1,219,150 (814,094) -67% Net position, beginning of year 8,949,763 7,730,613 1,219,150 16% Net position, end of year $ 9,354,819 $ 8,949,763 $ 405,056 5% 6
Management's Discussion and Analysis Analytical Overview (continued) Revenue and Expense Variance Analysis Between 2013 and 2012 Operating revenues are sales net of cost of goods sold, and are comprised of dining services (Residence Halls, Central Campus venues, Vending, Prelude and Concessions), outsourced bookstore operations and rental operations (Salazar building leasehold improvements). Operating revenues decreased by $60,475. This fluctuation was expected as the student headcount was very comparable to the previous year. Operating expenses increased by $916,431. The majority of the increase incurred was in the categories of supplies, uniforms, equipment rental, non-capitalized equipment, contractual services as well as non contractual services. There was also a slight increase in salaries and benefits. These increases were anticipated with the opening of the Prelude venue and concessions operations located at the Donald and Maureen Green Music Center. Investment income, net increased by $195,955. The increase over the previous year is primarily due to market fluctuations. Total investment income includes interest and dividends of $381,464 (which includes all interest and dividends along with the faculty/staff housing land lease income from the University), and $197,770 of unrealized gain. The remaining nonoperating expenses decreased by $1,040,028. The majority of the decrease is related to amounts transferred to the University, which are indicated as Gifts, noncapital. The Organization transferred a total of $650,449 to fund its obligation to the Student Center project ($269,429 of this was related to equipment for the building). The Organization also transferred $50,000 to the University to support the grand opening of the Weill Hall at the Green Music Center. In the previous year the Organization was able to transfer $1,118,980 to fund its obligation to the Student Center project and $600,000 to support hospitality spaces at the Green Music Center. Revenue and Expense Variance Analysis Between 2012 and 2011 Operating revenues increased by $528,441. This was primarily the more students on the meal plan and a modest increase in the meal plan prices. Operating expenses decreased by $77,153. The majority of the savings were incurred in the area of supplies and non-capital equipment when compared to the previous year. There was a slight increase in salary and benefit expenses which offset these savings. Investment income, net decreased by $156,973. Total investment income included interest and dividends of $363,545 along with $10,832 of realized gain and $8,902 of unrealized gain. The fluctuation from the previous year is primarily due to market fluctuation. The remaining nonoperating expenses increased $1,262,715. The majority of the increase is related to amounts transferred to the University. The Organization transferred $1,118,980 to fund its obligation to the Student Center project and $600,000 to support hospitality related spaces at the Green Music Center, while in the previous year the Organization was only able to transfer $572,350 to fund its obligation to Student Center project. 7
Management's Discussion and Analysis Factors Impacting Future Periods The Organization holds land classified as investments on the statements of net position which the University intends to purchase for faculty and staff housing. This land will be purchased after sewer and water arrangements are negotiated between the University and local agencies. The Organization commenced retail operations at the Green Music Center on September 29, 2012. Additional planning and opening expenses may be incurred related to the development of outdoor concession venues and the MasterCard Performing Arts Pavilion scheduled to open no earlier than 2015. The Organization is planning for a new building (Student Center) to replace retail and most dining facilities. The Student Center project is expected to be complete in September 2013, with Dining venues not likely to fully come on-line until December 2013. This project will have a number of planning, operational and opening expenses associated with it in the upcoming year. Most of the capital assets in the buildings currently owned, and the Bookstore building, will be disposed of in the upcoming year. The fiscal impact will be analyzed and incorporated into future budgets. The California State University has faced reduced funding due to the severe budget situation in the State of California. While the upcoming year s funding has stabilized, future years are still uncertain. As such, Sonoma State University may continue to face potential enrollment reductions. Enrollment reductions would likely