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SAN MIGUEL OF TUCSON CORPORATION DBA SAN MIGUEL HIGH SCHOOL

AND SAN MIGUEL CORPORATE WORK STUDY PROGRAM Audited Combined Financial Statements

For the year ended June 30, 2019

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SAN MIGUEL OF TUCSON CORPORATION DBA SAN MIGUEL HIGH SCHOOL AND SAN MIGUEL CORPORATE WORK STUDY PROGRAM

TABLE OF CONTENTS

Page

Independent Auditor’s Report 1

Financial Statements:

Combined Statement of Financial Position 2

Combined Statement of Activities 3

Combined Statement of Functional Expenses 4

Combined Statement of Cash Flows 5

Notes to Combined Financial Statements 6-15

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COMBINED STATEMENT OF FINANCIAL POSITION June 30, 2019

ASSETS

Current assets:

Cash and cash equivalents $ 2,056,996

Accounts and grants receivable, net 113,134

Unconditional promises to give, current portion 90,000

Investments 1,085,923

Total current assets 3,346,053

Unconditional promises to give, non-current portion, net 56,655

Other assets 1,325

Beneficial interests in funds held by others 121,539

Property and equipment, net 8,414,704

Total assets $ 11,940,276

LIABILITIES AND NET ASSETS

Current liabilities:

Accounts payable $ 23,253

Deferred program revenue 78,000

Long-term debt, current portion 57,500

Total current liabilities 158,753

Total liabilities 158,753

Net assets:

Without donor restrictions:

Available for operations 2,808,025

Expended/donated property and equipment 8,357,204

Total net assets without donor restrictions 11,165,229

With donor restrictions:

Purpose restrictions 308,101

Time-restricted for future periods 186,655

Subject to appropriation and expenditure 28,312

Perpetual in nature 93,226

Total net assets with donor restrictions 616,294

Total net assets $ 11,781,523

Total liabilities and net assets $ 11,940,276

See independent auditor’s report and notes to combined financial statements.

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COMBINED STATEMENT OF ACTIVITIES For the year ended June 30, 2019

Revenue and support;

Support:

Tax credit contributions $ - $ 2,007,841 $ 2,007,841 Corporate work study program 1,666,400 159,450 1,825,850 Contributions and bequests 482,696 425,699 908,395 Empowerment scholarships 291,022 - 291,022

Tuition 285,301 - 285,301

In-kind contributions 7,080 - 7,080

Total support 2,732,499 2,592,990 5,325,489

Revenue and other income:

Lunch program revenue 154,847 - 154,847

Other income 128,963 - 128,963

Investment income, net 80,956 818 81,774

Special events 42,801 - 42,801

Change in beneficial interest in funds held by others - 3,650 3,650 Total revenue and other income 407,567 4,468 412,035 Net assets released from restrictions:

Satisfaction of donor restrictions 2,322,165 (2,322,165) - Total public support and revenue 5,462,231 275,293 5,737,524 Expenses:

Program services 4,502,220 - 4,502,220

Supporting services:

General and administrative 271,450 - 271,450

Fund-raising 343,693 - 343,693

Special events - costs of direct

donor benefits 12,574 - 12,574

Total expenses 5,129,937 - 5,129,937

Change in net assets 332,294 275,293 607,587 Net assets, beginning of year 10,832,935 341,001 11,173,936 Net assets, end of year $ 11,165,229 $ 616,294 $ 11,781,523

Without Donor With Donor

Restrictions Restrictions Total

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COMBINED STATEMENT OF FUNCTIONAL EXPENSES For the year ended June 30, 2019

Salaries and wages $ 2,584,010 $ 192,765 $ 220,303 $ 2,997,078 Payroll taxes 316,773 26,088 29,814 372,675 Employee benefits 166,059 13,675 15,629 195,363 Total employee expenses 3,066,842 232,528 265,746 3,565,116 Program materials 585,640 - - 585,640 Depreciation 246,753 2,640 2,640 252,033 Dues, fees and subscriptions 173,621 680 28,456 202,757 Utilities 95,458 7,861 8,984 112,303 Office expenses 78,338 6,451 7,373 92,162 Maintenance and repairs 88,572 - - 88,572 Insurance 69,633 5,734 6,554 81,921 Service charges 33,045 2,721 3,110 38,876 Printing 21,107 1,589 9,248 31,944 Telephone and internet 22,036 1,815 2,074 25,925 Advertising 15,301 - 7,523 22,824 Postage 5,874 484 553 6,911 Donations - 3,882 1,432 5,314 Interest expense - 3,635 - 3,635 Professional fees - 1,430 - 1,430 Total functional expenses $ 4,502,220 $ 271,450 $ 343,693 $ 5,117,363

