Financial Report 1996
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NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996 AND 1995

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Principles of Combination

The accompanying financial statements are the combined statements of Seattle Pacific University (the University) and Seattle Pacific Foundation (the Foundation), which is an affiliated entity under common control.

 

Basis of Presentation

In 1996, the University adopted the revised standards for financial reporting set forth in Statement of Financial Accounting Standards No. 117, "Financial Statements of Not-for-Profit Organizations" and changed its method of accounting for contributions received to adopt the provisions of Statement of Financial Accounting Standards No. 116, "Accounting for Contributions Received and Contributions Made." Statement No. 117 establishes standards for external financial reporting by not-for-profit organizations and requires that resources be classified for accounting and reporting purposes into three net asset categories according to externally (donor) imposed restrictions. Statement No. 116 requires that unconditional promises to give be recorded as a receivable and as revenue. It also requires the organization to distinguish between contributions received for each net asset category in accordance with donor imposed restrictions. A description of the three net asset categories follows.

 

Unrestricted net assets

Net assets that are not subject to donor-imposed restrictions or such donor imposed restrictions were temporary and expired during the current year, are general in nature, or are for operating purposes and include the following:

 

Available for operational activities include the combined unrestricted operating net assets of the University and the Foundation including internally designated funds for operational or special purposes, such as student loan net assets from lending activity to students, and net assets designated for acquisition and construction of buildings and equipment.

 

Long-term investments - endowments include gifts not otherwise restricted and Board designations of assets functioning as endowment, realized and unrealized gains, and reinvested income on all endowment funds unless restricted by the terms of the donor endowment.

 

Invested in land, building and equipment include the cost less accumulated depreciation of land, building and equipment acquired or constructed, less related debt.

 

Temporarily restricted net assets

Net assets that are subject to donor imposed time or use restrictions that have not been met, primarily related to net assets held in irrevocable trusts.

 

Permanently restricted net assets

Net assets subject to donor imposed restrictions that the corpus be invested in perpetuity and only the income be made available for program operations and scholarships in accordance with donor restrictions. Only the original gift of an endowment that has donor restrictions is considered permanently restricted.

 

The University also adopted Statement of Financial Standards No. 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations." The statement requires that investments be measured at fair value in the Statement of Financial Position and the gains and losses on investments be reported in the Statement of Activities.

 

The provisions of these three statements were applied retroactively and accordingly, the financial statements for 1995 have be restated.

 

Revenue and expense recognition

Revenues from sources other than contributions are reported as increases in unrestricted net assets. Contributions, including unconditional promises to give, are reported in the period received as increases in the appropriate category of net assets based on donor restrictions. Contributions that the donor restricts where the restrictions are met within the same fiscal year as the contribution is received are included in unrestricted net assets. All expenses are reported as decreases in unrestricted net assets. Except as restricted by donors, gains and losses on investments are reported as increases or decreases in unrestricted net assets. Expirations of temporary restrictions on net assets are reported as reclassifications from temporarily restricted net assets to unrestricted net assets. Temporary restrictions on gifts to acquire long-lived assets are considered met in the period which the assets are acquired or placed into service. Contributions other than cash are recorded at their fair market value at the date of gift or at net realizable value if the assets are intended for sale.

 

Investments

Investments in marketable securities, pooled investments, and real estate are recorded at fair value which is determined based on quoted market prices and appraisal values provided by independent parties. If an independent appraisal is not available the real estate investment is recorded at an amount which approximates fair value based on the judgment of University management. These investments are intended by management to be long-term investments primarily held in trust or maintained for use as endowments managed by the Foundation.

 

Depreciation

The University uses the straight-line method of depreciation to allocate the cost of assets over the estimated useful lives. The estimated useful lives range from 3 years for computers to 50 years for buildings.

 

Estates and Trusts

The University is named beneficiary of various estates in probate. Unless the ultimate amount available for distribution can be determined before the close of the probate proceedings, the University does not record these amounts until the point of asset distribution. Trusts in which either the University or the Foundation is named as irrevocable beneficiary but is not trustee, are recorded when the University is notified by the trustee and the ownership percentage and valuation are determined.

 

Student Loans

The University administers two federal student loan programs, the Perkins Student Loan and the Nursing Student Loan. The programs are funded 67% by the Federal Government and 33% by the University. These loans have a ten-year repayment period, with interest rates between 3% and 6%. In the event of termination of the program, the loan repayments would be distributed to the Federal Government and the University on the basis of their relative contributions to the program. It is anticipated that any uncollectable loan balances would also be treated in a similar manner.