have a negative impact on the revenue of the Organization. The Organization is participating in a group called On-Campus Presents (OCP). OCP is a collaborative University body charged with enhancing student programming primarily at the Green Music Center. Through this group, the Organization may be involved in facilities development, production and related food and retail activities. These activities may have revenue and expense implications for the Organization in future years. The Organization has awarded a Bookstore operating agreement for Barnes and Noble College Booksellers for the ten-year period beginning July 1, 2013. The terms of the agreement are less favorable than previous agreements due to the continued uncertainty in the textbook market. Management, however, does not feel the less favorable terms should have a significant impact on financial results. 8
Statements of Net Position June 30, 2013 2012 Assets Current assets Cash and cash equivalents $ 873,839 $ 1,168,694 Short-term investments 2,320,302 1,624,785 Accounts receivable 193,029 274,197 Prepaid expenses and other assets 143,872 158,886 Total current assets 3,531,042 3,226,562 Noncurrent assets Capital assets, net 4,562,470 4,636,704 Other long-term investments 6,705,921 6,448,018 Total noncurrent assets 11,268,391 11,084,722 Total assets 14,799,433 14,311,284 Liabilities Current liabilities Accounts payable 91,600 68,789 Unearned revenue 275,179 256,000 Long-term debt obligation, current portion 237,034 221,143 Other liabilities 185,326 182,157 Total current liabilities 789,139 728,089 Noncurrent liability Long-term debt obligation, net of current portion 3,991,342 4,228,376 Total liabilities 4,780,481 4,956,465 Net position Net investment in capital assets 334,094 187,185 Unrestricted 9,684,858 9,167,634 Total net position $ 10,018,952 $ 9,354,819 See accompanying 9
Statements of Revenues, Expenses and Changes in Net Position Year Ended June 30, 2013 2012 Operating revenues Sales and services of auxiliary enterprises, net $ 6,853,423 $ 6,912,929 Other operating revenues 1,036,535 1,037,504 Total operating revenues 7,889,958 7,950,433 Operating expenses Auxiliary enterprise expenses 6,316,169 5,441,809 Depreciation and amortization 298,450 256,379 Total operating expenses 6,614,619 5,698,188 Operating income 1,275,339 2,252,245 Nonoperating revenues (expenses) Investment income, net 579,234 383,279 Gifts, noncapital (700,449) (1,718,980) Interest on capital-related debt (305,745) (320,571) Other nonoperating expenses (184,246) (190,917) Net nonoperating expenses (611,206) (1,847,189) Increase in net position 664,133 405,056 Net position Net position at beginning of year 9,354,819 8,949,763 Net position at end of the year $ 10,018,952 $ 9,354,819 See accompanying 10
Statements of Cash Flows Year Ended June 30, 2013 2012 Increase (decrease) in cash and cash equivalents Cash flows from operating activities Sales and services of auxiliary enterprises $ 6,956,939 $ 6,841,613 Other receipts 1,036,535 1,037,504 Payments to University for wages (2,567,414) (2,226,181) Payments to suppliers (3,710,930) (3,321,188) Net cash provided by operating activities 1,715,130 2,331,748 Cash flows from noncapital financing activities Gifts, noncapital (700,449) (1,718,980) Other nonoperating expenses (53,360) (52,734) Net cash used for noncapital financing activities (753,809) (1,771,714) Cash flows from capital and related financing activities Principal payments on capital debt (221,143) (206,318) Interest paid on capital debt (305,745) (320,571) Purchase of capital assets (355,102) (43,090) Net cash used for capital and related financing activities (881,990) (569,979) Cash flows from investing activities Investment income 295,814 295,824 Proceeds from sale of investments 3,200,000 3,055,661 Purchase of investments (3,870,000) (3,705,661) Net cash used in investing activities (374,186) (354,176) Net decrease in cash and cash equivalents (294,855) (364,121) Cash and cash equivalents, beginning of the year 1,168,694 1,532,815 Cash and cash equivalents, end of the year $ 873,839 $ 1,168,694 See accompanying 11
Statements of Cash Flows (continued) Year Ended June 30, 2013 2012 Increase (decrease) in cash and cash equivalents Reconciliation of operating income to net cash provided by operating activities Operating income $ 1,275,339 $ 2,252,245 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 298,450 256,379 Change in assets and liabilities: Accounts receivable 81,168 (132,649) Prepaid expenses and other assets 15,014 15,559 Accounts payable 22,811 (121,119) Unearned revenue 19,179 - Other liabilities 3,169 61,333 Net cash provided by operating activities $ 1,715,130 $ 2,331,748 Noncash investing, capital, and financing activities Impairment on capital assets $ 130,886 $ 138,183 Dividends & realized gains reinvested $ 85,650 $ 78,553 Unrealized gains on long-term investments $ 197,770 $ 8,902 See accompanying 12