Program General and

Services Administrative Fund-raising Total

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COMBINED STATEMENT OF CASH FLOWS For the year ended June 30, 2019

Cash flows from operating activities:

Change in net assets $ 607,587

Adjustments to reconcile change in net assets to net cash provided by operating activities:

Depreciation and amortization 252,033

Change in discount to present value 3,345

Note payable forgiven (57,500)

Realized and unrealized (gain) loss on investments (58,667) Change in value of beneficial interest in funds held by others (818) Changes in operating assets and liabilities:

Accounts receivable 20,819

Unconditional promises to give (150,000)

Other assets 11,964

Accounts payable (3,068)

Deferred program revenue 78,000

Total adjustments 96,108

Net cash provided by operating activities 703,695 Cash flows from investing activities:

Purchases of property and equipment (99,051)

Purchases of investments (510,740)

Proceeds from sale of investments 151,050

Net cash used in investing activities (458,741)

Cash flows from financing activities:

Payments on long-term debt (245,000)

Cash collections of contributions for long-term purposes 250,000 Net cash provided by financing activities 5,000

Change in cash and cash equivalents 249,954

Cash, cash equivalents, beginning of year 1,809,874

Cash and cash equivalents, end of year $ 2,059,828

Supplemental disclosure of cash flow information:

Cash paid for interest $ 3,635

Schedule of noncash investing and financing activities:

Note payable forgiven $ 57,500

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NOTES TO COMBINED FINANCIAL STATEMENTS For the year ended June 30, 2019

1. Organization

San Miguel of Tucson Corporation dba San Miguel High School is an Arizona nonprofit religious corporation established to provide a college preparatory secondary school education to students from families of limited means residing in the southern area of the Tucson community. The sole member of San Miguel is the Lasallian Education Corporation (LEC), a non-profit religious organization. These financial statements represent only the financial statements of San Miguel of Tucson Corporation dba San Miguel High School (San Miguel) and San Miguel Corporate Work Study Program. San Miguel’s policy is provided and directed by a Board of Trustees composed of appointed individuals. The significant sources of revenue for both entities are tax credit revenue, donations and the Corporate Work Study Program revenues.

In 2004, San Miguel Corporate Work Study Program (an Arizona nonprofit religious organization) was established to provide educational opportunities to students of San Miguel High School through a Corporate Work Study Program. San Miguel of Tucson Corporation dba San Miguel High School has controlling authority over San Miguel Corporate Work Study Program through a common board and common management, and accordingly, the financial statements of both have been combined.

San Miguel of Tucson Corporation dba San Miguel High School and San Miguel Corporate Work Study Program are herein collectively referred to as “the School”.

2. Summary of Significant Accounting Policies

Financial Statement Presentation and Contributions

The School is required, under accounting principles generally accepted in the United States of America, to report information regarding its financial position and activities based on the existence or absence of donor or grantor-imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows:

• Net assets without donor restrictions – net asset is available for use in general operations and not subject to donor (or grantor) restrictions.

• Net assets with donor restrictions – net assets subject to donor (or grantor) restrictions. Some donor-imposed restrictions are temporary in nature, such as those that will be met by the passage of time or purposes fulfilled as specified by the donor. Other donor-imposed restrictions are perpetual in nature, where the donor stipulates that resources be maintained in perpetuity.

Principles of Combination

The combined financial statements include the accounts of San Miguel and San Miguel Corporate Work Study Program. All significant inter-organization accounts and transactions have been eliminated.

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 combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

See independent auditor’s report.

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2. Summary of Significant Accounting Policies, Continued Cash and Cash Equivalents

The School considers all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. The School maintains its cash in bank deposit accounts, which, for short periods of time, may exceed federally insured limits. At June 30, 2019, the School had $856,779 on deposit in excess of federally insured limits. It is the opinion of management that the solvency of the referenced financial institutions is not of concern at this time.