 

Taxes

The University and the Foundation are exempt from federal income taxes as entities described in Section 501(c)(3) and Section 509(a)(3) of the Internal Revenue Code. In addition, the University presently is exempt from real and personal taxes on educational and other noncommercial properties of the University and the Foundation.

 

Reclassifications

Certain reclassifications have been made to the 1995 financial statements to conform to the classifications used in 1996.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

 

NOTE B - FUND BALANCE CONVERSION

 

A summary of the effect of adoption of Statements No. 116 and No. 117 is as follows at June 30 1995:

 

Conversion of fund balance to net assets:

 

 

Total fund balances, as previously reported

$ 70,787

Reclassification of federal loan program funds

attributable to the federal government to long-term

liabilities

 

 

(4,873)

Reclassification of life income trust and annuity

obligations for the present value of future payments

to long-term liabilities

 

____(7,029)

 

Net Assets

 

$ 58,885

 

Designation of prior fund balance categories to net asset categories, continued:

 

   

   

Unrestricted

 

Temporarily

 

Permanently

 

Total

Unrestricted operating funds-

               

University

 

$ 733

 

$ -

 

$ -

 

$ 733

Foundation

 

37

         

37

                 

Restricted operating funds

 

661

 

160

     

821

Quasi-endowment funds

 

2,945

         

2,945

Endowment funds

 

3,722

     

8,102

 

11,824

Annuity and trust funds

 

209

 

5,840

     

6,049

Loan funds

 

1,184

 

14

     

1,198

Plant funds-

               

Unexpended

 

609

 

37

     

646

Invested in Plant

 

34,632

         

34,632

 

Total Net Assets

 

 

$ 44,732

 

 

$ 6,051

 

 

$ 8,102

 

 

$ 58,885

 

 

 

 

NOTE C - STUDENT ACCOUNTS RECEIVABLE:

 

Student accounts receivable consists of net amounts due from students for tuition, room, board and other enrollment related charges. At June 30, 1996 and 1995 net amounts due for subsequent summer term charges for students who enrolled at that date are recorded as receivable with the related revenue reflected as deferred revenue. Student accounts receivable consists of the following balances:

 

 

June 30,

 

1996

 

1995

Amounts due from charges for prior academic terms

$ 1,569,000

 

$ 1,956,000

Amounts due for summer term

1,408,000

 

1,283,000

 

2,977,000

 

3,239,000

Allowance for doubtful accounts

(349,000)

 

(327,000)

 

Net student accounts receivable balance

 

$ 2,628,000

 

 

$ 2,912,000

 

 

NOTE D - INVESTMENTS:

 

Investments are composed of pooled investment funds, marketable securities and real estate. There are four investment pools maintained by the Foundation for various trusts, annuities, pooled income, and endowment funds. The investment pools are managed by the Foundation through an investment committee of the Directors.

 

 

 

June 30,

 

1996

 

1995

Pooled investments:

     

Short-term investments

$ 922,000

 

$ 2,130,000

Marketable securities, primarily common stock

     

and bond mutual funds

18,811,000

 

13,332,000

Notes receivable

2,896,000

 

1,702,000

Total pooled investments

 

22,629,000

 

 

17,164,000

 

Marketable securities:

 

 

 

 

 

Security instruments

Debt instruments

86,000

1,393,000

 

116,000

1,466,000

 

Total investments

 

$ 24,108,000

 

 

$ 25,714,000

 

NOTE E - ENDOWMENTS

 

Endowment and long-term investment net assets functioning as endowment are summarized as follows:

 

 

June 30,

 

1996

 

1995

       

Permanently restricted by donors for endowment

$ 8,742

 

$ 8,102

Unrestricted, designated by Board for endowment

8,853

 

6,667

 

Total net assets acting as endowment

 

$ 17,595

 

 

$ 14,769

 

NOTE F - LAND, BUILDINGS, AND EQUIPMENT:

 

Land, buildings and equipment are recorded at cost or estimated fair market value at the date of donation or acquisition and consist of the following:

 

 

 

June 30,

 

1996

 

1995

Land

$ 14,074,000

 

$ 13,878,000

Buildings

50,683,000

 

48,748,000

Equipment

8,684,000

 

7,809,000

Library books

2,891,000

 