Note A. Organization Sonoma State Enterprises, Inc. (the Organization) was formed as an auxiliary organization of the California State University (CSU) as defined in Education Code Section 24054.5 and provides services to the campus of Sonoma State University (the University). As such, the Organization is a component unit of the CSU, which is a component unit of the State of California. The Organization is involved in the following activities: The retail activity oversees the outsourced operations of the Sonoma State University Bookstore. This retail activity was outsourced in July 2006. The food service activity operates the residence hall food services, various food venues and vending services. Note B. Summary of Significant Accounting Policies Financial Reporting Entity The Organization is a legally separate tax-exempt component unit of the University. The University is part of the CSU system. Costs are allocated to specific activities where possible. Costs not identified with specific activities that relate to the full scope of the Organization's activities are allocated to the operational activities. The Organization's board appointments require approval from the University President, and as a result, the Organization follows the reporting principles promulgated by the Governmental Accounting Standards Board (GASB). The basic financial statements present only the Statements of Net Position, Statements of Revenues, Expenses and Changes in Net Position, and Statements of Cash Flows of the Organization. These statements do not purport to present financial information of the CSU system as a whole. Basis of Presentation The accompanying basic financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. 13
Note B. Summary of Significant Accounting Policies (continued) Basis of Presentation (continued) The basic financial statements required by GASB Statements No. 34, as amended, and 35 include a statement of net position, a statement of revenues, expenses and changes in net position, and a statement of cash flows. As a component unit of a public institution, the Organization has chosen to present its basic financial statements using the reporting model for special-purpose governments engaged only in business-type activities. This model allows all financial information for the Organization to be reported in a single column in each of the basic financial statements. In accordance with the business-type activities reporting model, the Organization prepares its statements of cash flows using the direct method. Classification of Current and Noncurrent Assets and Liabilities The Organization considers assets to be current that can reasonably be expected, as part of its normal business operations, to be converted to cash and be available for liquidation of current liabilities within twelve months of the statement of net assets date. Liabilities that reasonably can be expected, as part of normal business operations, to be liquidated within twelve months of the statement of net position date are considered to be current. All other assets and liabilities are considered to be noncurrent. Cash and Cash Equivalents The Organization considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. The Organization considers amounts included in the California State University internal investment pool to be investments. Inventory Inventory is stated at the lower of cost or market value using the first-in, first-out method. Inventory totaled $131,727 and $91,218 at June 30, 2013 and 2012, respectively, and is included in prepaid expenses and other assets in the statements of net position. Investments Investments are reflected at fair value using quoted market prices, except for investments in land and real estate, which are reflected at cost. Realized and unrealized gains and losses are included in the accompanying statements of revenues, expenses and changes in net position as investment income. The long range investment goal of the Organization is to ensure the continued health and growth of the Organization by achieving a maximum rate of return on assets based on a desired level of risk and consistent with prudent investment management. The general policy of the Organization shall be to diversify investments so as to provide a balance that will enhance total return while avoiding undue risk concentration in any single asset class or investment category. 14