Investments held by brokerage institutions are covered up to $500,000 under insurance provided by the Securities Investor Projection Corporation (SIPC). However, the SIPC does not protect against losses in market value. The School had $569,743 in investments in excess of the SIPC limit at June 30, 2019. The School’s investments on deposit with brokerage institutions are also insured under additional insurance in varying amounts based on the brokerage institution. This additional protection becomes available in the event that SIPC limits are exhausted. It is the opinion of management that the solvency of the referenced financial institutions is not of concern at this time.

Investments

In accordance with accounting principles generally accepted in the United States of America applicable to nonprofit organizations, investments in marketable securities with readily determinable fair values and all investments in debt securities are stated at fair market value. Unrealized gains and losses are included in the change in net assets.

The School adopted an investment spending policy which allows either the CEO or CFO to withdraw monies from the investment portfolio in any given year based on a rolling three-year average of the portfolio’s net balance as of each December 31. The maximum withdrawal rate in any fiscal year shall not exceed 3% of the rolling three-year net average portfolio balance and may not exceed the net average return for the same period. Circumstances that require greater than a 3% withdrawal will require approval from the finance committee.

Accounts Receivable

Accounts receivable consist primarily of sponsorships for the Corporate Work Study Program and are stated at the unpaid balance, which is the sponsorship rate determined by the School. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the collectability of specific accounts. The allowance for doubtful accounts is based on experience, the aging of receivables and other circumstances which may affect the ability of customers to meet their obligations. It is the School’s policy to charge off uncollectible accounts receivable when management determines the receivable will not be collected. The allowance for uncollectible accounts receivable at June 30, 2019 was $5,530.

Property and Equipment

The School capitalizes all expenditures for property and equipment in excess of $5,000. Purchased property and equipment are carried at cost. Donated property and equipment are carried at the approximate fair value at the date of donation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets ranging from 7 to 50 years.

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2. Summary of Significant Accounting Policies, Continued Endowments

The School’s endowments consist of funds held at the Catholic Foundation for the Diocese of Tucson (Catholic Foundation). As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds (including funds designated by the Board of Trustees to function as endowments) are classified and reported based on the existence or absence of donor-imposed restrictions.

The Board of Trustees of the School has interpreted the State of Arizona’s Prudent Management of Institutional Funds Act (PMIFA) (the Act) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the School classifies as net assets with donor restrictions, not subject to spending policy or appropriation (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion, if any, of the donor-restricted endowment fund that is not classified as net assets with donor restrictions, not subject to spending policy or appropriation, is classified as net assets with donor restrictions, subject to appropriation and expenditure by the School in a manner consistent with the standard of prudence prescribed by the Act. In accordance with the Act the School considers the following factors in determination of the appropriate or accumulate endowment funds:

(1) The duration and preservation of the fund

(2) The purposes of the School and the donor-restricted endowment fund (3) General economic conditions

(4) The possible effect of inflation and deflation

(5) The expected total return from income and the appreciation of investments (6) Other resources of the School

(7) The investment policies of the School Contributions

Contributions received are recorded as net assets with donor restrictions or net assets without donor restrictions depending on the existence and/or nature of any donor restrictions. When a restriction expires, net assets with donor restrictions are reclassified to net assets without donor restrictions and reported in the combined statements of activities as net assets released from restrictions.

Donated Goods, Facilities and Services

Donated goods and facilities are valued at their fair market value. Donated services are recognized in the combined financial statements at their fair market value if the following criteria are met:

• The services require specialized skills and the services provided by individuals possessing those skills.

• The services would typically need to be purchased if not donated.

Although the School may utilize the services of outside volunteers, the fair value of these services has not been recognized in the accompanying combined financial statements since they do not meet the criteria for recognition under accounting principles generally accepted in the United States of America.

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2. Summary of Significant Accounting Policies, Continued Expense Allocation

The School allocates its expenses on a functional basis among its program and services. Expenses that can be identified with a specific program are allocated directly according to their natural classification. Certain other expenses are allocated among program services and supporting services benefited. These allocated expenses include payroll and related expenses, which are allocated based on estimates of time and effort as well as depreciation, utilities, insurance and other operating expenses, which are allocated based on the location. Each department is identified by a location code and various items purchased to maintain operations are allocated to the departments. Administration and fundraising expenses are identified by separate location codes and allocated based on use.

Income Tax Status

The School is exempt from federal income taxes under section 501(c)(3) of the Internal Revenue Code (IRC) and from filing information returns as church-controlled organizations. Accordingly, there are no income taxes reflected on the combined statements of financial position or the combined statements of activities. In accordance with accounting principles generally accepted in the United States of America, the School did not earn any unrelated business taxable income.

