Financial Report 1997
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 1997 AND 1996

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

General

Seattle Pacific University is a private nonprofit institution of higher education based in Seattle, Washington. The University offers degree programs rooted in the Christian faith for undergraduate and graduate students through the College of Arts and Sciences and three professional schools: Business and Economics, Education, and Health Sciences. The University offers 43 undergraduate majors and 37 minors, 9 masters degree programs and two doctoral programs.

Basis of Presentation

The accompanying financial statements are the consolidated statements of Seattle Pacific University (the University) and Seattle Pacific Foundation (the Foundation). The University has a controlling financial interest in the Foundation through direct ownership of the majority voting interest in the Foundation. Foundation Directors are appointed by the University's Board of Trustees.

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and include the accounts of the University and the Foundation. All significant intercompany transactions and balances have been eliminated.

Resources received by the University are classified into three net asset categories according to presence or absence of externally imposed donor restrictions. Unconditional promises to give are recorded as a receivable and as revenue. A description of the three net asset categories follows.

Unrestricted net assets

Net assets that are not subject to donor-imposed restrictions and net assets received during the year which were subject to donor imposed restrictions were temporary and were satisfied during the same year, are general in nature, or are for operating purposes and include the following:

Available for operational activities includes the consolidated unrestricted operating net assets of the University and Foundation including internally designated funds for operational or special purposes such as net assets for lending activity to students and net assets designated for acquisition and construction of buildings and equipment.

Long-term investments for endowments includes assets designated by the Board of Trustees as functioning as endowment and the 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 includes the cost less accumulated depreciation of land, building and equipment 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. At June 30, 1997, $8,580,000 is restricted by the passage of time and $203,000 is restricted by use requirements.

Permanently restricted net assets

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

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 the presence or absence of 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. Expirations of temporary restrictions on net assets are reported as reclassifications from temporarily restricted net assets to 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. 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.

Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. For purposes of the statement of cash flows, the University considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents totaled $7,918,000 and $6,720,000 at June 30, 1997 and 1996, respectively.

Investments

Investments in equity securities with readily determinable fair values and all investments in debt securities are reported at fair value. Real estate held for investment or sale were acquired through contributions, and therefore, are reported at fair market value or appraisal value at the date of the gift, unless there has been a non-temporary impairment of value which requires a subsequent adjustment to current fair value. 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.

Credit Risk and Fair Value of Financial Instruments

The University grants credit primarily to borrowers in the Pacific Northwest in the normal course of operations. The credit risk with respect to these receivables is generally considered minimal due to the wide dispersion of receivables. The carrying amount of cash and cash equivalents, student accounts receivables, governmental grants and other receivables, and accounts payable, approximate fair value due to the short-term maturities of these instruments. The carrying amount of the University's notes receivable and notes payable, approximate fair value as they bear interest at variable interest rates or fixed rates which approximate current market rates for notes with similar maturities and credit quality.

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

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 revolving 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. Loans under these programs 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. Any outstanding uncollectable loan balances would be allocated between the Federal Government and the University in a similar manner in the event of termination of the program.

Deferred Revenues

Deferred revenues consist primarily of payments of tuition and fees related to future academic years.

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 1996 financial statements to conform to the classifications used in 1997.

 

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 - 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, 1997 and 1996 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,

 

1997

 

1996

Amounts due from charges for prior academic terms

$ 1,897,000

 

$ 1,935,000

Amounts due for summer term earned subsequent to

year-end.

1,215,000

 

1,408,000

 

3,112,000

 

3,343,000

Allowance for doubtful accounts

(352,000)

 

(349,000)

Net student accounts receivable balance

$ 2,760,000

 

$ 2,994,000

 

NOTE C - NOTES RECEIVABLE

Notes receivable consist primarily of mortgage-related notes recorded in trusts and notes associated with the University's housing assistance and faculty loan programs. The notes and contracts recorded in trusts and the housing assistance program are all secured notes. The trust-related notes and contracts have interest rates ranging from 6.0% to 10.0% and maturities ranging from July 1997 to April 2022. The housing assistance and faculty loan receivables have interest rates ranging from 8.0% to 10.0% and maturities ranging from July 1997 to September 2012.

 

June 30,

 

1997

 

1996

Notes receivable

3,344,000

 

2,912,000

Housing assistance and faculty notes receivable

121,000

 

119,000

Less: Allowance

(128,000)

 

(56,000)

Total notes receivable

3,337,000

 

2,975,000

 

Current portion of notes receivable

333,000

 

121,000

Long term portion of notes receivable

3,004,000

 

2,854,000

Total notes receivable

3,337,000

 

2,975,000

 

NOTE D - INVESTMENTS:

Investments are composed of pooled investment funds, marketable securities and real estate. The University's pooled investments are composed of 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 its Directors.