Note B. Summary of Significant Accounting Policies (continued) Investments (continued) Changes in the fair value of investments are reported as part of investment income in the statements of revenues, expenses and changes in net position. For the year ended June 30, 2013 there was an unrealized gain included in investment income of $197,770 and for the year ended June 30, 2012 there was an unrealized gain in investment income of $8,902 included in investment income. The cumulative differences between cost and fair value was a gain of $143,801 for the year ended June 30, 2013 and a loss of $53,969 for the year ended June 30, 2012. Investments in real property include approximately 89 acres of land that was purchased by the Organization in July 2005. Capital Assets Capital assets, which include property, equipment, and intangible assets, are stated at cost. Capital assets with a value of $5,000 or more and with a useful life of one year or more are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of assets, which range from five to thirty-nine years. Amortization of the intangible assets, which consist of franchise fees, and software is computed using the straight-line method over their useful lives of five to ten years. Depreciation expense is shown separately in the statement of revenues, expenses and changes in net position rather than being allocated among other categories of operating expenses. Unearned Revenues Unearned revenue consists of payments received in advance from the University in accordance with an operating agreement. Net Position The Organization's net position is classified into the following categories: Net investment in capital assets: Capital assets, net of accumulated depreciation, amortization and outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. Unrestricted: All other categories of net position whose use is not restricted. Unrestricted net position may be designated for use by management or the Board of Directors to support future operations. 15
Note B. Summary of Significant Accounting Policies (continued) Classification of Revenues and Expenses The Organization 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 exchange transactions or from other activities that are connected directly to the Organization's primary operations. Exchange transactions include charges for services rendered and the acquisition of goods and services. Certain other transactions are reported as nonoperating revenues and expenses in accordance with GASB Statement 35. These nonoperating activities include net investment income and interest expense. Income Taxes The Organization is a not-for-profit corporation and is exempt from federal income taxes under provisions of Section 501(c)(3) of the Internal Revenue Code. The Organization is also exempt from California franchise taxes and, therefore, has made no provision for federal or California income taxes. Continuance of such exemption is subject to compliance with laws and regulations of the taxing authorities. Certain activities considered unrelated to the tax exempt purpose of the Organization may generate income that is taxable. No provision has been recorded for income taxes, as the net income, from any unrelated business activities, in the opinion of management, is not material to the basic financial statements taken as a whole. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on management s knowledge and experience. Those estimates affect the reported amounts of assets and liabilities, and the reported amount of revenue, support and expenses. The use of management s estimates primarily relate to the depreciable lives of capital assets. Actual results could differ from those estimates. New Accounting Pronouncements The GASB has released the following new standard: GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, issued in March 2012. The objective of this Statement is to either (a) properly classify certain items that were previously reported as assets and liabilities as deferred outflows of resources or deferred inflows of resources or (b) recognize certain items that were previously reported as assets and liabilities as outflows of resources (expenses or expenditures) or inflows of resources (revenues). These determinations are based on the definitions of those elements in Concepts Statement No. 4, Elements of Financial Statements. GASB Statement No. 65 is effective for financial statements for fiscal years beginning after December 15, 2012. Management has not determined the effect on the financial statements due to this pronouncement which has been issued but not yet adopted. 16