Advertising

Advertising costs are expensed as incurred. Total advertising expense for the year ended June 30, 2019 was $22,541.

Deferred Program Revenue

Deferred revenue consists of unearned funds held at year end through the Corporate Work Study Program for the following school year.

3. Liquidity and Availability of Resources

Financial assets available for general expenditure, that is, without donor or other restrictions limiting their use, within one year of the statement of financial position date, are comprised of:

Cash and cash equivalents $ 2,056,996

Accounts and grants receivable, net 113,134

Unconditional promises to give, current portion 90,000

Investments 1,085,923

Total financial assets available within one year 3,346,053 Less:

Amounts unavailable for general expenditures within one year due to:

Purpose restrictions (308,101)

Time restricted for future periods (186,655)

Total amount unavailable for general expenditures within one year (494,756) Total financial assets available to management for general

expenditure within one year $ 2,851,297

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3. Liquidity and Availability of Resources, Continued

The School maintains a policy of structuring its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, the School invests cash in excess of weekly requirements in short-term investments. To help manage unanticipated liquidity needs, the School has a committed line of credit of $300,000, which it could draw upon.

4. Unconditional Promises to Give

Unconditional promises to give consisted of the following at June 30, 2019:

Receivable in less than one year $ 90,000

Receivable in one to five years 60,000

Total unconditional promises to give 150,000

Less 3.875% discount to net present value (3,345)

Unconditional promises to give, net 146,655

Less current portion (90,000)

Non-current portion $ 56,655

5. Investments

Investments are comprised of the following at June 30, 2019:

Common stock $ 627,252

Mutual funds 292,964

Bonds 165,707

Total investments $ 1,085,923

Investment income, consists of the following for the year ended June 30, 2019:

Interest and dividend income $ 34,595

Realized and unrealized gain 58,667

Investment fees (11,488)

Investment income $ 81,774

6. Fair Value Measurements

The Financial Accounting Standards Board has established a framework for measuring fair value.

That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the School has the ability to access.

Level 2: Inputs to the valuation methodology include:

• Quoted prices for similar assets or liabilities in active markets;

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6. Fair Value Measurements, Continued

• Quoted prices for identical or similar assets or liabilities in inactive markets;

• Inputs other than quoted prices that are observable for the asset or liability;

• Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Additionally, the School has a beneficial interest in various endowment funds held at the Catholic Foundation. The Catholic Foundation does not have variance power related to the endowments. The balance in these accounts was $121,539 at June 30, 2019. Beneficial interest in funds held at the Catholic Foundation is considered as valued based on level 3 inputs, because the School owns units of pooled funds held at the Catholic Foundation and relies on the Catholic Foundation to provide the value of those funds.

The fair value of assets measured on a recurring basis are:

Level 2 Level 3 Total

Common stock $ 627,252 $ - $ - $ 627,252 Mutual funds 292,964 - - 292,964 Bonds 165,707 - - 165,707 Beneficial interest in

funds held by others - - 121,539 121,539 Total investments $ 1,085,923 $ - $ 121,539 $ 1,207,462

Level 1

Investments at Fair Value as of June 30, 2019

The table below summarizes the changes in the fair value of the School’s level 3 assets for the year ended June 30, 2019:

Balance, beginning of year $ 117,889

Change in value of funds held by Catholic Foundation 4,606 Contributions to funds held by Catholic Foundation 1,154 Distributions from funds held by Catholic Foundation (2,110)

Balance, end of year $ 121,539

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7. Tax Credit Contribution

The State of Arizona provides individual and corporate tax credits for donations to private school tuition organizations in accordance with ARS 43-109. The School receives contributions from various school tuition organizations throughout the year. During the year ended June 30, 2019, such contributions totaled $2,007,841.

8. Property and Equipment

Property and equipment consists of the following at June 30, 2019:

Land $ 256,316

Buildings and improvements 10,398,638

Furniture and equipment 139,223

Vehicles 638,886

Total property and equipment 11,433,063

Less accumulated depreciation (3,018,359)

Property and equipment, net $ 8,414,704

9. Long-term Debt

Long-term debt consists of the following at June 30, 2019:

57,500

Less current portion (57,500)

Non-current portion $ -

Forgivable note payable to a nonprofit organization; $57,500 to be forgiven annually for ten years provided that the School complies with the terms of the agreement; matures June 2020; collateralized with a deed of trust on real property.