 

June 30,

 

1997

 

1996

Pooled investments:

 

 

 

Cash and cash equivalents

$ 1,827,000

 

$ 922,000

Marketable securities, primarily common stock and bond mutual funds

24,441,000

 

17,744,000

Notes receivable

3,006,000

 

2,896,000

Real Estate

1,326,000

 

1,067,000

Total pooled investments

30,600,000

 

22,629,000

Marketable securities:

 

 

 

 

Equity instruments

Debt instruments

307,000

1,183,000

 

86,000

1,393,000

Real Estate held for investment

3,507,000

 

4,620,000

Total investments

$ 35,597,000

 

$ 28,728,000

Current portion of investments

$ 17,560,000

 

$ 13,331,000

Long-term portion of investments

17,947,000

 

15,397,000

Total investments

$ 35,597,000

 

$ 28,728,000

 

NOTE E - LAND, BUILDINGS, AND EQUIPMENT:

Land, buildings and equipment are recorded at cost or estimated fair market value at the date of donation if received as a contribution and consist of the following:

 

 

June 30,

 

1997

 

1996

Land

$ 14,124,000

 

$ 14,074,000

Buildings

52,619,000

 

50,683,000

Equipment

9,597,000

 

8,684,000

Library books

3,145,000

 

2,891,000

Construction in progress

2,496,000

 

1,809,000

 

81,981,000

 

78,141,000

Less accumulated depreciation

(28,408,000)

 

(25,286,000)

Net land, buildings and equipment

$ 53,573,000

 

$ 52,855,000

 

NOTE F - LONG TERM DEBT:

The University has available with Seafirst National Bank (Seafirst) an $18,000,000 credit agreement to finance capital construction through term notes at variable rates based on the bank's cost of funds at the time of note issuance. As of June 30, 1997, eight notes totaling $12,724,000 have been issued under the agreement. The credit agreement also provides for a $6,000,000 line of credit at a floating prime interest rate. The credit agreement prohibits the University from otherwise encumberiong non-residential properties. The University also maintains other long-term notes with US Bank and Seafirst that are not included in the credit agreement.

The University has entered into interest swap agreements with Seafirst to reduce the impact of changes in interest rates on six of these eight term notes by swapping the variable rates for fixed rates. The interest rate swap agreements mature at the time the related note matures. The notes with an associated swap agreement are noted with an asterisk (*).

 

June 30,

 

1997

1996

Debt under Seafirst Bank Credit Agreement

 

 

Seafirst Bank 7 year term note, 8.12%, due August 1999 *

$ 3,502,000

$ 3,622,000

Seafirst Bank 7 year term note, 6.48%, due June 2000 *

649,000

839,000

Seafirst Bank 10 year term note, 8.12%, due August 2002 *

4,082,000

4,216,000

Seafirst Bank 10 year term note, 6.73%, due April 2003

842,000

956,000

Seafirst Bank 10 year term note, 7.31%, due July 2003 *

898,000

926,000

Seafirst Bank 10 year term note, 7.61%, due December 2003 *

1,829,000

1,883,000

Seafirst Bank 10 year term note, 7.72%, due March 2004 *

923,000

949,000

Seafirst Bank 10 year term note, LIBOR plus 1.0%(6.90% at June 30, 1997) due July 2006

999,000

1,100,000

US Bank term note, 8.48% interest, due October 1997

876,000

1,132,000

Other, primarily residential secured notes with fixed rates ranging from 7.00% to 9.50% and maturities ranging from May 1998 to November 2023.

807,000

822,000

Total Bank Notes Payable

$ 15,407,000

$ 16,454,000

 

 

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

Fiscal Year Ending

Principal

1998

$ 1,727,000

1999

691,000

2000

7,652,000

2001

531,000

2002

439,000

Thereafter

4,167,000

Total

$ 15,407,000

 

NOTE G - RETIREMENT PLAN:

The University participates in a 401(a) 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, 1997 and 1996, were $1,361,000 and $1,403,000, respectively. The University also provides a 403(b)(7) supplemental retirement plan funded by individual employee contributions. These contributions are voluntary and the plan is open to all employees.

NOTE H - 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. The University has committed to invest $1,793,000 in these programs. At June 30, 1997, a cumulative total of $441,000 has been invested. The remaining $1,352,000 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, 1997, the University had a $238,000 contingent liability for its portion of a $2,000,000 letter of credit issued to CLIC by a bank on which the University is a guarantor. The liability would arise if CLIC were to fail to repay amounts borrowed under the letter of credit.

The University receives and expends monies under the Federal grant programs and is subject to audits by cognizant governmental agencies. Management believes that any liabilities resulting from such audits will not have a material impact on the University.

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