Note C. Cash and Cash Equivalents and Investments Cash and Cash Equivalents Cash and cash equivalents at June 30, 2013 2012 Book balance $ 873,839 $ 1,168,694 Bank balance 829,877 1,055,401 Difference between book and bank balance $ 43,962 $ 113,293 Significant reconciling items consist of: Deposits in transit $ 201,747 $ 134,201 Outstanding checks (179,285) (36,208) Cash and change fund 21,500 15,300 $ 43,962 $ 113,293 Composition of Investments The Organization participates in an internal investment pool managed by US Bank, an asset management and investment advisory firm that serves the California State University. Securities within the investment pool are not held in the Organization's name and are not insured. The investments are held in the name of California State University. Fair market value was $2,320,302 as of June 30, 2013 and $1,624,785 as of June 30, 2012. Fair market value is based on the Organization's proportionate interest in the University's US Bank account. Other investments are reported as other long-term investments on the statements of net position and totaled $6,705,921 and $6,448,018 at June 30, 2013 and 2012, respectively. 17
Note C. Cash and Cash Equivalents and Investments (continued) Composition of investments (continued) The composition of investments at June 30, 2013: Short-term Long-term Total CSU consolidated SWIFT pool $ 2,320,302 $ - $ 2,320,302 Real estate - 4,701,313 4,701,313 Mutual funds - 2,004,608 2,004,608 $ 2,320,302 $ 6,705,921 $ 9,026,223 The composition of investments at June 30, 2012: Short-term Long-term Total CSU consolidated SWIFT pool $ 1,624,785 $ - $ 1,624,785 Real estate - 4,701,313 4,701,313 Mutual funds - 1,746,705 1,746,705 $ 1,624,785 $ 6,448,018 $ 8,072,803 The Organization does not hold investments on behalf of others. Aggregated costs and fair values of other long-term debt, equity and real estate investments at June 30 are as follows: 2013 Cost Reported Value Mutual funds, reported at fair value $ 1,860,807 $ 2,004,608 Real estate, reported at cost 4,701,313 4,701,313 Total other long-term investments $ 6,562,120 $ 6,705,921 18
Note C. Cash and Cash Equivalents and Investments (continued) 2012 Cost Reported Value Mutual fund, reported at fair value $ 1,800,674 $ 1,746,705 Real estate, reported at cost 4,701,313 4,701,313 Total other long-term investments $ 6,501,987 $ 6,448,018 Investment income Investment income, as reflected in the statements of revenues, expenses and changes in net position includes the following for the year ended June 30: 2013 2012 Rent $ 295,750 $ 295,750 Interest and dividends 85,714 67,796 Realized gain on long-term investments - 10,831 Unrealized gain on long-term investments 197,770 8,902 Total investment income, net $ 579,234 $ 383,279 Interest and dividends include all interest and dividends from investments, cash, and cash equivalents. Deposit and Investment Risk Custodial Credit Risk Custodial credit risk is the risk that in the event of the failure of the counterparty (custodial broker) the Organization would not be able to recover the value of its investments or collateral securities that are in the possession of the outside party. Financial instruments that potentially subject the Organization to custodial credit risk consist primarily of bank demand deposits and investments in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investors Protector Corporation (SIPC). The Organization had cash on deposit with one financial institution, which exceeded the federally insured limit by $446,199 as of June 30, 2013 but was fully federally insured at June 30, 2012. Other investments which qualify for SIPC coverage exceeded coverage limits by $1,138,284 and $880,350 at June 30, 2013 and 2012, respectively. The Organization does not have a policy for addressing custodial credit risk related to deposits and investments. 19
Note C. Cash and Cash Equivalents and Investments (continued) Deposit and Investment Risk (continued) Concentration of Credit Risk The Organization does not limit the amount that may be invested in any one issuer. Management believes that investments are adequately diversified and don't give rise to significant concentration of credit risk. Interest Rate Risk Interest rate risk is the risk of exposure to fair value losses resulting from rising interest rates. At June 30, 2013 and 2012 the Organization had only a minimal interest rate risk because of its relatively small holdings in fixed income investments and no notes receivables. The Organization does have some mutual funds which, as a result of their balanced equity/bond approach, mitigate interest rate risk. The Organization's short-term investments are held as agency trust funds by the University. The California State University manages its exposure to interest rate risk by purchasing a combination of short-term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or nearing maturity evenly over time as necessary to provide the cash flows and liquidity needed for operations. The weighted average maturity for these investments ranges from 0.0 to 8.0 years. The California State University monitors the interest rate risk inherent in its portfolio. Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The Organization participates in an internal investment pool managed by US Bank, an asset management and investment advisory firm that serves the California State University. Investment ratings range between AAA and A, and there are some which are not rated. Note D. Composition of Accounts Receivable Accounts receivable at June 30 consisted of the following: 2013 Current Noncurrent Total Due from the University or other auxiliary $ 164,789 $ - $ 164,789 Other accounts receivable 28,240-28,240 Total accounts receivable $ 193,029 $ - $ 193,029 20