10. Line of Credit

The School has a $300,000 revolving line of credit with a financial institution maturing February 2020.

Interest is payable at the bank’s index rate plus 2.5% with a floor of 7.00%. The line is collateralized by substantially all of the assets of the School, other than the real property described in Note 8. The line of credit had no outstanding balance at June 30, 2019.

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11. Net Asset With Donor Restrictions

Net assets with donor restrictions are restricted for the following purposes or periods at June 30, 2019:

Subject to expenditure for specified purpose:

Scholarships $ 52,117

Information technology coach 99,761

Health and wellness 44,931

Robotics 42,001

College counseling 16,000

Supplies and other 53,291

308,101

Subject to expenditure in future periods:

EOL program 116,655

Admission - new seats 70,000

186,655

Endowments:

Subject to appropriation and expenditure - accumulated earnings on original perpetual endowment gifts:

School operating 18,880

Scholarships 2,131

Corporate work study program 7,301

28,312 Not subject to spending policy or appropriation - beneficial

interest in funds held by others, original perpetual gifts 93,226

Net assets with donor restrictions $ 616,294

See independent auditor’s report.

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11. Net Asset With Donor Restrictions, Continued

Activity in net assets with donor restrictions is comprised of the following for the year ended June 30, 2019:

Subject to expenditure for specified purpose:

Scholarships $ 2,017,847 $ 818 $ - $ (2,021,141) Corporate work study program 159,450 - - (159,450) Information technology coach - - - -

STEM/Robotics 47,383 - - (20,382) Health and wellness 44,931 - - - College counseling 16,000 - - (16,000)

Vans 45,000 - - (60,000)

Supplies and other 72,224 - - (31,626) 2,402,835

818 - (2,308,599) Subject to expenditure in future periods:

EOL program 120,155 - - (13,566)

Admission - new seats 70,000 - - - 190,155

- - (13,566) Endowments:

Subject to appropriation and expenditure - accumulated earnings on original perpetual endowment gifts:

School operating - - 3,644 - Scholarships - - (12) - Corporate work study program - - 18 -

-

- 3,650 - Net assets with donor restrictions $ 2,592,990 $ 818 $ 3,650 $ (2,322,165)

Change in Beneficial Interest in

Investment Releases/

Contributions Income Losses

Funds Held by Others

12. Endowments

Funds with Deficiencies

From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or the Act requires the School to retain as a fund of perpetual duration. In accordance with accounting principles generally accepted in the United States of America, accumulated deficiencies of this nature that are reported in net assets with donor restrictions were $-0- at June 30, 2019.

Return Objectives and Risk Parameters

The School’s endowment assets are invested at the Catholic Foundation and the School utilizes the Catholic Foundation’s return and risk policies to direct their investments. Endowment assets may include those assets of donor-restricted funds that the School must hold in perpetuity or for a donor- specified period, as well as board-designated funds.

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12. Endowments, Continued Investment Strategies

To satisfy its long-term rate-of-return objectives, the School relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The School targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints.

Spending Policy

The School has various endowment funds held at the Catholic Foundation. The School has adopted the spending policy of the Catholic Foundation for these funds. Accumulated earnings on these endowments are released as appropriations from net assets with donor restrictions when distributed by the Catholic Foundation and the related restriction (if any) has been met.

Endowment Fund Net Assets

Endowment fund net asset activity consists of the following for the year ended June 30, 2019:

Balance, June 30, 2018 $ - $ 92,072 $ 92,072 Change in value of beneficial interest

in funds held by others - 1,154 1,154 Balance, June 30, 2019 $ - $ 93,226 $ 93,226

With Donor

Restrictions Total Without Donor

Restrictions

13. Retirement Plan

During the year ended June 30, 2012, the School adopted a 403(b) plan for employees. The School made a discretionary matching contribution of $174,598 during the year ended June 30, 2019.

14. Operating leases

The School leases office equipment and a facility under non-cancelable operating leases expiring in January 2020. Rental expense for the year ended June 30, 2019 was $13,803. Future minimum lease payments during the year ended June 30, 2020 are $14,004.

15. Subsequent Events

The School was unaware of any subsequent events as of December 12, 2019, the date the combined financial statements were available to be issued.