2,648,000

Construction in progress

1,809,000

 

1,721,000

 

78,141,000

 

74,804,000

Less accumulated depreciation

(25,286,000)

 

(22,593,000)

 

Net land, buildings and equipment

 

$ 52,855,000

 

 

$ 52,211,000

 

 

NOTE G - BANK NOTES, REAL ESTATE CONTRACTS, MORTGAGES AND BONDS PAYABLE:

 

The University has available with Seattle First National Bank an $18,000,000 credit agreement to finance capital construction through term notes at fixed rates based on the bank’s cost of funds at the time of note issuance. The credit agreement also provides for a $6,000,000 line of credit at a floating prime interest rate. The credit agreement requires the University to not encumber non-residential properties. Outstanding under this agreement at June 30, 1996, were eight term notes totaling $14,490,000 with interest rates ranging from 6.48% to 8.12% with a weighted average interest rate of 7.56%. The University had no outstanding balance on the line of credit at June 30,1996.

 

The University has maintained other long-term notes with US Bank and Seattle First National Bank that are not included in the credit agreement. The US Bank note has an outstanding balance at June 30, 1996 of $1,142,000 with an interest rate of 8.48% due October 7, 1997. The Seattle First National Bank notes are all secured by real estate and have outstanding balances totaling $822,000 with interest rates ranging from 7.00% to 7.75%.

 

Fiscal Year Ended

 

Principal

     

Interest

     

Total

1997

 

$ 1,070,000

     

$ 1,216,000

     

$ 2,286,000

1998

 

1,690,000

     

1,102,000

     

2,792,000

1999

 

891,000

     

1,016,000

     

1,907,000

2000

 

7,652,000

     

452,000

     

8,104,000

2001

 

531,000

     

368,000

     

899,000

Thereafter

 

4,620,000

     

996,000

     

5,616,000

   

$ 16,454,000

     

$ 5,150,000

     

$ 21,604,000

The aggregate minimum payments required for principal reduction for all bank term notes payable listed above are as follows:

 

Other long-term debt includes contracts, mortgages and general obligation bonds totaling $252,000, which are due at various dates through 2006.

 

 

 

NOTE H - INTEREST RATE SWAP AGREEMENT:

 

The University has entered into interest swap agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At June 30, 1996, the University had outstanding six interest rate swap agreements with Seattle First National Bank, having a total principal amount of $12,435,000. Those agreements effectively change the University’s interest rate exposure on its $4,216,000 floating rate note due August 1, 2002 to a fixed interest rate of 8.12%; its $3,622,000 floating rate note due August 1, 1999 to a fixed interest rate of 7.65%; its $839,000 floating rate note due June 1, 2000 to a fixed interest rate of 6.48%; its $926,000 floating rate note due June 1, 2003 to a fixed interest rate of 7.31%; its $1,883,000 floating rate note due December 1, 2003 to a fixed interest rate of 7.61%; and its $949,000 floating rate note due March 1, 2004 to a fixed interest rate of 7.72%. The interest rate swap agreements mature at the time the related note matures. The University is exposed to credit loss in the event of nonperformance by Seattle First National Bank in the interest rate swap agreements; however, the University does not anticipate nonperformance.

 

 

NOTE I - RETIREMENT PLAN:

 

The University participates in a trustee defined contribution retirement plan. The plan provides for employer contributions which are directed by participants to investment funds of Teachers Insurance and Annuity Association or Fidelity Investments. All faculty and staff at least 21 years of age with one year of full-time employment participate in the plan. Contributions to the plan are made by the University and are funded as the liability occurs. The University’s contributions to the plan for the years ended June 30, 1996 and 1995, were $1,403,000 and $1,274,000, respectively.

 

 

NOTE J - COMMITMENTS AND CONTINGENCIES:

 

Commitments

The investment pools managed by the Foundation participate in four venture and private equity investment programs through Endowment Advisors, Inc., a companion organization of the Common Fund. Through June 30, 1996, a cumulative total of $272,000 of the total commitment of $1,880,000 has been invested. The remaining $1,608,000 must be invested in one or more installments, and in amounts and on dates specified by Endowment Advisors, Inc.

 

 

Contingencies

The University is an equity owner of the College Liability Insurance Company (CLIC). For the fiscal year ended June 30, 1996, the University had a $280,600 contingent liability for its portion of the CLIC $2,000,000 letter of credit. The liability would arise if CLIC were to fail to meet this obligation.

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