Note D. Composition of Accounts Receivable (continued) 2012 Current Noncurrent Total Due from the University or other auxiliary $ 245,079 $ - $ 245,079 Other accounts receivable 29,118-29,118 Total accounts receivable $ 274,197 $ - $ 274,197 Note E. Capital Assets Capital asset activity for the year ended June 30, 2013, consisted of the following: Balance June 30, 2012 Additions Reductions Balance June 30, 2013 Nondepreciable capital assets: Land and land improvements $ - $ - $ - $ - Works of art and historical treasures - - - - Construction work in progress - - - - Total nondepreciable capital assets - - - - Depreciable capital assets: Buildings and building improvements 6,785,906 - (130,886) 6,655,020 Personal property: Equipment 457,587 72,350 (18,647) 511,290 Other intangible assets 36,427 282,752-319,179 Total depreciable capital assets 7,279,920 355,102 (149,533) 7,485,489 Total capital assets 7,279,920 355,102 (149,533) 7,485,489 Less accumulated depreciation: Buildings and building improvements (2,215,977) (231,118) - (2,447,095) Personal property: - Equipment (392,645) (27,536) 18,647 (401,534) Other intangible assets (34,594) (39,795) - (74,389) Total accumulated depreciation (2,643,216) (298,450) 18,647 (2,923,019) Total capital assets, net $ 4,636,704 $ 56,652 $ (130,886) $ 4,562,470 Total depreciation and amortization $ 298,450 An asset impairment charge of $130,886 was recognized during the year ended June 30, 2013 related to leasehold improvements located in three dining venues. With the new Student Center building opening next year it was determined that the value of the leasehold improvements should be adjusted, as they will not be utilized through their original estimated lives. 21
Note E. Capital Assets (continued) Capital asset activity for the year ended June 30, 2012, consisted of the following: Balance June 30, 2011 Additions Reductions Balance June 30, 2012 Nondepreciable capital assets: Land and land improvements $ - $ - $ - $ - Construction work in progress - - - - Total nondepreciable capital assets - - - - Depreciable capital assets: Buildings and building improvements 6,910,065 16,650 (140,809) 6,785,906 Personal property: Equipment 465,466 26,440 (34,319) 457,587 Other intangible assets 37,618 - (1,191) 36,427 Total depreciable capital assets 7,413,149 43,090 (176,319) 7,279,920 Total capital assets 7,413,149 43,090 (176,319) 7,279,920 Less accumulated depreciation: Buildings and building improvements (1,987,063) (231,540) 2,626 (2,215,977) Personal property: Equipment (406,688) (20,276) 34,319 (392,645) Other intangible assets (31,222) (4,563) 1,191 (34,594) Total accumulated depreciation (2,424,973) (256,379) 38,136 (2,643,216) Total capital assets, net $ 4,988,176 $ (213,289) $ (138,183) $ 4,636,704 Total depreciation and amortization $ 256,379 An asset impairment charge of $138,183 was recognized during the year ended June 30, 2012 related to the leasehold improvements located in the bookstore building. With the new student center building under construction it was determined that the value of the leasehold improvements in the bookstore should be adjusted, as they will not be utilized through their original estimated lives. 22
Note F. Long-Term Debt Obligations Notes Payable The Organization entered into an agreement with Sonoma State University Academic Foundation (the Foundation) to borrow $6,100,000, at 8% beginning September 28, 2002. The Organization renegotiated this loan and entered into an agreement with the Foundation during the fiscal year 2006-2007. The terms of the agreement require quarterly payments of $131,722 including interest at 7% per annum. These payments are based on a 19-year amortization schedule. The loan balance may be paid prior to June 28, 2025 without penalty to the Organization. Long-term debt principal and related interest payment obligations subsequent to June 30, 2013 are as follows: All Other Long-Term Revenue Bonds Debt Obligations Total Principal Principal Principal and and and Principal Interest Interest Principal Interest Interest Principal Interest Interest Year ending June 30, 2014 $ - $ - $ - $ 237,034 $ 289,854 $ 526,888 $ 237,034 $ 289,854 $ 526,888 2015 - - - 254,067 272,821 526,888 254,067 272,821 526,888 2016 - - - 272,324 254,564 526,888 272,324 254,564 526,888 2017 - - - 291,893 234,995 526,888 291,893 234,995 526,888 2018 - - - 312,868 214,020 526,888 312,868 214,020 526,888 2019-2023 - - - 1,935,682 698,760 2,634,442 1,935,682 698,760 2,634,442 2024-2025 - - - 924,508 70,789 995,297 924,508 70,789 995,297 $ - $ - $ - $ 4,228,376 $ 2,035,803 $ 6,264,179 $ 4,228,376 $ 2,035,803 $ 6,264,179 23
Note F. Long-Term Debt Obligations (continued) Long-Term Liabilities Activity Long-term liabilities activity for the year ended June 30, 2013 was as follows: Balance Balance Long- June 30, June 30, Term Current 2012 Additions Reductions 2013 Portion Portion Accrued Compensated absences $ - $ - $ - $ - $ - $ - Capitalized Lease Obligations: Total Capitalized Lease Obligations - - - - - - Long-term debt obligations: Other: Note payable 4,449,519 - (221,143) 4,228,376 3,991,342 237,034 Total Long-term obligations 4,449,519 - (221,143) 4,228,376 3,991,342 237,034 Unamortized bond premium - - - - - - Unamortized loss on refunding - - - - - - Total long-term debt 4,449,519 - (221,143) 4,228,376 3,991,342 237,034 Total long-term liabilities $ 4,449,519 $ - $ (221,143) $ 4,228,376 $ 3,991,342 $ 237,034 Long-term liabilities activity for the year ended June 30, 2012 was as follows: Balance Balance Long- June 30, June 30, Term Current 2011 Additions Reductions 2012 Portion Portion Accrued Compensated absences $ - $ - $ - $ - $ - $ - Capitalized Lease Obligations: Total Capitalized Lease Obligations - - - - - - Long-term debt obligations: Other: Note payable 4,655,837 - (206,318) 4,449,519 4,228,376 221,143 Total Long-term obligations 4,655,837 - (206,318) 4,449,519 4,228,376 221,143 Unamortized bond premium - - - - - - Unamortized loss on refunding - - - - - - Total long-term debt 4,655,837 - (206,318) 4,449,519 4,228,376 221,143 Total long-term liabilities $ 4,655,837 $ - $ (206,318) $ 4,449,519 $ 4,228,376 $ 221,143 Cash paid for interest during the years ended June 30, 2013 and 2012, totaled $305,745 and $320,571, respectively. 24
Note G. Risk Management The Organization is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters. The Organization has joined together with other CSU Auxiliaries in the CSU Risk Management Authority (CSURMA), a public entity risk pool. The Organization pays an annual premium to CSURMA for its general insurance coverage. The intent is for CSURMA to remain self-sustaining through member premiums and will reinsure through commercial companies for claims in excess of $15,000,000 limit per each insured event. For the years ended June 30, 2013 and 2012, $51,220 and $55,738 was paid for annual premiums, respectively. Note H. Commitments and Contingencies The Organization outsourced its bookstore operations in July 2006 to Barnes and Noble College Booksellers, Inc., (B & N). The agreement with B & N continues through June 30, 2013. During the current year the Organization requested proposals for book store operations in the new space that will be located in the Student Center which is opening in the fall of 2013. A committee reviewed the proposals and the selection process was completed during the year. B & N will continue the bookstore operations. The contract that expired June 30, 2013 was extended until the new contract can be finalized. As of the date of this audit report the new contract had not been executed. Under the proposed terms of this new agreement, the Organization has commitments to provide B & N with infrastructure and services. More specifically, the Organization provides utilities, building maintenance, the existing equipment, local telephone/data service, telecommunications and network systems access, trash and extermination services, and participation in debit, credit or Wolfbucks card programs. Annually, B & N would pay the Organization a guaranteed payment or applicable percentage of gross sales, whichever is greater plus 1% of annual sales to help offset utility expenses. Additionally, B & N provides an annual unrestricted donation. The new contract financial terms are not as favorable as the previous contract due to continued uncertainty in the textbook market. The Organization participates in other ongoing leases with the University as noted in Note J. 25
Note I. Classification of Operating Expenses The Organization has elected to report operating expenses by functional classification in the statements of revenues, expenses and changes in net position, and to provide the natural classification of those expenses as an additional disclosure. For the years ended June 30, 2013 and 2012, operating expenses by natural classification consisted of the following: Scholarship Supplies Depreciation and and other and 2013 Salaries Benefits fellowships services amortization Total Functional classification: Auxiliary enterprise expenses $ 2,555,141 $927,831 $ - $2,833,197 $ - $6,316,169 Depreciation - - - - 298,450 298,450 Total $ 2,555,141 $927,831 $ - $2,833,197 $ 298,450 $6,614,619 Scholarship Supplies Depreciation and and other and 2012 Salaries Benefits fellowships services amortization Total Functional classification: Auxiliary enterprise expenses $ 2,219,163 $809,406 $ - $2,413,240 $ - $5,441,809 Depreciation - - - - 256,379 256,379 Total $ 2,219,163 $809,406 $ - $2,413,240 $ 256,379 $5,698,188 26
Note J. Transactions with Related Entities The Organization has an operating agreement with the University for the provision of certain auxiliary activities including managing and operating the campus cafeteria, dining and vending services and overseeing the outsourced bookstore operations. The agreement permits the Organization to use buildings and facilities within the campus in the provision of these services. The agreement provides for reimbursement of allowable direct costs plus an allocable portion of indirect costs associated with facilities, goods and services provided by the University on behalf of the Trustees in accordance with CSU Executive Order 1000-Allocation of Costs to Auxiliary Enterprises and the University's annual cost allocation plan. Fees paid during the years ended June 30, 2013 and 2012, are reflected below. The Organization is the lessor for two operating leases with the University. The first lease is for the leasehold improvements in the Salazar building on the University campus. This lease amount is $973,800 annually. The second lease is for undeveloped land, held as an investment by the Organization, and is $295,750 annually and terminated June 30, 2013, with the intent this lease will be renewed. The Organization does not have employees. It contracts with the University to provide all employee services. The Organization is responsible for reimbursing the University for all direct employee related expenses as reflected below. These amounts are included in auxiliary enterprise expenses in the statements of revenues, expenses and changes in net position. The accompanying financial statements include the following transactions with related parties as of and for the years ended June 30: 2013 2012 Payments to the University in accordance with CSU Executive Order 1000 $ 682,812 $ 689,585 Facility rental payments to the University 965,858 885,967 Reimbursements to the University for credit card fees 44,335 53,986 Reimbursements to the University for employee related expenses 3,519,435 3,054,085 Payments to the University for other supplies and services 214,447 99,607 $ 5,426,887 $ 4,783,230 Other University support (included in other nonoperating expenses) $ 53,360 $ 52,734 Amounts received from the University as pass through relating to meal plans, summer conferences, catering and wolfbucks (included in sales and services) $ 8,351,772 $ 7,975,069 Amounts received from the University as reimbursement for special event costs (included in operating expenses) $ 332,158 $ - 27
Note J. Transactions with Related Entities (continued) 2013 2012 Restricted transfers to the University (included in gifts, noncapital) $ 700,449 $ 1,718,980 Accounts payable to University or other auxiliary organizations at the end of the year $ 65,445 $ 51,727 Accounts receivable from the University or other auxiliary organizations at the end of the year $ 164,789 $ 245,079 Facility rental payments to the Sonoma Student Union Corporation (included in operating expenses) $ - $ 36,419 Principal payments made to SSU Academic Foundation $ 221,143 $ 206,318 Interest payments made to SSU Academic Foundation $ 305,745 $ 320,571 Payments to other auxiliaries for program activities (included in operating expenses) $ 27,804 $ 46,281 Receipts from other auxiliaries for program activities (included in sales and services) $ 9,341 $ 23,442 Rent income from the University for leasehold improvements (included in other operating revenues) $ 973,800 $ 973,800 Rent income from the University for undeveloped land (included in investment income) $ 295,750 $ 295,750 Unearned revenue for advance on contract board from the University $ 270,000 $ 256,000 28
Note K. Calculation of Net Investment in Capital Assets June 30, 2013 2012 Capital assets, net of accumulated depreciation $ 4,562,470 $ 4,636,704 Long-term debt obligations, current portion (237,034) (221,143) Long-term debt obligations, net of current portion (3,991,342) (4,228,376) $ 334,094 $ 187,185 Note L. Concentrations The Organization is dependent on third party food distributors for all of its supply of food. In the year ended June 30, 2013, products purchased from the Organization's largest supplier accounted for approximately 30% of operating expenses after losses, related party expenses and interest. In the year ended June 30, 2012 products purchased from the largest supplier accounted for approximately 32%, of operating expenses after losses, related party expenses and interest. Management believes that the Organization can obtain food at comparable prices from other suppliers. 29